107.) On June 30, 2018, ABC Co. purchased 25% of the outstanding ordinary shares of DEF Co. at a total cost of P2,100,000. The book value of DEF's net assets on acquisition date was P7.2 million. For the following reasons, ABC was willing to pay more than book value for the DEF shares.

• DEF has depreciable assets with a current fair value of P180,000 more than their book value. These assets have a remaining useful life of 10 years.
• DEF owns a tract of land with a current fair value of P900,000 more than its carrying amount.
• All other identifiable tangible and intangible assets of DEF have current fair values that are equal to their carrying amounts.

DEF reported a net income of P1,620,000 earned evenly during the current year ended December 31, 2018. Also in the current year, it declared and paid cash dividends of P315,000 to it's ordinary shareholders. Market value of DEF's ordinary shares at December 31, 2018, is P9 million. ABC's financial year-end is December 31.

Under the equity method, the carrying value of ABC's investment in ordinary shares of DEF on December 31, 2018 should be

1. P2,100,000
2. P2,221,500
3. P2,070,000
4. P2,250,000
5. Answer not given

Explain the principles applied on the computation.