Problem 1

On January 1, Forest Company acquired 30% interest in an investee at a cost of P3,200,000. The equity of the investee on the date of acquisition was P6,000,000, consisting of P4,000,000 share capital and P2,000,000 retained earnings.

All the identifiable assets and liabilities of the investee were recorded at fair value except for an equipment with a fair value of P3,000,000 greater than carrying amount. The remaining useful life of the equipment is 5 years.

On July 1, 2019, the investee sold and equipment for P900,000 to Forest Company. The carrying amount of the equipment is P500,000 at the time of sale. Forest Company applies a 10% straight line depreciation.

On December 31, 2019, Forest Company had inventory costing P2,000,000 on hand which had been purchased from the investee. A profit of P600,000 had been made on the sale.

During the current year, the investee reported net income of P4,000,000 and paid dividend of P1,500,000.

The equity of the investee on December 31, 2019 showed the following:

Share capital 4,000,000

Retained earnings 3,500,000

Retained earning appropriated 1,000,000

Revaluation surplus 3,000,000

The revaluation surplus arose from a revaluation of land made on December 31, 2019. The retained earnings appropriated arose from a transfer of unappropriated retained earnings to retained earnings appropriated for contingencies.

Required:

Determine the goodwill arising from the acquisition.

Determine the investment income from the current year.

Prepare journal entries for the current year.

Determine the carrying amount of the Investment in Associate at the end of 2019.