To determine the carrying amount of the investment in associate on December 31, 20x1, we need to use the equity method of accounting. Under this method, the investment is initially recorded at cost and adjusted annually for the investor's share of the investee's profits or losses, as well as any dividends paid.
In this case, Entity A acquired a 25% interest in Entity B for ₱800,000 on January 1, 20x1. This means that the initial carrying amount of the investment was ₱800,000.
Entity B reported a profit of ₱1,000,000 in 20x1. Since Entity A has a 25% interest in Entity B, its share of the profit is ₱250,000 (25% x ₱1,000,000).
Entity B also declared dividends of ₱100,000 in 20x1. Since Entity A has a 25% interest in Entity B, its share of the dividends is ₱25,000 (25% x ₱100,000).
To calculate the carrying amount of the investment in associate on December 31, 20x1, we need to subtract Entity A's share of the dividends from its share of the investee's profits and add this amount to the initial carrying amount of the investment:
Carrying amount of investment = Initial carrying amount + Share of profit - Share of dividends
Carrying amount of investment = ₱800,000 + ₱250,000 - ₱25,000
Carrying amount of investment = ₱1,025,000
Therefore, the carrying amount of the investment in associate on December 31, 20x1, is ₱1,025,000.