Pre-Test 10

Answer this test wisely and show your solution. (10 Points)

On January 2, 2010, Mills Company purchased 25% of Boon Corporation’s ordinary shares; no
goodwill resulted from the purchase. Mills appropriately carries this investment at equity and the
balance in Mill’s investment account at December 31, 2010 was P1,900,00. Boon Company reported
net income of P1,200,000 for the year ended December 31, 2010 and paid ordinary share dividends
totaling P480,000 during 2010. How much did Mills Company pay for its 25% interest in Boon
Company?
P1,720,000 c. P2,020,000
P2,080,000 d. P2,320,000
Answer: A
Carrying value of investment P1,900,000
Add/Deduct:
Share in NI (P1,200,000 x 25%) ( 300,000)
Share in Dividends (P480,000 x 25%) 120,000
Acquisition cost, Jan 2, 2010 P1,720,000

On January 2, 2010, Street Company purchased 25% of Life Company’s ordinary shares; no goodwill
resulted from the purchase. Street appropriately carries this investment at equity and the balance in
Life’s investment account was P3,800,000 at December 31, 2010. Life reported net income of
P2,400,000 for the year ended December 31, 2010 and paid dividends amounting to P960,000 during
2010. How much did Street pay for its investment in Life?
P3,200,000 c. P3,440,000
P4,040,000 d. P4,640,000
Answer: C
Carrying value of investment P3,800,000
Add/Deduct:
Share in NI (P2.400,000 x 25%) ( 600,000)
Share in Dividends(P960,000 x 25%) 240,000
Acquisition cost, Jan 2, 2010 P3,440,000

On January 1, 2010, Align Corporation acquired as a long term investment for P2,500,000, a 30%
ordinary share interest in Parallel Company. On that date Parallel had net assets with a book value
and current market value of P8,000,000. The difference of the cost of acquisition and the book value
of net asset acquired is attributable to a depreciable asset with a remaining life of 5 years. During
2010, Parallel reported net of tax income P900,000, declared and paid and paid cash dividends
P200,000. Income tax rate is 32%. What is the maximum amount of income that Parallel should
report from this investment for 2010?
P 60,000 c. P210,000
P250,000 d. P256,400
Answer: B
Share in NI (P900,000 x 30%) P270,000
Net understatement of dep’r 20,000
Income from Investment P250,000

Acquisition cost P2,500,000

Less: BV of net assets (P8,000,000 x 30%) P2,400,000
Understatement of dep’r asset P 100,000
÷Remaining life 5 years
Net Understatement of depreciation P 20,000

Table owns 50% and 20% of Chair Corporation’s ordinary and preference shares, respectively.
Chair’s share outstanding at December 31, 2010 follows:

Ordinary share P4,000,000

10% cumulative preference share 900,000

Chair reported net income of P600,000 for the year ended December 31, 2010 and declared the
current year dividend on the preference shares. What’ amount should Table report revenue related to
its investment in Chair Company for the year ended December 31, 2010?
None c. P255,000
P273,000 d. P300,000
Answer: C
Net income P600,000
Less: Dividends related to preference
Share (P900,000 x 10%) 90,000
NI available to ordinary shares P510,000
x Investor’s interest 50%
Share of Investor in NI P255,000

On January 2, 2010, PSG Company purchased 20% of PLDT Company’s ordinary shares for
P4,500,000. During 2010, PLDT reported net income of P4,000,000 and paid cash dividends of
P3,000,000 on its ordinary shares. What is the balance of PSG Company’s investment in PLDT
account at December 31, 2010?
P4,300,000 c. P4,400,000
P4,500,000 d. P4,700,000
Answer: D
Original cost - 1.2.10 P4,500,000
Add/Deduct:
Share in NI for 2010 (P4,000,000 x 20%) 800,000
Share in dividends (P3,000,000 x 20%) (600,000)
Carrying value 12.31.10 P4,700,000