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Palmones Adrio B. Investment in Equity Securities
Palmones Adrio B. Investment in Equity Securities
Palmones Adrio B. Investment in Equity Securities
THEORIES:
1). It is the date on which the stock and transfer book of the entity is closed for
registration. Only those shareholders registered as of this date are entitled to received
dividends.
a. Date of declaration
b. Date of record
c. Date of payment
d. Date of mailing the dividend check
2). At which of the following dates has the shareholder theoretically realized income
from dividend?
a. Income
b. Retained earnings
c. Investment account
d. Share capital
a. Dividend income
b. Return of investment
c. Partly dividend income and partly return of investment
d. If the stock dividends are received and subsequently sold at the cash received and
gain or loss is recognized
10). An investor owns 10% of the ordinary shares of an investee throughout the year.
The investee has no preference shares outstanding. The investor’s interest gives the
right to
11. When a company has acquired a "passive interest" in another corporation, the
acquiring company should account for the investment
a. by using the equity method.
b. by using the fair value method.
c. by using the effective interest method.
d. by consolidation.
12. Bista Corporation declares and distributes a cash dividend that is a result of
current earnings. How will the receipt of those dividends affect the investment
account of the investor under each of the following accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect
14. Byner Corporation accounts for its investment in the common stock of Yount
Company under the equity method. Byner Corporation should ordinarily record a
cash dividend received from Yount as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.
15. Under the equity method of accounting for investments, an investor recognizes
its share of the earnings in the period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.
16. When a company holds between 20% and 50% of the outstanding stock of an investee,
which of the following statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless
circum-stances indicate that it is unable to exercise "significant influence" over the
investee.
c. The investor must use the fair value method unless it can clearly demonstrate the
ability to exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.
17. When an investment in an available-for-sale security is transferred to trading
because the company anticipates selling the stock in the near future, the
carrying value assigned to the investment upon entering it in the trading
portfolio should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the higher of its original cost or its fair value at the date of the transfer.
d. the lower of its original cost or its fair value at the date of the transfer.
19. Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2007,
Marin had net earnings of $300,000 and paid dividends of $30,000. Dane
mistakenly recorded these transactions using the fair value method rather than
the equity method of accounting. What effect would this have on the investment
account, net income, and retained earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
20. All of the following are requirements for disclosures related to financial
instruments except
a. disclosing the fair value and related carrying value of the instruments.
b. distinguishing between financial instruments held or issued for purposes
other than trading.
c. combining or netting the fair value of separate financial instruments.
d. displaying as a separate classification of other comprehensive income the net
gain/loss on derivative instruments designated in cash flow hedges.
Sources:
Theory of Accounts, Conrado Valix, CPA
Intermediate accounting 12th edition, Kieso
Problems:
1). On January 1, 2011, ABC Company purchased 40,000 shares of RST at P100 per
share. The investment is measured at fair value through other comprehensive income.
Brokerage fees amounted to P120,000. A P5 dividend per share of RST had been
declared on December 15, 2010, to be paid on March 31, 2011 to shareholders of record
on January 31, 2011. No other transactions occurred in 2011 affecting the investment in
RST shares.
Solution 1 Answer c
a. 1,000,000
b. 900,000
c. 800,000
d. 400,000
Solution 2 Answer c
a. 980,000
b. 880,000
c. 180,000
d. 150,000
Solution 3 Answer c
4). During 2011, Lawan Company bought the shares of Burwood Company as follows:
If the FIFO approach is used, what is the gain on the sale of the shares?
a. 1,150,000
b. 950,000
c. 150,000
d. 550,000
Solution 4 Answer a
Average approach
Sale price 3,750,000
Cost of shares sold (30,000/60,000 x 5,600,000) 2,800,000
Gain on sale 950,000
5). Wood Company owns 20,000 shares of Arlo Company’s 200,000 shares of P100 par,
6% cumulative, nonparticipating preference share capital and 10,000 shares
representing 2% ownership of Arlo’s ordinary share capital. During 2011, Arlo declared
and paid preference dividends of P2,400,000. No dividends had been declared or paid
during 2010. In addition, Wood received a 5% stock dividend on ordinary share from
Arlo when the quoted market price of Arlo’s ordinary share was P10. What amount
should Wood report as dividend income in its 2011 income statement?
a. 120, 000
b. 125,000
c. 240,000
d. 245,000
Solution 5 Answer c
6). Day Company received dividends from its share investments during the year ended
December 31, 2011 as follows:
* A stock dividend of 4,000 shares from Parr Company on July 31, 2011 when the
market price of Parr’s share was P20. Day owns less than 1% of Parr’s share
capital.
* A cash dividend of P150,000 from Lark Company in which Day owns a 25%
interest. A majority of Lark’s directors are also directors of Day.
What amount of dividend revenue should Day report in its 2011 income statement?
a. 230,000
b. 150,000
c. 80,000
d. 0
Solution 6 Answer d
The stock dividend from Parr Company is not and income. The cash dividend from Lark
Company is not also an income because the interest is 25% and therefore the equity
method is used.
a. 600,000
b. 560,000
c. 100,000
d. 40,000
Solution 7 Answer d
8). During 2011, Neil Company held 30,000 shares of Brock Company’s 100,000
outstanding shares and 6,000 shares of Amal Company’s 300,000 outstanding shares.
During the year, Neil received P300,000 cash dividend from Brock, P15,000 cash
dividend and 3% stock dividend from Amal. The closing price of Amal share is P150.
What amount should be reported as dividend revenue for 2011?
a. 342,000
b. 315,000
c. 442,000
d. 15,000
Solution 8 Answer d
9). On March 1, 2011, Evan Company purchased 10,000 ordinary shares of LVC at P80
per share. On September 30, 2011, Evan received 10,000 stock rights to purchase an
additional 10,000 shares at P90 per share. The stock rights had an expiration date on
February 1, 2012. On September 30, 2011, LVC’s share had a market value P 95 and the
stock right had a market value of P5. What amount should Evan report in its September
30, 2011 statement of financial position for investment in stock rights?
a. 150,000
b. 100,000
c. 50,000
d. 60,000
Solution 9 Answer c
10). Rice Company owns 30,000 ordinary shares of Wood Company acquired on July 31,
2011, at a total cost of P1,100,000. On December 1, 2011, Rice received 30,000 stock
rights from Wood. Each right entitles the holder to acquire one share at P 45. The
market price of Wood’s share on this date was P50 and the market price of each right
was P10. Rice sold its rights on December 31, 2011 for P450,000 less a P10,000
commission. What amount should be reported as gain from the sale of the rights?
a. 150,000
b. 140,000
c. 250,000
d. 240,000
Solution 10 Answer b
11). Adam Company owns 50,000 ordinary shares of Bland Company. These 50,000
shares were purchased by Adam in 2009 for P120 per share. On August 30, 2011, Bland
distributed 50,000 stock rights to Adam. Adam was entitled to buy one new share of
Bland Company for P90 cash and two of these rights. On August 30, 2011, each share
had a market value of P130 and each right had a market value of P20. What total cost
should be recorded for the new shares that Adam acquired by exercising the rights?
a. 2,250,000
b. 3,250,000
c. 3,050,000
d. 5,550,000
Solution 11 Answer b
12). Excelsia Company issued rights to subscribe to its stock, the ownership of 4 shares
entitling the shareholders to subscribe for 1 share at P100. Jealina Company owns
50,000 shares of Excelsia Company with total cost of P5,000,000. The share is quoted
right-on at 125. The stock rights are accounted for separately. What is the cost of the
new investment if all of the stock rights are exercised by Jealina Company?
a. 1,500,000
b. 1,250,000
c. 1,562,500
d. 1,450,000
Solution 12 Answer a
13). On January 1, 2011, Mylene Company purchased 50,000 shares of another entity
for P3,600,000. On October 1, 2011, Mylene received 50,000 stock rights from the
investee. Each right entitles the shareholder to acquire one share for P85. The market
price of the investee’s share was P100 immediately before the rights were issued and
P90 immediately after the rights were issued. On December 1, 2011, Mylene exercised
all stock rights. On December 31, 2011, Mylene sold 25,000 shares at P90 per share. The
stock rights are not accounted for separately.
If the FIFO approach is used, what is the gain on sale of investment that should be
recognized in 2011?
a. 450,000
b. 700,000
c. 287,500
d. 125,000
Solution 13 Answer a
Shares Cost
Original investment 50,000 3,600,000
New investment acquired through stock rights
(50,000 x 85) 50,000 4,250,000
Total 100,000 7,850,000
FIFO Approach
Sale price (25,000 x 90) 2,250,000
Cost of shares (25,000 / 50,000 x 3,600,000) 1,800,000
Gain on sale 450,000
Average approach
Sale price 2,250,000
Cost of shares sold (25,000 / 100,000 x 7,850,000) 1,962,500
Gain on sale 287,500
Christopher Company was advised that it would “lose out on the investment if it did not
pay in the money for the rights”. Thus, on April 1, 2009, Christopher Company paid for
the new shares charging the payment to the investment account.
Since Christopher Company felt that it had been assessed by Bay Company, the
dividends received from Bay Company in 2009 and 2010 (10% on December 31 of each
year) are credited to the investment account until the debit was fully offset.
On January 1, 2011, Christopher Company received 50% stock dividend from Bay
Company. On same date, the shares received as stock dividend were sold at P160 per
share and the proceeds were credited to income.
On December 31, 2011, the share of Bay Company were split 2 for 1. Christopher
Company found that each new share was worth P5 more than the P110 paid for the
original shares.
Accordingly, Christopher Company debited the investment account with the additional
shares received at P110 per share and credited income.
On June 30, 2012, Christopher Company sold one-half of the investment at P92 per
share and credited the proceeds to the investment account.
14). What is the balance of the investment on December 31, 2012 as it was kept by
Christopher Company?
a. 3,150,000
b. 2,650,000
c. 2,200,000
d. 4,950,000
Solution 14 Answer b
Shares Cost
1/1/2009 (20,000 x 110) 20,000 2,200,000
4/1/2009 ( 5,000 x 100) 5,000 500,000
12/31/2009 (10% x 2,500,000) - (250,000)
12/31/2010 (10% x 2,500,000) - (250,000)
12/31/2011 (25,000 x 110) 25,000 2,750,000
6/30/2012 (25,000 x 92) (25,000) (2,300,000)
Investment account per book 25,000 2,650,000
15). Using the “average method”, what is the correct balance of the investment on
December 31, 2012?
a. 2,200,000
b. 1,800,000
c. 900,000
d. 0
Solution 15 Answer c
Shares Cost
1/1/2009 (20,000 x 110) 20,000 2,200,000
4/1/2009 (5,000 x 100) 5,000 500,000
1/1/2011 ( 50% x 25,000) 12,500 -
Balance 37,500 2,700,000
1/1/2011 (12,500 / 37,500 x 2,700,000) (12,500) (900,000)
Balance 25,000 1,800,000
12/31/2011 (2 for 1 split) 25,000 -
Balance 50,000 1,800,000
6/30/2012 (1/2 x 1,800,000) (25,000) (900,000)
Balance December 31, 2012 25,000 900,000
16. During 2007, Ellis Company purchased 20,000 shares of Hiller Corp. common
stock for $315,000 as an available-for-sale investment. The fair value of these
shares was $300,000 at December 31, 2007. Ellis sold all of the Hiller stock for
$17 per share on December 3, 2008, incurring $14,000 in brokerage
commissions. Ellis Company should report a realized gain on the sale of stock in
2008 of
a. $11,000.
b. $25,000.
c. $26,000.
d. $40,000.
17. Kennett Corporation purchased 25,000 shares of common stock of the Swenson
Corporation for $40 per share on January 2, 2008. Swenson Corporation had
100,000 shares of common stock outstanding during 2008, paid cash dividends
of $60,000 during 2008, and reported net income of $200,000 for 2008. Kennett
Corporation should report revenue from investment for 2008 in the amount of
a. $15,000.
b. $35,000.
c. $50,000.
d. $55,000.
Garrison Co. owns 20,000 of the 50,000 outstanding shares of Steele, Inc. common
stock. During 2008, Steele earns $800,000 and pays cash dividends of $640,000.
18. If the beginning balance in the investment account was $500,000, the balance at
December 31, 2008 should be
a. $820,000.
b. $660,000.
c. $564,000.
d. $500,000.
Solution 18 Answer c $500,000 + [($800,000 – $640,000) × (20,000 ÷ 50,000)] =
$564,000.
20. If Karter Company used the fair value method of accounting for its investment in
Flynn Company, its Investment in Flynn Company account on December 31, 2007
should be
a. $290,000.
b. $330,000.
c. $300,000.
d. $340,000.
21. If Karter Company uses the equity method of accounting for its investment in
Flynn Company, its Investment in Flynn Company account at December 31, 2007
should be
a. $290,000.
b. $300,000.
c. $330,000.
d. $340,000.
Barry Corporation earns $240,000 and pays cash dividends of $80,000 during 2007.
Glenon Corporation owns 3,000 of the 10,000 outstanding shares of Barry.
22. What amount should Glenon show in the investment account at December 31,
2007 if the beginning of the year balance in the account was $320,000?
a. $392,000.
b. $320,000.
c. $368,000.
d. $480,000.
24. On December 31, 2006, Nance Co. purchased equity securities as trading
securities. Pertinent data are as follows:
Fair Value
Security Cost At 12/31/07
A $132,000 $117,000
B 168,000 186,000
C 288,000 258,000
On December 31, 2007, Nance transferred its investment in security C from
trading to available-for-sale because Nance intends to retain security C as a long-
term investment. What total amount of gain or loss on its securities should be
included in Nance's income statement for the year ended December 31, 2007?
a. $3,000 gain.
b. $27,000 loss.
c. $30,000 loss.
d. $45,000 loss.
The summarized balance sheets of Elston Company and Alley Company as of December
31, 2007 are as follows:
Elston Company
Balance Sheet
December 31, 2007
Assets $1,200,000
Liabilities $ 150,000
Capital stock 600,000
Retained earnings 450,000
Total equities $1,200,000
Alley Company
Balance Sheet
December 31, 2007
Assets $900,000
Liabilities $225,000
Capital stock 555,000
Retained earnings 120,000
Total equities $900,000
25. If Elston Company acquired a 20% interest in Alley Company on December 31,
2007 for $195,000 and the fair value method of accounting for the investment
were used, the amount of the debit to Investment in Alley Company Stock would
have been
a. $135,000.
b. $111,000.
c. $195,000.
d. $180,000.
26. If Elston Company acquired a 30% interest in Alley Company on December 31,
2007 for $225,000 and the equity method of accounting for the investment were
used, the amount of the debit to Investment in Alley Company Stock would have
been
a. $285,000.
b. $225,000.
c. $180,000.
d. $202,500.
27. If Elston Company acquired a 20% interest in Alley Company on December 31,
2006 for $135,000 and during 2008 Alley Company had net income of $75,000
and paid a cash dividend of $30,000, applying the fair value method would give a
debit balance in the Investment in Alley Company Stock account at the end of
2008 of
a. $111,000.
b. $135,000.
c. $150,000.
d. $144,000.
Solution 27 Answer b $135,000, acquisition cost.
28. If Elston Company acquired a 30% interest in Alley Company on December 31,
2007 for $202,500 and during 2008 Alley Company had net income of $75,000
and paid a cash dividend of $30,000, applying the equity method would give a
debit balance in the Investment in Alley Company Stock account at the end of
2008 of
a. $202,500.
b. $216,000.
c. $225,000.
d. $217,500.
29. Young Co. acquired a 60% interest in Tomlin Corp. on December 31, 2006 for
$945,000. During 2007, Tomlin had net income of $600,000 and paid cash
dividends of $150,000. At December 31, 2007, the balance in the investment
account should be
a. $945,000.
b. $1,305,000.
c. $1,215,000.
d. $1,395,000.
Stone Co. owns 4,000 of the 10,000 outstanding shares of Maye Corp. common stock.
During 2007, Maye earns $120,000 and pays cash dividends of $40,000.
30. If the beginning balance in the investment account was $240,000, the balance at
December 31, 2007 should be
a. $240,000.
b. $272,000.
c. $288,000.
d. $320,000.