Equity Investment Drill 10/28/2020

Identify the letter of the choice that best completes the statement or answers the question.
TOA
1. Which of the following statements is incorrect in regard to trading investments?
a. Trading investments are held with the intention of selling them in a short period of time.
b. Unrealized gains and losses are reported as part of net income.
c. Any discount or premium is not amortized.
d. All of the statements are correct.

2. Equity investment irrevocably accounted for at fair value through other comprehensive income are
a. Nontrading investments where an entity has holdings of less than 20%.
b. Trading investments where an entity has holdings of less than 20%.
c. Investments where an entity has holdings of between 20% to 50%.
d. Investments where an entity has holdings of more than 50%.

3. Transfers of investments between categories

a. Result in entities omitting recognition of fair value in the year of the transfer.
b. Are accounted for at fair value for all transfers.
c. Are considered unrealized and unrecognized if transferred out of held for collection into fair value.
d. Should always result in an impact on net income.

4. When stock dividends of different class are received

a. No formal entry is made by only a memorandum.
b. Cash is debited and dividend income is credited.
c. A new investment account is debited and dividend income is credited.
d. A new investment account is debited and the original investment account is credited.

5. At the beginning of the current year, an investee acquired 30% of the ordinary shares of another entity. In
the current year, the investee had net earnings which exceeded the dividends paid. The investor mistakenly
recorded these transactions using the cost method instead of the equity method of accounting. What effect
would this have on investment account, net earnings, and retained earnings, respectively?
a. Overstate, overstate, overstate
b. Overstate, understate, understate
c. Understate, overstate, understate
d. Understate, understate, understate

6. An investor uses the equity method to account for its 30% investment. Amortization of the investor’s share
of the excess of fair value over carrying amount of depreciable assets at the date of the purchase shall be
reported in the investor’s income statement as part of
a. Other expense c. Equity in earnings of investee
b. Depreciation expense d. Amortization of goodwill

7. Which of the following assets is not a financial asset?

a. Cash
b. An equity instrument of another entity
c. A contract that may or will be settled in the entity’s own instrument and is not classified as an equity
instrument of the entity
d. Prepaid expenses

8. Which of the following methods is/are applicable to Investment in Preference share?

a.Cost method c.Cost and Equity method
b.Equity method d.Fair value and Equity method

9. Statement 1 When stock rights is accounted for not separately and sold, gain or loss on sale of
stock is recognized.
 Statement 2 When stock rights are received by the shareholder and accounted for separately, the
original investment account is credited.
a. Both statements are true c. Statement I is true while statement II is false
b. Both statements are false d. Statement I is false while statement II is true

10. Which of these statements is/are correct on equity method of investments?

Statement I Excess of cost over fair value decreases the investment account when the net assets are found
to be fairly stated.
Statement II When dividend is earned a credit to the investment account is necessary.
a. Both statements are true c. Statement I is true while statement II is false
b. Both statements are false d. Statement I is false while statement II is true

Practical Accounting 1
• On January 6,2020, Granny Company acquired 40,000 shares (10%) of Little Corporation’s ordinary share at
P28 per share. The securities are classified as financial asset at fair value through other comprehensive
income. On October 24,2020, Little declared and paid a cash dividend of P1 per share. On December
31,2020, the market value of Little’s ordinary share was P32 per share. Little also reported a net income of
P2,000,000 for 2020.

1. The amount reported in the statement of comprehensive income for the year ended December 31,2020 is
_____.
2. On December 31,2020 statement of changes in equity, the amount reported is _____.
3. On December 31,2020, the carrying amount of financial asset at fair value through other comprehensive
income is _____.
4. The entry to be recognized on December 31,2020 is _____.

5. On December 31, 2019, Tarzan Company approximately reported a P100,000 unrealized loss. There was no
change during 2020 in the composition of Tarzan’s portfolio of marketable equity securities held as “trading”.
Pertinent data are as follows”
Security Cost Market Value at 12.31.2020
A P1,200,000 P1,300,000
B 900,000 500,000
C 1,600,000 1,500,000
P3,700,000 P3,300,000
The amount of loss on these securities should be included in Tarzan’s statement of comprehensive income
for the year ended December 31, 2020 as component of profit or loss is _______.

6. Magma Man Company invested in share of North Company acquired as follows:

No. of shares Cost
2018 22,500 1,800,000
2019 37,500 3,300,000
In 2020, Magma Man Company received 60,000 rights to purchase North Company share at P80. Five rights
are required to purchase one share. At issue date, rights had a market value of P4 each and share was selling
ex-right at P96. Magma Man Company used rights to purchased 9,000 additional shares of North Company
and allowed the rights not exercised to lapse. In determining the stock rights exercised, assuming the use
of the FIFO method. The amount to be debited to the investment account for the purchase of the 9,000
additional shares assuming the right is not recorded separately ________.

7. On January 1, 2017, Ben Ten Company acquired as a long-term investment for P7,000,00, a 40% interest in
Cha Company when the fair value of Cha’s net assets was P17,500,000. Cha Company reported the following
net losses:
2017 5,000,000
2018 7,000,000
2019 8,000,000
2020 4,000,000
On January 1, 2019, Ben Ten Company made cash advances of P2,000,000 to Cha Company. On December
31, 2020, it is not expected that Ben Ten Company will provide further financial support for Cha Company.
Ben Ten Company should reported in 2020 a loss from investment of ________.
8. On March 31, 2020, The Bear Stearns Companies Inc. acquired 40% of the outstanding ordinary shares of an
investee for P6,500,000. The carrying amount of the net assets of the investee equaled P12,500,000. Any excess
of cost over the carrying is attributable to equipment with remaining useful life of 10 years. During 2020, the
investee reported loss of 4,000,000 and paid dividends of P2,500,000. On December 31, 2020, the carrying
amount of its investment in associate will be reported at ________.