PROBLEMS

For problems that needs solutions, show them in good accounting form, on a separate
sheet of paper.

1. Equity securities acquired for trading shall be measured at

a. Cost, being the purchase price plus transaction costs
b. Cost, being the purchase price
c. Fair value, with change in fair value taken to profit or loss
d. Fair value, with change in fair value taken to other comprehensive income

2. Under which type of investment classification is directly attributable cost of

acquisition not included in the initial measurement basis?
a. Investment in associate
b. Financial assets at amortized cost
c. Financial assets at fair value through profit or loss
d. Financial assets at fair value through other comprehensive income

3. An instrument representing ownership shares and the right to acquire ownership

shares.
a. Debt Security
b. Equity Security
c. Shareholder's Equity
d. Treasury Bills

4. Which one of the following indicates that the investor does not exercise
significant influence over the investee?
a. Majority ownership of the investee is concentrated among a small
group of shareholders who operate the investee without regard to
the views of the investor.
b. There is interchange of managerial personnel between the investor and
the investee.
c. There are material intercompany transactions between investor and
investee.
d. The investor has representation in the investee's board of directors.

5. An investor uses equity method to account for investment in associate. The

purchase price implies a fair value of the investee's depreciable assets in excess
of the investee's net asset carrying values. The investor's amortization of the
excess
a. Decreases goodwill account.
b. Decreases the investment in associate account.
c. Increases the investment income account.
d. Does not affect the carrying value of the investment.
6. Investment in associate gives the holder of the securities the power to participate
in (but not to govern) the financial and operating policy decisions of the investee.
Cash dividends received by the holder of securities from the associate will:
a. Be credited to dividend income.
b. Be debited to Dividends Payable.
c. Be credited to Retained Earnings.
d. Be a deduction from the investment in associate account.

7. Under IFRS 9, the cumulative balance of equity as a result of measuring equity

investments at fair value through OCI.
a. Shall not be reversed to P/L but may be transferred to another equity
account
b. Shall not be reversed to P/L and shall be transferred to another equity
account
c. Shall be reversed to P/L at the date the security is sold
d. Shall be reversed to P/L when there is objective evidence of impairment.

8. Non-trading equity instrument shall be classified as

a. At fair value through profit or loss
b. At fair value through other comprehensive income
c. Based on irrevocable choice at date of initial recognition either at fair
value through P/L or at fair value through OCI
d. Based on irrevocable choice at the reporting date either at fair value
through P/L or at fair value through OCI

9. According to IAS 28, which of the following will not fall under the situation of
"existence of significant influence by an investor in the financial and operating
policy decisions of the investee but not control of these decisions."
a. Technological dependencies
b. Material intercompany transactions
c. Participation in the policy making decisions
d. Power to govern the financial and operating policy decisions of an
enterprise so as to obtain benefits from its activities.

10. An investor uses the equity method to account for its 30% investment in ordinary
shares of an investee. Amortization of the investor's share of the excess of
market value over book value of depreciable assets at the date of the purchase
should be reported in the investor's statement of comprehensive income as part
of
a. Share in the profit of investee
b. Other Expense
c. Depreciation Expense
d. Amortization of Goodwill
11. Pacman Company purchased 1,000 shares of RJ Company ordinary shares at
P540/share. Pacman also paid broker's commission of P10,000 in relation to the
said investment. The securities are designated as at fair value through profit or
loss. At the end of 2019, the securities had total market value of P565,000. At
December 31, 2020 the total market value of the equity securities is P 590,000.
The holding gains or loss that would be reported by Pacman on its income
statement for the year 2020 is _____₱ 25,000_____.

Solution:
Market Value, December 31, 2020 ₱ 590,000
Less: Market Value, December 31, 2019 ₱ 565,000
Holding Gain, December 31, 2020 ₱ 25,000

12. On December 01, 2020, Matiyaga Company purchased 1,000 shares of Masipag
Corp. P100 par ordinary shares (5% interest in voting rights) at P175 per share.
Matiyaga also paid transaction cost of P3,500. The shares were designated as
equity investments at fair value through other comprehensive income. On
December 31, 2020, Masipag ordinary shares were quoted at P200 per share.
What is the carrying value of the equity investment of Matiyaga at December 31,
2019? ______₱ 200,000______

Solution:
Purchased shares (1,000 shares x P175) ₱ 175,000
Add: Transaction Cost 3,500
Initial Cost, December 1,2020 ₱ 178,500

Fair Value (1,000 shares x P200) ₱ 200,000

Less: Initial Cost 178,500
Holding Gain ₱ 21,500

Initial Cost ₱ 178,500

Add: Holding Gain 21,500
Carrying Value, December 31,2020 ₱ 200,000

13. On September 11, 2020, Ali Company purchased for P7,000,000 the assets and
will assumed all the liabilities of Iris Corporation. As of this date, the book value
and fair market value of Iris assets are P10,000,000 and P11,500,000
respectively. Iris has current liabilities of P2,000,000 and noncurrent liabilities of
P3,250,000 respectively. How much goodwill is to be recorded by Ali? _₱
750,000___

Solution:
 Assets ₱ 11,500,000

Less: Liabilities (2,000,000+3,250,0000) 5,250,000

Net assets at fair value ₱ 6,250,000

Purchase Price ₱ 7,000,000

Less: Net assets at fair value 6,250,000
Goodwill ₱ 750,000

14. Which amounts should LA SCALA Corporation report in its December 31, 2019
Statement of Financial Position?

Equity Investment at Equity Investment at Other Comprehensive

Fair Value through Fair Value through Income – Unrealized
Profit and Loss Other Comprehensive Gain/Loss from equity
Income investment at OCI

a. P140,000 P50,500 P2,500 credit

b. P140,000 P48,000 P2,500 debit
c. P70,700 P49,400 none
d. P120,000 P100,000 P1,400

Solution:
Equity Investment at Fair Value through Profit and Loss:

Fair Value, Dec. 3,2019 (10,000 shares x P7) ₱ 70,000

Less: Initial Measurement 50,000
 Unrealized Gain, Dec. 3, 2019 ₱ 20,000

Unrealized Gain, Dec. 3, 2019 ₱ 20,000

Add: Investment, Dec. 18,2019 ₱ 120,000
Total Equity Investment ₱ 140,000

Equity Investment at Fair Value through Other Comprehensive Income:

Dec. 6, 2019 (1,000 shares x P50) ₱ 50,000

Add: Transaction Costs 500
Total Equity Investment ₱ 50,500

Other Comprehensive Income – Unrealized Gain/Loss from equity

investment at OCI:

Total Investment ₱ 50,500

Less: Closing Price (1,000 shares x P48) 48,000
Unrealized Gain ₱ 2,500

Equity Investment at Fair Value through OCI 2,500

Unrealized Gain 2,500

15. What is the journal entry to recognize P500 dividend received by LA SCALA from
Gaudioso?

Cash 500,000
Dividend Revenue 500,000
(1,000 shares x P500= 500,000)

Using the information 16 – 17:

Holiday, Inc. had the following transactions in the ordinary shares of May Corp., which
has 1,000,000,000 ordinary shares outstanding.
16. How much is the revised cost per share after receipt of bonus issue?_₱
80__

Solution:
Purchases Ordinary Shares 4,000
Multiply by: Bonus Received 10%
Additional Ordinary Shares 400

Purchased Ordinary Shares 4,000

Add: Additional Ordinary Shares 400

Total Ordinary Shares 4,400

Carrying Value, Jan. 5 (4,000 shares x P88) ₱ 352,000

Divide by: Total Ordinary Shares 4,400

Cost per Share after the receipt of issued Bonus ₱ 80

17. Based on the foregoing, what is the journal entry to recognize the receipt of cash
dividend?

Cash 17,600
Dividend Revenue 17,600
(4,400 shares x P4= 17,600)

18. Charmaine Company provided the following data pertaining to dividends on

ordinary share investments for the current year:
 On October 01, the entity received P600,000 liquidating dividend from A
Company. The entity owned a 10% interest in A Company.
 The entity owned a 20% interest in B Company which declared and paid a
P4,000,000 cash dividend to shareholders on December 31.
 On December 01, the entity received from C Company a dividend in kind
of one share of D Company for every 4 C Company shares held. The
entity had 100,000 C Company shares which have a market price of P50
per share on December 01. The market price of D Company share was
P10.
How much is the dividend income to be recognize for the year?
_ ₱ 1,050,000
 Solution:
Dividend – B Company (P4,000,000 x 20%) ₱ 800,000
Add: Property Dividend
(100,000 shares / 4 = 25,000)
( 25,000 x P10 = 250,000) 250,000
Dividend Income ₱ 1,050,000

19. Therese Company issued rights to subscribe to its stock, the ownership of 4
shares entitling the shareholders to subscribe for 1 share at P100. An investor
owned 50,000 shares with total cost of P5,000,000. The share is quoted right-on
at P125. The stock rights are accounted for separately and measured initially at
fair value. What is the cost of the new investment assuming all of the stock rights
are exercised by the investor? ₱ 1,500,000

Solution:
Initial Cost of Rights (50,000 shares x 5) ₱ 250,000
Add: Cash paid for the new shares
(5,000 shares/4= 12,500)
(12,500 x 100 = 1,250,000) 1,250,000
Cost of New Investment ₱ 1,500,000

20. On July 01, 2020, Jennifer Company acquired 20% of the outstanding ordinary
shares of another entity for P5,000,000. The carrying value of the acquired
assets was P4,000,000. The excess of cost over the carrying amount was
attributable to an identifiable intangible asset which was undervalued on the
investee’s statement of financial position and which had a remaining useful life of
5 years. For the year ended December 31, 2020, the investee reported net
income of P6,000,000 and paid cash dividends of P1,000,000 on ordinary shares
capital and issued 10% stock dividend on December 31, 2020. What is the
carrying value of the investment in associate on December 31, 2020? ₱
5,300,000__

Solution:
Acquisition cost ₱ 5,000,000
Add: Share in Profit (6,000,000 x 20% x 6/12) 600,000
Less: Cash Dividend (1,000,000 x 20%) (200,000)
Adjustments in reported profit
(20% x 1,000,000)/5=40,000
40,000 x 6/12 = 20,000 (20,000)
Stocks Dividend (4,000,000 x 10% x 20%) (80,000)
Carrying Value of Investments in Associate ₱ 5,300,000