Accounting for Business Combination

Final Examination December 27, 2022

.

Students are required to maintain academic integrity. Cheating, lying, and other unethical or
immoral conduct will not be tolerated. Any student found guilty of cheating on quizzes or exams
will get (at a minimum) a 60% on the said test.

Submission: December 29, 2022

Part 1: Multiple Choice Theories

Instruction: Encircle the letter that corresponds to the best answer.
1. How should import duties be dealt with when valuing inventories at the lower cost and net
realizable value (NRV) according to IAS2 Inventories? (select one answer)
A. added to cost C. deducted in arriving at NRV
B. deducted from cost D. Ignored

2. How should sales staff commission be dealt with when valuing inventories at the lower of cost
and net realizable value (NRV), PAS2 Inventories? (select one answer)
A. added to cost C. deducted in arriving at NRV
B. deducted from cost D. Ignored

3. How should trade discounts be dealt with when valuing inventories at the lower of cost and net
realizable value (NRV) according to PAS2 Inventories?
A. Added to cost C. deducted in arriving at NRV
B. deducted from cost D. Ignored

4. Excel Corp. manufactures and sells paper envelopes. The stock envelope was included in the
closing Inventory as of December 31, 2007, at a cost P50 each per pack. During the final
audit, the auditors noted that the subsequent sale price for the inventory at January 15, 2008
was P40 each per pack. Furthermore, inquiry reveals that during the physical count, a water
leakage has created damages to the paper and the glue.
Accordingly, in the following, Excel has spent a total of P15 per pack for repairing and
reapplying glue to the envelopes. The net realizable value and inventory write-down (loss)
amount to:
A. P25 and P25 respectively C. P40 and P10 respectively
B. P30 and P15 respectively D. P45 and P10 respectively

Net realizable = estimated selling price per unit – cost for repairing the goods
= 40-15
Net realizable = 25
Inventory written down = cost per pack – net realizable value
=50-25
Inventory Written down = 25

5. Inventory estimates will be required for the following except

A. when the interim financial statements are prepared
B. when inventory is destroyed by typhoon or lahar flow
C. as proof of reasonable accuracy of the physical inventory
D. in the determination of the ending inventory to be shown on the balance sheet at year
end

6. Under the retail inventory method of approximating ending inventory, which of the following
is included in the computation of the cost to retail percentage?
A. Freight-in C. Mark-up
B. Mark-down D. All of these

7. If the average retail inventory method is used, which of the following calculations would
include or exclude net markdowns?
A. B. C. D.
Cost ratio Include Include Exclude Exclude
Ending inventory at Include Exclude Include Exclude
retail

8. On November 4,2010, Bona Company contracted to buy foreign goods requiring payment in
dollars in one month after their receipt at Nova’s factory. Title to the goods passed on December
15, 2010. The goods were still in transit on December 31, 2010. Exchange rates of the peso to the
dollar were P34, P38, and P40 on Nov. 4, Dec.15, and Dec. 31, respectively. According to PAS
1, Nova should account for the exchange rate fluctuation in 2010 as
A. An extraordinary loss
B. A loss included in net income from operating activities
C. A gain included in net income after operating activities but before net income from
ordinary activities
D. A loss included in net income after operating activities but before net income from
ordinary activities

9. Losses which are expected to arise from firm and non-cancellable commitments for the
furniture purchase of inventory items, if onerous or material should be
A. Charged to retained earnings
B. Disclosed in the notes to financial statements only
C. Ignored, because the contract is still executory, thus there are no value exchanges
 D. Recognized in the accounts by debiting loss on purchase commitments and crediting
estimated liability for loss on purchase commitments

10. Which one of these is not within the range of activities considered as “agricultural activity”
A. Capability of change C. Measurement of change
B. Management of change D. Production of change

11. According to PAS 41 Agriculture, which of the following items would be classified as
biological asset?
A. Chickens C. Land in mango orchard
B. Eggs D. Oranges

12. Which ONE of the following items would be classified as agricultural produce, according to
PAS 41 Agriculture?
A. Apple C. Butter
B. Bush D. Tree

13. According to PAS 41 Agriculture, which of the following would be classified as a product
that is the result of processing after harvest?
A. Bananas C. Cotton
B. Cheese D. Wool

14. Are the following statements about classification according to PAS 41 Agriculture true or
false?
1) Sugar should be classified as agricultural produce.
2) Wool should be classified as agricultural produce.
A. B. C. D.
Statement 1 True True False False
Statement 2 True False True False

15. According to PAS 41 Agriculture, which of the following criteria must be satisfied before a
biological asset can be recognized in an entity’s financial statements?
I. The entity controls the asset as a result of past events
II. It is probable that economic benefits relating to the asset will flow to the entity
III. An active market for the asset exists
IV. The asset forms a homogenous biological group
A. I and II only C. I, II and IV only
B. II and III only D. I,II, III and IV

16. Which of the following liabilities is a financial liability?

A. Deferred revenue
B. A warranty obligation
 C. A constructive obligation
D. An obligation to deliver own shares worth a fixed amount of cash

17. Ysobelle Company has an account receivable from Silver Corp. of P 55,000. Ysobelle also
has an account payable to Silver of P 15,000. Local law allows the enforceable right of
offset of the recognized amounts. It is, however, not normal business practice to settle the
amounts net. At what amount should the accounts receivable and accounts payable be
presented in Ysobelle’s Statement of Financial Position per PAS 32?
A. B. C. D.
Accounts Nil P40,000 P55,000 P55,000
receivable
Accounts P15,000 nil nil P15,000
payable

18. The Freemantle Company has issued the following two types of financial instrument to raise
capital:
1) Convertible bonds which are redeemable for cash in five years time. The holders have
the right to request the issue of a fixed number of new ordinary shares in lieu of cash.
The holders have not yet indicated whether they will exercise the right to receive the
new ordinary shares.
2) Preference shares with no fixed date for redemption. The preference shares are
redeemable for cash at any time in the future at the option of Freemantle. Freemantle
must give 6 months written notice of its intention to redeem the preference shares and no
notice has yet been given.
In accordance with PAS32 Financial instruments, presentation, the appropriate
classifications for these financial instruments are
Convertible bonds Preference share:
A. Compound financial instrument Equity instrument
B. Compound financial instrument Compound financial instrument
C. Financial liability Equity instrument
D. Financial liability Compound financial instrument

19. The Proctor Company has 300 7% preference shares in issue. They are redeemable on 31
December 20X9. How will the preference shares and the related preference dividend be
presented in Proctor’s financial statements for the year ended 31 December 20X6, according
to PAS32 Financial instruments: presentation?
Preference shares Preference dividend
A. Equity Finance cost
B. Equity Deducted from equity
C. Non-current liability Finance cost
D. Non-current liability Deducted from equity
20. The following statements true or false according to PAS 32, Financial Statement
presentation?
1) Transaction costs of issuing equity instruments are charged against income
2) The components of a compound financial instrument are classified separately in
accordance with their substance
A. B. C. D.
Statement 1 True True False False
Statement 2 True False True False

21. Which of the following statements about treasury shares true or false, according to PAS32
Financial instruments: presentation?
1) Treasury share purchases are recognized as financial assets.
2) Any gain or loss on purchasing treasury shares is recognized as profit or loss.
A. B. C. D.
Statement 1 True True False False
Statement 2 True False True False

22. Are the following statements about dividends true or false, according to PAS32 Financial
instruments: presentation?
1) Dividends in respect of ordinary shares are debited directly in equity.
2) Dividends in respect of redeemable preference shares are debited directly in equity.
A. B. C. D.
Statement 1 True True False False
Statement 2 True False True False

23. The scope of PAS39 includes all of the following, except

A. Financial instruments that meet the definition of a financial asset
B. Financial instruments that meet the definition of a financial liability
C. Contracts to buy or sell non-financial items that can be settled net
D. Financial instruments issued by the entity that meet the definition of an equity
instrument

24. Which of the following is not a category of financial assets defined in PAS 39?
A. Loans and receivable
B. Held-for-sale investments
C. Available-for-sale financial assets
D. Financial assets at fair value through profit or loss

25. What is the principle for recognition of a financial asset or a financial liability in PAS 39?
A. A financial asset is recognized when and only when, the entity becomes a party to the
contractual provisions of the instrument
 B. A financial asset is recognized when, and only when, the entity obtains the risks and
rewards of ownership of the financial asset and has the ability to dispose the financial
asset
C. A financial asset is recognized when and only when, it is probable that future economic
benefits will flow to the entity and the cost or value of the instrument can be measured
reliably
D. A financial asset is recognized when and only when, the entity obtains control of the
instrument and has the ability to dispose of the financial assets independent of the
auction of others

Part 2: Multiple Choice Problems : Show your solution and double rule your final answer
1. In 2000 Geother Company purchased P10,000,000 life insurance policy on its president, of which
Geother is the beneficiary. Information regarding the policy for 2004 is:
Cash surrender value - January 1 400,000
Cash surrender value - December 31 450,000
Annual premium paid on January 1 300,000
During 2004, dividend of P20,000 was applied to increase the cash surrender value. What should be
reported as life insurance expense for 2004?

SOLUTION:

Cash surrender value - December 31 450,000

Cash surrender value - January 1 (400,000)
Cash surrender value 50,000

Annual premium paid on January 1 300,000

Cash surrender value (50,000)

Life Insurance expense P 250,000

2. In 2000 Gary Company purchased P10,000,000 life insurance policy on Its president, of which
Gary is the beneficiary. Information regarding the policy for 2005 is
Cash surrender value- January 1 2,000,000
Cash surrender value- December 31 2,075,000
Annual premium paid on January 1, 2005 500,000
 During 2005, dividends of P30,000 was applied to increase the cash surrender value. What
should be reported as life insurance expense for 2005?
SOLUTION:
Cash surrender value - December 31 2,075,000
Cash surrender value - January 1 (2,000,000)
Cash surrender value 75,000

Annual premium paid on January 1 500,000

Cash surrender value (75,000)

Life Insurance expense P 425,000

3. Eastern Company purchased a P4,000,000 life insurance policy on the company president. The
premium that was paid on January 1 amounted to P96,000. In the first year, cash surrender value
amounted to P7,000 and dividends received by Eastern from the insurance company for the year
amounted to P1,500. What was the amount of insurance expense for the first year?
SOLUTION:
Annual premium paid on January 1 96,000
Cash surrender value (7,000)

Dividend received (1,500)

Life Insurance expense P 87,500

4. The following investments (classified as trading unless otherwise stated) are being held by Thesa Bank,
as of December 31, 2004, its first year of operation:

Cost Market

Marketable equity securities:

Wickham Corp. 2,000,000 1,900,000
Lawrence Co. 1,000,000 880,000
Thesa Bank 1,500,000 2,400,000
Edith Corp. 2,500,000 2,300,000
 Dexter, Inc 2,500,000 2,700,000
Joey Co. (redeemable preferred 1,500,000 1,250,000
stock)
Investment in stock rights
Jude Co. 500,000 400,000
Marketable debt securities:
Edu Co. (convertible bonds) 3,000,000 3,700,000
Demi Co. 4,500,000 4,200,000

Investment in Dexter, Inc. represents 30% of outstanding preferred stock. Total income reported by
Dexter, Inc. for 2004 amounted to P10,000,000.
The Thesa Bank intends to hold its investment in Demi Co. bonds to maturity. How much is the
income related to the investments to be reported in Thesa Bank’s income statement for 2004?

130,000

5. Bobbi Company purchased 20% of Jean Company's common stock on July 1, 2004. A P5,000,000
goodwill resulted from the acquisition. The goodwill has an estimated useful life of 5 years Bobbi
appropriately carries this investment at equity and the balance of the investment account was
P18,000,000 at December 31, 2004. Jean reported net income of P30,000,000 for the year ended
December 31, 2004 and paid Bobbi dividends of P2,000,000 on December 31, 2004.
How much did Bobbi pay for its 20% interest in Jean company? 17, 500,000

SOLUTION:

Balance of Investment 18,000,000

Goodwill amortization (5,000,000 /5 x 6/12) 500,000

Dividends received 2,000,000

Net Income (30,000,000 x 20% x 6/12) ( 3,000,000)

Cost of investment P 17,500,000

6. Lea Company purchased 25% of East Company’s common stock on July 1, 2003. A P5,000,000
goodwill resulted from the acquisition. The goodwill has an estimated useful life of 5 years. Lea
appropriately carries this investment at equity and the balance of the investment account was
P18,000,000 at December 31, 2003. East reported net income of P20,000,000 the year ended
December 31, 2003 and paid dividends of P4,000,000 on December 31, 2003. How much did Lea
pay for its 25% interest in East Company? 17,000,000
SOLUTION:
Balance of investment 18,000,000

Amortization (5,000,000/5x6/12) 500,000

Cash dividend (4,000,000 x 25%) 1,000,000

Net income (20,000,000 x 25%x 6/12) (2,500,000)

Acquisition cost P 17,000,000

7. On January 1, 2003 Eraile Company purchased 20% interest in South Company for P20,000,000. On
this date, South’s stockholders’ equity was P70,000,000. The carrying amounts of South’s
identifiable net assets approximated their fair values, except for land whose fair value exceeded its
carrying amount by P5,000,000. South reported net income of P15,000,000 for 2003 and paid no
dividends. Eraile accounts for this investment using the equity method and amortizes goodwill over
5 years. In its December 31, 2003 balance sheet, what amount should Fraile report as investment in
associate? 22,000,000
SOLUTION:
Investment in South Company 20,0000,000
Carrying amount 5,000,000
Interest revenue (15,000,00x20%) (3,000,000)
Total P 22,000,000
8. On January 2, 2003, Halina, Inc. acquired a 15% interest in Tracy Corp. by paying P2,000,000 for
10,000 common shares. On this date, the net assets of Tracy Corp. totaled P12,000,000. The Halina
did not have the ability to exercise significant influence over the operating and financial policies of
Tracy. Tracy declared dividends of P1,000,000 and reported a net income of P2,000,000 for the year
ended December 31, 2003. On January 1, 2004, Halina paid P4,500,000 for 30,000 additional shares
of Tracy common stock, which represents a 25% interest in Tracy. As a result of this additional
acquisition Halina has the ability to exercise significant influence over Tracy. Tracy declared
dividends of P1,500,000 and reported net income of P5,000,000 for the year ended December 31,
2004. Halina amortized any goodwill over the maximum period allowed. The balance of the
investment in Tracy
SOLUTION:
Cost Acquisition 01/2/2003 2,000,000
Cash dividends (1,000,000x15%) (150,000)
Net income (2,000,000x155) 300,000
Amortization 2003 (2,000,000-( 12,000,0000x15%))/20 (10,000)
Balance of investment as of 2004 2,140,000
Additional acquisition 4,500,000
Cash dividends 2004 (1,500,000x 40%) 25%+15% (600,000)
Net income 2004 (5,000,000x40%) 25%+15% 2,000,000
Amortization 2003 (10,000)

Amortization 2004 (4,500,000 - (15,600,000 x 25%))/20 (30,000)

Tracy balance of investment 12/31/2003 P 8,000,000

9. On June 30, 2004, Duran Company purchased 30% of the outstanding common stock of Rose
Company for P30,000,000. At that time, Rose Company’s net assts amounted to P80,000,000. The
level of investment is sufficient to provide Duran significant influence over the activities of Rose.
The difference between the purchase price and the underlying book value of Rose’s net assets is due
to the following:
 Land is undervalued by P5,000,000
 Goodwill is determined to exist for any remaining difference between cost and book value.
Goodwill is estimated to have a useful life of 5 years from the date of the stock purchase
Rose Company reported net income of P50,000,000 for the year 2004 and paid cash dividends of
P10,000,000 on December 31, 2004. What amount should be reported by Duran Company as
investment in Rose Company on December 31, 2004?
34,050,000

SOLUTION:

Cost 30,000,000

Net assets acquired (30% x 80,000,000) (24,000,000)

Excess of cost 6,000,000

Applicable to land (30% x 5,000,000) (1,500,000)

Goodwill 4,500,000

Cost 30,000,000

Share in net income (50,000,000 x30%x6/12) 7,500,000

Share in cash dividend (10,000 x 30%) (3,000,000)

Amortization (4,500,000/5x 6/12) (450,000)

Balance of investment 12/312004 P 34,050,000

10. On January 1, 2005, Mar Company purchased 25% of Core Company's common stock for
P12,000,000. The stockholders' equity of Core at the same date is P40,000,000. However several
assets in Core's balance sheet had fair values different from their book values. The fair value of
inventory and building exceeded their carrying amounts by P500,000 and P4,000,000 respectively.
Core's plant assets are being depreciated over their remaining useful life of ten years and Mar's policy
is to amortize any goodwill over five years. The inventory is already sold during the year. Core
reported net income of P10,000,000 for the year ended December 31, 2005 and paid Mar dividends of
P1,000,000 during the year. What is the carrying amount of Mar's investment in Core at December
31, 2005?
SOLUTION:
Acquisition Cost 12,000,000
Net income 10,000,000x25% 2,500,000
Dividends (1,000,000)

Amortization excess Cost (4000,000)

Carrying amount 12/31/2005 P 13,100,000

Amortization excess Cost of computation

Inventory (500,000x25%) 125,000

Building (400,000x25%) 100,000

25,000
Goodwill (500,000+400,000)- 25,000
= 875,000/5 175,000

Amortization excess Cost 400,0000

11. In 2003, Mamerto Company held the following investments in common stock:
 40,000 shares of RST Company’s 200,000 outstanding shares. Mamerto level of ownership does
not give it the ability to exercise significant influence over the financial and operating policies of
RST.
 100,000 shares of MNO Company’s 500,000 outstanding shares. Mamerto’s level of ownership
gives it the ability to exercise significant influence over the financial and operating policies of
MNO.
During 2003, Mamerto received P1,500,000 cash dividend from RST and P2,500,000 cash dividend
from MNO. On December 31, 2003 MNO Company declared and issued a 5% stock dividend. The
market price of the MNO stock was P150. What amount of dividend revenue should Mamerto report
 for 2003?
1,500,000
12. Karla Company acquired 20% of Victoria Company’ s voting stock for P50,000,000 on January 1,
2002. The 20% interest gave Karla the ability to exercise significant influence over Victoria’s
operating and financial policies. During 2002, Victoria earned P8,000,000 and paid dividends of
P5,000,000. Victoria reported earnings of P6,000,000 for the 6 months ended June 30, 2003, and
P10,000,000 for the year ended December 31, 2003. On July 1, 2003, Karla sold half of its stock in
Victoria for P33,000,000 for cash. Victoria paid dividends of P3,000,000 on October 1, 2003. In its
2003 income statement, what amount should Karla report as gain from sale of investment?
7,100,000

SOLUTION:

Cost 50,000,000

Net income 2002 (8,000,000x20%) 1,600,000

Dividends 2002 (5,000,000x20%) (1,000,000)

Net Income

(1/1 to 6/ 30/ 2003 (6,000,000X20% ) 1,200,000

Book value 6/30/2003 51,800,000

Selling price 33,000,000

Book value sold (51,800,000 x6/12) 25,900,000

Gain from sale of investment P 7,100,000

13. Noralyn Company acquired 20% of Carmina Company’s voting stock for P20,000,000 on January 1,
2002. The 20% interest gave Noralyn the ability to exercise significant influence over Carmina’s
operating and financial policies. During 2002, Carmina earned P6,000,000 and paid dividends of
P4,000,000. Carmina reported earnings of P5,000,000 for the 6 months ended June 30, 2003, and
P9,000,000 for the year ended December 31, 2003. On July 1, 2003, Noralyn sold half of its stock in
Carmina for P15,000,000 for cash. Carmina paid dividends of P3,500,000 on October 1, 2003. In its
2003 income statement, what amount should Noralyn report as gain from sale of investment?

SOLUTION:

Cost 20,000,000

Net income 2002 (6,000,000x20%) 1,200,000

Dividends 2002 (4,000,000x20%) (800,000)

Net Income

(1/1 to 6/ 30/ 2003 (5,000,000X20% ) 1,000,000

Book value 6/30/2003 21,400,000

Selling price 15,000,000

Book value sold (21,400,000 x6/12) 10,700,000

Gain from sale of investment P 4,300,000

14. The following information relates to a noncurrent investment that Vivian Company placed in trust:
Bond sinking fund – January 1, 2004 6,000,000
2004 additional investment 2,000,000
Dividends on investment 1,500,000
Interest revenue 500,000
Administrative costs 1,000,000
Bonds payable 10,000,000
Premium of bonds payable 2,000,000
What amount should Vivian report in its December 31, 2004 balance sheet as noncurrent investment
in bond sinking fund?

SOLUTION:

Bond sinking fund- January 1, 2004 6,000,000

Add: Additiaonal investment 2004 2,000,000
Dividends on investment 1,500,000
Interest revenue 500,000 4,000,000
Total 10,000,000
Less: administrative cost 1,000,000
Sinking fund December 31, 2004 P 9,000,000

15. The following investments (classified as trading unless otherwise stated) are being held by
Thesa Bank, as of December 31, 2004, its first year of operation:
 Cost Market
Marketable equity securities:
Wickham Corp. 2,000,000 1,900,000
Lawrence Co. 1,000,000 880,000
Thesa Bank 1,500,000 2,400,000
Edith Corp. 2,500,000 2,300,000
Dexter, Inc 2,500,000 2,700,000
Joey Co. (redeemable preferred 1,500,000 1,250,000
stock)
Investment in stock rights
Jude Co. 500,000 400,000
Marketable debt securities:
Edu Co. (convertible bonds) 3,000,000 3,700,000
Demi Co. 4,500,000 4,200,000

Investment in Dexter, Inc. represents 30% of outstanding preferred stock. Total income
reported by Dexter, Inc. for 2004 amounted to P10,000,000.
The Thesa Bank intends to hold its investment in Demi Co. bonds to maturity. How much is
the income related to the investments to be reported in Thesa Bank’s income statement for
2004?
130,000

Thesa Bank

Cost 1,500,000
Market value 2,400,000
Unrealized loss 900,000

Held investment
Demi co. ( 4,500,000-4,200,000) 300,000
Total 1,200,000x30%
Income P 360,000
16. Carrie Investment Corporation began operations on January 1, 2005. The following
information pertains to the December 31, 2005 portfolio of marketable securities.
Trading Available for sate
Aggregate cost 20,000,000 12,000,000
 Aggregate market value 18,000,000 10,000,000
Aggregate lower of cost or
market
17,000,000 9,500,000
value applied to each
security

What amount should Carrie report as unrealized loss on these securities in its 2005 income
statement?

SOLUTION:
Aggregate cost 20,000,000
Aggregate market value (18,000,000)
Unrealized loss P 2,000,000

17. On April 1, 2004, Renha Company purchased as a short-term investment a P1,000,000 face
value 8% bond for P906,000 including accrued interest. The bond are dated January 1, 2004
and mature on January 1, 2009, and pay interest annually on January 1 and July 1. On
December 31, 2004, the bonds had a market value of P945,000. On April 1, 2005, Renha sold
the bonds for P950,000. In its 2005 income statement, what amount should Renha report as
gain from the sale of short-term investment in debt securities?
SOLUTION:
Total payment 906,000
Accrued interest (1,000,000x8%x3/12) (20,000)
Cost of investment 886,000
Selling Price 950,000
Gain from the sale of investment P 64,000
18. Data regarding the available for sale securities of Ma. Cristina Bank follow:
Cost Market
December 31, 8,000,000 6,000,000
2002
December 31, 8,000,000 6,500,000
2003
Differences between cost and market value are considered temporary. The stockholders’
equity section of the December 31, 2003 balance sheet should report unrealized loss on
these securities at
SOLUTION:
Cost 12/31/2003 8,000,000
Market value 12/31/2003 (6,500,000)
Unrealized loss 12/31/2003 P 1,500,000

19. On April 1, 2003, Fenalon Company purchased P8,000,000 face value, 9% treasury notes for
P7,430,000 including accrued interest of P180,000. The notes mature July 1, 2004 and pay
interest semiannually on January 1 and July 1. Fenalon uses the straight-line method of
amortization and intends to hold the notes to maturity. In its October 31, 2003 balance sheet,
the carrying amount of this investment should be
SOLUTION:
Investment on treasury notes ( 7,430,000-180,000) 7,250,000
Amortization discount 4/1/2003-10/31/2003
(8,000,000-7,250,000= 750,000) 350,000
(750,000/15 months x7 months) __________
Carrying amount10/31/2003 P 7,600,000
20. On July 1, 2003, Wendy Company purchased 5,000 of the P1,000 face amount, 8% bonds of
Marianne Corporation for P4,615,000 to yield 10% per annum. The bonds, which mature on
July 1, 2008, pay interest semiannually on January 1 and July 1. Wendy uses the interest
method of amortization and the bonds are appropriately recorded as long-term investment.
The bonds should be reported on the December 31, 2003 balance sheet at

SOLUTION:
Interest expense ( 4,615,000x10%x6/12) 230,750
Interest paid (5,000,000x8%x6/12) 200,000
Amortization of discount 2003 30,750
Bond payable 4,615,000
Total P 4,645,750
21. On April 1, 2003, Melissa Company purchased P6,000,000 face value, 9% treasury notes for
P5,535,000 including accrued interest of P135,000. The notes mature July 1, 2004 and pay
interest semiannually on January 1 and July 1. Melissa uses the straight-line method of
 amortization and intends to hold the notes to maturity. In its October 31, 2003 balance sheet,
the carrying amount of this investment should be
5,680,000

SOLUTION:
Investment on treasury notes (5,535,000-135,000) 5,400,000
Amortization discount 4/1/2003-10/31/2003 280,000
(6,000,000-5,400,000= 600,000)
(600,000/15 months x7 months) __________
Carrying amount10/31/2003 P 5,680,000

22. Kristine Bank had investments in 10-year, 14% bonds costing P10,500,000 which were
acquired on January 1, 2003 and classified as "available for sale". On December 31, 2004,
Kristine Bank decided to hold the investments to maturity and accordingly reclassified them
as "held to maturity" on that date. The investments market value was P9,900,000 at
December 31, 2003, P9,700,000 on December 31, 2004 and P9,400,000 on December 31,
2005.
The unrealized loss on "available for sale securities" in its 2005 statement of stockholders'
equity is
SOLUTION:
Cost of investment 10,500,000
Market value @ date of transfer 2004 9,700,000
Unrealized loss 2004 800,000
Amortization 2005 (800,000/8yrs) (100,000)
Unrealized loss 2005 P 700,000

23. On January 1, 2004, Khristine Bank purchased 5,000 of the P1,000 face value 12% bonds for
P5,500,000. The bonds mature on January 1, 2014 and pay interest annually on December
31. The bonds are intended to be held to maturity and appropriately classified as part of the
bank’s investment in bonds and other debt instruments. On December 31, 2004, the bank
decided to reclassify the bond investment to “available for sale” securities in response to
legal and liquidity reserves, security deposits and allowable alternative investments. The
market value of the bond investment on December 31, 2004 was P6,000,000. The unrealized
 gain that will appear on the December 31, 2004 balance sheet is
SOLUTION:
Cost 5,500,000
Amortization of premium (500,000/10) (50,000)
Book Value of investment 5,450,000
Market Value 6,000,000
Unrealized gain P550,000

24. Reja Bank began operations on January 1, 2003. The following information pertains to the
bank’s December 31, 2003 portfolio of marketable securities:

Trading Available for

sale
Aggregate cost 8,000,00 5,000,000
0
Aggregate market value 7,200,00 4,900,000
0
Aggregate lower of cost or market value
applied to each security
7,100,00 4,700,000
0

What amount should Reja Bank report as loss on these securities in it 2003 income
statement?

SOLUTION:
Aggregate cost 8,000,000
Aggregate market value (7,200,000)
Unrealized loss P 800,000

25. Jazel Banking Corporation began operations on January 1, 2001. The following information
pertains to the December 31, 2004 portfolio of debt and equity securities:

Trading Available for IBODI

sale
Aggregate cost 12,500,000 18,000,000 20,000,000
 Aggregate market 10,000,000 16,000,000 19,500,000
value
Aggregate lower of
cost or market value
applied each security
9,500,000 15,000,000 18,000,000

Assuming any decline in market values to be temporary, what amount should Jazel report as
loss on these securities in its 2004 income statement?

SOLUTION:
Aggregate cost 12,500,000
Aggregate market value (10,000,000)
Unrealized loss P 2,500,000

"If you think you are different, you can probably do things differently."

Prepared by:
HERNAN L. PARROCHA, CPA, MBA, CTT
Licensed Accounting Professor
PRC – CPA 0155263
Board of Accountancy Accredited Licensed
Accountancy Teacher No. F21 - 1252