[FAR & AP]

PROBLEM 1 – Information relevant to three different companies follows:

Thirdy Company had the following portfolio of financial instrument as of December 31, 2022. All
securities were acquired at the end of 2021:
Security Denomination Initial recorded value
First shares 200,000 shares P11,000,000
Second shares 20,000 shares 900,000
• First shares were acquired and designated as equity investment at fair value through profit
or loss. The shares were acquired at P55 per share which included P1.00 per share
transaction cost. Half of the First shares were sold at P62 per share on September 30, 2022.
Each share is selling at P65 on December 31. 2022.
• Second shares were acquired and designated as equity investments at FV through other
comprehensive income. The shares were purchased at P45 including P1.00 per share
transaction cost. The FV of each share on December 31, 2022 was at P50.
At the beginning of 2022, Tristan Co. purchased 250,000 ordinary shares of Daniella Co. at P45 per
share, giving Tristan 40% ownership and a significant influence over Daniella. On this date, the book
value Daniella's net asset amounted to P23,125,000. On the date of acquisition, the carrying amount
of Daniella's identifiable assets and liabilities approximate their carrying amounts, except for the
following:
• The aggregate fair value of Daniella's depreciable property, plant, and equipment is
P2,500,000 greater than its carrying value. Such item is depreciated over 8-years remaining
useful life on the date of acquisition.
• The fair value of Daniella's inventories was P2,000,000 greater than its carrying amount. All
of these inventories were sold in 2022.
• A land costing P1,000,000 had fair value of P1,500,000
During the year, the Daniella earned and reported net income of P10,200,000, and paid cash
dividends of P1,800,000 to Tristan Company.
Lance Company acquired on January 1, 2022 a 5 year, 8%, P5,000,000 face value bonds, for
P4,445,615 dated January 1, 2022. The bonds which pay interest every December 31 had 11%
prevailing interest rate on the date of acquisition. Lance's business model is to collect contractual
cash flows and the cash flows are solely payment of principal and interest and to sell the bonds when
circumstances warrants. The prevailing interest rate on December 31, 2022 is 10%.
1. What amount should Lance Company report its debt investment in the Statement of Financial
Position as of December 31, 2022?
a. 5,450,000 c. 4,683,013
b. 4,696,128 d. 4,534,633
2. What amount should Tristan Company report its investment in the Statement of Financial
Position as of December 31, 2022?
a. 12,605,000 c. 14,300,000
b. 13,685,000 d. 14,315,000
3. What amount should Thirdy Company report as unrealized gain (loss) in its Statement of
Comprehensive Income for the period ending December 31, 2022?
a. 100,000 c. 1,200,000
b. 1,000,000 d. 1,220,000
PROBLEM 2
On January 1, 2018 Iffy Corp. acquired 30,000 shares of ABC Corp’s 100,000 shares outstanding for
P5,000,000. The book value of ABC’s identifiable net assets on this date was at P14,000,000.All its
assets carrying value approximated their fair values except for a depreciable assets with a remaining
life of 5 years, which was undervalued on this date by P1,600,000.
ABC reported total comprehensive income in 2018 at P4,000,000 which was net of a foreign exchange
loss reported in as other comprehensive loss at P800,000.ABC also paid dividends at P1.5M at the
end of the year, P500,000 of which is from pre-acquisition Retained Earnings. The fair market value
of shares on this date was at P210 per share.
1. What is the carrying value of Iffy’s investment in ABC shares as of December 31, 2018, using
the appropriate accounting standards?
a. 5,990,000 c. 5,654,000
b. 5,750,000 d. 5,894,000
2. Assuming that Iffy Corp. is a medium-sized entity and that the company uses the fair value
method in accounting for its investment in ABC, how much in total should be recognized in
Iffy’s Corp.’s profit or loss for 2020?
a. 300,000 c. 1,300,000
b. 450,000 d. 1,750,000
3. Assuming that Iffy Corp. sold 18,000 shares of its ABC shares investment on December 31,
2018 at its prevailing fair value, how much in total should be recognized in the profit or loss
as a result of the transaction?
a. 646,000 c. 387,600
b. 406,000 d. 243,600
4. Using the information in the previous item, how much shall be the carrying value of any
remaining investments as of December 31, 2018?
a. 2,261,600 c. 2,300,000
b. 2,357,600 d. 2,520,000
5. Assuming that ABC issued 25,000 shares to other stockholders on December 31, 2018 at
prevailing fair value without Iffy Corp’s participation, how much should be recognized in the
profit or loss as a result of the transaction/event?
a. None c. 129,200
b. 196,200 d. 81,200
PROBLEM 3
Benshoppe Inc. had the following portfolio of financial assets as of December 31, 2020.All the
financial asset were acquired in 2020:
Financial asset Acquisition Cost
Aye Corp. Stocks, 20,000 shares P590,000
Bee Inc. Stocks, 40,000 shares 1,100,000
See Co. 10%, P2M bonds 1,973,000
Dee Corp. Stocks, 50,000 shares 2,400,000
Audit notes:
a. Aye Corp. shares were acquired with an intention of generating short-term profits from the
share price’s fluctuations. The company paid P29.50 per share, which included the P0.50 per
share broker’s fees and commissions. The shares were acquired on February 20, 2020. A P2
per share cash dividends were received on March 30. These dividends were declared by Aye
Corp. on January 20, 2020 to stockholders as of record date March 1, 2020.
b. The company paid P27.50 per share, including P0.50 per share brokers’ fee on the acquisition
of Bee Inc. on March 1, 2020. These shares were acquired for trading purposes. A P3 per share
dividends were received from the said shares on May 3, 2020. These dividends were declared
on April 1 to stockholders as of record date April 20.
c. See Co. bonds which pay semi-annual interest every June 30 and December 31, were acquired
on October 1, 2020 at P1,973,000, when the prevailing effective interest rate on similar
instrument was at 12%. The bonds shall mature on December 31, 2022. The company has a
business model of holding debt securities for short-term profits.
d. Dee Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and
commissions on June 30, 2020. Dee Corp. had a total of 200,000 shares outstanding on the same
date. The company received P5 dividends per share form Dee on December 20, 2020.
e. The following information were deemed relevant at year-end and no entries had been made
yet by the company to reflect any of the following information:
Aye Corp. Bee Inc. See Co. Dee Corp.
Net income in 2020 P1,200,000 P1,500,000 P2,000,000 P2,240,000
Fair Value P35/sh P25/sh 11% P51/sh
1. What is the unrealized holding gain/loss to be reported in the 2020 statement of
comprehensive income?
a. 1,948 b. 51,948 c. 121,948 d. 122,750
2. What is the correct carrying value of investments that should be presented as current asset?
a. 3,665,750 c. 3,664,948
b. 3,543,000 d. 3,765,250
3. What is the correct carrying value of investment in Dee Corp. shares that should be presented
in the 2020 Statement of Financial Position?
a. 2,430,000 c. 2,280,000
b. 2,150,000 d. 2,550,000
4. Assuming that the company’s business model regarding debt securities has an objective of
collecting contractual cash flows, what is the correct carrying value of the investment in See
Co. Bonds that should be presented in the 2018 Statement of Financial Position?
a. 1,930,690 c. 1,965,750
b. 1,932,690 d. 1,960,960
THEORIES:
1. 1.In order to guard against the misappropriation of company-owned marketable securities,
which of the following is the best course of action that can be taken by a company with a large
portfolio of securities?
a. Require that one trustworthy and bonded employee be responsible for access to the
safekeeping are where securities are kept
b. Requirement that employees who enter and leave the safekeeping are sign and record in
a log the exact reason for their access
c. Require that employees involved in the safekeeping function maintain a subsidiary
control ledger for securities on a current basis
d. Require that the safekeeping function for securities be assigned to a bank or stockbroker
that will act as a custodial agent.
2. Squid Company had large amounts of funds to invest on a temporary basis. The board of
directors decided to purchase securities and derivatives and assigned the future purchase
and sale decisions to a responsible financial executive. The best person or persons to make
periodic reviews of the investment activity would be:
a. An investment committee of the board of directors
b. The chief operating officer
c. The corporate controller
d. The treasurer
3. The auditors who physically examine securities should insist that a client representativebe
present in order to:
a. Detect fraudulent securities
b. Lend authority to the auditors’ directives.
c. Acknowledge the receipt of securities returned
d. Examination of cash disbursements records
4. The best way to verify the amounts of dividend revenue received during the year is:
a. Recomputation
b. Verification by reference to dividend record books
c. Confirmation with dividend paying companies
d. Examination of cash disbursement records.
5. When an auditor is unable to inspect and count a client’s investment securities until after the
balance sheet date, the bank where the securities are held in a safe deposit box should be
asked to
a. verify differences between the contents of the box and the balances in the client’s
subsidiary ledger.
b. provide a list of securities added and removed from the box between the balance-sheet
date and the security count date.
c. confirm that there has been no access to the box between the balance sheet date and the
security-count date.
d. count the securities in the box so the auditor will have an independent direct verification.