CHAPTER 6 - Audit of Investments Problem 1 The following data pertains to Rainbow Corporation‟s investments in marketable securities:
Trading Available-for-sale
Cost P 150,000 150,000
Market Value 12/31/07 12/31/06 P 155,000 P 100,000 130,000 126,000
Questions 1. What amount should Rainbow Corporation report as unrealized holding gain in its 2007 income statement? a. P 65,000 b. P 60,000 c. P 55,000 d. P 50,000 2. What amount should Rainbow Corporation report as unrealized loss on marketable equity securities at December 31, 2007, in accumulated other comprehensive income in stockholders‟ equity? a. P 20,000 b. P 13,000 c. P 10,000 d. P 0 Solution 1. C Market value – 1/1/07 Market value – 12/31/07 Unrealized holding gain 2. A Cost Market value – 12/31/07 Unrealized holding loss
P 100,000 155,000 P 55,000 P 150,000 130,000 P 20,000
Problem 2 The following information pertains to Every Now and Then, Inc.‟s portfolio of marketable investments for the year ended December 31, 2007: Cost
Fair Value 12/31/06
Held-to-maturity Security ABC Trading Security Security DEFP 150,000 Available-for-sale Security GHI 190,000 Security JKL 170,000
2007 activities Purc. Sales P 100,000
P 95,000
P 100,000 165,000 175,000
Security ABC was purchased at par. temporary.
Fair value 12/31/07
155,000 P 175,000 160,000 All declines in fair values are considered to be
Questions 1. The carrying value of security ABC at December 31, 2007 is a. P 95,000 b. P 98,000 c. P 100,000
d. P 105,000
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2. The carrying value of security DEF at December 31, 2007 is a. P 100,000 b. P 120,000 c. P 150,000
d. P 155,000
3. The carrying value of security JKL at December 31, 2007 is a. P 160,000 b. P 165,000 c. P 170,000
d. P 175,000
4. The recognized gain or loss on sale of security GHI is a. P (40,000) b. P (25,000) c. P (15,000)
d. P )10,000)
5. The unrealized holding gain or loss to be reported in 2007 net income is a. P 55,000 b. P (25,000) c. P 15,000 d. P (5,000) 6. Unrealized gain or loss to be reported at December 31, 2007, as a separate component of stockholders‟ equity entitled “accumulated other comprehensive income” is a. P (20,000) b. P 15,000 c. P (10,000) d. P 5,000 Solution 1. C Cost since the security is considered as held-to-maturity 2. D Market value at year-end 3. A Market value at year-end 4. C Selling Price P 175,000 Cost 190,000 Loss P( 15,000) 5. A Market value – 1/1/07 P 100,000 Market value – 12/31/07 155,000 Unrealized holding gain P 55,000 6. D Cost P 170,000 Market value – 12/31/07 175,000 Holding gain P 5,000
Problem 3 At December 31, 2007, Maria Angela Corporation had the following investments that were purchased during 2005, its first year of operations: Cost
Fair Value
700,000 210,000 910,000
725,000 200,000 925,000
500,000 850,000 1,350,000
560,000 865,000 1,425,000
Securities to be Held to Maturity: Security E 970,000 Security F 412,000 Totals 1,382,000
980,000 409,000 1,389,000
Trading Securities: Security A Security B Totals Securities Available for Sale: Security C Security D Totals
No investments were sold during 2007. All securities except Security D and Security F are considered short-term investments. None of the market changes is considered permanent.
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Questions 1. The amount of investment to be reported as current assets is: a. P 2,465,000 b. P 2,455,000 c. P 2,380,000
d. P 1,485,000
2. The amount of investment to be reported as non-current assets is: a. P 1,389,000 b. P 1,382,000 c. P 1,277,000 d. P 1,274,000 3. The unrealized gain (or loss) component of income before taxes is: a. P 15,000 b. P 75,000 c. P 97,000 d. P 100,000 4. The unrealized gain (or loss) component of shareholders‟ equity is: a. P 82,000 b. P 75,000 c. P 60,000 d. P 12,000 Solution 1. B Security A P 725,000 at mv Security B 200,000 at mv Security C 560,000 at mv Security E 970,000 at cost Total P 2,465,000 2. C Security D P 865,000 at mv Security F 412,000 at cost Total P 1,277,000 3. A Trading security – cost P 910,000 Trading security – mv 925,000 Holding gain P 15,000 4. B Available-for-sales security – cost P 1,350,000 Available-for-sales security – mv 1,425,000 Holding gain P 75,000
Problem 4 Marc Corporation had investments in marketable debt securities costing P650,000 that were classified as available-for-sale. On June 30, 2007, Marc Corporation decided to hold the investments to maturity and accordingly reclassified them from the held-to-maturity category on that date. The investments‟ market value was P575,000 at December 31, 2006; P530,000 at June 30, 2007; and P490,000 at December 31, 2007. Questions 1. What amount of loss from investments should Marc Corporation report in its 2007 income statement? a. P 0 b. P 45,000 c. P 85,000 d. P 120,000 2. What amount should Marc Corporation report as net unrealized loss on marketable debt securities in its 2007 statement of stockholders‟ equity? a. P 160,000 b. P 120,000 c. P 45,000 d. P40,000 Solution Entry: Valuation allowance 75,000 Unrealized holding loss (SHE) 75,000 To close the valuation allowance of last year.
1.
a
MES – HTM 530,000 Unrealized holding loss (SHE) 120,000 MES – SAS 650,000 2. b (Note: the unrealized holding loss should be amortized over the life of the security)
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Problem 5 Quiters has investments in shares of common stock of NeverWin Company, bought as follows: 2003 1,000 shares – P 140,000 2005 500 shares – P 90,000 The following transactions took place in 2007 with respect to these holdings: April 10 By proper resolution, there was a 3 for 1 stock split and Quiters Company received 3,000 shares in addition to her original holdings. July 10 Quiters Company received a P0.60 per share cash dividend and also rights to subscribed to one share at P40 each for every five shares held. On this date, shares of stock of NeverWin Company were selling ex-rights at P55 per share and rights were selling at P2 each. July 20 Quiters Company exercised all her rights by buying the new shares and paid P36,000. Nov. 15 Quiters sold 1,000 shares at P60 each, taken from those acquired in 2003, less broker‟s commission of P750. Questions 1. The investment in stock at year-end is: a. P 222,023 b. P 221,031
c. P 220,971
d. P 219,334
2. The investment in stock at year-end from the 2003 purchase is: a. P 87,953 b. P 90,059 c. P 93,333
d. P 108,889
3. The investment in stock at year-end from the 2005 purchase is: a. P 90,000 b. P 88,422 c. P 86,842
d. P 81,931
4. The gain on sale of investment at year-end is: a. P 14,971 b. P 14,221 c. P 13,333
d. P 12,583
5. How many shares were purchased during the year? a. 900 shares b. 600 shares c. 300 shares
d. 150 shares
Solution April 10 Memo entry July 10 Cash 2,700 Dividend income 2,700 Investment in Stock Rights 8,070 Investment in stock 8,070 (2/57 x P230,000 = P8,070) July 20 Investment in stock 44,070 Cash 36,000 Investment in stock rights 8,070 Nov 15 Cash (60,000 – 750) 59,250 Investment in stock 45,029 (1,000 rights/3,000 rights x P135,088) Gain on sale 14,221 Answer: 1. C 2. B
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3. C
4. B
5. A
1999 Purchase 1,000 140,000 x 3 ______ 3,000 140,000 _____ ( 4,912) 3,000 135,088
Split Stock rights
Problem 6 Roelito Company has a fiscal year ending June 30. A summary of Roelito‟s transactions in the capital stocks of Joondee Company is presented below, except for several cash dividends that have no bearing on the situation. In all transactions, Joondee Company uses the specific certificate identification method. The transactions in the Investment of Joondee Company common stock are as follows: Sept 06, 2000
Purchased 500 shares of Joondee Company common, par P100 per share, at a total cost of P48,500.
July 15, 2003
Converted 500 shares of Joondee Company preferred stock into 500 shares of Joondee Company common, in accordance with the conversion privilege. The preferred shares originally cost P49,000, and the market price at conversion date was P95 per share. The market price of the common stock at July 15, 2003, was P101 per share. The transactions had no commercial substance.
Aug. 07, 2005
Received additional shares of Joondee Company common in a two-for-one stock split, in which the par value was reduced from P100 to P50 per share.
Sept. 06, 2005
Purchased 1,000 share of Joondee Company common at a total cost of P53,000.
Dec. 04, 2005
Exercised the option to receive Roelito share of common for each 10 shares held, in lieu of a cash dividend of P5.40 for each share held. The market price of a share was P54.
Dec. 02, 2006
Received stock dividend equal to 20 percent of the common shares held.
Apr. 04, 2007
Received warrants representing the right to purchase at par Roelito share of Joondee Company common for each ten shares of common owned. On that date of the issuance of the warrants, the market price of the stock ex-rights was P58, and the market price of the rights was P2 each.
Apr. 15, 2007
Roelito Company exercised the 1,000 rights applicable to the shares purchased on September 6, 2005, and sold all remaining rights. The net proceeds from the sale of the rights was P1.80 per right.
June 12, 2007
Sold 600 shares of Joondee Company common for P32,400 net. The shares were identified as 500 of those purchased on September 6, 2005, and 100 of those purchased April 15, 2007.
Question 1. The entry to record the conversion of preferred stock to common stock on July 15, 2003 is: a. Investment – preferred stock 47,500 Loss on conversion of stock 1,500 Investment – common stock 49,000 b. Investment – common stock 49,000 Investment – preferred stock 49,000
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c. Investment – common stock Loss on conversion of stock Investment – preferred stock b. Memorandum entry
47,500 1,500 49,000
2. The entry to record the December 4, 2005 transaction is: a. Memorandum entry b. Investment – common stock 16,200 Cash 16,200 c. Investment – common stock 16,200 Dividend income 16,200 d. Investment – common stock 16,200 Common stock 16,200 3. The cost of shares purchased through exercise of rights on April 15, 2007 is: a. P 6,473 b. P 6,391 c. P 5,000 d. P 3,527 4. Gain on sale of the rights is: a. P 1,761 b. P 1,473
c. P 1,294
d. P 1,244
5. Gain on sale of the stocks is: a. P 5,900 b. P 4,636
c. P 4,580
d. P 3,844
6. The audited balance of investment in common stock at December 31, 2007 is: a. P 139,796 b. P 138,344 c. P 95,081 d. P 89,344 7. The number of rights Roelito Company received from Joondee Company is: a. 39,600 rights b. 30,000 rights c. 3,960 rights d. 3,000 rights 8. The cost of the rights received is: a. P 4,897 b. P 5,507 Solution Sept 6, 2000 July 15, 2003 Aug 7, 2005 Sept 6, 2005 Dec 4, 2005 Dec 2, 2006 Apr 4, 2007 Apr 15, 2007
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c. P 5,557
Investment – common 48,500 Cash 48,500 Investment – common 49,000 Investment – preferred 49,000 Memo entry Investment – common 53,000 Cash 53,000 Investment – common 16,200 Dividend income 16,200 (shares outstanding – 3,000/10 = 300 shares x P54) Memo entry Stock rights 5,557 Investment – common 5,557 (Total investment to date – P166,700 x 2/60 = P 5,557) Investment – common 6,473 Cash 5,000 Stock rights 1,473 (2/60 x 53,000 = P1,767 x 1,000 rights/1,200 rights) Cash 5,328 Stock rights 4,084 (P5,557 – P1,473) Gain on sale 1,224
d. P 6,890
June 12, 2007
Cash
Answer: 1. B 2. C
32,400 Investment – common 27,820 [6,473 + (500/1200 x P51,233)] Gain on sale 4,580
3. A
4. D
5. C
6. A
7. C
8. C
Problem 7 On December 31, 2006, DreamBig Company reported as Available-for-sale securities: Attitude Company, 5,000 shares of common stock (a 1% interest) IstheKEY Company, 10,000 shares of common stock (a 2% interest) 2Success Company, 25,000 shares of common stock (a 10% interest) Marketable equity securities, at cost Less: Valuation allowance Marketable equity securities, at market
P 125,000 160,000 700,000 P 985,000 50,000 P 935,000
Additional information:
On May, 2007, Attitude Company issued a 10% stock dividend when the market price of its stock was P24 per share.
On November 1, 2007, Attitude Company paid a cash dividend of P0.75 per share.
On August 5, 2007, IstheKEY Company issued to all shareholders, stock rights on the basis of one right per share. Market prices at date of issue were P13.50 per share (exright) of stock and P1.50 per rights. DreamBig Company sold all rights on December 16, 2007 for net proceeds of P18,800.
On July 1, 2007, DreamBig Company paid P1,520,000 for 50,000 additional shares of 2Success Company‟s common stock which represented a 20% investment in 2Success Company. The fair value of all of the 2Success Company‟s identifiable assets net of liabilities was equal to their carrying amount of P6,350,000. As a result of this transaction, DreamBig Company owns 30% of 2Success Company and can exercise significant influence over 2Success Company‟s operating and financial policies.
DreamBig Company‟s initial 10% interest of 25,000 shares of 2Success Company‟s common stock was acquired on January 2, 2006 for P700,000. At that date, the net assets of 2Success Company totaled P5,800,000 and the fair value of 2Success‟s identifiable assets net of liabilities was equal to their carrying amount.
Market prices per share of the marketable equity securities which were all listed in the stock exchange, were as follows: At December 31 2006 2007 Attitude Company - common P 22 P 23 IstheKEY Company – common 15 14 2Success Company – common 27 29
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2Success Company reported net income and paid dividends of: Year ended December 31. 2006 Six months ended June 30, 2007 Six months ended December 31, 2007 (dividend was paid on 10/1/07
Year Ended P350,000 200,000 370,000
Div. per Share none none P 1.30
There were no other intercompany transactions between DreamBig Company and 2Success Company and there were no impairment of 2Success Company‟s asset at yearend.
Questions 1. The investment in Attitude Company common stock at year-end is: a. P 126,500 b. P 125,000 c. P 120,875 d. P 113,000 2. The investment in Isthekey Company common stock at year-end is: a. P 160,000 b. P 150,000 c. P 144,000 d. P 140,000 3. The investment in 2Success Company common stock at year-end is: a. P 2,288,500 b. P 2,270,250 c. P 2,264,000 d. P 2,175,000 4. The recovery of market decline to be reported in the income statement is: a. P 50,000 b. P 47,500 c. P 2,500 d. P
0
5. Dividend income to be reported in the income statement is: a. P 101,625 b. P 97,500 c. P 4,125
d. P
0
6. Gain on sale of stock rights is: a. P 3,600 b. P 2,800
d. P
0
c. P 1,200
7. The recovery on market decline in value of investment should be a. Credited to gain on recovery of market decline. b. Debited to gain on recovery of market decline. c. Credited to unrealized loss on market decline. d. Debited to unrealized loss on market decline. 8. The entry to adjust the dividend received from 2Success Company has: a. A debit to Dividend Income. b. A credit to Dividend Income. c. A debit to Retained Earnings. d. A debit to Investment in Equity. Solution Memorandum entry Cash 4,125 Dividend income Stock rights 16,000 Investment – IstheKey (1.50/15 x P160,000) Cash 18,800 Stock rights Gain on sale of stock rights Investment – 2Success 1,520,000 Cash
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4,125 16,000 16,000 2,800 1,520,000
Investment – 2Success 35,000 Retained earnings 35,000 To record share of income from 2Success for 2006 (10% x P350,000) Investment – 2Success Income from investment 6 mos. ended June 30 6 mos. ended Dec. 31
131,000
131,000 200,000 x 10% = P 10,000 370,000 x 30% = 111,000 P 131,000 Dividend income 97,500 Investment – 2Success 97,500 To adjust the dividend received Allowance for market decline 47,500 Unrealized loss on market decline 47,500 Market Cost Attitude 23 x 5,500 shares = P 126,500 P 125,000 Isthekey 14 x 10,000 shares = 140,000 144,000 Total P 266,500 P 269,000 Required Allowance Less: Beginning bal. Recovery Answer: 1. A 2. D
3. A
2,500 50,000 47,500 4. D
5. C
6. B
7. C
8. A
Problem 8 At December 31, 2006, ABARCA SUGAR CORPORATION properly reported as trading the following equity securities: Cost Market Shan Lily Co., 1,000 shares, P2.40 convertible preferred stock 40,000 42,000 Azenith Corp., 6,000 shares of common 60,000 66,000 Ronette Co., 2,000 shares of common 55,000 40,000 On January 2, 2007, ABARCA SUGAR CORPORATION purchased 100,000 shares of Nagasaki Ryuco Company common stock for P1,700,000, representing 30% of Nagasaki‟s outstanding common stock and an underlying equity of P!,400,000 in Nagasaki‟ net assets on January 2. ABARCA SUGAR had no other financial transactions with Nagasaki during 2006. AS a result of ABARCA SUGAR‟s ownership of Nagasaki, ABARCA SUGAR has the ability to exercise significant influence over Nagasaki‟s financial and operating policies. During 2007, ABARCA SUGAR disposed of the following securities:
January 18 - sold 2,500 shares of Azenith Corporation for P13 per share. June 1 - sold 500 shares of Ronette Company, after a 10% stock dividend was received, for P21 per share. October 1 - converted 500 shares of Shan Lily Company‟s preferred stock into 1,500 shares of Shan Lily‟s common stock, when the market price was P60 per share for the preferred stock and P21 per share for the common stock. The conversion has no economic substance.
The following 2007 dividend information pertains to stock owned by ABARCA SUGAR:
February 14 - Ronette issued a 10% stock dividend, when the market price of Ronette‟s common stock was P22 per share.
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April 5 and October 5 - Shan Lily paid dividends of P1.20 per share on its P2.40 preferred stock, to stockholder of record on March 9 and September 9, respectively. Shan Lily did not pay dividends on its common stock during 2007. June 30 - Azenith paid a P1.00 per share dividend on its common stock. March 1, June 1, September 1, and December 1 - Nagasaki paid quarterly dividends of P0.50 per share on cash of these dates. Nagasaki‟s net income for the year ended December 31, 2007 was P1,200,000.
At December 31, 2007, ABARCA SUGAR‟s management intended to hold Nagasaki‟s stock on a long term basis with the remaining investments considered temporary. Market prices per share of the marketable equity securities were as follows: Shan Lily Co., preferred stock Shan Lily Co., common stock Azenith Corp., common stock Ronette Co., common stock Nagasaki Ryuco, Co., common
12/31/07 P 56 20 11 22 16
12/31/06 P 42 18 11 20 18
All of the foregoing stocks are listed on major stock exchanges. Declines in market value from cost would not be considered permanent. Instruction: Based on the information above and other analysis as necessary, answer the following question: 1. The cost per share of Shan Lily preferred at December 31, 2007 is: a. P 13.33 b. P 20.00 c. P 40.00 d. P 60.00 2. The adjusted balance of Shan Lily preferred (cost) at December 31, 2007 is: a. P 20,000 b. P 28,000 c. P 30,000 d. P 50,000 3. The number of shares acquired by ABARCA SUGAR through conversion of Shan Lily stock is: a. 300 b. 500 c. 1,500 d. 3,000 4. The adjusted balance of Azenith common (cost) at December 31, 2007 is: a. P 60,000 b. P 37,273 c. P 35,000 d. P 27,500 5. The sale of Ronette common on June 1 resulted to a: a. Gain of P3,250 b. Loss of P2,000 c. Gain of P12,500
d. Loss of P3,250
6. The adjusted balance of Ronette common (cost) at December 31, 2007 is: a. P 55,000 b. P 46,900 c. P 42,500 d. P 41,250 7. The adjusted balance of Nagasaki common (cost) at December 31, 2007 is: a. P 1,845,000 b. P 1,860,000 c. P 1,700,000 d. P 1,545,000 8. The total dividend income of ABARCA SUGAR at December 31, 2007 is: a. P 8,400 b. P 5,900 c. P 5,300 d. P 0 9. The total income from investment of ABARCA SUGAR from Nagasaki at December 31, 2007 is: a. P 145,000 b. P 160,000 c. P 345,000 d. P 360,000
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10. ABARCA SUGAR‟s income statement at December 31, 2007 will report a: a. No unrealized gain/loss in market decline. b. P7,000 unrealized loss in market decline. c. P7,000 unrealized gain in market decline. d. P23,400 unrealized gain in market recovery. Solution Jan 2 Investment – Nagasaki 1,700,000 Cash 1,700,000 Jan 18 Cash 32,500 MES – Azenith 25,000 Gain on sale 7,500 Feb 14 Memorandum entry Apr 5 Cash 1,200 Dividend income 1,200 June 1 Cash 10,500 Loss on sale 2,000 MES – Ronette 12,500 June 30 Cash 3,500 Dividend income 3,500 Oct 1 Investment – common Shan Lily 20,000 Investment – preferred Shan Lily 20,000 Oct 5 Cash 1,200 Dividend income 1,200 March 1, June 1, September 1, and December 1 for Nagasaki shares Cash 200,000 Investment – Nagasaki 200,000 (P0.50 x 100,000 shares = 50,000 x 4 quarters = P200,000 Dec 31 Investment – Nagasaki 360,000 Income from investment 360,000 (P1,200,000 x 30% = P 360,000) Market Value Shan Lily preferred stock P 56 x 500 shares = P28,000 Shan Lily common stock P 20 x 1,500 shares = 30,000 Azenith common P 11 x 3,500 shares = 38,500 Ronette P 22 x 1,700 shares = 37,400 P133,900 Valuation Allowance__________ Recovery * 23,400 Beg. Bal. 7,000 _____ _____ Ending bal. 16,400 * squeeze figure Answer: 1. C 2. B 3. C 4. C 5. B 6. C 7. B 8. B 9. D
Cost P20,000 20,000 35,000 42,500 P117,500
10. D
Problem 9 An examination of the general ledger account of HOPE COMPANY discloses the following trading securities: Debit/(Credit) Jan. 10 Purchased 5,000 shares of Piltel common at P20 per share P 100,000 Mar 15 Purchased 2,000 of ABS-CBN common at P15 per share 30,000 Oct 5 Purchased additional 2,000 shares of Piltel common 36,000 Nov 4 Sold 2,000 stock rights ( 3,000) P 163,000 Additional information: 1. The company received stock rights from Piltel common when the market values of Piltel common stock and stock rights were P19 and P1 respectively. Each right entitles the
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holder to acquire 1 additional share of common stock for P18 per share on or before December 31, 2007. 2. The company exercised its rights to acquire 2,000 additional Piltel common shares on October 5, 2007. 3. On November 4, HOPE COMPANY sold 2,000 stock rights at P1.50 each. 4. At the end of the year, shares were quoted in the stock exchange as follows: Piltel Common ABS-CBN common
P 18 14
Question 1. Ending balance per audit of Piltel common at year-end is: a. P 140,000 b. P 138,000 c. P 133,000
d. P 126,000
2. Ending balance per audit of ABS-CBN common at year-end is: a. P 28,000 b. P 30,000 c. P 36,000
d. P 38,000
3. Ending balance of investment at year-end is: a. P 154,000 b. P 163,000 c. P 170,000
d. P 172,000
4. Allowance for market decline in value of investment at year-end is: a. P 0 b. P 10,000 c. P 9,000 d. P 3,000 5. Gain or loss on stock rights transaction is: a. P 0 b. P 2,000
c. P 1,000
d. P
500
6. Stock rights at December 31, 2007 is: a. P 0 b. P 2,000
c. P 1,000
d. P
500
Solution 1. Stock rights 5,000 Investment – Piltel 5,000 (1/2 x P100,000) 2. OE: Investment – Pitel 36,000 Cash 36,000 CE: Investment – Piltel 38,000 Cash 36,000 Stock rights 2,000 Adj: Investment – Piltel 2,000 Stock rights 2,000 3. OE: Cash 3,000 Investment – Pittel 3,000 CE: Cash 3,000 Stock rights 2,000 Gain on sale of rights 1,000 Adj: Investment – Piltel 3,000 Stock rights 2,000 Gain on sale of rights 1,000 4. Loss on market decline 9,000 Allowance for market decline 9,000 MV Piltel P18 x 7,000 shares = P 136,000 ABS-CBN P14 x 2,000 shares = 28,000 P 154,000 5. Loss on expiration of the rights 1,000 Stock rights 1,000
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Cost P 133,000 30,000 P 163,000 = P9,000
Answer: 1. D 2. A
3. B
4. C
5. A
6. A
Problem 10 YPILAN Investment Company has the following transactions in the common stock of CHERRY MAE Chemicals Corporation: a. On January 7, 2000, YPILAN purchased 2005 shares of P100 par value common stock at P110 per share. b. The CHERRY MAE Chemicals Corporation was expanding and as of March 1, 2001, issued to YPILAN 2,000 rights each permitting them to purchase one fourth share of common stock at par. The bid price of these stocks on March 1, 2001 was P140. There was no quoted price for the rights. c. YPILAN was advised that they should use the rights. YPILAN thereafter paid for the new shares on April 1, 2001, charging the payment to the Investment account. YPILAN purchased 500 shares of stocks using the stock rights. d. The accountant felt that the cash paid for the new shares was merely an assessment since their proportionate share in CHERRY MAE Chemicals was not changed. He credited all dividends (5% in December of each year) to the Investment Account until the debit was fully offset. e. In December, 2005, YPILAN received a 50% stock dividend from CHERRY MAE Chemicals. The accountant did not make any entry for this dividend because the company president expected to sell the shares received. They did sell the dividend share in January, 2006 for P160 per share. Income was credited for the proceeds. f.
In December, 2006, the stocks were split on a two-for-one basis and the new shares were issued at no-par value. YPILAN found that each new share was worth P5.00 more than the P110 per share which they had paid for their original shares so it was decided to debit the Investment account with the additional shares received at P110 per share and to credit income for it.
g. In June, 2007, YPILAN sold one-half of then CHERRY MAE Chemicals holdings at P100 per share. The proceeds was credited to the Investment account. Questions 1. The balance in Investment in CHERRY MAE‟s Chemicals account, per books, before correction is a. P 245,000 b. P 275,000 c. P 495,000 d. P 595,000 2. The correct balance of the Investment in CHERRY MAE Chemicals account as of June 30, 2007 is a. P 90,000 b. P 180,000 c. P 245,000 d. P 250,000 3. The average unit cost of the stocks sold in January, 2006 at P160 per share is a. P 110.00 b. P 100.00 c. P 90.00 d. P 72.00 4. The average unit cost of the no-par shares of stock sold in June 2007 is a. P 108.00 b. P 72.00 c. P 50.00 d. P 36.00
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5. As of June 30, 2007, the balance of stock holdings in CHERRY MAE Chemicals was a. 2,500 shares b. 3,750 shares c. 4,000 shares d. 5,000 shares 6. The 50% stock dividends should be taken up as+ a. A debit to Investment for P12,500. b. A credit to Investment for P12,500. c. A memorandum entry. d. A credit to income for P20,000. 7. The two-for-one split on December, 2006 should be taken up as a. A memorandum entry. b. A debit to investment for P27,500. c. A credit to income for P13,750. d. A debit to investment for P25,000. 8. The profit on the sale of the stock dividend shares received in December, 2005 is a. P 200,000 b. P 120,000 c. P 110,000 d. P 75,000 9. The profit of YPILAN from the sale of the 2,500 shares in June 2007 is a. P 250,000 b. P 160,000 c. P 125,000 d. P 10. Cash dividends received from 2001 to 2004 totaled a. P 100,000 b. P 75,000 c. P 50,000
75,000
d. P 55,000
Solution (1) Investment account as kept by YPILAN Investment Co. INVESTMENT IN CHERRY MAE CHEMICALS CORP. COMMON STOCK 01.07.00 2,000 Shares P220,000 12.31.01 Cash dividend 04.01.01 500 shares 50,000 12.31.02 -do12.31.06 2,500 shares 275,000 12.31.03 -do12.31.04 -doJune’ 07 Sold, 2,500 shs. 06.30.07 Bal. 2,500 shs. P245,000
P 12,500 12,500 12,500 12,500 250,000
(2) Investment account showing how the transactions should have been recorded:
01.07.00 04.01.01
INVESTMENT IN CHERRY MAE CHEMICALS CORP. COMMON STOCK 2,000 Shares P220,000 Jan.’06 Sold, 1,250 shs. 500 shares 50,000
01.31.06 Dec.’06
Bal. 2,500 shares Stock split,2,500 shs
P180,000 --
06.30.07
Bal., 2,500 shares
P 90,000
1. 2. 3. 4. 5. 8. 9. 10.
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A A D D A C B C
June’07
Sold, 2,500 shs.
P270,000 / 3,750 shares = P72.00 P180,000 / 5,000 shares = P36.00 6. C 7. A Selling price, P160 less cost per share of P72 = P88 x 1,250 shares = P110,000 Selling price, P100 less cost per share of P36 = P64 x 2,500 shares = P160,000 P250,000 par x 5% x 4 years = P50,000
P 90,000
90,000
Problem 11 The Stock Investment account of YAP, Inc. showed the following details: 1/01 Beg. bal. (2,000 shrs) 3/31 Purchased 300 shrs
STOCK INVESTMENT 40,000 2/28 Cash dividend 4,500 4/01 Sale of stock rights 6/30 Sale of 230 shares
1,000 3,000 5,000
1. A cash dividend of P0.50 per share was received on Feb. 28. The adjusting entry is: DEBIT CREDIT a. Stock Investment 1,000 Dividend Income 1,000 b. Retained earnings 1,000 Dividend Income 1,000 c. Dividend income 1,000 Stock investment 1,000 a. None of the above 2. On March 15, stock rights were received entitling shareholders to purchase one share for every five held at P15 per share. Market values on this date were: shares, P20; rights, P5. The adjusting entry to recognize the cost allocated to the right is: DEBIT CREDIT a. Stock rights 8,000 Stock investment 8,000 b. Stock rights 10,000 Stock investment 10,000 c. Stock rights 5,000 Stock investment 5,000 b. none of the above 3. On March 31, 300 shares were purchased with the partial exercise of these rights. The adjusting entry, after the adjustment in No. 14 above has been effected, is DEBIT CREDIT a. Stock investment 9,000 Stock rights 9,000 b. Stock investment 6,000 Stock rights 6,000 c. Stock rights 6,000 Stock investment 6,000 e. none of the above 4. On April 1, the remaining rights were sold for P3,000. The adjusting entry is: DEBIT CREDIT a. Stock investment 3,000 Gain on sale of rights 3,000 b. Stock investment 3,000 Stock rights 2,000 Gain on sale of rights 1,000 c. Stock investment 2,000 Stock rights 3,000 Loss on sale of rights 1,000 a. none of the above. 5. On June 30, 230 share were sold for P5,000 (use average cost method). The adjusting entry is DEBIT CREDIT a. Cash 5,000 Stock investment 4,250 Gain on sale of stock 750 b. Stock investment 4,250 Gain on sale of stock 4,250 c. Stock investment 750 Gain on sale of stock 750 d. none of the above. Answer 1. A 2. A
3. B
4. B
5. C
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Problem 12 The INVESTMENT account, as of December 31, 2007, appearing in the records JOY CORPORATION is as follows: Date Particular January 1 Balance January 31 Sold Ventanilla Stock March 31 Bought Don Dave Common June 30 Dividend on Suson Common July 31 Sold Suson Common August 31 Sold Jasmin bonds September 30 Interest on Sucuahi Mortgage
Debit 188,300
Credit 21,364
12,125 10,000 8,750 22,083 500
The audit working papers of the preceding year show that the account balances as of January 1, 2007, consisted of the following: Ventanilla Company – Common 1,000 shares, purchased in June 1997 at P20 per share, P20,000. 2,000 shares, purchased in August 1999 at P16 per share, P32,000. 1,500 shares, purchased in May 2002 at P22 per share, P33,000 Don Dave Company – Common 2,000 shares. Purchased in January 2003 at P33 per share, P66,000 Suson Company – Common 100 shares purchased in August 2003 at P73 per share, P7,300 Jasmin Company 5% bonds 2 bonds, P10,000 each purchased in July 2001 at par, P20,000 (Interest dates February 1 and August 1). Sucuahi Company chattel mortgage on machinery 5, P10,000 mortgage taken in September 2004 in settlement of a receivable, P10,000 Your examination discloses the following information: 1. In January 2007, 1,000 shares of the Ventanilla company common stock purchased in May 2002 were sold for P21,364 net. 2. In March 2007, 500 shares of Don Dave common stock were purchased at P24 per share plus brokerage, for P12,125. 3. In June 2007, the Suson Company paid a 100% stock dividend on common. 4. In July 2007, JOY CORPORATION sold to its president, for P125 per share, 100 shares of Suson common stock, for which the president gave his check for P8,750 and a letter in which he agreed to pay the balance upon demand of the treasurer of JOY CORPORATION. 5. On August 2007, the Jasmin Company redeemed its 5% bonds at 110 plus accrued interest.
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6. In September 2007, JOY CORPORATION received one year interest on the P10,000 chattel mortgage of Sucuahi. Question 1. The adjusted balance of Gain or Loss of Sale/Redemption on Investment at December 31, 2007 is: a. P 8,214 b. P 10,214 c. P 10,850 d. P 10,714 2. The adjusted balance of Investment at December 31, 2007 is: a. P 157,728 b. P 155,411 c. P 154,775
d. P 152,692
3. The Investment at December 31, 2007 is: a. Overstated by P 2,953 c. Overstated by P5,036 b. Overstated by P 2,317 d. Overstated by P3,056 4. Investment in Ventanilla Company common stock at year-end is: a. P 65,000 b. P 63,000 c. P 63,636
d. P 52,000
5. Investment in Don Dave Company common stock at year-end is: a. P 78,125 b. P 66,000 c. P 61,625
d. P 49,500
6. Investment in Suson Company common stock at year-end is: a. P 7,300 b. P 3,650 c. P 2,500
d. P 1,450
Solution 1. OE: Cash 21,364 Investment – Ventanilla CE: Cash 21,364 Loss on sale 636 Investment – Ventanilla (P22 x 1,000 shares) Adj: Loss on sale 636 Investment – Ventanilla 2. No adjustment 3. Dividend income 10,000 Investment – Suson 4. OE: Cash 8,750 Investment – Suson CE: Cash 8,750 Receivable – others 3,750 Investment – Suson (P7,300 x 100/200) Gain on sale Adj: Investment – Suson 5,100 Receivable – others 3,750 Gain on sale 5. OE: Cash 22,083 Investment – Jasmin CE: Cash 22,083 Investment – Jasmin Gain on sale Interest income Adj: Investment – Jasmin 2,083 Gain on sale Interest income 6. Investment – Sucuahi 500 Interest income Answer: 1. A 2. C 3. A 4. B 5. A
21,364 22,000 636 10,000 8,750 3,650 8,850 8,850 22,083 20,000 2,000 83 2,000 83 500 6. B
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Problem 13 Siacor Inc. acquired 30% of Lozano Co.‟s voting stock for P200,000 on January 2, 2007. Siacor‟s 30% interest in Lozano gave Siacor the ability to exercise significant influence over Lozano‟s operating and financial policies. During 2007, Lozano earned P80,000 and paid dividends of P50,000. Lozano reported earnings of P100,000 for the six months ended June 30, 2008, and P200,000 for the year enden December 31, 2008. On July 1, 2008, Siacor sold half of its stock in Lozano for P150,000 cash. Lozano paid dividends of P60,000 on October 1, 2008. 1. Before income taxes, what amount should Siacor include in its 2007 income statements as a result of investment? a. P15,000 b. P24,000 c. P50,000 d. P80,000 2. In Siacor‟s December 31, 2007 balance sheet, what should be the carrying amount of this investment? a. P200,000 b. P209,000 c. P224,000 d. P230,000 3. In its 2008 income statement, what amount should Siacor report as gain from the sale of half of its investment? a. P24,500 b. P30,500 c. P35,000 d. P45,500 Solution 1. B P80,000 x 30% = P24,000 2. B Purchase price + income from investment - dividends Ending balance – 12/31/03 3. B Beginning balance – 1/1/04 + income from investment (100,000 x 30%) Balance – June 30 Selling price Cost (239,000 x 1/2 ) Gain on sale
200,000 24,000 ( 15,000) 209,000 209,000 30,000 _______ 239,000 150,000 119,500 30,500
Problem 14 During 2006, Marlisa Company purchased marketable equity securities as trading securities. At December 31, 2006, the balance in the allowance to reduce marketable equity securities to market was P23,000. Pertinent information at December 31, 2007 is as follows: Security Helen common Maritess common
Cost P 245,000 180,000 P 425,000
Market Value P 230,000 182,000 P 412,000
On January 1, 2007, Marlisa Company paid P700,000 for 100,000 shares of Louie Company representing 30% of Louie‟s outstanding common stock. The following computations was made by Marlisa Company: Purchase price P 700,000 30% equity in book value of Louie‟s net assets 500,000 Excess of cost over book value P 200,000
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The excess cost over book value was attributed to goodwill. Louie reported net income for the year ended December 31, 2007 of P300,000. Louie Company paid cash dividends of P100,000 on July 1, 2007. As of December 31, 2007 Marlisa reported, in its balance sheet, a P700,000 balance of an Investment of Louie Stocks. Question 1. Marlisa Company‟s December 31, 2007 balance sheet should report the marketable equity securities at: a. P 427,000 b. P 412,000 c. P 410,000 d. P 402,000 2. In a. b. c. d.
its 2007 income statement, Marlisa should report a (an): Gain on market recovery of P8,000. Gain on market recovery of P10,000. Unrealized loss of P13,000. Unrealized loss of P15,000.
3. If Marlisa Company exercised significant influence over Louie Company, the amount of net investment revenue Marlisa Company should report from its investment in Louie would be a. P 30,000 b. P 80,000 c. P 90,000 d. P 110,000 4. If Marlisa Company exercised significant influence over Louie Company, the carrying value of its investment in Louie at December 31, 2007 would be a. P 810,000 b. P 780,000 c. P 760,000 d. P 750,000 5. If Marlisa Company did not exercise significant influence over Louie Company and properly accounted for the long-term, investment under the cost method. The amount of net investment revenue Marlisa Company should report from its investment in Louie would be a. P 30,000 b. P 80,000 c. P 90,000 d. P 110,000 6. If Marlisa Company did not exercise significant influence over Louie Company and properly accounted for the long-term investment under the cost method, the carrying value of its investment in Louie at December 31, 2007 would be a. P 780,000 b. P 750,000 c. P 700,000 d. P 500,000 Solution For Marketable Equity Securities Total Cost Total Market Required Allowance – Dec. 31 Less: Allowance – Jan. 1 Recovery
425,000 412,000 13,000 23,000 10,000
Allowance in market decline 10,000 Gain on market recovery 10,000 For Investment If acquired significant influence Investment 90,000 Income from investment 90,000 To record share of income from the investee (P300,000 x 30%) Dividend income 30,000 Investment 30,000 To adjust the dividend received (P100,000 x 30%)
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Income from investment 10,000 Investment 10,000 To record amortization of excess over cost (P200,000/20 years) If acquired NO significant influence There will be no adjustment since the company used the cost method in accounting for the investment in the books. Answer: 1. B 2. B 3. B 4. C 5. A 6. C
Problem 15 On July 1 of the current year, AISAH Company acquired 25% of the outstanding shares of common stock of Adonis Co., at a total cost of P1,400,000. The underlying equity (net assets) of the stock acquired by AISAH Company was only P1,200,000. AISAH Company was willing to pay more than book value for the Adonis Company stock for the following reasons: a. Adonis Company owned depreciable plant assets (10-year remaining economic life) with a current fair value of P120,000 more than their carrying amount. b. Adonis Company owned land with a current fair value of P600,000 more than its carrying amount. c. AISAH Company believed Adonis Company possessed enough goodwill to justify the remainder of the cost. Adonis Company earned net income of P1,080,000 evenly over the current year ended December 31. On December 31, Adonis Company declared and paid a cash dividend of P210,000 to common stockholders. Market value of Adonis Company‟s share of the stock at December 31 is P1,500,000. Adonis Company closes its accounting records on December 31. As of December 31, 2007, the Investment in Adinois common has a balance of P1,400,000. AISAH Company has a portfolio of current marketable equity securities. Information on cost and market value is as follows: Cost Market December 31, 2006 P 950,000 950,000 December 31, 2007 840,000 820,000 AISAH Company has not recorded yet any allowance for market decline in its marketable securities. Marketable Securities at December 31, 2007 has a balance of P840,000. Presented below is an amortization schedule related to AISAH Company‟s 5-year, P100,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004, for P108,660. Date 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
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Cash Received P 7,000 7,000 7,000 7,000 7,000
Interest Income
Bond Premium Amortization
P 5,433 5,354 5,272 5,186 5,095
P 1,567 1,646 1,728 1,814 1,904
Carrying Value of bonds 108,660 107,093 105,447 103,719 101,905 100,000
As of December 31, 2007, the Investment in bonds is recorded in the balance sheet at P108,660. Questions 1. The Investment in Adonis Company common at year-end is: a. P 1,473,000 b. P 1,478,500 c. P 1,480,500
d. P 1,481,000
2. The income from investment in the Adonis Company common at year-end is: a. P 131,000 b. P 133,500 c. P 159,250 d. P 185,500 3. The marketable securities at December 31, 2007 is: a. P 820,000 b. P 840,000 c. P 930,000
d. P 950,000
4. The amortization of investment in bonds at year-end is: a. P 1,728 b. P 4,941 c. P 6,669
d. P 7,000
5. Interest income from the investment in bonds at year-end is: a. P 7,000 b. P 5,354 c. P 5,272
d. P 5,186
6. The investment in bonds at year-end is: a. P 108,660 b. P 105,447
d. P 100,000
Solution Cost Net Asset Acquired Excess over cost Undervalue of asset (720,000 x 25%) Implied Goodwill
c. P 103,719
P 1,400,000 1,200,000 P 200,000 180,000 ________ P 20,000
Adj # 1:Income from investment 2,000 Investment 2,000 Undervaluation of depreciable asset - P1,500 [(P120,000 x 25%) / 10 x 6/12) Implied goodwill (P20,000/20 x 6/12) 500 Total P2,000 Adj # 2:Investment 135,000 Income from investment 135,000 (P1,080,000/12 mos. x 6 mos. x 25%) Adj # 3:Dividend income 52,500 Investment 52,500 (P210,000 x 25%) Adj # 4:Unrealized loss in market decline 20,000 Allow. for unrealized loss in market decline 20,000 Cost - P840,000 Market - 820,000 Allow. –P 20,000 Adj # 5:Retained earnings (2005 & 2006) 3,213 Interest income (2007) 1,728 Investment 4,941 Answer: 1. C 2. B 3. A 4. A 5. C 6. c
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Problem 16 Roxanne Company‟s permanent investment consists of the following: 3-year 8% P100,000 face value Paul Bonds (cost) Cash surrender value of life insurance of the president Available-for-sale securities held for long-term appreciation of value (at cost)
P 96,500 15,000 180,000
The cost and market value of these securities are presented here: Sony Incorporate Macky Corporation Ruela Company
Cost 80,000 60,000 40,000
Market 90,000 60,000 20,000
Additional information: 1. According to the company‟s treasurer, investment in Paul bonds was acquired at the beginning of the year with the intention of selling it when the need for additional working capital arises. Interest at 8% is received annually every January 1. Accrued interest on these bonds had been recorded. Effective interest rate for this type of securities is 10%. The fair market value of Paul Bonds at the end of the year is P 98,000. 2. As part of additional compensation, the company insured the life of its president for a total coverage of P2 million pesos. Insurance premium paid during the year amounted to P54,000. Increase in cash surrender value of 5,000 was credited to insurance expense account. 3. Subsequent event review revealed that the year-end market decline of Ruela Company stock was other than temporary. Questions 1. The total Available-for-sale securities of Roxanne Company at year-end is: a. P 170,000 b. P 180,000 c. P 185,000 d. P 268,000 2. The Paul bonds at year-end is: a. P 98,150 b. P 98,000 3
c. P
96,500
d. P 100,000
The cash surrender value of life insurance at year-end is: a. P 15,000 b. P 20,000 c. P 69,000
d. P 0
4. The Held-to-maturity securities at year-end is: a. P 98,150 b. P 98,000 c. P 96,500
d. P 0
Solution Current MES 3-Year 8% P100,000 Paul bonds Long-term Investment Cash surrender value of life insurance Long-term MES, at market Total ANSWER: 1. C 2. C
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3. A
4.A
5. C
- P 96,500 - P 15,000 - 170,000 - P185,000
Problem 17 On January 1, 2007, Michelle Co. bought 30% of the outstanding common stock of Manila Corporation. Michelle Co. accounts for this investment by the equity method. At the date of acquisition of the stock, Manila Corporation‟s net assets had a carrying value of P11,800,000. Assets with an average remaining life of 5 years have a current market value that is P2,600,000 in excess of their carrying values. The remaining difference between the purchase price and the value of the underlying stockholders‟ equity cannot be attributed to any tangible asset. At the end of 2007, Manila Corporation reports net income of P3,600,000. During the 2007, Manila Corporation declared and paid cash dividends of P400,000. The balance of Michelle‟s investment in Manila Corporation is P5,922,000 at December 31, 2007. Questions 1. What is the total adjustment to share of income for 2007? a. P 198,000 b. P 156,000 c. P 256,000
d. P 562,000
2. What is the total dividend income for 2007? a. P 0 b. P 78,000
d. P 120,000
c. P 107,400
3. What is the acquisition cost of Michelle Company‟s investment in Manila Corporation? a. P 6,198,000 b. P 5,118,000 c. P 3,540,000 d. P 1,920,000 Solution
Investment Acquisition cost * 5,118,000 Amort. of Share of income 1,080,000 depreciable assets ** Dividends *** _________ 6,198,000
156,000 120,000 276,000
Ending bal. 5,922,000 * Squeeze figure ** P2,600,000 x 30% = 780,000/5 years = P156,000 *** P400,000 x 30% Answer: 1. B 2. A 3. B
Problem 18 The following entries were made by the accountant of LECIRAM COMPANY: 2007 Jan 2 Investment in bonds 11,120,000 Cash 11,120,000 Purchase of P10,000,000, 18% bonds at 102plus accrued interest and broker’s fee. Bonds mature January 1, 2010. Jan 3 Cash
900,000 Interest income 900,000 Interest received on 18% investment in bonds. (This same entry was made when interest was received on July 1, 2007).
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July 1 Investment in preferred stock 10,020,000 Premium paid on preferred stock 200,000 Cash 10,220,000 Purchase of 100,000 shares of 8% P100 preferred stock of Al Corp. at 102; broker’s fee, P20,000 Dec 1 Investment in common stock 5,000,000 Cash 5,000,000 Purchase of 50,000 shares P100 par common stock of Randy Co. at P100 per share after a P1 per share dividend had been declared by Randy Co. No broker’s fee. Dec 31 Cash
800,000 Premium paid on preferred stock Dividend income Dividend received on preferred stock investment 50,000 Investment in common stock P1 per share on investment in common stock
200,000 600,000
Dec 31 Cash
50,000
Question 1. What is the total interest income on investment in bonds for 2007? a. P 1,827,500 b. P 1,800,000 c. P 1,772,500 d. P 927,500 2. What is the carrying value of the investment in bonds at December 31, 2007? a. P 11,092,500 b. P 10,247,500 c. P 10,200,000 d. P 10,192,500 3. What entry should be made to correct the acquisition entry on Jan. 2, 2007? a. Interest income 900,000 c. Interest income 900,000 Investment in bonds 900,000 Interest Receivable 900,000 b. Broker‟s fees exp. 20,000 d. Interest income 900,000 Investment in bonds 20,000 Broker‟s fee exp. 20,000 Investment in bonds 920,000 4. What is the adjusting entry to record the accrual of interest on December 31, 2007? a. Interest receivable 900,000 c. Interest receivable 900,000 Interest income 900,000 Retained earnings 900,000 b. Interest income 900,000 d. No adjusting entry Retained earnings 900,000 5. What adjusting entry should be made to correct the acquisition on July 1? a. Broker‟s fees exp. 20,000 c. Invest. in pref. 200,000 Invest. In pref. 20,000 Premium on PS 200,000 b. Broker‟s fees exp. 20,000 d. No adjusting entry Premium on PS 20,000 6. What is the dividend income on preferred stock investment for 2007? a. P 0 b. P 200,000 c. P 600,000 d. P 800,000
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7. What adjusting entry should be made at December 31, 2007, to correct the investment in common stock account? a. Dividend income 50,000 c. Retained earnings 50,000 Invest. In CS 50,000 Invest. in CS 50,000 b. Retained earnings 50,000 d. No adjusting entry Dividend income 50,000 Solution Adjustments: Jan 2 Interest income 900,000 Investment - bonds 900,000 Jan 3 No adjustments July 1 Investment – preferred 200,000 Premium paid on preferred stock 200,000 Dec 1 Dividend income 50,000 Investment – common 50,000 Dec 31 Premium paid on pref. stock 200,000 Dividend income 200,000 Dec 31 Investment – common 50,000 Dividend income 50,000 Interest income 27,500 Investment – bonds 27,500 To record amortization of premium. (P220,000/8 years = P27,500) Answer: 1. C 2. D 3. A 4. A 5. C 6. D 7. D
Problem 19 The following two subsidiary accounts reflect the marketable securities of HOPE COMPANY for the year 2008: DREAM BIG COMPANY Date Transactions Shares Ref. Debit Credit Jan. 10 Purchase 20,000 CD P 1,900,000 31 Raised to market value, offset to retained earnings GJ 100,000 Mar 30 Sale at P150 (10,000) CR P 1,500,000 June 10 Stock dividend at par 10,000 GJ 1,000,000 July 28 Sale at P110 10,000 _________ 1,100,000 TOTALS P 3,000,000 P 2,600,000 Date Sept. 05 28
Oct. 01 05 Nov. 30
Transactions Purchase Cash dividends to stockholders or record Sept 15, declared Aug. 15 Purchases Sale at P65 Cash collected for sale made on Nov. 10, after a Nov. 1 declaration of P5 cash dividend per share to stockholders
AIM HIGH COMPANY Shares Ref. Debit 20,000 CD P 1,000,000
50,000 20,000
CR CD CR
Credit
P
50,000
2,500,000 1,000,000
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Dec. 15
on record as of December 1. Cash dividend received TOTAL
20,000 20,000
CR CR
__________ P 3,500,000
3,300,000 150,000 P 4,500,000
On January 2, 2008, HOPE COMPANY purchased 39,000 shares of GOB BLESS YOU COMPANY‟s 200,000 shares of outstanding common stock for P1,170,000. On that date, the carrying value of the acquired shares on GOD BLESS YOU COMPANY‟s books was P810,000. HOPE COMPANY attributed the excess of cost over carrying amount to goodwill. HOPE COMPANY‟s policy is to amortize intangible over 10 years. During 2008, HOPE COMPANY gained directors. GOD BLESS YOU COMPANY December 31, 2008, and declared and December 31, 2008, GOD BLESS YOU share.
a seat on GOD BLESS YOU COMPANY‟s board of reported earnings of P800,000 for the year ended paid cash dividends of P200,000 during 2008. On COMPANY‟s common stock was trading at P30 per
Questions 1. The gain on sale of 10,000 shares of DREAM BIG COMPANY on March 30 is: a. P 0 b. P 500,000 c. P 550,000 d. P 1,500,000 2. The gain on sale of 10,000 shares of DREAM BIG COMPANY on July 28 is: a. P 150,000 b. P 337,500 c. P 525,000 d. P 625,000 3. The adjusted balance of the HOPE COMPANY‟s Investment in DREAM BIG COMPANY on December 31, 2008 is: a. P 525,000 b. P 500,000 c. P 475,000 d. P 375,000 4. The gain on sale of 20,000 shares of AIM HIGH COMPANY on October 5 is: a. P 300,000 b. P 314,500 c. P 350,000 d. P 1,028,500 5. The gain on sale of 20,000 shares of AIM HIGH COMPANY on November 10 is: a. P 1,000,000 b. P 2,200,000 c. P 2,300,000 d. P 2,400,000 6. The adjusted balance of the HOPE COMPANY‟s Investment in AIM HIGH COMPANY on December 31, 2008 is: a. P 1,000,000 b. P 1,200,000 c. P 1,300,000 d. P 1,500,000 7. The gain on investment of HOPE COMPANY from the Investment in GOD BLESS YOU COMPANY at December is: a. P 81,000 b. P 120,000 c. P 156,000 d. P 990,000 8. The adjusted balance of the HOPE COMPANY‟s Investment in GOD BLESS YOU COMPANY at December 31, 2008 is: a. P 1,251,000 b. P 1,287,000 c. P 1,170,000 d. P 1,320,000 Solution DREAM BIG COMPANY Retained earnings MES OE: Cash MES CE: Cash MES Gain on sale
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100,000 1,500,000 1,500,000
100,000 1,500,000 950,000 550,000
Adj: MES Gain on sale Dividend income MES OE: Cash MES CE: Cash MES Gain on sale Adj: MES Gain on sale
550,000 1,000,000 1,100,000 1,500,000 625,000
AIM HIGH COMPANY OE: MES Cash CE: MES Dividend Income Cash Adj: Dividend income MES OE: Cash MES CE: Cash Dividend income Adj: MES Dividend income OE: Cash MES Gain on sale CE: Cash MES Gain on sale Adj: MES Gain on sale OE: Cash MES CE: Cash MES Gain on sale Dividend income Adj: MES Gain on sale Dividend income MES Dividend income
1,000,000 950,000 50,000 50,000 50,000 50,000 50,000 1,300,000 1,300,000 50,000 3,300,000 3,300,000
2,300,000 150,000
GOB BLESS YOU COMPANY MES Cash MES Investment income Cash MES Answer: 1. C 7. B
1,170,000 156,000
550,000 1,000,000 1,100,000 475,000 625,000 625,000
1,000,000 1,000,000 50,000 50,000 50,000 50,000 1,000,000 300,000 950,000 350,000 50,000 3,300,000 1,000,000 2,200,000 100,000 2,200,000 100,000 150,000
1,170,000 156,000
39,000 39,000 2. D 8. B
3. C
4. C
5. B
6. D
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Problem 20 The following are the transaction of DE GRACIA COMPANY for its Marketable Securities: Marketable Securities Jan 1
Beginning balance
58,000
Mar 15
Purchase 1,000 shares of Grace (common) at P20, plus P2,000 commission for broker
20,000
Apr 30 May 11
Sold 500 shares of El Salvador at P1, less P15 commission for broker
485
Purchased 10,000 shares (par P1) of President Company at P0.90 plus P90 commission for broker
9,090
June 30
Received 100% stock dividend from Prince Co.
July 30
Purchase 50 shares of De Gracia at P140, plus P70 commission for broker
Oct 1
Nov 15
7,000
Sold Ronald bonds; 10 bonds P10,400, plus accrued interest to date, and less P50 commission for broker
10,650
Sold 20 shares of Prince Company at P20, no commission involved
400
Nov 30
Proceeds from sale of stock rights
4,000
Dec 1
Liquidating dividend from Alta Company
400
Dec 10
Sold 15 shares of Grace (common) at P55, less Commission of P15.
810
Additional Information: 1. The beginning balances is detailed as follows: Prince common, 100 shares; par P50 El Salvador common, 70,000 shares; par P10 Ronald bonds, (face P1,000), 20 bonds, 12%, payable Jan. 1 and July 1 Alta Company, 200 shares Rhinna common, 5,500 shares, Par P2
5,000 20,000 22,000 1,000 10,000 58,000
2. Grace issued stock rights to stockholders entitling them to subscribe at par, 1 new share for every 10 shares held on October 31, 2007. Market values at date of issuance of rights were: Stock, ex-right P72 per share Stock rights 8 per share
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3. The following commission were unpaid and unrecorded as at December 31, 2007: P2,000 for the purchase of Grace stocks P 70 for the purchase of De Gracia stocks 4. The following information was obtained relative to dividends which were not in the books: Company Date declared Kind Rate Remarks Prince Company 12/15/07 Cash 20% Received 1/16/08 President Company 12/03/07 Stock 10% Received 1/19/08 Rhinna Company 01/15/08 Cash 10% Received 1/31/08 Question 1. The entry to adjust the March common is: a. Marketable securities Commission expense b. Marketable securities Commission payable c. Marketable securities Cash d. No adjustment
15 transaction on the purchase of 1,000 share of Grace 2,000 2,000 2,000 2,000 2,000 2,000
2. The entry to adjust the sale of 500 shares of El Salvador on April 30 is: a. Marketable securities 372 Gain on sale of MS 372 b. Marketable securities 342 Cash 342 c. Marketable securities 342 Gain on sale of MS 342 d. No adjustment 3. The entry to adjust the purchase of 50 shares of De Gracia common on July 30 is: a. Marketable securities 70 Commission payable 70 b. Treasury stock 7,070 Marketable securities 7,000 Commission payable 70 c. Treasury stock 7,000 Marketable securities 7,000 d. No adjustment 4. The entry to adjust the sale of a. Loss on sale of MS Marketable securities Interest income b. Loss on sale of MS Marketable securities c. Loss on sale of MS Marketable securities Interest income d. No adjustment
20 shares of Prince common on October 1 is: 650 350 300 350 350 600 300 300
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5. The gain on sale of stock rights is: a. P 2,000 b. P 1,800
c. P 1,750
d. P 1,500
6. The entry to adjust the liquidating dividend on December 1 is: a. Loss on investment 600 Marketable securities 600 b. Cash 600 Dividend income 600 c. Marketable securities 600 Dividend income 600 d. Marketable securities 600 Cash 600 7. Dividend receivable at year-end is: a. P 3,900 b. P 2,900
c. P 2,800
d. P 1,800
8. Gain on sale of marketable securities at year-end is: a. P 855 b. P 513 c. P 342
d. P 105
9. Loss on sale of marketable securities at year-end is: a. P 100 b. P 650 c. P 750
d. P 1,350
10. The marketable securities at year-end is: a. P 73,350 b. P 73,950
d. P 74,750
c. P 74,150
Solution 1. Marketable securities 2,000 Broker’s commission payable 2,000 To adjust the March 15 transaction. 2. Marketable securities 342 Gain on sale of MS 342 To adjust the April 30 transaction. Selling price P 485 Cost 143 Gain on sale P 342 3. Treasury stock 7,070 Marketable Securities 7,000 Brokers’ commission payable 70 To adjust the July 30 transaction. 4. Loss on sale of MS 650 Marketable securities 350 Interest income 300 To adjust the October 1 transaction. Selling price (P10,400 – P50) P 10,350 Cost of the bonds (P22,000/20 x 10) 11,000 Loss on sale P 650 5. Loss on sale of MS 100 Marketable securities 100 To adjust the Nov.15 transaction. Selling price P 400 Cost 500 Loss on sale P 100 6. Stock rights 2,200 Marketable securities 2,200 To record the transaction that transpired on October 31. Marketable securities 4,000 Stock rights 2,200 Gain on sale of Stock rights 1,800 To adjust the transaction on Nov. 30
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7.
Loss on investment 600 Marketable securities 600 To adjust the transaction on Dec. 1 8. Marketable securities 513 Gain on sale of MS 513 To adjust the transaction on Dec. 10 Selling price P 810 Cost 297 Gain on sale P 513 9. Dividend receivable 1,800 Dividend income 1,800 To record the dividend declared by Prince Company P 50 x 180 shares x 20% = P 1,800 Answer: 1. B 2. C 3. B 4. A 5. B 6. A 7. D
8. A
9. C
10. B
Problem 21 In connection with your audit of the financial statement of the William Company for the year 2007, the following investment in stock and dividend income accounts were presented to you: Investment in Stock Debit Credit June 18, 2006 10,000 shares common par value P50, Samson Company 390,000 April 30, 2007 5,000 shares Samson Company received as stock dividend 250,000 May 20, 2007 Sold 5,000 shares @ P25 125,000 Dec. 10, 2007 Sold 2,000 shares @ P60 120,000 April 30, 2007 Nov. 30, 2007
Dividend Income Stock dividend Samson Company common
250,000 50,000
The following information was obtained during your examination: 1.
The balance in the investment in stock account at December 31, 2006 per your last year„s working papers, was P390,000.
2. From independent sources, you determine the following dividend information: Type of Dividend Stock Cash Cash
Date Declared March 15, 2007 Nov. 1, 2007 Dec. 1, 2007
Date of Record April 1, 2007 Nov. 15, 2007 Dec. 15, 2007
Date of Payment April 30, 2007 Nov. 28, 2007 Jan. 2, 2008
Rate 50% P5/share 20%
3. Closing market quotation as at December 31, 2007: Bid Asked Samson Company common 13¾ 16½ Questions: Based on the above and the result of your audit, answer the following: 1. How much is the gain (loss) on the May 20, 2007 sale? a. P (70,000) b. P (5,000) c. P 5,000
d. P 0
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2. How much is the gain on the December 10, 2007 sale? a. P 68,000 b. P 48,000 c. P 42,000
d. P 0
3. How much is the total dividend income for the year 2007? a. P 400,000 b. P 300,000 c. P 150,000
d. P
50,000
4. How much is the adjusted balance of investment in stock as of December 31, 2007? a. P 208,000 b. P 145,000 c. P 117,000 d. P 110,000 5. How much is the Allowance for Unrealized loss as of December 31, 2007? a. P 98,000 b. P 35,000 c. P 7,000 d. P 0 Solution Adjustments Dividend income 250,000 Investment 250,000 ------------------------------------------------OE: Cash 125,000 Investment 125,000 CE: Cash 125,000 Loss on sale 5,000 Investment 130,000 Adj: Loss on sale 5,000 Investment 5,000 ------------------------------------------------OE: Cash 120,000 Investment 120,000 CE: Cash 120,000 Investment 52,000 Gain on sale 68,000 Adj: Investment 68,000 Gain on sale 68,000 ------------------------------------------------Computation for the dividend income: P5 x 10,000 shares = P 50,000 10,000 shares x P50 x 20% = 100,000 Total = P 150,000 Answer: 1. B 2. A 3. C 4. A 5. D
Problem 22 Macky Corporation‟s accounting records showed the following investment at January 1, 2007: Common stock Johny Corp (1,000 shares) P 10,000 Sony Corp (5,000 shares) 100,000 Real estate: Parking lot (leased to Ruel Co.) 300,000 Other: Trademark (at cost, less accumulated amortization 25,000 Total investment P435,000 Macky owns 1% of Johny and 30% of Sony. Maky‟s directors constitute a majority of Sony‟s directors. The Ruel lease, which commenced on January 1, 2002, is for ten year, at an annual rental of P48,000. In addition, on January 1, 2002, Ruel paid a nonrefundable deposit of P50,000, as well as security deposit of P8,000 to be refunded upon expiration of the lease. The trademark was licensed to Nappy Co. for royalties of 10% of sales of the trademark items. Royalties are payable semiannually on March 1 (for sales in July though
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December of the prior year), and on September 1 for the sales in January through June of the same year). During the year ended December 31, 2007, Macky received cash dividends of P1,000 from Johny, and P15,000 from Sony, whose 2007 net incomes were P75,000 and P150,000 respectively. Macky also received P48,000 rent from Ruel in 2007 and the following royalties from Nappy: March 1 September 1 2006 P3,000 P5,000 2007 4,000 7,000 Nappy estimated that sales of the trademark items would total to P20,000 for the last half of 2007. Questions 1. In Macky‟s 2007 income statement, how much should be reported for royalty revenue? a. P 14,000 b. P 13,000 c. P 11,000 d. P 9,000 2. In Macky‟s 2007 income statement, how much should be reported for rental revenue? a. P 43,000 b. P 48,000 c. P 53,000 d. P 53,800 3. In Macky‟s 2007 income statement, how much should be reported as the total investment income? a. P 63,000 b. P 78,000 c. P 108,000 d. P 111,000 Solution 1. D Royalty revenue for the 1st half of 2007 P Royalty revenue for the 2nd half of 2007 Total royalty revenue P 2. C Annual rental revenue P Nonrefundable deposit (50,000/10) Total rental revenue P 3. C Royalty revenue Rental revenue Dividend income Share of income from equity investment Total investment income
7,000 2,000 (P20,000 x 10%) 9,000 48,000 5,000 53,000 P
9,000 53,000 1,000 45,000 (P150,000 x 30%) P 108,000
Problem 23 In January of year 1, Divine Power paid P400,000 for 10,000 shares of Thy Grace voting common stock, representing 15% interest in Thy Grace. At this date, the net assets of Thy Grace totaled P2,000,000. The fair values of Thy Grace‟s identifiable assets and liabilities were equal to their book values. Divine Power did not have the ability to exercise significant influence over the operating and financial policies of Thy Grace. Divine Power received dividend of P0.70 per share from Thy Grace on October, year 1. Thy Grace reported net income of P250,000 for year ended December 31, year 1. The stock classified as availablefor-sale. Market price for the 10,000 shares was P450,000. In July of year 2, Divine Power paid P1,500,000 for 30,000 additional shares of Thy Grace‟s voting shares, which represents a 25% interest in Thy Grace. The fair value of Thy Grace‟s identifiable assets, net of liabilities, was equal to their book values of P4,600,000. As a result of this transaction, Divine Power has the ability to exercise significant influence over
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the operating and financial policies of Thy Grace. Divine Power received dividend of P0.80 per share from Thy Grace on April, year 2, and P1.35 per share from Thy Grace on October, year 2. Thy Grace reported net income for the six month ended July 31, year 2 for P200,000 and P300,000 for the year ended December 31, Year 2. The market value of the stock at the end of Year 2 is P52. Questions: 1. Amount of income from investment in Thy Grace that should be reported by Divine Power in its year 1 Income Statement is: a. P 7,000 b. P 37,500 c. P 57,000 d. P 87,500 2. The carrying value of the investment in Thy Grace that should be reported by Divide Power in its year 1 Balance Sheet is: a. P 393,000 b. P 400,000 c. P 443,000 d. P 450,000 3. Amount of income from investment in Thy Grace that should be reported by Divine Power in its year 2 Income Statement: a. P 48,500 b. P 70,000 c. P 120,000 d. P 71,500 4. The carrying value of the investment in Thy Grace that should be reported by Divide Power in its year 1 Balance Sheet is: a. P 1,916,500 b. P 1,923,500 c. P 1,938,500 d. P 2,080,000 Solution: Year 1
Year 2
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AFS
Cash Cash Dividend income Cash Dividend income AFS Cash RE – beg AFS AFS – equity RE – beg Dividend income AFS Cash AFS AFS Income from invest. AFS Income from invest.
400,000 7,000 8,000
400,000 7,000
8,000 1,500,000 1,500,000 7,000 7,000 37,500 37,500 8,000 8,000 54,000 54,000 30,000 30,000 40,000 40,000
