EXAMINATION about INVESTMENT 7

General Rule: Read the following problems carefully and answer it wisely. All solutions are needed, so put it
in the last page. Clear and Readable. (25 Points)

1. On January 2, 2010, paragon Company acquired 16,000 ordinary shares of Hexagon Company at P50 per share.
On July 1, 2010, the Hexagon ordinary share was split 5 to 1. On October 1, 2010, Paragon received from
Hexagon a preference share dividend of one share for every 10 ordinary shares held. On this date, the market
price of Hexagon ordinary is P15 per share and preference, P10 per share.

On December 31, 2010, Paragon received from Hexagon a dividend in Kind of one share of Octagon Company ordinary
share for every 4 Hexagon ordinary shares held. The market price of Octagon ordinary is P5 per share. In its 2010
statement of comprehensive income, how much should Paragon report as dividend revenue?
a. None c. P40,000
b. P100,000 d. P150,000
Solution: B
Share held (16,000 x 5) 80,000
Divided by: ÷4
Dividend 20,000
x market price per share 5
Property dividend P100,000
Note: Share dividend other than those held is not considered as an income, the accounting process is to allocate the
original investment between the ordinary and preference shares using their relative fair market value ratios. An
Accounting entry is then necessary to reflect this allocation by a debit to Investment in Preference and a credit to
Investment in Ordinary. Property dividend is considered as income and should be measured at MV of the property at the
time of declaration .

2. Dancer Company purchased 40,000 share of Lancer Corporation’s newly issued 6%, cumulative preference
shares, P50 par for P3,040,00 on May 9, 2010. Each share carried on detachable share warrant entitling the holder
to acquire at P60 one share of Lancer ordinary shares. On May 9, 2010, the market price of the preference share
ex-warrant was P69 per share and the market price of the share warrant was P6 warrant. On December 31, 2010,
Dancer sold stock warrants for P295,000. What is the gain on sale of warrants?
a. None c. P30,652
b. P51,800 d. P55,000
Solution: B
Selling Price P295,000
Less: Cost of warrants (sch. 1) P243,200
Gain on Sale P 51,800

MV Cost Allocated cost

3. On December 20, 2009 Ball Corporation purchased 30,000 shares of Pencil Company’s share at P100 each. On
December 31, 2009, Pencil Company’s shares are selling at P125 per share. On February 1, 2010, Ball received
30,000 rights entitling it to purchase at P130 per share one additional share of Pencil for each 10 share then held.
On date, Pencil’s shares were selling ex-right at 145 and the rights were selling at P5.00.
Question 1: if the securities were classified by Ball Corporation as trading securities at the time of acquisition and
assuming the entire share rights were sold at their prevailing market price of P5, what amount of gain on sale of share
rights should Ball Corporation recognize?
a. P 25,000 c. P 50,000
b. P100,000 d. P150,000
Answer: A
Selling Price (30,000 x P5) P150,000
Less: Cost of rights {5/150 (30,000 x P125)} 125,000
Gain on Sale of rights P 25,000
Question 2: if the securities were classified by ball Corporation as available for sale securities at the time of acquisition
and assuming the entire share rights were sold at their prevailing market price of P5, what amount of gain on sale of share
rights should Ball Corporation recognize?
a. P25,000 c. P 50,000
b. P100,000 d. P150,000
Answer: C
Selling Price (30,000 x P5) P150,000
Less: Cost of rights {5/150 x 3,000,000 } 100,000
Gain on Sale of rights P 50,000

4. World Company owns 2,000 ordinary shares of Company, which has hundred thousand share publicly trade.
World Company purchased these 2,000 shares in 2011 for P120 per share. On November 1, 2011, hope
distributed 2,000 share rights to World. World Company was entitled to buy one new share of hope Company
ordinary share for P125 for every two of these rights. On November 1, 2011, hope Company’s share have a
market value of P132 ex-right and the share rights had a market value of P18. On December 31, 2011, hope
Company’s market value has yet to change.

Question 1: If the investment was classified as Available for Sale Securities how much should be recorded as cost of new
investment in trading securities assuming all the share rights were exercised?
a. P153,800 c. P155,000
b. P156,000 d. P161,000
Answer: C
Cash paid for the New shares (2,000 ÷2 x P125) P125,000
Add: Cost of rights (P18/P150(2,000 x P125) 30,000
Cost of new Investment P155,000

Question 2: If the investment was classified as Available for sale Securities how much should be recorded as cost of new
investment in Available for Sale securities assuming all the share rights were exercised?
a. P153,800 c. P155,000
b. P156,000 d. P161,000
Cash paid for the New shares (2,000 ÷2 x P125) P125,000
Add: Cost of rights (P18/P150(2,000 x P120) 28,800
Cost of new Investment P153,800

5. On January 2, 2010, Stereo Company purchased 50,000 shares of Mono Company ordinary share for P3,600,000.
Stereo Company classified the investment as available for sale securities. On December 4, 2010, Stereo received
50,000 share rights from Mono. Each right entitles the holders to acquire one share for P85, market value of share
was P100, immediately before the rights issued, and P90 a share, immediately after the rights were issued, Stereo
sold its rights on December 31, 2010 for P10 a right. How much would be gain from the sale of the right?
a. None c. P100,000
 b. P140,000 d. P500,000
Answer: B
Selling Price (50,000 x P10) P500,000
Less: Cost of rights (10/100 x P3,600,000) P360,000
Gain on sales of rights P140,000