Problem 1

Magnolia Corp. invested its excess cash in equity securities during 2018. The business model for these investments is to
profit from trading on price changes.
As of December 31, 2018, the equity investment portfolio consisted of the following:
Investment Quantity Cost Fair Value
LJ, Inc. 1,000 shares 90,000 126,000
Polland Co. 2,000 shares 240,000 252,000
Alabang Corp. 2,000 shares 432,000 360,000
Totals 762,000 738,000

I. In the December 31, 2018 statement of financial position, what would be reported as carrying amount of the
investments?
a. 738,000 b. 690,000 c. 762,000 d. 810,000

II. In the 2018 income statement, what amount should be reported as unrealized gain or loss?
a. Unrealized gain of 24,000 c. Unrealized loss of 72,000
b. Unrealized loss of 24,000 d. Unrealized gain of 48,000

During the year 2019, Magnolia Corp. sold 2,000 shares of Polland Co. for 229,200 and purchased 2,000 more shares of
LJ, Inc. and 1,000 shares of Dwarfy Company. On December 31, 2019, Magnolia’s equity securities portfolio consisted of
the following:
Investment Quantity Cost Fair Value
LJ, Inc. 1,000 shares 90,000 120,000
LJ, Inc. 2,000 shares 198,000 240,000
Dwarfy Company 1,000 shares 96,000 72,000
Alabang Corp. 2,000 shares 432,000 132,000
Totals 816,000 564,000

III. What is the gain or loss on the sale of Polland Co. investment?
a. 10,800 gain b. 10,800 loss c. 22,800 gain d. 22,800 loss

IV. What is the carrying amount of the investments on December 31, 2019?
a. 816,000 b. 888,000 c. 564,000 d. 492,000

V. What amount of unrealized gain or loss should be reported in the income statement for the year ended December 31,
2019?
a. 252,000 unrealized gain c. 216,000 unrealized gain
b. 252,000 unrealized loss d. 216,000 unrealized loss

During the year 2020, Magnolia sold 3,000 of LJ, Inc. for 239,400 and 500 share of Dwarfy Company at a loss of 16,200.
On December 31, 2020, Magnolia’s equity investment portfolio consisted of the following:
Investment Quantity Cost Fair Value
Dwarfy Company 500 shares 48,000 36,000
Alabang Corp. 2,000 shares 432,000 492,000
480,000 528,000

VI. What should be reported as loss on sale of trading securities in 2020?

a. 120,600 c. 48,600
b. 64,800 d. 136,800

VII. What amount of unrealized gain or loss should be reported in the income statement for the year ended December 31,
2020?
a. 360,000 unrealized gain c. 48,000 unrealized gain
b. 360,000 unrealized loss d. 48,000 unrealized loss

VIII. In the December 31, 2020 statement of financial position, what amount should be reported as carrying amount of
trading securities?
a. 480,000 c. 528,000
b. 468,000 d. 540,000
Problem 2
Supporting records of Mayon Corporation’s trading securities portfolio show the following debt and equity securities:
Security Cost Fair Value
400 ordinary shares Concave Co. 254,500 243,000
800,000 Tipo Co. 7% bonds 796,500 774,000
1,200,000 Turkey Co. 7 1/2% bonds 1,207,500 1,218,900
Totals 2,258,500 2,235,900

Interest dates on the bonds are January 1 and July 1. Mayon Corporation uses the income approach to record the purchase
of bonds with accrued interest. During 2020 and 2021, Mayon completed the following transactions related to trading
securities:
2020
Jan. 1 Received semi-annual interest on bonds. Assume that the appropriate adjusting entry was made on
December 31, 2017.

April 1 Sold 600,000 of 7 1/2% Turkey bonds at 102 plus accrued interest. Brokerage fees were 2,000.

May 21 Received dividend of 1.25 per share on the Concave ordinary share capital. The dividend had not been
Recorded on the declaration date.

July 1 Received semi-annual interest on bonds and then sold the 7% Tipo bonds at 97 1/2. Brokerage fees
Were 2,500.

Aug. 15 Purchased 200 shares of Newman, Inc. ordinary share capital at 580 per share plus brokerage fees of 500

Nov. 1 Purchased 500,000 of 8% Toll Co. bonds at 101 plus accrued interest. Brokerage fees were 1,250.
Interest dates are January 1 and July 1.

Dec. 31 Market prices of securities were:

Concave ordinary shares 550
7 1/2% Turkey bonds 101 3/4
8% Toll bonds 101
Newman ordinary shares 583.75

2021
Jan. 2 Recorded the receipt of semi-annual interest on bonds

Feb. 1 Sold the remaining 7 1/2% Turkey bonds at 101 plus accrued interest. Brokerage fees were 3,000.

I. What is the total interest and dividend income for 2020?

a. 125,166 b. 164,416 c. 91,417 d. 98,804

II. What amount should be reported as gain on sale of trading securities in 2020?
a. 4,050 b. 12,752 c. 8,550 d. 9,375

III. What amount of unrealized gain or loss should be reported in the income statement for the year ended December 31,
2020?
a. 21,200 unrealized gain c. 6,150 unrealized gain
b. 21,200 unrealized loss d. 6,150 unrealized loss

IV. What is the carrying amount of the remaining trading securities on December 31, 2020?
a. 1,481,000 b. 1,450,450 c. 1,473,450 d. 1,452,250

V. What is the loss on the sale of the remaining Turkey bonds on February 1, 2021?
a. 7,500 b. 10,500 c. 13,500 d. 750

VI. Prepare the journal entries for the preceding transactions and to accrue interest on December 31, 2020. Ignore
amortization of premium or discount on bonds.
Problem 3
During the course of your audit of the financial statements of Fishing Corporation for the year ended December 31, 2020,
you found a new account, “Investment in Equity Securities”. Your audit revealed that during 2020, Fishing began a
program of investments and all investment-related transactions were entered in this account. Your analysis of this account
for 2020 follows: Debit Credit
Salmon Company Ordinary Shares
Feb. 14 Purchased 24,000 share @ 55 per share 1,320,000

July 26 Received 2,400 ordinary shares of Salmon Company as a

share dividend (Memorandum entry in general ledger)

Sept. 28 Sold the 2,400 ordinary shares of Salmon Company

Received July 26 @ 70 per share 168,000

Tamban, Inc. Ordinary Shares

April 30 Purchased 120,000 shares @ 40 per share 4,800,000

Oct. 28 Received dividend of 1.20 per share 144,000

Additional Information:
1. The fair value of each security as of the 2020 date of each transaction follow:
Security Feb. 14 April 30 July 26 Sept. 28 Dec. 31
Salmon Company 55 62 70 74
Tamban, Inc. 40 32
Fishing Corp. 25 28 30 33 35

2. All of the investments of Fishing Corporation are nominal in respect to percentage of ownership (5% or less)

3. Each investment is considered by Fishing Corporation to be non-trading. Fishing Corporation has made an irrevocable
election to present in other comprehensive income subsequent changes in fair value of its non-trading equity securities.

I. What amount should be reported as gain on sale of non-trading equity securities in 2020?
a. 36,000 c. 48,000
b. 12,000 d. P0

II. The receipt of 2,400 share dividend would cause the investment balance to increase by
a. 148,800 c. 132,000
b. 168,000 d. P0

III. What entry is necessary to correct the recording of the cash dividend received from Tamban, Inc.?
a. Cash 144,000
Dividend income 144,000
b. Cash 144,000
Investment in equity securities 144,000
c. Investment in equity securities 144,000
Dividend income 144,000
d. Dividend income 144,000
Investment in equity securities 144,000

IV. What amount of unrealized gain or loss should be reported in the 2020 statement of comprehensive income as
component of other comprehensive income?
a. 384,000 gain c. 960,000 gain
b. 384,000 loss d. 960,000 loss

V. What amount should be reported as Investment in Equity Securities in the statement of financial position on December
31, 2020?
a. 5,616,000 c. 5,040,000
b. 6,000,000 d. 6,576,000
Problem 4
On June 30, 2020, Cabbage Company purchased 25% of the outstanding ordinary shares of IB Co. at a cost of 4,200,000.
The book value of IB Co.’s net assets on acquisition date was 14,400,000. For the following reasons, Cabbage was willing
to pay more than book value for the IB Co. shares.

1. IB Co. has depreciable assets with a current fair value of 360,000 more than their book value. These assets have a
remaining useful life of 10 years.

2. IB Co. owns a tract of land with a current fair value of 1,800,000 more than its carrying amount.

3. All other identifiable tangible and intangible assets of IB Co. have current fair values that are equal to their carrying
amounts.

IB Co. reported net income of 3,240,000, earned evenly during the current year ended December 31, 2020. Also in the
current year, it declared and paid cash dividends of 630,000 to its ordinary shareholders. Market value of IB Co.’s
ordinary shares at December 31, 2020, is 18,000,000. Cabbage Company’s financial year-end is December 31.

I. What is the total amount of goodwill of IB Co. based on the price paid by Cabbage Company?
a. 600,000 c. 240,000
b. 2,160,000 d. 60,000

II. What amount of investment income should Cabbage report in its income statement for the year ended December 31,
2020 under the equity method?
a. 405,000 c. 157,500
b. 400,500 d. 247,500

III. Under the equity method, the carrying value of the Cabbage Company’s investment in ordinary shares of IB Co. on
December 31, 2020 should be
a. 4,443,000 c. 4,140,000
b. 4,200,000 d. 4,500,000

Problem 5
Durian Corp. purchased 40% of Associate Company’s outstanding ordinary shares on January 2, 2020 for 540,000,000.
The book value of Associate Company’s net assets (shareholders’ equity) at the purchase date totaled 900,000,000. Book
values and fair values were the same for all financial statement items except for inventory and buildings, for which fair
values exceeded book values by 25,000,000 and 225,000,000, respectively. All inventory on hand at the purchase date
was sold during 2020. The buildings have average remaining useful lives of 15 years. Associate Company reported net
income of 220,000,000 for the year ended December 31, 2020 and paid cash dividends 80,000,000. The fair value of
Durian’s investment in associate was 600,000,000 at December 31, 2020.

I. Of the amount paid for the acquisition of Associate Company’s ordinary shares, how much is attributable to goodwill?
a. 100,000,000 c. 80,000,000
b. 90,000,000 d. 180,000,000

II. What is the investment balance at December 31, 2020?

a. 540,000,000 c. 580,000,000
b. 600,000,000 d. 596,000,000

III. At what amount will Durian Corp. report its investment revenue in its 2020 income statement?
a. 88,000,000 c. 40,000,000
b. 72,000,000 d. 32,000,000