UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

Molino Campus, Molino 3, Bacoor City, Cavite

Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

MULTIPLE CHOICE PROBLEMS:

How much should Primary Company report as unrealized
Trading Securities gain or loss related to the securities transactions in its
1. Master Company acquired the following portfolio of
2010 profit or loss?
trading securities during 2010 and reported the following
a. None c. P60,000
balance at December 31, 2010:
unrealized loss
12.31.10
b. P60,000 unrealized gain d.P70,000
Security Cost Market Value
unrealized gain
C P300,000 P280,000
Solution: B
B 360,000 370,000
Aggregate Market value P1,560,000
A 500,000 460,000
Less: Aggregate Cost P1,500,000
Realized Loss P 60,000
No sales occurred during 2010. All declines are
considered to be temporary. What is the carrying value of
5. Storm Company began business in November of
the securities on December 31, 2010 on Master’s
2009. During the year, Storm purchased the three trading
statement of financial position?
securities listed below. In its December 31, 2009 sheet,
a. P1,110,000 c. P1,150,000
Storm appropriately reported a P50,000 debit balance in
b. P1,160,000 d. P1,170,000
its “Fair Value Adjustment-Trading Securities” account.
Solution: A
There was no change during 2010 in the composition of
Security Market Value
Storm’s portfolio of trading securities. Pertinent data are
C P 280,000
as follows:
B 370,000
12. 31.10
A 460,000
Security Cost Market Value
Total P1,110,000
G P 400,000 P 350,000
O 500,000 350,000
2. Citibank purchased the following portfolio of trading
D 900,000 800,000
securities during 2010 and report the following balance at
P1,800,000 P1,500,000
December 31, 2010. No sales occurred during 2010. All
declines are considered to be temporary.
What amount of unrealized loss on these securities
12.31.10
should be included in Storm’s profit or loss for the year
Security Cost Market Value
ended December 31, 2010?
X P 800,000 P 820,000
a. None c. P300,000
Y 1,400,000 1,320,000
b. P350,000 d.
Z 320,000 280,000
P400,000
Solution: B
How much should Citibank as unrealized loss related to
Aggregate Market Value P1,500,000
the securities transactions in its 2010 profit or loss?
Less: Aggregate Cost P1,800,000
a. None c. P20,000
FV adjustment 50,000 P1,850,000
unrealized loss
Decrease in Value P 350,000
b. P100,000 unrealized loss
d.P120,000unrealized loss
6. During 2010, Hong Kong Bank purchased marketable
Solution: B
equity securities as a short-term investment and then as
Market Unrealized
trading securities. The cost and Market value at
Security Cost Value loss
December 31, 2010 were as follows:
X P 800,000 P 820,000
12.31.10
Y 1,400,000 1,320,000
Security Shares Cost Market Value
Z 320,000 280,000
X 200 P 84,000 P102,000
Total P2,520,000 P2,420,000
Y 2,000 430,000 459,000
P100,000
Z 4,000 945,000 885,000
3. First bank purchased the following portfolio of trading
Hong Kong Bank sold the investment in security Y on
securities during 2010 and reported the following balance
March 9, 2011 for P250 per share. How much should
at December 31, 2010. No sales occurred during 2010. All
Hong Kong Bank report as realized gain on the sale?
declines and considered to be temporary.
a. P 5,000 c. P30,000
12.31.10
b. P41,000 d. P70,000
Security Cost Market Value
Solution: B
AA P200,000 P205,000
Net Selling price (2,000 x P250)
BB 350,000 330,000
P500,000
CC 280,000 270,000
Less: MV of Security Y P459,000
Total P830,000 P805,000
Gain on Sales P 41,000
Note: When a single equity security is sold “in part”
How much should First Bank report as unrealized loss
from an equity portfolio of trading securities, the realized
related to the securities transaction in its 2010 profit or
gain or loss is the difference of the selling price and
loss?
carrying value of the last valuation date.
a. None c. P5,000
unrealized loss
b. P25,000 unrealized loss d. P30,000 7. Information regarding ABC Bank’s portfolio of trading
unrealized loss securities is as follows:
Solution: B Aggregate Cost, 12.31.10 P3,000,000
Aggregate Market value P805,000 Unrealized gain, 12.31.10 90,000
Less: Aggregate Cost P830,000 Unrealized losses, 12.31.10 (300,000)
Unrealized Loss P 25,000 Net realized gain during 2010 350,000

4. Primary Company purchased the following portfolio In its December 31, 2010 profit or loss, what amount of
of trading securities during 2010 and reported the net realized gain should the company report?
following balance December 31, 2010. No sales occurred a. P90,000 c. P140,000
during 2010. b. P350,000 d.
12.31.10 P440,000
Security Cost Market Value Solution: C
M P400,000 P 390,000 Unrealized losses P(300,000)
N 600,000 630,000 Unrealized gains 90,000
O 500,000 540,000 Net realized losses – 12.31.10 P(210,000)
Total P1,500,000 P 1,560,000 Add: Net realized gains during 2010 P 350,000

Page 1 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

Net realized gains P 140,000 No sales occurred during 2010 and 2011. all declines are
considered to be temporary. What is the carrying value of
Note: Net realized gains during 2010 were a result of a the securities in Asian’s December 31, 2010 and 2010
disposal of a security. The unrealized gain or loss is the statement of financial position, respectively?
difference between MV of the securities & historical cost. a. P1,390,000 and P1,400,000
b. P1,400,000 and P1,400,000
8. PCIB Corporation has the following short-term c. P1,400,000 and P1,450,000
marketable securities classified as trading securities as d. P1,440,000 and P1,450,000
December 31, 2009: Solution: D
Historical Cost Market Value Market Value
ABC P1,625,000 P1,700,000 Security 2010 2011
DEF 2,375,000 2,400,000 A P 590,000 P 620,000
B 380,000 370,000
On March 31, 2010, PCIB Corporation decided to dispose C 470,000 460,000
ABC and DEF securities for a sum of P4,365,000. What is Total P1,440,000 P1,450,000
the amount of realized gain PCIB should report in its 2010
profit or loss result of the sale of securities? Note: PAS 39, paragraph 43 states that “when a financial
a. None c. P265,000 asset is recognized initially, it shall be measured at FMV
b. P340,000 d. plus transaction costs that are attributable to the
P365,000 acquisition except when the financial assets is trading
Solution: C securities, the transaction cost is treated outright
expenses.
Selling price P4,365,000
Less: Carrying Value (MV) P4,100,000
12. Gerald Company acquired available for sale
Realized gain on sale P
securities during the year 2010 to be as current
265,000
investment. An analysis of the current investments on
December 31, 2010 showed the following.
Note: Realized gain or loss on a sale of all trading
Securities Cost Market
securities is determined by comparing the selling price
P P 1,500,000 P 1,400,000
versus the carrying value (MV) of the securities at the
I 2,200,000 2,300,000
time of sale since any increase or decrease (unrealized
C 3,000,000 2,900,000
gain or loss) recognized previously is not reversible.
U 3,800,000 4,000,000
Total P10,500,000 P10,600,000
9. PNB Company purchased the following portfolio of
trading securities and reported the following balance at
December 31, 2009. All declines are judged to be
In Gerald’s December 31, 2010 statement on financial
temporary:
position how much should be reported as the carrying
12/31/09
value of the securities?
Security Historical Cost Market Value,
a. P10,300,000 c. P10,400,000
P P 450,000 P 465,000
b. P10,500,000 d. P10,600,000
I 650,000 675,000
C 375,000 400,000
Solution: D
P1,475,000 P1,540,000
Note: AFS securities are valued at FMV and the
aggregate FMV is P10,600,000.
On February 1, 2010. PNB Company decided to sell all the
securities receiving net proceeds of P1,750,000. What is
13. What amount of unrealized gain should be reported
the total amount of realized gain that PNB Company
in Gerald’s December 31, 2010 in the profit or loss?
should recognize on the sale of the securities?
a. None c. P200,000
a. None c. P210,000
b. P100,000 d.
b. P215,000 d.
P300,000
P275,000
Solution: A
Solution: C
Note: AFS securities are initially recorded at FMV. Any
Net proceeds from sales P1,750,000
changes in the MV of the securities are to be recognized
Less: Carrying value of securities P1,540,000
as Unrealized Gain or Loss in the statement of
Realized gain P 210,000
comprehensive income and not at the profit or loss.
Available for Sale Securities
14. Citibank purchased the following portfolio of
10. Red Company had the following portfolio of available
available-for-sale securities during 2010 and reported the
for sale equity securities at December 31, 2010:
following balance at December 31, 2010. No sales
Security Cost Market Value
occurred during 2010. All declines are considered to the
A P 400,000 P 410,000
temporary.
B 700,000 660,000
(12/31/10)
Total P1,100,000 P1,070,000
Securities Cost Market Value
X P 800,000 P 820,000
In Red’s December 31, 2010 statement of financial
Y 1,400,000 1,320,000
position, how much should be reported as the carrying
Z 320,000 280,000
value of the portfolio?
Total P2,520,000 P2,420,000
a. P1,060,000 c. P1,070,000
b. P1,100,000 d. P1,110,000
Solution: C
How much should Citibank report as unrealized loss
11. As Bank acquired the following portfolio of available- related to the securities transactions in its 2010
for-sale securities during 2010 and reported the following statement of financial position?
balance: a. None c. P20,000
Historical Market Value unrealized loss
Security Cost 2010 2011 b. P100,000 unrealized loss
A P600,000 P590,000 P620,000 d.P120,000unrealized loss
B 380,000 380,000 370,000 Solution: B
C 450,000 470,000 460,000 Aggregate FMV P2,420,000
Less: Aggregate Cost P2,520,000
Unrealized Loss P 100,000

Page 2 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

Required FV Adjustments P 87,500

15. On January 1, 2010, Maya Company appropriately Less: FV adjustment credits P 350,000
reported a credit balance of P125,000 in the fair value Increase in AFS value P 262,500
adjustment account in conformity with the valuation of
available for sale securities. There was no change during Question 2: what amount of unrealized loss Parrot
2010 in the composition of portfolio of available for sale Company report in its 2010 shareholders’ equity?
investment. Pertinent data on December 31, 2010 are as a. None c. P 87,500
follows: b. P262,500 d.
Securities Cost Market P350,000
C P1,500,000 P1,625,000
P 1,250,000 1,000,000 Solution: C
A 2,250,000 1,750,000 Aggregate FMV 12.31.10 P4,912,500
Total P5,000,000 P4,375,000 Less: Historical cost P5,000,000
What additional amount of unrealized loss on these Required FV Adjustments P 87,500
securities should the company recognize during 2010?
a. None c. P375,000 18. During 2009, Patrol Company purchased marketable
b. P500,000 d. securities as available for sale. At December 31, 2009,
P625,000 the balance in the fair value adjustment was P200,000
Solution: B credit. There were no security transactions during 2010.
Aggregate FMV P4,375,000 Pertinent data on December 31,2010 are:
Less: Aggregate Cost P5,000,000 Securities Historical Market
Required FV adjustments P 625,000 C P1,500,000 P1,600.000
Less: FV adjustment 1.1.10 (credit P 1,200,000 1,400,000
Balance or unrealized loss) P 125,000 A 2,300,000 2,400,000
Increase in Unrealized loss P 500,000 Total P5,000,000 P5,400,000
What amount of unrealized gain should the company
16. On January 1, 2010, May Company appropriately report in its 2010 statement of financial position of the
reported a debit balance of P125,000 in the fair value increase in the value of the security?
adjustment in conformity with the valuation of available a. None c. P200,000
for sale securities. There was no change during 2010 in b. P400,000 d. P600,000
the composition on the portfolio of available for sale Solution: B
investments. Pertinent data on December 31, 2010 are Aggregate FMV P5,400,000
as following: Aggregate Historical cost P5,000,000
Securities Cost Market Total Unrealized Gain P 400,000
C P 1,500,000 P 1,625,000
P 1,250,000 1,000,000 19. Trend Company reported the following investment in
A 2,250,000 1,750,000 available for sale securities in its December 31, 2009
Total P 5,000,000 P 4,375,000 statement of financial position:
Questions 1: By what amount the available for sale
securities decreased during 2010? Brand company, equity instrument, at fair market
a. None c. P500,000 value, P1,200,000; Unrealized loss reported in equity
b. P625,000 d. is P200,000
P750,000
Solution: D On December 31, 2010, there was objective evidence
Aggregate FMV P4,375,000 that came to the attention of Trend Company that the
Less: Aggregate Cost P5,000,000 investment in Brand Company is impaired. Market value
Required FV adjustments P 625,000 of the investment was established at P800,000. What
Add: FV adjustment 1.1.10 (debit amount of impairment loss should Trend Company
Balance or unrealized gain) P 125,000 recognize on the investment as of December 2010?
Total decrease in value of AFS P 750,000 a. None c. P200,000
b. P400,000 d. P600,000
Question 2: What amount of unrealized loss should May Solution: D
Company report in its December 31, 2010 shareholders’ FMV 12.31.10 P 800,000
equity related to its investment? FMV 12.31.09 P1,200,000
a. None c. P500,000 Impairment Loss P 400,000
Add: Unrealized loss in equity to P/L 200,000
Total Impairment Loss P 600,000
b. P625,000 d.
P750,000
Note: PAS 39, paragraph 67 states that “if there’s an
Solution: B
objective evidence that the MV of an investment in AFS
Aggregate FMV P4,375,000
securities is impaired, any cumulative amount of
Less: Aggregate Cost P5,000,000
unrealized loss reported in the Equity shall be removed
Required FV adjustments P 625,000
from Equity and recognized in P/L even though the
financial assets has not been derecognized.”
17. During 2009, Parrot Company purchased marketable
securities as available for sale. At December 31, 2009,
20. Resolve Company has investment in financial equity
the balance in the fair value adjustment was P350,000
instrument in Marcus Company acquired at a cost of
credit. There were no security transactions during 2010.
P900,000 in 2009. This investment was classified as
Pertinent data on December 31, 2010 are:
available for sale securities. At the close of the
Securities Historical Cost Market
accounting year 2009, observable objective evidence
C P 1,500,000 P1,625,000
came to the knowledge of Resolve Company that Marcus
P 1,250,000 1,200,000
Company is in deep financial trouble; market value of its
A 2,250,000 2,087,500
securities had been going down. Based on available
Total P 5,000,000 P4,912,500
information as to this date, Resolve Company’s
investment in Marcus has a market value of P700,000 as
Question 1: What total amount the Available for sale
a result, Resolve Company recognized the decline in the
instrument had increased its value in 2010?
value of its investment in the 2009 profit or loss as
a. None c. P87,500
impairment loss.
b. P262,500 d.
P350,000
During the year 2010, due to changes in financial climate
Solution: B
there has been a complete turn-around in Marcus
Aggregate FMV 12.31.10 P4,912,500
Company’s financial instrument, Due to this objective
Less: Historical cost P5,000,000
turn-around in the market value of Resolve Company’s

Page 3 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

investment, market value at the close of 2010 was Wand Company recognize in 2011 from selling those
established at P950,000. What amount of impairment shares?
reversal should Resolve Company recognize in its 2010 a. P100,000 c.
profit or loss? P400,000
a. None c. P 50,000 b. P500,000 d.
b. P200,000 d. P600,000
P250,000 Solution: B
Solution: A SP – 2011 Sales (10,000 shares x P60) P600,000
Note: PAS 39, Paragraph 69, Impairment losses Less: CV of Security (unrecovered cost)
recognized in profit or loss for AFS securities shall not be Total cost (40,000 x P40) P1,600,000
reversed through profit or loss. Less: Proceeds from sales
(30,000 x P50) P1,500,000 P100,000
21. Grand Company has 60,000 ordinary shares of Brand Realized Gain on Sale P500,000
Corporation as an investment in available for securities.
These shares were acquired at fair market value which Note: When the FMV of financial instrument cannot be
was P80 per share on May 2, 2011. On December 20, measured reliably, the cost recovery method should be
2011, Grand Company sold 42,000 shares of its used in measuring the realized gain or loss on the
investment in Brand Corporation for P85 per share. disposal of the instrument.
Market value of Brand’s shares has yet to change; it
remained at P90 per share. 23. During 2010, Ostrich Company purchased
Question 1: What amount of realized gain or loss should marketable securities as available for sale. The cost and
Grand Company recognize in selling those shares? market value at December 31, 2010 were:
a. None c. P210,000
b. P300,000 d. Securities Shares Cost Market
P420,000 Suma 10,000 P 1,340,000 P1,460,000
Solution: C Cum 10,000 1,950,000 1,980,000
Market Ratio Carrying Laude 20,000 2,400,000 2,500,000
Value Value
Share sold (42,000 x P90) P3,780,000 70% Ostrich sold 10,000 shares of Company Cum stock on
P3,360,000 January 31, 2011, for a net proceeds of P2,100,000. On
Shares retained (18,000 x P90) 1,620,000 30% the sale, how much should Ostrich report as realized
P1,440,000 gain?
Total P5,400,000 a. None c. P120,000
P4,800,000 b. P150,000 d. P170,000
Solution: B
Selling Price (42,000 x P85) P3,570,000 Net Selling Price P2,100,000
Less: Carrying value of security sold P3,360,000 Cost of Security – Cum P1,950,000
Realized Gain on Sales P 210,000 Realized Gain P 150,000

Question 2: What amount of unrealized gain or loss Note: When a single equity security is sold in “part”,
should Grand Company derecognize in selling those from an equity portfolio of available for sale securities,
shares? changes in market value of the securities in the portfolio
a. None c. P210,000 should not affect the realized gain or loss on the sale of
b. P180,000 d. the single security from the portfolio, meaning, the
P420,000 realized gain or loss is the difference of the SP and the
Solution: D historical cost of the single security disposed of.
Market Value – partly sold P3,780,000
Less: Carrying value – partly sold P3,360,000
Unrealized Gain - to be derecognizedP 420,000
24. On November 1, 2009, Gain Company invested
Question 3: What amount of unrealized gain or loss P600,000 in equity securities representing 20,000
should Grand Company carry over to the next ordinary shares of Brain Company. The investment was
measurement date? classified as available for sale security since the company
a. None c. P210,000 does not intend to sell the security for a short-term profit.
b. P180,000 d. P420,000 On December 31, 2009, this investment has a market
Solution: B value of P580,000. On December 31, 2010, the market
Market Value – partly retained P1,620,000 value of the investment was P640,000 On January 15,
Less: Carrying value – partly retained P1,440,000 2011, Gain Company sold the investment for P650,000.
Unrealized Gain - to be carried over P 180,000 What amount realized gain should Grain Company
recognize on the disposal of the available for sale
Note: PAS 39, paragraph 27, when a single instrument is security?
partly disposed of, the carrying amount of the instrument a. None c. P20,000
should be allocated between the partly disposed of and b. P30,000 d. P50,000
partly retained, based on the relative values. A Answer: D
cumulative gain or loss that has been recognized in Selling price P650,000
equity is allocated between the parts that continues to be Less: Historical cost P600,000
recognized (part retained) and part that is derecognized Realized gain in sale P 50,000
(sold/exchanged) based on their relative fair market
values of those parts. The amount of unrealized gain/loss Investment in Equity
related to the part disposed of is derecognized, while the 25. Turbo Company bought 2,000 shares of Miguel
amount of unrealized gain/loss on the part retained is Company on January 2, 2010 at P150 per share and paid
carried over until the next measurement. P2,250 as brokerage fee and P1,500 nonrefundable tax.
At the time acquisition, Turbo Company had a positive
22. Wand Company has 40,000 shares of unquoted intent to hold this instrument for an indefinite period of
equity instrument of Sand Corporation. These shares time. Prior to the data of acquisition, information revealed
were acquired at P40 per share on January 2, 2010. On that on December 9, 2009, Miguel Company declared a
December 31, 2010, Wand Company sold 30,000 shares P10 cash dividend to shareholders on record as of January
of its investment in Sand Corporation for P50 per share. 31, 2010 payable on April 30, 2010. There were no record
The remaining securities were sold on December 15, as of in 2010 affecting the investment in Miguel Company.
2011 for P60 per share. Market value of Sand’s share What is the historical cost of the investment account?
is not determinable or cannot be measured a. P283,750 c.
reliable. What amount of realized gain or loss should P300,000

Page 4 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

b. P302,250 d. Original # of shares purchased 50,000

P303,750 Add: Share dividends (50,000 x 15%) 7,500
Solution: A Total shares 57,500
Amt paid for the shares (2,000 x P150) P300,000 X Dividend per share P8
Add: Transaction costs: Total cash dividend P460,000
Brokerage P2,250
Non-refundable tax P1,500 3,750 29. Threshold Company purchased 20,000 out of 200,00
Tax cash outlay P303,750 share outstanding of Power company’s ordinary shares on
Less: Amt of dividend included February 23, 2010 for P924,00. Threshold Company
(2,000 x P10) 20,000 intends to hold the instrument for an indefinite period of
Historical cost of investment P283,750 time. Threshold Company received a P40,000 cash
dividend on Power Company on July 1, 2010. Power
declared a 10% share dividend on December 1, 2010 to
Note: The equity instruments were selling dividends
shareholders of record as to December 31, 2010. The
on; hence, the amount paid includes payment for
dividends was distributed on January 31, 2011. The
dividend.
market price of the share was P38 on December 1, 2010,
P40 on December 31, 2010 and P42 on January 31, 2011.
26. On December 30, 2010, Tandem Company acquired
5,000 ordinary shares (120 par) and to be classified as Question 1: What amount should Threshold record as
available for sale shares of Thermal Company. Tandem dividend revenue for the year ended December 31, 2010?
Company settled the shares by exchanging its equipment a. P 40,000 c. P 88,000
with a carrying value of P900,000 but currently has a b. P116,000 d.
market value of P800,000. Shares of Thermal are not P120,000
actively traded in the market and its market value cannot Solution: A
be reliably determined. At what amount the investment Note: Only the cash dividend of P40,000 should be
in equity instrument be recorded? reported as income, share dividend is not an income.
a. P600,000 c.
P700,000
Question 2: What amount should Threshold Company
b. P800,000 d.
report the investment in its 2010 balance sheet?
P900,000
a. P800,000 c.
P836,000
Solution: B
b. P880,000 d.
P924,000
Note: The cost of an equity instrument acquired is equal
Solution: B
to the FMV of the instrument. If the FMV of the equity
Share purchased 20,000
instrument is not clearly determinable, then the cost is
Add: Dividend received (20,000 x 10%) 2,000
equal to the FMV of the consideration that was sacrificed
Total shares held 22,000
in acquiring the instrument.
x MV of shares – 12.31.10 P40
FV of investment P880,000
27. On September 30, 2010, Pilgrims Company
exchanged equipment for 2,500 available for sale share
30. Comfort Company purchased 10,00 shares of Abel
of Theme Company’s ordinary share. On that date, the
ordinary shares at P90 per share on January 2, 2010. On
equipment had a carrying value of P250,000 and its fair
December 31, 2010, Comfort received 2,000 shares of
market value was not clearly determinable. The par value
Abel ordinary share in lieu of cash dividend of P10 per
of Theme’s share was P80 per share but its market value
share. On this date, the Abel ordinary share has a quoted
on September 30, 2010 is P90 per share.
market price of P60 per share. In its 2010 statement of
comprehensive income, how should comfort report as
Question 1: What is the cost of the investment?
dividend income?
a. P225,000 c.
a. None c. P 20,000
P250,000
b. P100,000 d. P120,000
b. P290,000 d.
Solution: D
P290,100
Note: Share dividend in lieu of cash dividend is
Solution: A
considered as income and should be measured by the
Shares acquired 2,500
market value of the share of P60 per share (P60 x 2,000)
x market value of shares P 90
MV of shares acquired P225,000
31. On January 2, 2010, paragon Company acquired
16,000 ordinary shares of Hexagon Company at P50 per
Note: The cost of the investment is the market value of
share. On July 1, 2010, the Hexagon ordinary share was
the asset surrender or MV of asset received whichever is
split 5 to 1. On October 1, 2010, Paragon received from
clearly determinable.
Hexagon a preference share dividend of one share for
every 10 ordinary shares held. On this date, the market
Questions 2: What is the amount of gain or loss on the
price of Hexagon ordinary is P15 per share and
disposal of the equipment?
preference, P10 per share.
a. None c. P25,000 gain
b. P25,000 loss d. P40,000 gain
On December 31, 2010, Paragon received from Hexagon
Solution: B
a dividend in Kind of one share of Octagon Company
Exchange price (2,500 shares x P90) P225,000
ordinary share for every 4 Hexagon ordinary shares held.
Less: Carrying value of equipment P250,000
The market price of Octagon ordinary is P5 per share. In
Loss on Exchange (P25,000)
its 2010 statement of comprehensive income, how much
should Paragon report as dividend revenue?
28. Guess Company purchased 50,000 available for sale
a. None c. P40,000
share (5% ownership) of Fortune Company on January 2,
b. P100,000 d. P150,000
2010. Guess received a share dividend of 15% on March
Solution: B
31, 2010 when the market price of the share is P40. On
Share held (16,000 x 5) 80,000
November 30, Guess paid P20 per share special
Divided by: ÷4
assessment on the shares. On December 15, 2010, Guess
Dividend 20,000
paid a cash dividend of P8 per share. In the December
x market price per share 5
31, 2010 statement of comprehensive income of Guess
Property dividend P100,000
Company, what amount is reported as dividend income?
a. P60,000 c. P150,000
Note: Share dividend other than those held is not
b. P400,000 d.
considered as an income, the accounting process is to
P460,000
allocate the original investment between the ordinary and
Solution: D

Page 5 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

preference shares using their relative fair market value Question 1: If the investment was classified as Available
ratios. An Accounting entry is then necessary to reflect for Sale Securities how much should be recorded as cost
this allocation by a debit to Investment in Preference and of new investment in trading securities assuming all the
a credit to Investment in Ordinary. Property dividend is share rights were exercised?
considered as income and should be measured at MV of a. P153,800 c.
the property at the time of declaration . P155,000
b. P156,000 d.
32. Dancer Company purchased 40,000 share of Lancer P161,000
Corporation’s newly issued 6%, cumulative preference Answer: C
shares, P50 par for P3,040,00 on May 9, 2010. Each share Cash paid for the New shares (2,000 ÷2 x P125)
carried on detachable share warrant entitling the holder P125,000
to acquire at P60 one share of Lancer ordinary shares. On Add: Cost of rights (P18/P150(2,000 x P125) 30,000
May 9, 2010, the market price of the preference share ex- Cost of new Investment
warrant was P69 per share and the market price of the P155,000
share warrant was P6 warrant. On December 31, 2010,
Dancer sold stock warrants for P295,000. What is the Question 2: If the investment was classified as Available
gain on sale of warrants? for sale Securities how much should be recorded as cost
a. None c. P30,652 of new investment in Available for Sale securities
b. P51,800 d. P55,000 assuming all the share rights were exercised?
Solution: B a. P153,800 c.
Selling Price P295,000 P155,000
Less: Cost of warrants (sch. 1) P243,200 b. P156,000 d.
Gain on Sale P 51,800 P161,000
Cash paid for the New shares (2,000 ÷2 x P125)
MV Cost Allocated P125,000
cost Add: Cost of rights (P18/P150(2,000 x P120) 28,800
Preference share 69/75 3,040,000 P2,796,800 Cost of new Investment
P153,800
Warrant 6/75 3.040,000 243,200
35. On January 2, 2010, Stereo Company purchased
50,000 shares of Mono Company ordinary share for
33. On December 20, 2009 Ball Corporation purchased P3,600,000. Stereo Company classified the investment as
30,000 shares of Pencil Company’s share at P100 each. available for sale securities. On December 4, 2010,
On December 31, 2009, Pencil Company’s shares are Stereo received 50,000 share rights from Mono. Each
selling at P125 per share. On February 1, 2010, Ball right entitles the holders to acquire one share for P85,
received 30,000 rights entitling it to purchase at P130 per market value of share was P100, immediately before the
share one additional share of Pencil for each 10 share rights issued, and P90 a share, immediately after the
then held. On date, Pencil’s shares were selling ex-right at rights were issued, Stereo sold its rights on December 31,
145 and the rights were selling at P5.00. 2010 for P10 a right. How much would be gain from the
sale of the right?
Question 1: if the securities were classified by Ball a. None c. P100,000
Corporation as trading securities at the time of b. P140,000 d.
acquisition and assuming the entire share rights were P500,000
sold at their prevailing market price of P5, what amount Answer: B
of gain on sale of share rights should Ball Corporation Selling Price (50,000 x P10) P500,000
recognize? Less: Cost of rights (10/100 x P3,600,000) P360,000
a. P 25,000 c. P 50,000 Gain on sales of rights P140,000
b. P100,000 d.
P150,000 36. Valentine Company issues rights to subscribe to its
Answer: A share, the ownership of 4 shares entitling the
Selling Price (30,000 x P5) P150,000 shareholders to subscribe for 1 share at P100. Conrad
Less: Cost of rights {5/150 (30,000 x P125)} 125,000 owns 20,000 shares with total cost of P1,650,000. The
Gain on Sale of rights P 25,000 share is quoted rights on at P125. What is the cost of the
new investment assuming Conrad exercises all share
Question 2: if the securities were classified by ball rights?
Corporation as available for sale securities at the time of a. P 66,000 c. P500,000
acquisition and assuming the entire share rights were b. P563,462 d.
sold at their prevailing market price of P5, what amount P566,000
of gain on sale of share rights should Ball Corporation Answer: D
recognize? Cash Paid (20,000 ÷4 x P100) P500,000
a. P25,000 c. P 50,000 Add: Cost of rights (P1,650,000 x 5/125) P 66,000
b. P100,000 d. Total P566,000
P150,000
Answer: C Theoretical value of rights (rights on)
Selling Price (30,000 x P5) P150,000
Less: Cost of rights {5/150 x 3,000,000 } 100,000 MV of share – Subscription price
Gain on Sale of rights P 50,000 = -------------------------------------------
N+1

P125 – P100
34. World Company owns 2,000 ordinary shares of = --------------- = P5
Company, which has hundred thousand share publicly 4+1
trade. World Company purchased these 2,000 shares in
2011 for P120 per share. On November 1, 2011, hope 37. Box Company bought the shares (classified as
distributed 2,000 share rights to World. World Company available of sale) of Pyramid, INC. as follows:
was entitled to buy one new share of hope Company
ordinary share for P125 for every two of these rights. On Jun 9, 2010 2,000 shares @ P100 P200,000
November 1, 2011, hope Company’s share have a market Dec 4, 2010 3,000 shares @ P120 360,000
value of P132 ex-right and the share rights had a market P560,000
value of P18. On December 31, 2011, hope Company’s The following were the transaction for 2011:
market value has yet to change. Jan 4 received cash dividend at P10 per share.
Jun 19 received 20% share dividend
Dec 9 Sold 3,00 share at P120 per share.

Page 6 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

b. P140,000 d.
How much is the gain on the sale of the shares, assuming P150,000
the average cost approach is used? Answer: D
a. None c. P 60,000 Proceeds from sales(10,000 shares x P10)
b. P80,000 d. P100,000 P100,000
Answer: B Carrying value of investment
6.09.10 12.04.10 (10,000 shares x P25) P250,000
Total Loss on Sales of investment
Upon Acquisition 2,000 3,000 P150,000
Share dividend (20%) 400 600
Total before sales 2,400 3,600 6,000 40. Soprano Company acquired 50,000 ordinary shares
Divided by: Total Cost (P200,000 + P360,000) of Alto Company on September 30, 2009 for P8,250,000.
P560,000 On October 30, the shares were split into a 2:1 basis. On
Ave. Unit cost P93.99 November 30, 2010, Alto distributed 10% ordinary share
dividends when the market price of the share was P250
per share. On December 31, 2010, Soprano sold 6,000 of
Selling Price (3,000 x P120)
its Alto share for P600,000. For the year ended
P360,000
December 31, 2010, how much Soprano a gain on sale of
Less: Cost of investment (3,000 x P93.99)
investment?
P280,000
a. P105,000 c.
Gain on Sales P
P150,000
80,000
b. P200,000 d.
P250,000
38. Flowers Corporation acquired ordinary shares of
Answer: C
Stems Company as follows:
Selling Price P600,000
Date of No. Of Total
Less: Cost of investment (6,000 x P75) P450,000
Lot Acquisition Shares Cost
Gain on Sales of Investment
A Oct 4, 2010 1,500 P 60,000
P150,000
B May 9, 2010 800 36,000
C Aug 19, 2011 1,600 80,000
Acquisition 50,000 shares
Total P176,000
Stock split (2:1) x 2
Stock after stock split 100,000 shares
On June 19, 2011, Stems Company issued a 10% share
Stock dividend (10%) (100,000 x 10%) 10,000 shares
dividend. On September 1, 2011, Flowers sold 2,100
Total shares 110,000
share of the share at P60 per share. No cash dividends
Divided by: Cost of investment P8,250,000
were declared from 2010 to 2011. How much is the gain
Unit cost of Investment P 75 / share
or loss on the sale, computing the cost of the shares sold
on the basis of (a) first in first out (FIFO) and (b) average
41. On January 2, 2009, Chandler Company acquired
cost?
5,000 ordinary shares of Grand Corporation for P340,000
FIFO Average Cost
including P10,000 transaction cost. Chandler Company
a. P47,590 gain P36,498 gain
intends to hold the investment indefinitely. At the end of
b. P47,590 loss P36,498 loss
2009, Grand Company paid P10 cash dividend to all of its
c. P49,636 gain P46,316 loss
shareholders. In June 2010, there was a complete
d. P49,636 loss P46,316 gain
turnaround in Grand’s operation due to financial crisis, its
Answer: A
management decided to dissolve and complete the
Lot A Lot B Lot C Total
dissolution by paying all its shareholder P65 per share as
Acquired 1,500 800 1,600 3,900
liquidating dividends on December 31, 2012. The present
6.9.11 dividend (10%) 150 80 230
rate of return for a similar instrument as of December 31,
Total 1,650 880 1,600 4,130
2010 is 10%.
Divided by: Total cost P176,000
Ave. Unit Cost P 42.62
Question 1: What is the carrying value of Chandler’s
investment in Grand Company that should be reported in
Ave Method:
its 2010 financial statement?
Selling Price (2,100 x P60) P126,000
a. P244,177 c.
Less: Cost of investment sold
P268,593
(2,100 x 42.62) P 89,502
b. P298,454 d.
Gain on Sales on Investment P
P340,000
36,498
Answer: C
Expected cash inflow (P65 x P5,000 shares) P325,000
FIFO Method
x Present value factor of 10% after 2 yrs 0.82644
Selling Price P126,000
FMV of the investment – 12.31.10 P268,593
Less: Cost of investment
Lot A 1,650 shares = P60,000
Question 2: What amount of impairment loss should
Lot B 450 shares = P18,410 P 78,410
Chandler Company recognize in 2010?
(450/880 x P36,000)
a. P21,407 c. P61,407
Gain on Sales on Investment P
b. P51,407 d. P71,407
47,590
Answer: D
FMV of Investment – 12.31.10 P268,593
39. On January 2, 2009, Phone Company purchased
Less: Carrying value of investment P340,000
10,000 shares (10%) of the outstanding ordinary share of
Impairment loss P 71,407
Pal, Inc. for P25 per share. The purchase was
appropriately recorded as a long-term investment and
Investment in Associate
accounted for under the fair value method. The market
42. On January 2, 2010, Power Company purchased 15%
price of the share was P24 per share on December 31,
of Plant Corporation’s ordinary shares for P3,000,000.
2009. During 2010 Pal experienced severe financial
This investment did not give Power the ability to exercise
difficulties and Phone disposed of its entire investment in
significant influence over Plant Corporation. During 2010,
Pal share for P10 share on November 9, 2010. Phone’s
Plant reported net income of P1,750,000 and paid cash
effective tax rate was 32% for 2010. In its 2010
dividends of P1,000,000 on its ordinary shares. As of
statement of comprehensive income, how much should
December 31, 2010, the market value of Plant
Phone report as loss from disposal of the long-term
Corporation’s shares is not clearly and readily
investment?
determinable. What is the balance in Power’s investment
a. P 84,000 c. P 90,000
in plant Corporation’s account at December 31, 2010?
a. P3,000,000 c. P3,112,500

Page 7 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

b. P3,150,000 d. P3,262,500 was undervalued on Peace’s balance sheet and which had
Answer: A 10- years useful life remaining. For the year ended
Note: PAS 28, paragraph 6, states that if an investor December 31, 2010, Peace reported net income after tax
holds, 20% or more of the voting power of the investee, it of P180,000 and paid cash dividends of P60,000 on its
is presumed that the investor does have significant ordinary. Income tax rate is 32%. How much is the
influence, unless it can be clearly demonstrated carrying value of Hope’s investment in Peace at
otherwise. December 31, 2010?
a. P678,000 c.
43. On January 2, 2010, Moore Company purchased 10% P690,000
of Dem Corporation’s ordinary shares for P3,000,000. This b. P714,000 d.
investment did not give Moore the ability to exercise P717,200
significant influence over Dem but intends to hold the Answer: B
investment indefinitely. During 2010, Dem reported net Acquisition cost P700,000
income of P1,750,000 and paid cash dividends of Add/Deduct:
P1,000,000 on its ordinary shares. What is the amount of Net understatement of dep’r (10,000)
income from investment that Moore should recognize in Share in NI (180,000 x 20%) 36,000
its investment in Dem Corporation at December 31, Share in Dividends (60,000 x 20%) (12,000)
2010? Carrying Value P714,000
a. P100,000 c.
P150,000 Acquisition cost P700,000
b. P200,000 d. Less: BV of net assets P600,000
P350,000 Net Excess P100,000
Answer: A ÷ Remaining life of asset 10 years
Dividends P1,000,000 Net understatement of dep’r P 10,000
x % of interest 10%
Dividend Income P 100,000 46. On January 2, 2010, Mills Company purchased 25% of
Boon Corporation’s ordinary shares; no goodwill resulted
44. On January 1, 2009, Oval Company purchased 10% from the purchase. Mills appropriately carries this
of the outstanding ordinary share of Tin Corporation for investment at equity and the balance in Mill’s investment
P800,000, when the fair value of Tin’s net assets was account at December 31, 2010 was P1,900,00. Boon
P4,000,000. Oval does not have the ability to exercise Company reported net income of P1,200,000 for the year
significant influence over the operating and financial ended December 31, 2010 and paid ordinary share
policies of Tin. The following data concerning Tin are dividends totaling P480,000 during 2010. How much did
available for 2010: Mills Company pay for its 25% interest in Boon Company?
12.31,09 12.31,10 a. P1,720,000 c. P2,020,000
Net income P1,200,000 P1,000,000 b. P2,080,000 d. P2,320,000
Dividends declared & paid 0 2,500,000 Answer: A
Carrying value of investment P1,900,000
Question 1: In its income statement for the year ended Add/Deduct:
December 31, 2010, how much should Oval report from Share in NI (P1,200,000 x 25%) ( 300,000)
this investment? Share in Dividends (P480,000 x 25%) 120,000
a. None c. P100,000 Acquisition cost, Jan 2, 2010
b. P220,000 d. P1,720,000
P250,000
Answer: B 47. On January 2, 2010, Street Company purchased 25%
Cumulative net income of Life Company’s ordinary shares; no goodwill resulted
P2,200,000 from the purchase. Street appropriately carries this
x % of interest 10% investment at equity and the balance in Life’s investment
Investment Income P 220,000 account was P3,800,000 at December 31, 2010. Life
reported net income of P2,400,000 for the year ended
Question 2: What is the carrying value of Oval’s December 31, 2010 and paid dividends amounting to
investment in Tin as of December 31, 2010? P960,000 during 2010. How much did Street pay for its
a. P770,000 c. investment in Life?
P800,000 a. P3,200,000 c. P3,440,000
b. P830,000 d. b. P4,040,000 d. P4,640,000
P460,000 Answer: C
Answer: A Carrying value of investment P3,800,000
Original cost Add/Deduct:
P800,000 Share in NI (P2.400,000 x 25%) ( 600,000)
Less: Return of investment Share in Dividends(P960,000 x 25%) 240,000
Total Dividends declared P2,500,000 Acquisition cost, Jan 2, 2010
P3,440,000
Less: Cumulative net income P2,200,000
48. On January 1, 2010, Align Corporation acquired as a
Excess P 300,000
long term investment for P2,500,000, a 30% ordinary
x % of interest 10% P 30,000
share interest in Parallel Company. On that date Parallel
Carrying Value of investment
had net assets with a book value and current market
P770,000
value of P8,000,000. The difference of the cost of
acquisition and the book value of net asset acquired is
Note: The investor recognizes income only to the extent
attributable to a depreciable asset with a remaining life of
that it receives distributions from the accumulated net
5 years. During 2010, Parallel reported net of tax income
profits of the investee arising subsequent to the date of
P900,000, declared and paid and paid cash dividends
acquisition by the investor. Distributions received in
P200,000. Income tax rate is 32%. What is the maximum
excess of such profits are considered a recovery of
amount of income that Parallel should report from this
investment and are recorded as a reduction of the cots of
investment for 2010?
the investment.
a. P 60,000 c. P210,000
b. P250,000 d.
45. On January 2, 2010, Hope, Inc. acquired 20% of the
P256,400
outstanding ordinary shares of Peace Company for
Answer: B
P700,000 investment gave Hope the ability to exercise
Share in NI (P900,000 x 30%) P270,000
significant influence over Peace. The book value of the
Net understatement of dep’r 20,000
acquired shares was P600,000. The excess of the over
Income from Investment P250,000
book value was attributed to a depreciable asset which

Page 8 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

Acquisition cost P2,500,000 Annual understatement of dep’r P

Less: BV of net assets (P8,000,000 x 30%) P2,400,000 30,600
Understatement of dep’r asset P 100,000 Multiply by: 3/12
÷Remaining life 5 years Understatement of Dep’r P 7,560
Net Understatement of depreciation P
20,000 52. In October 1, 2010, RG Company acquired 30% of
the outstanding ordinary shares of BS Company for
49. Table owns 50% and 20% of Chair Corporation’s P3,000,000. This investment gave RG Company the
ordinary and preference shares, respectively. Chair’s ability to exercise significant influence over BS Company.
share outstanding at December 31, 2010 follows: The book value of the acquired shares was P3,000,000.
For the year ended December 31, 2010, BS Company
Ordinary share P4,000,000 reported net of tax income of P900,000 and paid cash
10% cumulative preference share 900,000 dividends of P100,000 on its ordinary share and
thereafter issued 5% dividend.
Chair reported net income of P600,000 for the year ended
December 31, 2010 and declared the current year On January 1, 2011, BS Company revalued its building.
dividend on the preference shares. What’ amount should The revaluation of the building has created a revaluation
Table report revenue related to its investment in Chair surplus, net of tax in the amount of P340,000 in the
Company for the year ended December 31, 2010? books of BS Company and the revaluation was made
a. None c. P255,000 known to RG Company. Both BS Company and RG
b. P273,000 d. Company use a uniform income tax rate of 32%for all
P300,000 years. For the year ended December 31, 2011, BS
Answer: C Company reported a net of tax income of P1,200,000 and
Net income P600,000 paid P300,000 cash dividends to all its shareholders.
Less: Dividends related to preference What is the carrying value of RG Company Investment in
Share (P900,000 x 10%) BS account on December 31, 2011?
90,000 a. P3,022,500 c. P3,307,300
NI available to ordinary shares P510,000 b. P3,409,500 d. P3,637,300
x Investor’s interest 50% Answer: B
Original cost – 10.1.10
P3,000,000
Share of Investor in NI P255,000
Add/Deduct:
Share in NI(900,000x 3/12 x 30%) P 67,500
50. On January 2, 2010, PSG Company purchased 20% of
Share in dividends (100,000 x 30%)
PLDT Company’s ordinary shares for P4,500,000. During
(30,000)
2010, PLDT reported net income of P4,000,000 and paid
Carrying value – 12.31.10 P3,037,500
cash dividends of P3,000,000 on its ordinary shares.
Add/Deduct:
What is the balance of PSG Company’s investment in
Share in NI (1,200,000 x 30%) P 360,000
PLDT account at December 31, 2010?
Share in dividends(300,000 x 30%) (90,000)
a. P4,300,000 c. P4,400,000
Share in revaluation
b. P4,500,000 d. P4,700,000
(P500,000 x30% x 68%) 102,000
Answer: D
Carrying value – 12.31.11 P3,409,500
Original cost - 1.2.10 P4,500,000
Add/Deduct:
Revaluation surplus, net of tax P340,000
Share in NI for 2010 (P4,000,000 x 20%) 800,000
÷ Net of tax rate 68%
Share in dividends (P3,000,000 x 20%)
Revaluation surplus b4 income tax P500,000
(600,000)
Carrying value 12.31.10
53. On September 1, 2010, Tender Company purchased
P4,700,000
30% of the outstanding ordinary share of Care
Corporation for P3,000,000 when the book value of net
51. In October 1, 2010 AB Company acquired 30% of the
assets of Care Corporation was P9,000,000. The fair
outstanding ordinary shares of SG Company for
values of the assets are equal to their carrying value
P2,706,000. This investment gave AB Company the ability
except of a land which was undervalued by P1,000,000.
to exercise significant influence over SG Company. The
Care reported net earnings throughout the year in the
book value of the acquired share was P2,400,000. At the
amount of P2,400,000 and paid total paid dividends of
time of acquisition, SG Company’s building was reported
P1,000,000. What is the maximum amount of income
at its carrying value with a remaining useful life ten
Tender Company could include in its 2010 profit or loss as
years. The fair value of this building over its carrying
“income from investment”?
value exceed by P1,500,000. SG Company’s accounting
a. P207,500 c.
policy is continually measure this building under the cost
P235,000
model.
b. P237,500 d.
For the year ended December 31, 2010, SG Company
P240,000
reported net of tax income of P900,000 and paid cash
Answer: D
dividends of P100,000 on its ordinary share and
Net income for the year P2,400,000
thereafter issued 5% stock dividend. Income tax rate is
÷ Number of months in a year 12
32%. What is the carrying value of AB’s investment in SG
Average monthly income P 200,000
Company account on December 31, 2010?
x No, of monsths (Sept – Dec) 4
a. P2,706,000 c. P2,712,900
Net income for 4 months P 800,000
b. P2,735,940 d. P2,743,500
x % of interest 30%
Answer: B
Share in NI P 240,000
Original cost P2,706,000
Add/Deduct:
54. TMG Company purchased 40% of GHQ Company’s
Share in NI 67,500
outstanding ordinary share on January 2, 2010 for
Share in cash dividend ( 30,000)
P8,000,000. The carrying amount of GHQ’s net assets at
Understatement of Dep’r ( 7,560)
the date of purchased totaled P18,504,000. Fair value and
Carrying value of investment
carrying value were the same for all items except for plan
P2,735,940
and inventory for which fair value exceeded their carrying
amounts by P1,000,00 and P200,000, respectively. The
Acquisition cost P2,706,000
plant has a 20-year life. The entire inventory was sold
Less: BV of net asset acquired P2,400,000
during 2010. Goodwill, if any, is not to be amortized and
Excess P 306,000
no impairment test has been done since company
÷ Remaining useful life 10 years
believes that the goodwill has yet to decline its value
2010, GHQ Company reported net of P2,400,000 and a

Page 9 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

P400,000 cash dividends. Income tax rate is 32%. What Adj to income for 2011
amount should TMG Company report in its profit or loss Income – equity method (12,000,000x10%) P1,200,000
from its investment in GHQ Company for the year ended Less: income – cost method
December 31, 2010? (4,000,000 x 10%) P
a. P836,000 c. 400,000
P844,000 Adjustment to income P 800,000
b. P860,000 d.
P892,000 57. On January 2, 2011, Crimson Company purchased
Answer: D 15% of the 100,000 outstanding ordinary share of Creek
Share in NI (2,400,000 x 40%) P960,000 Company for P300,000 when the market value of Creek’s
Less: Amortization of excess (100,000 x 68%) net assets was P2,000,000. Crimson Company classified
(68,000) this investment as available for sale. In 2011. Creek
Income from investment reported a net income of P900,000 and paid cash
P892,000 dividend of P300,000. As of December 31, 2011, Creek’s
ordinary are selling at P25 per share.
Original cost P8,000,000
On January 2, 2012, Creek repurchased and retired
25,000 outstanding ordinary shares from other investors.
Less: BV of net asset (18,504,000x40%) P7,401,600
After the repurchased and retirement of share, Creek’s
Excess P 598,400
net assets are fairly valued at P1,950,000 on January 2,
Allocation of excess
2012. Crimson Company immediately reclassified its
Plant asset (1,000,000 x 40% x 68%) (272,000)
investment in Creek to investment in associate.
Inventory (200,000 x 40% x 68%) ( 54,400)
Question 1: What should be the initial carrying value of
Goodwill P 272,000 the investment in associate account at the date of
transfer?
Plant asset (400,000 ÷ 20 yrs) P 20,000 a. P300,000 c.
Inventory P 80,000 P360,000
Amortization of excess b. P375,000 d.
P100,000 P390,000
Answer: D
55. MPC Company purchased 10% of KFC Corporation’s Initial cost of acquisition P300,000
200,000 outstanding shares of ordinary shares on January Add: Unrealized gain 12-31.11
2, 2010 for P2,500,000. On October 31, 2010 MPC (P375,000 – P300,000) P 75,000
Company purchased another 40,000 shares of KFC for Carrying value – 12.31.11 P375,000
P6,000,000. There was no goodwill as a result of either Less: Reversal of existing unrealized gain 75,000
acquisition and KFC had not issued any stock dividends Historical cost P300,000
during 2010. KFC had not issued any stock dividends Add/Deduct:
during 2010. KFC reported earning P6,000,000 for the Share on NI (900,000 x 15%) 135,000
ended December 31, 2010. What amount should Share on Dividends (300,000 x 15%) 45,000
Company reported in its December 31, 2010 balance Carrying value of Inv in associate P390,000
sheet as Investment in KFC?
a. P8,500,000 c. P 9,300,000 Number of shares (100,000 x 15%) 15,000 shares
b. P9,400,000 d. P10,300,000 X MV per share P25
Answer: C FMV P375,000
Original cost Note: When an investor level of influence changes from
Jan acquisition P2.500.000 insignificant to significant, the method of valuation must
October acquisition P6,000,000 also change from fair value method to equity method.
Total P8,500,000 Anent to this, the investor must also adjust retroactively
Add: Share in NI the carrying amount of investment, the NI for the prior
Jan – Oct (6,000,000x10/12 x10%) 500,000 periods and current period, amortization of excess and
Oct – Dec (6,000,000x 2/12 x30%) 300,000 impairment of assets related to the acquired investment
Carrying value of investment and dividends of both the current & prior periods. This
P9,300,000 means, as if the equity method had been in effect
for all these years.
56. On January 2, 2011, UE Company acquired 10% of
the outstanding voting stock of FEU Company. On January Question 2: What amount of unrealized gain on transfer
2, 2012, UE Company gained the ability to exercise Crimson Company should recognize in its statement of
significant influence over and operating control of FEU by financial position immediately on the date of transfer?
additional 20% of FEU’s outstanding shares. The Two a. None c. P 75,000
acquisitions were made proportionate to the value b. P90,000 d. P165,000
assigned to FEU’s net assets, which equaled their Answer: A
carrying values. For the years ended December 31, 2011 Note: At the date of transfer from FV to the equity
and 2012, FEU company reported the following: method, any cumulative unrealized gain or loss related to
2011 2012 the AFS should be reversed, restoring it to its historical
Net income P 12,000,000 13,000,000 cost; hence unrealized gain or loss to be carried over to
Dividends 4,000,000 6,000,000 the entity’s statement of financial position is zero.

In 2012, what amounts should UE Company report as 58. Park Corporation acquired 30% of Light Company’s
current year investment income and as an adjustment to voting stock on January 2, 2009 for P2,000,000. During
2011 income, respectively? 2009 Light earned P800,000 and paid dividends of
a. P2,100,000 and P800,000 P500,000. Park’s interest in Light of 30%, gives Park the
b. P3,900,000 and P800,000 ability to exercise significant influence over light’s
c. P3,900,000 and P2,000,000 operating and financial policies. For the year 2010, Light
d. P3,900,000 and P3,200,000 earned P1,000,000 but paid dividends of P300,000 on
Answer: B April 1 and Another P300,000 on October 1, 2010. On July
Investment income 1, 2010, Park sold half of its stock investment in Light for
NI P13,000,000 P1,320,000 cash. What should be the gain on sale of this
x Interest 30% investment in Park’s 2010 profit or loss?
a. P200,000 c.
Investment income – 2012 P 3,900,000 P245,000

Page 10 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

b. P275,000 d. Note: Investment in trading securities are initially

P320,000 recorded at the FMV of the securities received, which is
Answer: C equal to the MV of the consideration being sacrificed.
Selling Price P1,320,000 Transaction cost is not included in the initial cost.
Less: Carrying value of investment
(P2,150,000 x ½) P1,075,000 61. On May 1, 2011, Parrot Company purchased a debt
Gain P 245,000 security having a face value of P2,000,000 with an
interest rate of 9% for P2,100,000 including the accrued
Original cost P2,000,000 interest. Parrot. Company intends to hold the instrument
Add: Share in NI for an indefinite period but not until maturity. The bonds
2009 = P800,000 x 30% P 240,000 mature on January 1, 2016, and pay interest semi-
2010 = P1,000,000 x 30% x ½ P 150,000 annually on January 1 and July 1. On December 31, 2011,
Total P2,390,000 the bonds had a market value of P2,205,000. What
Less: Dividends amount should Parrot report for short-term investment in
2009 = 500,000 x 30% P150,000 debt securities?
2010 = 300,000 x 30% 90,000 P 240,000 P2,000,000 c. P2,040,000
Carrying value P2,150,000 P2,100,000 d. P2,205,000
Answer: C
Amt paid P2,100,000
Held to Maturity
Less: Accrued interest (Jan 1 – May 1)
59. On May 1, 2011, Graham Company purchased a
(P2,000,000 x 9% x 4/12) P 60,000
short term P2,000,000 face value, 9% debt instrument for
Acquisition cost P2,040,000
P1,860,000 including the accrued interest and classified it
as an investment to profit or loss security. The debt
62. On October 1, 2011, Nile Company purchased a debt
instruments mature on January 1, 2014 and pay interest
security having a face value of P3,000,000 with an
semi-annually on January 1 and July. On December 31, the
interest rate of 10% for P3,200,000 including the accrued
fair market value of the instruments is 98%. On march 2,
interest. A total of P50,000 was incurred and paid by Nile
2012, Graham Company sold the security for P1,980,000.
Company which is in relation to the acquisition of the
debt instrument. Nile Company intends to hold the
Question 1: What amount should Graham report for short-
instrument for an indefinite period but until maturity. The
term debt securities on December 31, 2011?
bonds mature on January 1, 2016, and pay interest semi-
a. P1,800,000 c. P1,860,000
annually on value January 1 and July 1. On December 31,
b. P1960,000 d. P1,980,000
2011, bonds had a market value of P3,400,000. What
Answer: B
amount should Parrot report for short-term investment in
FV of the debt P2,000,000
debt securities?
x & of MV – 12.31.11 98%
P3,125,000 c. P3,175,000
FMV of the debt P1,960,000
P3,200,000 d. P3,250,000
Note: A debt instrument under the category of trading
Answer: C
security is reported in an entity’s balance sheet at its fair
Total cash paid P3,200,000
market value, that increases or decreases as a result of
Less: Accrued interest for 3 mos.
market fluctuations will be adjusted to the investment
(3,000,000 x 10% x 3/12) P 75,000
account & the corresponding unrealized gain or loss will
Cash paid to the debt instruments P3,125,000
be reported in the current period income statement.
Add: Transaction cost P 50,000
Debt securities classified under the trading securities are
Total Investment P3,175,000
not subject to amortization since they are sold within a
short period.
63. On January 1, 2011, Orbit Company
purchase a 10-year, 10%, P3,000,000 face value bonds
Question 2: What amount of unrealized gain or loss
for 110 including incidental transaction cost at P36,000.
should the company report in its 2011 statement of
Interests are received semi-annual on January 1 and July
comprehensive income related to its investment in
1. Orbit Company intends to hold the instruments until
trading securities?
maturity. What is the total carrying value of the bonds on
a. None c. P120,000
January 1, 2011?
b. P160,000 d. P200,000
a. P3,000,000 c. P3,264,000
Answer: B
b. P3,300,000 d. P3,336,000
FMV of instrument P1,960,000
Answer: D
Less: Historical cost
Purchase price (3,000,000 x 110%) P3,300,000
Amt paid P1,860,000
Add: Transaction costs P 36,000
Accrued interest P 60,000
Total carrying value
P1,800,000
P3,336,000
Unrealized gain–Comprehensive income P160,000
64. Maker Company purchased a held to
60. On May 1, 2011, Golden Company purchased a short-
maturity instrument with a face value of P5,000,000 on
term P4,000,000 face value 9% debt instruments for
January 2, 2011. The bonds will on January 2 2016 and
3,720,000 excluding the accrued interest and classified it
the nominal rate of interest is 12%. Interest is payable
as a trading security. Golden Company incurred and paid
annually every December 30. The maker rate of interest
P20,000 transaction cost related to the acquisition of the
on this date is 10%.
instrument. The debt instruments mature on January 1,
2014, and pay interest semi-annually on January 1, and
PV factor of 12% after 5 years 0.567
July 1. On December 31 the fair market value of the
PV factor of 10% after 5 years 0.621
instrument is P3,880,000 on February 2, 2012, Graham
PV factor of annuity of 12% after 5 years
Company sold the trading security for P3,960,000.
3.605
PV factor of annuity of 10% after 5 years 3.791
Question 1: What is the initial cost of Golden Company’s
investment in trading securities?
How much did Maker pay in acquiring the instruments?
a. P3,720,000 c. P3,740,000
P5,247,610 c. P5,326,006
b. P3,880,000 d. P4,000,000
P5,348,580 d. P5,379,600
Answer: A
Answer: D
Future interest (P5,000,000 x 12% x3.791) P2,274,600
Question 2: What amount should Golden Company report
Face Value (5,000,000 x .621) P3,105,000
for short-term debt securities on December 31, 2011?
Purchase price or amt paid P5,379,600
a. P3,600,000 c. P3,720,000
b. P3,880,000 d. P3,960,000
Answer: B

Page 11 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

65. Market Company purchased a held to 1.1.11

maturity instrument with a face value of P5,000,000 on P3,697,120
July 1, 2011. The 5year 12% bonds were issued on 12.31.11 P320,000 P369,712 P49,712
January 2, 2011 and will mature on January 2, 2016. P3,746,832
Interest is payable annually every December 30. Market 12.31.12 P320,000 P374,683 P54,683
rate of interest for a similar debt instrument at the time P3,801,515
of acquisition is 10% that is also the market rate of
interest for a similar debt instrument at the time the FMV – 12.31.12 P4,000,000
instrument was issued. Less: Carrying value of the debt
PV factor of 12% after 5 years 0.567 P3,801,515
PV factor of 10% after 5 years 0.621 Unrealized gain – Stockholders’ equity P 198,485
PV factor of annuity of 12% after 5 years
3.605 68. On January 1, 2010 Marvel Company made P3,697,120
PV factor of annuity of 10% after 5 years 3.791 investment in the caper Corporation’s 8%, 5-year bonds
with face value of P4,000,000. effective rate for similar
What is the fair value of the debt instrument at the of financial asset is 10%. Marvel Company intends to hold
acquisition? the bonds until maturity. PV factor of 11% after 3 years,
a. P5,348,580 c. P5,626,000 0.731 and the PV factor of annuity of 11% after 3 years,
b. P5,648,580 d. P5,679,600 2.444
Answer: A
Future interest (P5,000,000 x 12% x3.791) On December 31, 2011, Marvel could no longer hold the
P2,274,600 bonds investments in the Caper Corporation until
Face Value (5,000,000 x .621) P3,105,000 maturity and decided to transfer it to available for sale
Purchase price or amt paid P5,379,600 securities. The market rate of interest on December 31,
Less: Amortization of premium – 6 mos 2011 on similar debt instrument is 11%. What amount of
Int earned (P5,000,000 x 6%) P300,000 unrealized gain/loss should Marvel Company recognize on
Int income (P5,379,600 x 5%) P268,980 P 31,020 the date of transfer?
a. P 95,435 c. P 18,192
b. P253,168 d. P371,360
Fair value
Answer: A
P5,348,580
Interest Interest Discount Book
66. On January 1, 2012 Sun Company
Date Earned Income amortization Value
purchased the debt instruments of Silk Company with a
1.1.10
face value of P5,000,000 bearing interest rate of 8% for
P3,697,120
P4,621,006 to yield 10% interest per year. The bonds
12.31.10 P320,000 P369,712 P49,712
mature on January 1, 2016 and pay interest annually on
P3,746,832
December 30 but Sun Company does not intend to hold
12.31.11 P320,000 P374,683 P54,683
instrument until maturity.
P3,801,515
If the market of the instruments as of December 31, 2012
FMV – 12.31.11 P3,706,080
is 96% face amount, what amount of unrealized gain or
Less: Carrying value of the debt
loss should Sun Company report in its 2012 shareholders’
P3,801,515
equity?
Unrealized loss – Stockholders’ equity P 95,435
a. None c. P26,559 unrealized gain
b. P48,582 unrealized gain d. P116,892 unrealized
Interest (P4,000,000 x 8% x 2.444) P 782,080
gain
Face (P4,000,000 x .731) P2.924,000
Answer: B
Total P3,706,080
Interest Interest Discount Book
Date Earned Income amortization Value
69. On January 2, 2010, Holy Company
1.1.11
investment in a 4-year 10% bond with a face value of
P4,621,006
P4,000,000 in which interest is to be paid every
12.31.11 P400,000 P462,101 P62,101
December 31. The bonds has an effective interest rate of
P4,683,107
10% and was acquired for P4,000,000. Holy Company
12.31.12 P400,000 P468,311 P68,311
originally classified the bonds as held-to-maturity
P4,751,418
securities. On November 30, 2011, Holy Company is in
need of cash and decided to sell part of its investment in
FMV (P5,000,000 x 96%) P4,800,000
held-to-maturity. On December 31, 2011, P3,000,000 face
Less: Carrying value of the debt
value of the held-to-maturity was sold at the prevailing
P4,751,418
effective market rate of 12%. Immediately after the sale
Unrealized gain – Stockholders’ equity P 48,582
the remaining held-to-maturity security was reclassified
to available-for-sale security.

67. On January 1, 2011, Marcus Company made P3,967,120 PV factor of 12% 2 years 0.797
investments in the Camper Corporation’s 8%, 5-year PV factor of annuity of 12% after 2 years
bonds with face value of P4,000,000. The effective rate 1.690
for similar financial asset is 10% Marcus Company intends
to hold the bolds until maturity. What amount of unrealized loss should Holy Company
recognize at the date of transfer?
On December 31, 2012, Because of financial difficulty the None c. P34,000
management of Marcus Company has decided not to hold P102,000 d. P136,000
the instrument until maturity. Because of the inability to Answer: C
hold the instrument based on its initial intent, the FV 12.31.11 – based on market
investment was reclassified to available-for-sale. The Face (P1,000,000 x .797) P 797,000
market value of the securities on the date of Interest (100,000 x 1.690) P 169,000
reclassification was P4,000,000. On March 31, 2013, the Total P 966,000
debt security was sold at the prevailing rate of similar Less: historical cost P1,000,000
debt instruments. What amount of unrealized gain should Unrealized loss P 34,000
Marcus Company recognize on the date of transfer?
a. None c. P138,333 70. On January 2, 2010, Saint Company in a
b. P198,485 d. P253,168 4-year 10% bond with a face value of P6,000,000 in which
Answer: B interest is to be paid every December 31. The bonds has
Interest Interest Discount Book an effective interest rate of 9% and was acquired for
Date Earned Income amortization Value

Page 12 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

P6,194,220. Saint Company originally Classified the P3,000,000 in which interest is to be received every
bonds as held-to-maturity securities. December 31. The debt instrument has an effective
interest rate of 8% and was acquired for P3,402,000.
During December 2011, Saint Company is in financial Super company originally classified the debt instrument
scrape that it decided to dispose P4,000,000 face value of as available-for-sale. On January 2, 2011 or after four
its investment in held-to-maturity which will be used to years of having this instrument as available-for-sale its
settle an obligation and to finance of its operating costs. market rate of interest is on a stand still and as a result of
this rare event for debt instrument the company decided
On December 31, 2011 the four million face value held- to reclassify the investment to amortized cost
to-maturity debt instrument was disposed of when Classification.
market rate of similar instrument was 11%. On the same
date, Saint Company immediately reclassified the PV factor of 8% after 6 years 0.630
remaining held-to-maturity to available-for-sale security. PV factor of annuity of 8% after 6 years 4.623

PV factor of 11% after 2 years 0.8116 What amount should Super Company measure the net
PV factor of annuity of 11% after 2 years 1.7125 classification at the time transfer?
a. P3,276,900 c. P3,311,620
Question 1: What is the amortized cost of the debt b. P3,344,093 d. P3,374,160
instrument on December 31, 2011? Answer: A
P6,000,000 c. P6,105,353 Amortized cost after 4 yrs
P6,151,700 d. P6,194,220 PV of future interest (P300,000 x 4.623) P1,386,900
Answer: C PV of future amount (P3,000,000 x .630) P1,890,000
Interest Interest Premium Book Amortized cost on Jan 2, 2008
Date Earned Income amortization Value P3,276,900
1.1.10 P6,194,220
12.31.10 P600,000 P557,480 P42,520 73. On January 1, 2009, Cream Company purchased the debt
P6,151,700 instruments of Silk Company with a face value of
12.31.11 P600,000 P553,653 P46,347 P5,000,000 bearing interest rate of 8% for P4,621,006 to
P6,105,353 yield 10% interest per year. The bonds mature on January
1 2013 and pay interest annually on December 30 but
Question 2: What is the amount of unrealized gain or loss cream Company does not intend to hold the instrument
should the company recognize in their 2011 shareholder’s until maturity. On December 31, 2010 the fair value of
equity as a result of the transfer? bond was P P4,525,800.
a. P51,358 c. P69,418
b. P78,134 d. P96,330 The company did not receive the interest due on
Answer: C December 30, 2011 and it soon became clear that the
FV 12.31.11 – based on market issuer was in financial difficulties. On December 31, 2011
Face (P2,000,000 x .8116) P1,623,200 the company reviews the issuer’s financial condition and
Interest (200,000 x 1.7125) P a prospect for repayment of the loan determines that the
342,500 bond is impaired. On the basis of the information
Total P1,965,700 available at the time, the company’s best estimate of
Less: Carrying value of the debt future cash flows is a receipts of P2,000,000. On
(P6,105,353 x 2/6) P2,035,118 December 31,2011 current marker rate for discounting
Unrealized loss P 69,418 the cash flows is 12% (12% risk-free rate on acquisition
plus 200 basis point)
71. On January 1, 2010. Gadgets Company purchases 10%
P10,000,000 10 year with interest payable on December Question 1: What amount of unrealized loss should the
31 each year. The bonds purchase price is P10,811,100. company report in its December 31,2010 statement of
The bonds effective interest rate was 8.75%. At the time financial position?
of acquisition the bonds were classified as held-to- P173,440 c. P225,618
maturity. On December 31, 2015, When the bonds P248,582 d. P317,760
amortized cost was P10,407,192 and a fair value at a Answer: C
market rate of 7.75% was P10,749,395, the company FV P4,525,800
sells P1,000,000 bonds and realizes a gain on disposal of Less; Amortized cost P4,751,418
P34,215. Unrealized loss P 225,618

Since the company sold more than an insignificant Question 2: What amount of impairment loss should
amount of its held-to-maturity investment, the portfolio is Cream Company recognize in its December 31, 2011
trained. As a result the company has reclassified the profit or loss?
remaining investment to available-for-sale. Question 1: a. P1,273,578 c. P1,047,960
What is the initial carrying value of the available-for-sale b. P904,507 d. P842,406
investment at the time of reclassification? Answer: A
a. P9,000,000 c. P9,366,473 Interest Interest Discount Book
b. P9,520,464 d. P9,674,406 Date Earned Income amortization Value
Answer: D 1.1.09 P4,621,006
Total FV of 10M bonds P10,749,340 12.31.09 P400,000 P462,101 P62,101
x ratio of remaining bonds over total 9/10 P4,683,107
FV of bonds reclassified P 9,674,406 12.31.10 P400,000 P468,311 P68,311
P4,751,418
Question 2: What is the amount of unrealized gain or loss 12.31.11 P400,000 P475,142 P75,142
should the company immediately recognize at the of P4,826,560
reclassification?
None c. P34,215 PV of the cash flows on:
P307,933 d. P342,203 12,31.12 (P2,000,000 x .8928) P1,785,600
Answer: B 12,31.12 (P4,500,000 x .7972) P1,993,000
FV of bonds reclassified P9,674,406 FMV of the instrument P3,778,600
Less: Amortized cost of bonds P10,497,192 Less: Amortized cost of instrument P4,826,560
x ratio of remaining bonds 9/10 P9,366,473 Amt of impairment loss P1,047,960
Unrealized gain P 307,933 Add: Unrealized loss in equity P 225,618
Total impairment loss P1,273,578
72. On January 2, 2007, Super Company investment in a 10-
74. On July , 2011, Parry Company an 8%, 4
year 10% debt instrument with a face value of
year, P8,000,000 face value bonds for P7,492,800. The

Page 13 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

bonds are dated July 1, 2011 and pays interest for June 07.01.12 P240,000 P252,378 P12,378
30. Effective rate of the bonds is 10%. The bonds were P1,815,076
classified as held-to-maturity security. 07.01.13 P240,000 P254,111 P14,111
P1,829,187
The company did not receive the interest due on June 30,
2012 and it soon became clear that the issuer was in Interest Income 2011
financial difficulties. On June 30, 2012 the company Jan 1 – Jun 30 (P250,857 x ½ ) P125,428
reviews the issuer’s financial conditions and a prospect Jul 1 – Dec 31 (P252,378 x ½) P126,189
for repayment of the loan determines that the bonds is Total Interest Income – 2011
impaired. On the basis of the information available at the P251,617
time, the company’s best estimate of future cash flows is
a total receipt of P5,000,000 on maturity. The fair value of
the estimated cash flow as of June 30, 2012 is 78. On January 1, 2010, Alarm Company purchased as long-
P3,756,600. term investment P5,000,000 face value of Clock
Corporation’s 8% bonds for P4,683,000 to yield 10%
On June 30, 2013, on the basis of new information the interest per year. The bonds mature on January 1, 2014,
issuer entity has improved its credit rating and the basis and pay interest annually on January 2, 2012, Alarm
of the new information, the company’s best estimated of Company sold the debt security when the market rate of
future cash flow is a total receipt of P7,000,000 on interest was 12%. What amount should Alarm Company
maturity. The fair value of the new cash flow as of June report as gain or on the sale of the debt instrument (Carry
30, 2013 is P5,785,100. What is the amount of present value factor up to 3 decimal places)
impairment reversal should Parry Company report in its a. P165,430 c. P173,570
profit or loss for the year-ended June 30, 2013? b. P240,700 d. P317,000
None c. P1,214,900 Answer: A
P1,652,840 d. P1,600,500 PV of future interest (P400,000 x 1.690) P 676,000
Answer: B PV of the face (P5,000,000 x 0.797) P3,985,000
Carrying value – Jun 30, 2012 P3,756,600 Total P4,661,000
Add: interest income (P3,756,600 x 10%) 375,660 Less: Amortized cost P4,826,420
Amortized cost P4,132,260 Loss on sales P 165,430
FV on Jun 30, 2013 P5,785,100
Impairment recovery to profit or loss 79. Warrior Company has an outstanding
P1,652,840 bonds investment as of April 1, 2010 with a face value of
P5,000,000. The bond was acquired at face and bears
75. On July 1, 2011, Taker Company purchased P3,000,000 interest of 8% per annum and matures on March 31,
face, 8%, 5-year bonds for P3,251,880 the effective rate 2016. The bonds were classified as held-to-maturity.
of the bonds is 6%. The bonds are dated July 1, 2011 and
pays interest every June 30. On March 31, 2010 bond’s fair value when market rate of
interest of 6% is P5,491,732 consisting of the present
What the total interest income to be recognized by Taker value of the principal only strip of P3,524,802 and present
in its December 31, 2011 profit or loss? value of the interest only strip of P1,966,930. On the
P35,000 c. P 97,556 same day warrior company unconditionally transferred its
P192,000 d. P256,000 right to the principal only strip to under a legal
Answer: C assignment for cash payment equal strip to under a legal
Carrying value at acquisition P3,251,880 assignment for cash payment equal to its fair value
x effective rate (semi-annually) 3% without any recourse whatsoever. The company retained
Total interest income P 97,556 the interest only strip (right to receive the interest annual
interest of P400,000 until maturity). What amount of gain
76. On July 1, 2011, Royal Corporation should the company recognize on the disposal of the
acquired a long-term investment in Blood Company’s 10- principal only strip?
year 12% bonds, with value of P5,000,000, for a. None c. P176,740
P5,386,300. Interest is payable semi-annually on January b. P315,612 d. P491,732
1. The bonds mature on July 1, 2016, Bonds effective rate Answer: B
is 10%. What is the carrying value of the investment and Selling Price P3,524,802
interest income to be reported in Royal’s financial Less: Carrying value P3,209,190
statements on December 31, 2011, respectively? Gain on Sales P 315,612
a. P5,386,300 and P269,315 c. P5,386,300 and
P300,000 Principal P3,524,802 64.1837% P3,209,190
b. P5,355,615 and P300,000 d. P5,355,615 and
P269,315
Interest P1,966,930 35.8163% P1,790,810
Answer: D
Total P5,491,732 P5,000,000
Interest Interest Discount Book
Date Earned Income amortization Value
Note: When an entity transfers an asset that is part of a
07.01.11 P5,386,300
larger financial asset (meaning transfer interest only or
12.31.11 P300,000 P269,315 P30,685
principal only), this will qualifies for de-recognition in its
P5,355,615
entirety. Hence, the previous carrying value of the
financial asset is allocated between the part that
77. On July 1, 2010, Throw Company Pillow,
continues to be recognized and the part that is de-
INC. 10-year, 12% bonds with a face value of P2,000,000
recognized. The allocation is based on the relative fair
for P1,791,840. The bonds will on July 1, 2020 and pay
values of those parts as the date of transfer,
interest annually on July 1. Bonds effective rate is 14%.
Investment in Property
What is the amount of income throw Company should
80. On January 2, 2011, Silent Corporation
recognize related to the bond investment on December
has an investment property that was carried at fair value
31, 2011?
with a carrying amount of P2,500,000 (historical cost
a. P250,857 c. P251,100
P2,400,000). As of the December 31, 2011, the fair market
b. P251,617 d. P254,111
value of the property is P2,600,000. On December 31,
Answer: B
2012, the fair market value of the property was
Interest Interest Discount Book
P2,800,000. On this date, Silent Corporation decided to
Date Earned Income amortization Value
reclassify/transfer the property to inventory. On the date
12% 14%
of transfer, what amount should the inventory be valued?
07.01.10 P1,791,840
a. P2,400,000 c. P2,500,000
07.01.11 P240,000 P250,857 P10,858
b. P2,600,000 d. P2,800,000
P1,802,698

Page 14 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

Answer: D Carrying value – 1.1. 13(no impairment) P3,375,000

Note: Transfer from investment property carried at FV to
owner-occupied property (PPE) or to inventories, the fair
Carrying value – 1.2.13(no impairment) P3,375,000
value at the time of transfer is the measure of its new
Less: Carrying value – 1.2.13 P2,250,000
classification.
Impairment recovery
P1,125,000
81. On January 2, 2011, Grand Company
made a test of impairment on one of its building carried
Question 2: What amount of unrealized gain or
as plant asset. The test on impairment revealed a
revaluation surplus should Grand Company recognize in
recoverable value of P5,500,000 on that building, The
its shareholders’ equity on the date of transfer?
carrying value of this building as of January 2, 2011 is
None c. P 125,000
P8,000,000 with a remaining useful life of 10 years. On
P1,125,000 d. P1,250,000
January 2, 2013, Grand Company decided to convert the
Answer: C
building into an investment property that is to be carried
FMV – Jan 2, 2012 P3,500,000
at fair value. The cost of converting the building is
Carrying value – Jan 1, 2013 P3,375,000
insignificant but as a result of the change in the usage,
Revaluation Surplus – SE P 125,000
the fair market value of the building was reliably valued
at P7,000,000.
83. On January 2, 2010, Haven Corporation
acquired a track of land that is to be sold in the ordinary
Question 1: What amount of unrealized gain/revaluation
conduct of business. The purchase price of the property
surplus should grand company recognize in its
of P50,000,000 was paid in cash and total transaction of
shareholder’s equity on the date of transfer?
P500,000 related to the acquisition of the property was
a. None c. P 600,000
also paid at a later date. The land was subdivided into 2,
b. P2,000,000 d. P2,600,000
000 lots (200 square meters for every lot) for an
Answer: C
additional cost of P5,500,000. On December 31, 2010,
Carrying value – Jan 2, 2011 P8,000,000
The market value of the lot was P1,500 per square meter.
Less: FMV – Jan 2, 2011 P5,500,000
Impairment loss – to P/L P2,500,000
As of December 31, 2011, only 20,000 square meters are
still unsold and market of the lot had increased to P1,600
FMV – Jan 2, 2011 P5,500,000
per square meter. On this date, Haven Corporation
Less: Depreciation for year 2011/2012
decided to transfer the remaining lots into investment
(P5,500,000 / 10 years x 2 year) P1,100,000
property that is to be carried under the fair value model.
Carrying value – Jan 1, 2013 P4,400,000
There was no additional cost incurred on the change of
infection on the property. What amount of gain should
Carrying value – Jan 2, 2011 P8,000,000
Haven Corporation recognize as a result of the transfer?
Less: Depreciation for 2011/2012
P29,200,000 c. P29,225,000
(P8,000,000 / 10 years x 2 years) P1,600,000
P29,475,000 d. P29,500,000
Carrying value – 1.1. 13(no impairment) P6,400,000
Answer: A
Cash price of the property P50,000,000
FMV – Jan 2, 2013 P7,000,000
Add: Transaction cost 500,000
Carrying value – Jan 1, 2013 P6,400,000
Total cost P50,500,000
Revaluation Surplus – SE P 600,000
Add: Subsequent cost (Dev’t cost) 5,500,000
Total cost P56,000,000
Question 2: what amount of realized revenue/ impairment ÷ Number of lots 2,000
recovery should Grand Company recognize in its profit or Unit cost per lot P 28,000
loss statement on the date of transfer? ÷ No of sq.m / lot 200
a. None c. P 600,000 Unit cost /sqm P 140
b. P2,000,000 d. P2,600,000
Answer: B FV – date of transfer (20,000 x P1,600) P32,000,000
Carrying value – 1.2.13(no impairment) P6,400,000 Less: Cost of Inventory (20,000 sqm x P140) P 2,800,000
Less: Carrying value – 1.2.13 P4,400,000 Gain on transfer
Impairment recovery P29,200,000
P2,000,000
84. In 2010, Tremor Company has an
82. On January 2, 2002, Power Company investment property with a carrying amount of
acquired a building costing P6,000,000. Power Company P40,000,000 is destroyed by fire. The building element of
estimated that useful that the life of the property is 20 the property was carried at P12,000,000. A claim was
years. Power Company’s policy is to depreciate all made for compensation to the company’s insurers, but
depreciable assets using the straight-line method, has not been agreed at the time the financial statements
without scrap. On January, 2, 2007, the building was re- for 2010 are issued. In 2011, the claim is agreed and the
measured at P3,000,000 and with a remaining revised company receives P20,000,000 in compensation. Also, at
useful life of 20 years. On January 2, 2012 Power the end of year 2011 a replacement building is
Company converted the property into investment constructed at a cost of P16,000,000.
property when the fair value is P3,500,000.
Question 1: What amount of impairment loss should
Question 1: On January 2, 2012, what amount of gain or Tremor Company recognize in its 2010 statement of
impairment recovery should the company recognize? comprehensive income?
a. None c. P 125,000 None c. P12,000,000
b. P1,125,000 d. P1,250,000 P16,000,000 d. P40,000,000
Answer: B Answer: C
Carrying value – Jan 2, 2007 P4,500,000 Note: For the year 2010, Tremor Company recognizes an
Less: FMV – Jan 2, 2007 P3,000,000 impairment loss of P12,000,000 in respect of the loss of
Impairment loss – to P/L P1,500,000 the building. The element is not impaired but the
company would continue to account for that element as
FMV – Jan 2, 2007 P3,000,000 investment property.
Less: Depreciation for year 2007/2011
(P3,000,000 / 20 years x 5 year) P 750,000 Question 2: What amount of insurance claim should
Carrying value – Jan 2, 2012 P2,250,000 Tremor Company recognize in its 2010 statement of
comprehensive income?
Carrying value – Jan 2, 2011 P4,500,000 a. None c. P12,000,000
Less: Depreciation for 2007/2012 b. P16,000,000 d. P20,000,000
(P4,500,000 / 20 years x 5 years) P1,125,000 Answer: A

Page 15 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

Note. The insurance claims has not been agreed at the Proceeds of life insurance P4,000,000
end of 2010 and so no compensation is receivable at the Less: Carrying value of CSF (sch 1) P 48,600
end of 2010 and none can be recognized. Gain on life insurance P3,951,400

Question 3: what amount of insurance claim should Cash surrender value – Jan 1, 2011 P39,600
Tremor Company recognize in its 2011 statement of Add: Increase during 2011 (sch 2) P 9,000
comprehensive income? Cash surrender value – Oct 31, 2011 P48,600
None c. P12,000,000
P16,000,000 d. P20,000,000 Cash surrender value – 12.31.11 P50,400
Answer: D Cash surrender value – Jan 1, 2011 P39,600
Note: In year 2011 compensation of P20,000,000 is Increase during the year P10,800
receivable and so, it is also recognized in the statement x mos in a year (Oct 31) 10/12
of comprehensive income for that year. Increase during 2011 P 9,000

Question 4: What is the carrying value of the investment 87. Fodder Corporation insures the life of its
property in Tremor Company’s statement of financial president for P6,000,000, the corporation being the
position for the year ended December 31, 2011? beneficiary of an ordinary life policy. The annual premium
P16,000,000 c. P28,000,000 of P144,000 is payable every January 2 nd of the year. The
P36,000,000 d. P44,000,000 policy is dated January 2, 2006 and carries the following
Answer: D cash surrender values:
Note: The compensation may be not be offset against
the cost of replacement building. Instead, the cost of End of Policy Year Cash Surrender Value
replacement building of P16,000,000 is capitalized and 2006 -
added to the carrying amount of the investment property 2007 -
(the land element ) of P28,000,000 to arrived at the 2008 50,400
carrying value of the investment in property. 2009 60,000
2010 79,200
Question 5: Assuming the compensation of P20,000,000 2011 100,800
become receivable during 2011, How should the
compensation and impairment loss be presented in the The corporation follows the calendar year as its fiscal
statement of comprehensive income of 2010? period. The president dies on September 30, 2011 and
a. Report a revenue of P20,000,000 the policy is collected on December 2, 2011. What is the
b. Report an impairment loss of P12,000,000 gain on life insurance settlement?
c. Report a net revenue of P8,000,000 a. P5,768,600 c. P5,868,600
d. Report the revenue a P20,000,000 b. P5,904,600 d. P6,000,000
separately and impairment loss of P12,000,000 Answer: C
separately. Proceeds of life insurance P6,000,000
Answer: D Less: Carrying value of CSF (sch 1) P 131,400
Gain on life insurance P5,868,600
Fund & other Investments
85. The following information relates to non-current Cash surrender value (Sch 2) P 95,400
investment that Dragon Company placed in trust as Unexpired insurance (Sch 3) P 36,000
required by underwriter of its bonds: Bond sinking fund BV of assets surrender P131,400
balance, January 1, 2011, P2,000,000; Additional
investment during 2011, P500,000; Interest revenue, Jan 1, 2011 P79,200
P20,000; administrative costs, P15,000; Carrying value of Add: Increase during 2011 to time of death:
bonds payable, P3,000,000. Dec 31, 2011 balance P100,800
Jan 01, 2011 balance P 79,200
What amount should Dragon Company report in its Increase during the yr. P 21,600
December 31, 2011 balance sheet related to its non- x mos in a year (Sep 30) 9/12
current investment for bond sinking fund requirements? P16,200
a. P2,000,000 c. P2,500,000 Carrying value of CSV P95,400
b. P2,505,000 d. P3,000,000
Answer: B Annual premium
Beginning balance P2,000,000 P144,000
Add/Deduct: ÷ No of mos in a year 12
Additional investment P 500,000 mos
Interest income P 20,000 Monthly premium P 12,000
Expense in admin the fund P ( 15,000) x unexpired mos (oct 1– Dec 31) 3 mos
Carrying value of investment Unexpired premiums P 36,000
P2,505,000
88. On January 1, 2008, Chivas Company
86. Fundador Corporation insures the life of purchased a P4,000,000 ordinary life insurance policy on
its president for P4,000,000, the corporation being the its president. Additional data for the year 2011 are: Cash
beneficiary of an ordinary life policy. The monthly surrender value, January 1, P200,000 cash surrender
premium is P6,000 payable every first day of the month. value, December 31, P220,000; annual insurance
The policy is dated January 1, 2006, and carried the premium paid on January 1, 2011, P80,000; Dividend
following cash surrender values: received on August 1, P10,000. Chivas Company is the
End of Policy Year Cash Surrender Value beneficiary under the life insurance policy. Chives should
2006 - report life insurance expense for 2011 of
2007 - P50,000 c. P60,000
2008 25,200 P70,000 d. P80,000
2009 30,000 Answer: A
2010 39,600 Periodic insurance premium P80,000
2011 50,400 Add/Deduct:
Increase in CSV
The corporation follows the calendar year as its fiscal Ending balance P220,000
period. The president dies on October 31, 2011 and the Beginning balance P200,000
policy is collected on December 1, 2011. What is the gain (20,000)
on Life insurance settlement? Dividends received (10,000)
a. P3,913,600 c. P3,939,400 Life Insurance expense
b. P3,951,400 d. P4,000,000 P50,000
Answer: B

Page 16 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

Derivatives even though its value is closely related to interest rate

89. On November 3, 2011, Simmer Company invests that also affect the value of the underlying.
P2,000,000 in a convertible debt instrument issued by
Princess Company that pays fixed interest of 7% and that Question 2: If interest rate will be reset at the market
can be converted into 10,000 shares in Princess Company rate at the time of extension, what amount of derivative
in five years at Simmer’s option. Otherwise the debt will should be recognized separately on the date the
pay P2,000,000 at maturity. At the time of acquisition the instrument was issued?
conversion option has a fair value of P260,000. On a. None c. P37,400
December 31, 2011 the debt instrument has a fair value b. P34,900 d. P72,300
of P1,750,000 and the conversion option has a Answer: A
determinable fair value of P300,000. Note: As to the option to extend the term to causes the
interest rate to reset to current market rates, the option is
Question 1: What amount of derivative asset to be regarded as closely related to the host debt. Such an
reported separately in the December 31,2011 statement option has no real value to the entity, because if the
of financial position assuming the host contract (debt market rate at the time of extension is 8%, the company
instrument) was classified as trading securities as initial cannot extend the term without paying additional2%
recognition? interest anyway. On the other hand, if market rate drops
a. None c. P260,000 to 4%, the extension is equivalent to taking out a new
b. P250,000 d. P300,000 loan at 4%.
Answer: A
Note: Since the host contract is classified as at FV 92. On January 2, 2008, Cinderella
through P/L, the embedded derivative is not Company enters into a forward contract to purchase on
bifurcated/separeated, hence the derivative asset is not January 2, 2010, a specified number of barrels of oil at a
reported separately in the FS. fixed price. Cinderella Company is speculating that the
price of oil will increase and plans to net settle the
Question 2: What amount of derivative asset to be contract if the price increases. Cinderella Company does
reported separately in the December 31,2011 statement not pay anything to enter into the forward contract on
of financial position assuming the host contract (debt January 2, 2008. Cinderella Company does not designate
instrument) was classified as available for sale at initial the forward contract as a hedging instrument. At the end
recognition? of 2008, the fair value of the forward contract has
a. None c. P260,000 increased to P400,000 at the end of 2009 its fair value
b. P250,000 d. P300,000 has declined to P350,000. What amount of forward loss
Answer: D should Cinderella Company recognize at the end of the
Note: When the host contract is not carried at FV through year 2009?
P/L and the embedded derivative is a derivative when it a. None c. P350,000
was freestanding and also it is not clearly and closely b. P50,000 d. P400,000
related to the host contract, the embedded derivative is Answer: B
bifurcated. Therefore, at initial recognition the derivative Fair value as of 12.31.09 P350,000
asset is recognized and measured at its FV of P260,000 Less: Fv as of 12.31.08 P400,000
and re-measured at P300,000 on Dec 31, 2011 balance Forward loss to P/L in 2009 P 50,000
sheet and the resulting increase is reported in the current
year profit or loss. 93. On January 31, 2011, MBC Company
enters into a contract with ABS Company to receive the
90. On January 2, 2010, S Company issues fair value of 2,000 of MBC Company’s own outstanding
its P5,000,000 face value at par value a term of 5 years. ordinary shares as of February 1, 2012 in exchange for a
The debt is also redeemable at par. However, the loan payment of P212,000 in cash or an equivalent of P106
agreement provides that during the term of the loan S per shares on February 1, 2012. The contract will be
Company will either receive or pay an amount based on settled net in cash. At the time of the contract, shares of
the changes in the share price of B Company, an MBC Company are selling at P100 per share; the present
unrelated listed entity. The reference point being the value of the forward contract is zero.
market price of B Company at the date of issue of the
debt instrument. At the time of issue the fair value of the On December 31, 2011, shares of MBC Company are
payment linked variable is P70,000, its fair value on selling at P115 and the forward contract has a fair value
December 31, 2010, is P95,000 and P120,000 on of P13,800. On February 1, 2012, shares of MBC
December 2011. What amount of derivative Company are selling at P108 and the fair value of the
asset/liability should be accounted for separately on forward contract is P4,000. Question 1: What amount
January 2, 2010? should MBC Company recognize as forward asset on
a. None c. P 95,000 January 31, 2011?
b. P70,000 d. P120,000 a. None c. P13,800
Answer: B b. P4,000 d. P17,800
Answer: A
91. RGH Company issues 6% P4,000,000 Note: The price per share when the contract is agreed
face bonds on January 2, 2010 which will mature 2012. on Jan 31, 2011 is P100. The initial FV of the forward
The term of issue includes a clause that RGH Company to contract on Jan 31, 2011 is zero. No entry is required
extend the debt’s term beyond the original maturity for 2 because the FV of the derivatives is zero and no cash is
more years and for an issue of an instrument which has a paid or received.
term extending option the market rate of interest is 7%. Question 2: what amount of gain on forward contract
On date of issue, the fair value of the term-extending should MBC Company recognized on December 31, 2011?
option is P72,300 while its fair value on December 31, a. None c. P 9,800
2011 is P37,400. b. P4,000 d. P13,800
Answer: D
Question 1: If interest will not be reset at the time of FV of forward – 12.31.11 P13,800
extension, what amount of derivative should be Less: Fv of forward – 01.31.11 -0-
recognized separately on the date the instrument was Forward gain
issued? P13,800
a. None c. P37,400
b. P34,900 d. P72,300 94. On July 1, 2011, MTV Company enters
Answer: D into a contract with LBC Company to receive the fair
Note: Term extending options could be valuable to the value of 3,000 of MTV company’s own outstanding
entity as it allows the issuer to refinance the debt at the ordinary shares as of February 1, 2012 in exchange for a
same rate at the time interest rates are rising, payment of P318,000 in cash or an equivalent of P106
conversely, if interest rates are falling, the entity would per share on February 1, 2012. The contract will be
not exercise its options to extend separation is required settled net in shares. At the time of the contract, shares

Page 17 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

of MTV Company are selling at P100 per share; the

present value of the forward contract is zero. Question 3: If LCD Company exercised its right on April
15, 2012, What should be the initial cost of its new
On December 31, 2011, shares of MTV Company are investment assuming the new investment is classified as
selling at P115 and the forward contract has a fair value available for sale?
of P20,700. On February 1, 2012, shares of MTV c. P300,000 c. P312,000
Company are selling at P109 and the fair value of the d. P309,000 d. P330,000
forward contract is P9,000. What is the effect of MTV Answer: D
company’s shareholders’ equity as a result of the FV of option P 30,000
settlement? Add: Option price P300,000
a. Not affected c. Will decrease by Cost of new investment P330,000
P11,700
b. Will decrease by P9,000 d. Will decrease by 97. On February 1, 2011, BZR Company
P20,700 enters into a contract with SGB Company the obligation
Answer: B to deliver, and BZR Company the right to receive the fair
Note: The contract is settled net in shares. MTV value of 2,500 of BZR Company’s own ordinary shares as
Company has an obligation to deliver P318,000 of January 31, 2012 in exchange for P257,500 in cash or
(P106,000 x 3,000) worth of its shares to LBC Company P103 per share on January 31, 2012. If BZR Company
and LBC has an obligation to deliver P327,000 (P109 x exercises the right, the contract will be settled net in
3,000) worth of shares to MTV Company. Thus, LBC cash. If BZR Company does not exercise its right, no
company delivers a net amount of P9,000 (P327,000 – payment will be made. Below is pertinent relevant
P318,000) worth of shares to MTV Company or 82.56 information:
shares (P9,000/P109). 2.01.11 12.31.11
12.31.12
95. On March 1, 2011 CTV Company enters Market value of share P100 P104 P105
into a contract with HGQ Company to pay the fair value of
4,000 of CTV Company’s own outstanding shares as of
Fair value of options P15,000 P8,000 P5,000
February 28, 2012 in exchange for P440,000 or P110 per
share on February 28, 2012. The contract will be settled
Question 1: What amount of call option asset should BZR
net in cash. On March 1, 2011, CTV Company shares are
recognize on February 1, 2011?
selling at P100 per share, the fair value of the forward
a. None c. P 8,000
contract is nil. On December 31, 2011, CTV shares are
b. P3,000 d. P15,000
selling at P115 and the forward contract has a fair value
Answer: D
of P50,000. On February 28, 2012, CTV shares are selling
Note: The price per share when the contract is agreed
at P112,50 and the forward contract has a fair value of
on Feb 01, 2011 is P100. The initial fair value of the
P10,000. Question 1: What amount should CTV Company
option contract on Feb 01, 2011 is P15,000, which BZR
recognize as forward liability on March 1, 2011?
Company pays to SGB in cash on that date.
a. None c. P40,000
b. P10,000 d. P50,000
Question 2: What is the intrinsic value of the option on
Answer: A
February 1, 2011?
Note: No entry is required because the FV of the
a. None c. P5,000
derivatives is zero and no cash is paid or received.
b. P2,500 d. P7, 000
Answer: A
Question 2: What amount gain or loss on forward contract Note: On contract date the option has no intrinsic value,
should CTV Company recognize on December 31, 2011? only time value, because the exercise price of P103
a. None c. P40,000 exceeds the market price per share of P100 and it would
b. P10,000 d. P50,000 therefore, not be economic to BZR company to exercise
Answer: D the option. In other words, the call option is “out the
FV of forward liability – 12.31.12 P50,000 money”.
Less: FV of forward liability – 03.1 11 -0-
Forward gain to P/L in 2011 P50,000 Question 3: What amount of gain or loss related to the
call option should BZR Company recognize on December
Question 3: What amount of gain or loss on forward 31, 2011?
contract should CTV recognize on February 28, 2012? a. None c. P6,000
a. None c. P40,000 b. P2,000 d. P7,000
b. P10,000 d. P50,000 Answer: D
Answer: C FV – 12.31.11 P8,000
FV of forward liability – 02.28.12 P10,000 FV – 02.01.11 15,000
Less: FV of forward liability – 12.31. 11 P50,000 Loss P7,000
Forward gain to P/L in 2012 P40,000 Note: On Dec 31, 2011, the market price per share has
increased to P104. The fair value of the call option has
96. On December 15, 2011 LCD Company decreased to P8,000, of which P5,000 is intrinsic value
entered into a call option contract that gives the right but (P104 – P102) x 2,500 and P3,000 is remaining time
not an obligation to purchase 3,000 shares issued by CRV value.
Company on April 15, 2012 at an exercise price (strike
price) of P100 per share. LCD Company paid P3 for each Question 4: What amount of gain or loss related to the
option shares. On December 31, 2011, market data call option should BZR Company recognize on January 31,
suggests that LCD Company could sell each option for P4 2012?
and CRV Company’s share are selling at P100 per share. a. P2,000 c. P6,000
On April 15, 2012, the fair value of each option is P10 and b. P3,000 d. P8,000
CRV Company’s share are selling at P110 per share. Answer: B
Question 1: What amount of derivatives asset should FV – 01.31.12 P5,000
LCD Company recognize on December 15, 2011 ? FV – 12.31.11 8,000
a. None c. P12,000 Loss P3,000
b. P9,000 d. P30,000
Answer: B (3,000 option shares x P3) = P9,000 98. On September 1, 2011, Jaguar
Company enters into a contract with Lynx Company that
Question 2: What amount of derivatives asset should gives Lynx Company the right to receive and Jaguar
LCD recognize on December 31, 2011? Company the obligation to pay the fair value of 5,000 of
a. None c. P12,000 Jaguar’s own ordinary shares as of January 31, 2012 in
b. P9,000 d. P30,000 exchange for P520,000 in cash (P104 per share) on
Answer: C (3,000 shares option x P4) = P12,000 January 31, 2012, if Lynx Company exercises the right.

Page 18 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

The contract will be settled net in cash. If Lynx Company value (P98 – P95 x 2,000), and P2,000 is the remaining
does not exercise its right, no payment will be made. time value.
Below is pertinent relevant information:
9.01.11 12.31.11 1.31.12 Question 3: What is the net effect in the shareholder’s
Market value of shares P102 P106 equity as a result of the exercise of the option?
P106 a. None c. P6,000
Fair value of options P25,000 P15,000 P10,000 b. P4,000 d. P8,000
Answer: A
Question 1: What amount of call option obligation should FV of the option P6,000
the Company recognize on September 11, 2011? Less: Intrinsic value (P95 – P98) x 2,000 P6,000
1. None Net effect of Shareholders’ equity P -0-
c. P15,000
2. P10,000 100. On January 2, 2010, GRO company
d. P25,000 received a 2-year P1,200,000 loan, with interest
Answer: D payments occurring at the end of each year and the
principal to be repaid on December 31, 2011. The
Question 2: What amount of gain on call option obligation interest rate for the first year is the prevailing interest
should the Company recognize on December 31, 2011? rate of 8% and the rate in 2011 will be equal to the
a. None c. P10,000 market interest rate on January 2, 2011. In conjunction
b. P5,000 d. P15,000 with the loan, GRO Company enters into an interest rate
Answer: C swap agreement to receive a swap payment based on the
FV of option 12.31.11 P15,000 amount of the loan if the interest rate is greater than 8%
Less: Intrinsic value and make a swap payment if the rate is less than 8%.
(P106 – P104) x P5,000 P10,000 The interest swap payment will be made in December 31,
Gain on call option obligation or 2011. If the interest rate on January 2, 2011 is 7%, and
Remaining time value P 5,000 the PV of 7% after 1 period is 0.9345, what amount of
equity reserve should GRO Company recognize in its
Question 3: What amount of cash should the company December 31, 2010 shareholders’ equity?
pay upon the exercise of the option? a. None c. P120,000
a. None c. P10,000 b. P11,214 d. P131,214
b. P5,000 d. P15,000 Answer: B
Answer: C Notional Amount P1,200,000
MV of share – 01,.31.12 (P106 x 5,000) P530,000 Change in interest rate (8% - 7%) 1%
Settlement (P104 x 5,000) P520,000 Change in interest P 12,000
Settlement of the option contract P 10,000 PV of 7% after 1 period 0.9345
Amount to be reported in equity P 11,214
99. On February 1, 2011, Gold Company
enters into a contract with Silver Company that gives 101. STI Company has an investment in
Gold Company the right to sell, and Silver Company the equity instrument classified as an available for sale
obligation to buy the fair value of 2,000 shares of Gold investment with a historical cost of P500,000. On
Company’s own ordinary share outstanding as of January November 1, 2011, STI Company entered into a
31, 2012 at a strike price of P196,000 (P98 per share) on derivative futures contract to hedge the fair value of the
January 31, 2012, if Gold Company exercise the right. investment. All the conditions for hedge accounting are
The contract will be settled net in right. The contract will met, and the hedge qualifies as a fair value hedge
be settled net in cash, however, if Gold Company does because it is a hedge of an exposure to changes in the
exercise the right, no payment will be made. Below is fair value of recognized asset. On December 31, 2011,
pertinent relevant information: the fair value of the hedge item was P460,000, based on
2.01.11 12.31.11 1.31.12 quoted market bid prices and the fair value of the
Market value per share P100 P95 derivative(hedging instrument was P36,000).
P95 Question 1: What should be charged against income, STI
Fair value of options P10,000 P8,000 P6,000 recognized in 2011 related to the hedge item (investment
in available for sale)?
Question 1: What of option asset should Gold Company a. None c. P36,000
recognize on February 1, 2011? b. P4,000 d. P40,000
a. None c. P 8,000 Answer: D
b. P5,000 d. P10,000 FV of the hedge item P460,000
Answer: D Less: historical cost P500,000
The price per share when the contract is agreed on Feb. Loss P 40,000
1, 2011 is P100. The initial fair value of the option
contract on Feb. 1, 2011 is P10,000, which Gold pays to Question 2: What amount should be credited to income
Silver in cash on that date. Also, on that date, the option of STI Company recognized in 2011 related to the
has no intrinsic value, only time value, because the hedging instrument?
exercise price of P98 is less than the market price per a. None c. P36,000
share of P100. Therefore, it would be economic for Gold b. P4,000 d. P40,000
to exercise the option. In other words, the put option is Answer: C
out of the money.
102. Exodus Company and its subsidiary,
Question 2: What amount should be reported in the Genesis Company, both use the Philippine Peso as their
December 31, 2011 profit or loss related to the above functional currency. Exodus Company wants to limit the
contract? effect of currency fluctuations in its group accounts in the
a. None c. P6,000 next quarter, by hedging forecasted Yen denominated
b. P2,000 d. P8,000 sales by Genesis. Exodus Company expects Genesis
Answer: B Company to sell Y12,000,000 of goods on June 30, 2011.
FV of options 12.31.11 Therefore, on January 1, 2011, it enters into a 6-months
P8,000 forward contract to sell Y12,000,000 and received
Less: Intrinsic value (P98 – P95) x 2,000) P6,000 P450,000 on June 30, 2011 (at a forward rate of 0.357 for
Loss on call option recognized in P/L or a Y1) The following table summarizes the following
Remaining time value information:
P2,000 Date Spot rate Forward rate
Note: On December 31, 2011, the market price per share Jan 1, 2011 P1 = Y0.370 P1 = Y0.375
has decreased to P95. The fair value of the put option Mar 31, 2011 P1 = Y0.375 P1 = Y0.380
has decreased to P8,000, of which P6,000 is intrinsic Jun 30, 2011 P1 – Y0.385 P1 = Y0.385

Page 19 of 20 PA 1 - 105
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
Molino Campus, Molino 3, Bacoor City, Cavite
Financial Accounting & Reporting 1 Edmund E. Hilario, CPA, MBA
Accounting for Investment 1 st Semester 2014-2015

Market rate of interest for similar transaction is 5% per

annum. What amount related to the forward contract
should be reported in the shareholders’ equity for the
quarter ended March 31, 2011 interim financial
statement?
a. None c. P 6,089
b. P5,911 d. P12,000
Answer: B

Page 20 of 20 PA 1 - 105