Thoroughly read the instructions and answer what is needed in each set of questions.

Test I: Multiple Choice

Encircle the letter of the correct answer. Show your solutions.

PROBLEM 1
Sual Inc. had the following portfolio of financial assets as of December 31, 2020. All the financial asset
were acquired in 2020:
Financial asset Acquisition Cost
Bagbag Corp. Stocks, 20,000 shares P 590,000
Masa Inc. Stocks, 40,000 shares 1,100,000
Mirey Co. 10%, 2M bonds 1,973,000
Batanes Corp. Stocks, 50,000 shares 2,400,000

Audit notes:
a. Bagbag Corp. shares were acquired with an intention of generating short-term profits from the share
price's fluctuations. The company paid P29.50 per share, which included the P0.50 per share broker's
fees and commissions. The shares were acquired on February 20, 2020. A P2 per share cash
dividends were received on March 30. These dividends were declared by Bagbag Corp. on January 20,
2020 to stockholders as of record date March 1, 2020.

b. The company paid P27.50 per share, including P0.50 per share brokers’ fee on the acquisition of
Masa Inc. on March 1, 2020. These shares were acquired for trading purposes. A P3 per share
dividends were received from the said shares on May 3, 2020. These dividends were declared on April
to stockholders as of record date April 20.

c. Mirey Co. bonds which pay semi-annual interest every June 30 and December 31, were acquired on
October 1, 2020 at P1,973,000, when the prevailing effective Interest rate on similar instrument was at
12%. The bonds shall mature on December 31, 2022. The company has a business model of holding
debt securities for short term profits.

d. Batanes Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and
commissions on June 30, 2020. Batanes Corp. had a total of 200,000 shares outstanding on the sacre
date. The company received P5 dividends per share from Batanes on December 20, 2020.

e. The following information were deemed relevant at year-end and no entries had been made yet by
the company to reflect any of the following information:

Bagbag Coгр. Masa Inc. Mirey Co. Batanes Corp

Net income in 2020 P1,200,000 P1,500,000 P2,000,000 P2,240.000
Fair Value P35/sh P25/sh 11% P51/sh

Requirements:
1. What is the unrealized holding gain/loss to be reported in the 2020 statement of comprehensive
income?
a. 51,948 c. 1,948
b.121,948 d. 122,750

2. What is the correct carrying value of investments that should be presented as current asset?
a. 3,664,948 c. 3,665,750
b. 3,543,000 d. 3,765,250

3. What is the correct carrying value of investment in Batanes Corp. shares that should be presented in
the 2018 Statement of Financial Position?
a. 2,430,000 c. 2,280,000
b. 7,150,000 d. 2,550,000

4. Assuming that the company's business model regarding debt securities has an objective of collecting
contractual cash flows. What is the correct carrying value of investment in Mirey Co. Bonds that should
be presented in the 2020 Statement of Financial Position?
a.1,960,960 c. 1,965,750
b.1,932,690 d. 1,930,690

PROBLEM 2
On January 1, 2020 Lablab Corp. acquired 30,000 shares of Bebe Corp's 100,000 shares outstanding
for P5,000,000. The book value of Bebe's identifiable net assets on this date was at P14M. All its
assets carrying value approximated their fair values except for a depreciable assets with a remaining
life of 5 years, which was undervalued on this date by P1.6M.

Bebe reported total comprehensive income in 2020 at P4,000,000 which was net of a foreign exchange
loss reported in as other comprehensive toss at P800,000. Bebe also paid dividends at P1.5M at the
end of the year. P500,000 of which is from pre-acquisition Retained Earnings. The fair market value of
shares on this date was at P210 per share.

Requirements:
1. What is the carrying value of Lablab's Investment in Bebe shares as of December 31, 2020 using the
appropriate accounting standards?
a. 5,654,000 c. 5,990,000
b. 5,750,000 d. 5,894,000

2. Assuming that Lablab Corp. is a medium-sized entity and that the company uses the fair value
method in accounting for its investment in Bebe, how much in total should be recognized in Lablab
Corp.'s profit or loss for 2020?
a. 1,750,000 c. 1,300,000
b. 450,000 d. 300,000

3. Assuming that Lablab Corp. sold 18,000 shares of its Bebe shares investment on December 31,
2020 at its prevailing fair value, how much in total should be recognized in the profit or loss as a result
of the transaction?
a. 387,600 c. 406,000
b. 646,000 d. 243,600

4. Using the information in the previous tem, how much shall be the carrying value of any remaining
investments as of December 31, 2020?
a. 2,357,600 c. 2,300,000
b. 2,520,000 d. 2,261,600

5. Assuming that Bebe issued 25,000 shares to other stockholders on December 31, 2020 at prevailing
fair value without Lablab Corp's participation, how much should be recognized in the profit or loss as a
result of the transaction/event?
a. 81,200 c. 129,200
b. 196,200 d. None

Test I. Multiple Choice

PROBLEM 1
1. B
2. A
FMV 12/20 CV/Cost
Bagbag Corp. Shares 700,000 540,000 (29.50 – 2 – 0.50)*20,000sh
Masa Inc. Shares 1,000,000 1,080,000 (27.50 - .50)*40,000sh
Mirey Co. 10%, 2M Bonds** 1,964,948 1,923,000 (1,973,0000-50,000)
3,664,948 3,543,000
Unrealized holding gain – IS 121,948
Financial assets at FMVPL 3,664,948
Mirey Co. 10%, 2M Bonds (FMV/PV of Cash flows using 5.5% semi-annual effective rate)
Principal (2M*0.8072) 1,614,433
Interest (100,000*3.5052) 350,515
** 1,964,948

3. A
Investment in Batanes Shares (Associate)
Initial cost (6/30/20) 2,400,000
Share from dividends (250,000)
Share from net income 280,000 (2,240,000*6/12)*25%
Investment in Assoc Balance 2,430,000

4. D
Amortization table: Financial asset at amortized cost, Mirey Co. at effective rate 10%
Correct Int. Normal Int. Amortization Balance *excluding

accrued interest
October 1, 2020 1,923,000
December 31, 2020 57,690 50,000 7,690 1,930,690

PROBLEM 2
Acquisition price 5,000,000
Share from net income (4.8M*30%) 1,440,000
Understatement depr. (1.6M/5)*30% (96,000) 1,344,000
Share from other comp. loss (800,000*30%) (240,000)
Share from dividends (1,500,000*30%) (450,000)
Carrying value, 12/31/20 5,654,000 1. A

If SME using the FMV Method:

Acquisition price 5,000,000
Fair market value, 12/31/20 (30,000*210) 6,300,000
Unrealized holding gain – IS 1,300,000
Dividend Income (1.5M*30%) 450,000
Total Investment Income 1,750,000 2. A
CESSATION:
Proceeds from sale (18,000*210) 3,780,000
Fair value of remaining share to be reclassified 4. B
to FA at FMV (12,000*210) 2,520,000
Total 6,300,000
Less: Carrying value of Investment in Assoc. before
cessation 5,564,000
Gain before recycling of OCLoss 646,000
Recycling of OCLoss (240,000)
Total cessation loss – IS 406,000 3. C

DILUTION: Before After

# shares held 30,000 30,000
# shares outstanding 100,000 125,000
% of interest 30% 24%

Share from increase in Assoc’s net assets

(25,000*210)*24% 1,260,000
Carrying value of Investment as if given up
(5,564,000*6/30) (1,130,800)
Gain on dilution before recycling of OCLoss 129,200
Recycling of OCLoss (48,000)
Total cessation loss – IS 81,200 5. A