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CHAPTER 6 - Audit of Investments
Problem 1 The following data pertains to Rainbow Corporation‟s investments in marketable securities:
Market Value Cost 12/31/07 12/31/ Trading P 150,000 P 155,000 P 100, Available-for-sale 150,000 130,000 126,
Questions
- What amount should Rainbow Corporation report as unrealized holding gain in its 2007 income statement? a. P 65,000 b. P 60,000 c. P 55,000 d. P 50,
- What amount should Rainbow Corporation report as unrealized loss on marketable equity securities at December 31, 2007, in accumulated other comprehensive income in stockholders‟ equity? a. P 20,000 b. P 13,000 c. P 10,000 d. P 0
Solution
1. C Market value – 1/1/07 P 100, Market value – 12/31/07 155, _Unrealized holding gain P 55,
- A_ Cost P 150, Market value – 12/31/07 130, Unrealized holding loss P 20,
Problem 2 The following information pertains to Every Now and Then, Inc.‟s portfolio of marketable investments for the year ended December 31, 2007:
Cost Fair Value 2007 activities Fair value 12/31/06 Purc. Sales 12/31/ Held-to-maturity Security ABC P 100,000 P 95,
Trading Security Security DEFP 150,000 P 100,000 155,
Available-for-sale Security GHI 190,000 165,000 P 175, Security JKL 170,000 175,000 160,
Security ABC was purchased at par. All declines in fair values are considered to be temporary.
Questions
- The carrying value of security ABC at December 31, 2007 is a. P 95,000 b. P 98,000 c. P 100,000 d. P 105,
- The carrying value of security DEF at December 31, 2007 is a. P 100,000 b. P 120,000 c. P 150,000 d. P 155,
- The carrying value of security JKL at December 31, 2007 is a. P 160,000 b. P 165,000 c. P 170,000 d. P 175,
- The recognized gain or loss on sale of security GHI is a. P (40,000) b. P (25,000) c. P (15,000) d. P )10,000)
- The unrealized holding gain or loss to be reported in 2007 net income is a. P 55,000 b. P (25,000) c. P 15,000 d. P (5,000)
- Unrealized gain or loss to be reported at December 31, 2007, as a separate component of stockholders‟ equity entitled “accumulated other comprehensive income” is a. P (20,000) b. P 15,000 c. P (10,000) d. P 5,
Solution
_1. C Cost since the security is considered as held-to-maturity
- D Market value at year-end
- A Market value at year-end
- C_ Selling Price P 175, Cost 190, _Loss P( 15,000)
- A_ Market value – 1/1/07 P 100, Market value – 12/31/07 155, _Unrealized holding gain P 55,
- D_ Cost P 170, Market value – 12/31/07 175, Holding gain P 5,
Problem 3 At December 31, 2007, Maria Angela Corporation had the following investments that were purchased during 2005, its first year of operations:
Cost Fair Value Trading Securities: Security A 700,000 725, Security B 210,000 200, Totals 910,000 925,
Securities Available for Sale: Security C 500,000 560, Security D 850,000 865, Totals 1,350,000 1,425,
Securities to be Held to Maturity: Security E 970,000 980, Security F 412,000 409, Totals 1,382,000 1,389,
No investments were sold during 2007. All securities except Security D and Security F are considered short-term investments. None of the market changes is considered permanent.
Problem 5 Quiters has investments in shares of common stock of NeverWin Company, bought as follows: 2003 1,000 shares – P 140, 2005 500 shares – P 90,
The following transactions took place in 2007 with respect to these holdings:
April 10 By proper resolution, there was a 3 for 1 stock split and Quiters Company received 3,000 shares in addition to her original holdings.
July 10 Quiters Company received a P0.60 per share cash dividend and also rights to subscribed to one share at P40 each for every five shares held. On this date, shares of stock of NeverWin Company were selling ex-rights at P55 per share and rights were selling at P2 each.
July 20 Quiters Company exercised all her rights by buying the new shares and paid P36,000.
Nov. 15 Quiters sold 1,000 shares at P60 each, taken from those acquired in 2003, less broker‟s commission of P750.
Questions
- The investment in stock at year-end is: a. P 222,023 b. P 221,031 c. P 220,971 d. P 219,
- The investment in stock at year-end from the 2003 purchase is: a. P 87,953 b. P 90,059 c. P 93,333 d. P 108,
- The investment in stock at year-end from the 2005 purchase is: a. P 90,000 b. P 88,422 c. P 86,842 d. P 81,
- The gain on sale of investment at year-end is: a. P 14,971 b. P 14,221 c. P 13,333 d. P 12,
- How many shares were purchased during the year? a. 900 shares b. 600 shares c. 300 shares d. 150 shares
Solution April 10 Memo entry July 10 Cash 2, Dividend income 2, Investment in Stock Rights 8, Investment in stock 8, (2/57 x P230,000 = P8,070) July 20 Investment in stock 44, Cash 36, Investment in stock rights 8, 1999 Purchase Nov 15 Cash (60,000 – 750) 59,250 1,000 140, Investment in stock 45,029 x 3 ______ Split (1,000 rights/3,000 rights x P135,088) 3,000 140, Gain on sale 14,221 _____ ( 4,912) Stock rights 3,000 135, Answer:
1. C 2. B 3. C 4. B 5. A
Problem 6 Roelito Company has a fiscal year ending June 30. A summary of Roelito‟s transactions in the capital stocks of Joondee Company is presented below, except for several cash dividends that have no bearing on the situation. In all transactions, Joondee Company uses the specific certificate identification method.
The transactions in the Investment of Joondee Company common stock are as follows:
Sept 06, 2000 Purchased 500 shares of Joondee Company common, par P100 per share, at a total cost of P48,500.
July 15, 2003 Converted 500 shares of Joondee Company preferred stock into 500 shares of Joondee Company common, in accordance with the conversion privilege. The preferred shares originally cost P49,000, and the market price at conversion date was P95 per share. The market price of the common stock at July 15, 2003, was P101 per share. The transactions had no commercial substance.
Aug. 07, 2005 Received additional shares of Joondee Company common in a two-for-one stock split, in which the par value was reduced from P100 to P50 per share.
Sept. 06, 2005 Purchased 1,000 share of Joondee Company common at a total cost of P53,000.
Dec. 04, 2005 Exercised the option to receive Roelito share of common for each 10 shares held, in lieu of a cash dividend of P5.40 for each share held. The market price of a share was P54.
Dec. 02, 2006 Received stock dividend equal to 20 percent of the common shares held.
Apr. 04, 2007 Received warrants representing the right to purchase at par Roelito share of Joondee Company common for each ten shares of common owned. On that date of the issuance of the warrants, the market price of the stock ex-rights was P58, and the market price of the rights was P2 each.
Apr. 15, 2007 Roelito Company exercised the 1,000 rights applicable to the shares purchased on September 6, 2005, and sold all remaining rights. The net proceeds from the sale of the rights was P1.80 per right.
June 12, 2007 Sold 600 shares of Joondee Company common for P32,400 net. The shares were identified as 500 of those purchased on September 6, 2005, and 100 of those purchased April 15, 2007.
Question
- The entry to record the conversion of preferred stock to common stock on July 15, 2003 is: a. Investment – preferred stock 47, Loss on conversion of stock 1, Investment – common stock 49, b. Investment – common stock 49, Investment – preferred stock 49,
June 12, 2007 Cash 32, Investment – common 27, [6,473 + (500/1200 x P51,233)] Gain on sale 4, Answer:
1. B 2. C 3. A 4. D 5. C 6. A 7. C 8. C
Problem 7 On December 31, 2006, DreamBig Company reported as Available-for-sale securities:
Attitude Company, 5,000 shares of common stock (a 1% interest) P 125, IstheKEY Company, 10,000 shares of common stock (a 2% interest) 160, 2Success Company, 25,000 shares of common stock (a 10% interest) 700, Marketable equity securities, at cost P 985, Less: Valuation allowance 50, Marketable equity securities, at market P 935,
Additional information:
On May, 2007, Attitude Company issued a 10% stock dividend when the market price of its stock was P24 per share.
On November 1, 2007, Attitude Company paid a cash dividend of P0.75 per share.
On August 5, 2007, IstheKEY Company issued to all shareholders, stock rights on the basis of one right per share. Market prices at date of issue were P13.50 per share (ex- right) of stock and P1.50 per rights. DreamBig Company sold all rights on December 16, 2007 for net proceeds of P18,800.
On July 1, 2007, DreamBig Company paid P1,520,000 for 50,000 additional shares of 2Success Company‟s common stock which represented a 20% investment in 2Success Company. The fair value of all of the 2Success Company‟s identifiable assets net of liabilities was equal to their carrying amount of P6,350,000. As a result of this transaction, DreamBig Company owns 30% of 2Success Company and can exercise significant influence over 2Success Company‟s operating and financial policies.
DreamBig Company‟s initial 10% interest of 25,000 shares of 2Success Company‟s common stock was acquired on January 2, 2006 for P700,000. At that date, the net assets of 2Success Company totaled P5,800,000 and the fair value of 2Success‟s identifiable assets net of liabilities was equal to their carrying amount.
Market prices per share of the marketable equity securities which were all listed in the stock exchange, were as follows: At December 31 2006 2007 Attitude Company - common P 22 P 23 IstheKEY Company – common 15 14 2Success Company – common 27 29
2Success Company reported net income and paid dividends of:
Year Ended Div. per Share Year ended December 31. 2006 P350,000 none Six months ended June 30, 2007 200,000 none Six months ended December 31, 2007 370,000 P 1. (dividend was paid on 10/1/
There were no other intercompany transactions between DreamBig Company and 2Success Company and there were no impairment of 2Success Company‟s asset at year- end.
Questions
- The investment in Attitude Company common stock at year-end is: a. P 126,500 b. P 125,000 c. P 120,875 d. P 113,
- The investment in Isthekey Company common stock at year-end is: a. P 160,000 b. P 150,000 c. P 144,000 d. P 140,
- The investment in 2Success Company common stock at year-end is: a. P 2,288,500 b. P 2,270,250 c. P 2,264,000 d. P 2,175,
- The recovery of market decline to be reported in the income statement is: a. P 50,000 b. P 47,500 c. P 2,500 d. P 0
- Dividend income to be reported in the income statement is: a. P 101,625 b. P 97,500 c. P 4,125 d. P 0
- Gain on sale of stock rights is: a. P 3,600 b. P 2,800 c. P 1,200 d. P 0
- The recovery on market decline in value of investment should be a. Credited to gain on recovery of market decline. b. Debited to gain on recovery of market decline. c. Credited to unrealized loss on market decline. d. Debited to unrealized loss on market decline.
- The entry to adjust the dividend received from 2Success Company has: a. A debit to Dividend Income. b. A credit to Dividend Income. c. A debit to Retained Earnings. d. A debit to Investment in Equity.
Solution Memorandum entry Cash 4, Dividend income 4, Stock rights 16, Investment – IstheKey 16, (1.50/15 x P160,000) Cash 18, Stock rights 16, Gain on sale of stock rights 2, Investment – 2Success 1,520, Cash 1,520,
April 5 and October 5 - Shan Lily paid dividends of P1.20 per share on its P2. preferred stock, to stockholder of record on March 9 and September 9, respectively. Shan Lily did not pay dividends on its common stock during 2007. June 30 - Azenith paid a P1.00 per share dividend on its common stock. March 1, June 1, September 1, and December 1 - Nagasaki paid quarterly dividends of P0.50 per share on cash of these dates. Nagasaki‟s net income for the year ended December 31, 2007 was P1,200,000.
At December 31, 2007, ABARCA SUGAR‟s management intended to hold Nagasaki‟s stock on a long term basis with the remaining investments considered temporary. Market prices per share of the marketable equity securities were as follows:
12/31/07 12/31/ Shan Lily Co., preferred stock P 56 P 42 Shan Lily Co., common stock 20 18 Azenith Corp., common stock 11 11 Ronette Co., common stock 22 20 Nagasaki Ryuco, Co., common 16 18
All of the foregoing stocks are listed on major stock exchanges. Declines in market value from cost would not be considered permanent.
Instruction : Based on the information above and other analysis as necessary, answer the following question:
- The cost per share of Shan Lily preferred at December 31, 2007 is: a. P 13.33 b. P 20.00 c. P 40.00 d. P 60.
- The adjusted balance of Shan Lily preferred (cost) at December 31, 2007 is: a. P 20,000 b. P 28,000 c. P 30,000 d. P 50,
- The number of shares acquired by ABARCA SUGAR through conversion of Shan Lily stock is: a. 300 b. 500 c. 1,500 d. 3,
- The adjusted balance of Azenith common (cost) at December 31, 2007 is: a. P 60,000 b. P 37,273 c. P 35,000 d. P 27,
- The sale of Ronette common on June 1 resulted to a: a. Gain of P3,250 b. Loss of P2,000 c. Gain of P12,500 d. Loss of P3,
- The adjusted balance of Ronette common (cost) at December 31, 2007 is: a. P 55,000 b. P 46,900 c. P 42,500 d. P 41,
- The adjusted balance of Nagasaki common (cost) at December 31, 2007 is: a. P 1,845,000 b. P 1,860,000 c. P 1,700,000 d. P 1,545,
- The total dividend income of ABARCA SUGAR at December 31, 2007 is: a. P 8,400 b. P 5,900 c. P 5,300 d. P 0
- The total income from investment of ABARCA SUGAR from Nagasaki at December 31, 2007 is: a. P 145,000 b. P 160,000 c. P 345,000 d. P 360,
- ABARCA SUGAR‟s income statement at December 31, 2007 will report a: a. No unrealized gain/loss in market decline. b. P7,000 unrealized loss in market decline. c. P7,000 unrealized gain in market decline. d. P23,400 unrealized gain in market recovery.
Solution _Jan 2 Investment – Nagasaki 1,700, Cash 1,700, Jan 18 Cash 32, MES – Azenith 25, Gain on sale 7, Feb 14 Memorandum entry Apr 5 Cash 1, Dividend income 1, June 1 Cash 10, Loss on sale 2, MES – Ronette 12, June 30 Cash 3, Dividend income 3, Oct 1 Investment – common Shan Lily 20, Investment – preferred Shan Lily 20, Oct 5 Cash 1, Dividend income 1, March 1, June 1, September 1, and December 1 for Nagasaki shares Cash 200, Investment – Nagasaki 200, (P0.50 x 100,000 shares = 50,000 x 4 quarters = P200, Dec 31 Investment – Nagasaki 360, Income from investment 360, (P1,200,000 x 30% = P 360,000) Market Value Cost Shan Lily preferred stock P 56 x 500 shares = P28,000 P20, Shan Lily common stock P 20 x 1,500 shares = 30,000 20, Azenith common P 11 x 3,500 shares = 38,500 35, Ronette P 22 x 1,700 shares = 37,400 42, P133,900 P117, Valuation Allowance__________ Recovery * 23,400 Beg. Bal. 7,
Ending bal. 16,
1. C 2. B 3. C 4. C 5. B 6. C 7. B 8. B 9. D 10. D
Problem 9 An examination of the general ledger account of HOPE COMPANY discloses the following trading securities: Debit/(Credit) Jan. 10 Purchased 5,000 shares of Piltel common at P20 per share P 100, Mar 15 Purchased 2,000 of ABS-CBN common at P15 per share 30, Oct 5 Purchased additional 2,000 shares of Piltel common 36, Nov 4 Sold 2,000 stock rights ( 3,000) P 163, Additional information:
- The company received stock rights from Piltel common when the market values of Piltel common stock and stock rights were P19 and P1 respectively. Each right entitles the
Answer:
1. D 2. A 3. B 4. C 5. A 6. A
Problem 10 YPILAN Investment Company has the following transactions in the common stock of CHERRY MAE Chemicals Corporation:
a. On January 7, 2000, YPILAN purchased 2005 shares of P100 par value common stock at P110 per share.
b. The CHERRY MAE Chemicals Corporation was expanding and as of March 1, 2001, issued to YPILAN 2,000 rights each permitting them to purchase one fourth share of common stock at par. The bid price of these stocks on March 1, 2001 was P140. There was no quoted price for the rights.
c. YPILAN was advised that they should use the rights. YPILAN thereafter paid for the new shares on April 1, 2001, charging the payment to the Investment account. YPILAN purchased 500 shares of stocks using the stock rights.
d. The accountant felt that the cash paid for the new shares was merely an assessment since their proportionate share in CHERRY MAE Chemicals was not changed. He credited all dividends (5% in December of each year) to the Investment Account until the debit was fully offset.
e. In December, 2005, YPILAN received a 50% stock dividend from CHERRY MAE Chemicals. The accountant did not make any entry for this dividend because the company president expected to sell the shares received. They did sell the dividend share in January, 2006 for P160 per share. Income was credited for the proceeds.
f. In December, 2006, the stocks were split on a two-for-one basis and the new shares were issued at no-par value. YPILAN found that each new share was worth P5.00 more than the P110 per share which they had paid for their original shares so it was decided to debit the Investment account with the additional shares received at P110 per share and to credit income for it.
g. In June, 2007, YPILAN sold one-half of then CHERRY MAE Chemicals holdings at P per share. The proceeds was credited to the Investment account.
Questions
- The balance in Investment in CHERRY MAE‟s Chemicals account, per books, before correction is a. P 245,000 b. P 275,000 c. P 495,000 d. P 595,
- The correct balance of the Investment in CHERRY MAE Chemicals account as of June 30, 2007 is a. P 90,000 b. P 180,000 c. P 245,000 d. P 250,
- The average unit cost of the stocks sold in January, 2006 at P160 per share is a. P 110.00 b. P 100.00 c. P 90.00 d. P 72.
- The average unit cost of the no-par shares of stock sold in June 2007 is a. P 108.00 b. P 72.00 c. P 50.00 d. P 36.
- As of June 30, 2007, the balance of stock holdings in CHERRY MAE Chemicals was a. 2,500 shares b. 3,750 shares c. 4,000 shares d. 5,000 shares
- The 50% stock dividends should be taken up as+ a. A debit to Investment for P12,500. b. A credit to Investment for P12,500. c. A memorandum entry. d. A credit to income for P20,000.
- The two-for-one split on December, 2006 should be taken up as a. A memorandum entry. b. A debit to investment for P27,500. c. A credit to income for P13,750. d. A debit to investment for P25,000.
- The profit on the sale of the stock dividend shares received in December, 2005 is a. P 200,000 b. P 120,000 c. P 110,000 d. P 75,
- The profit of YPILAN from the sale of the 2,500 shares in June 2007 is a. P 250,000 b. P 160,000 c. P 125,000 d. P 75,
- Cash dividends received from 2001 to 2004 totaled a. P 100,000 b. P 75,000 c. P 50,000 d. P 55,
Solution
(1) Investment account as kept by YPILAN Investment Co. INVESTMENT IN CHERRY MAE CHEMICALS CORP. COMMON STOCK 01.07. 00 2,000 Shares P220,000 12.31. 01 Cash dividend P 12, 04.01. 01 500 shares 50,000 12.31. 02 - do- 12, 12.31. 06 2,500 shares 275,000 12.31. 03 - do- 12, 12.31. 04 - do- 12, June’ 07 Sold, 2,500 shs. 250, 06.30. 07 Bal. 2,500 shs. P245,
(2) Investment account showing how the transactions should have been recorded:
INVESTMENT IN CHERRY MAE CHEMICALS CORP. COMMON STOCK 01.07.00 2,000 Shares P220,000 Jan.’0 6 Sold, 1,250 shs. P 90, 04.01.01 500 shares 50,
01.31.06 Bal. 2,500 shares P180,000 June’ 07 Sold, 2,500 shs. 90, Dec.’ 06 Stock split,2,500 shs --
06.30.07 Bal., 2,500 shares P 90,
_1. A
- A
- D P270,000 / 3,750 shares = P72.
- D P180,000 / 5,000 shares = P36.
- A 6. C 7. A
- C Selling price, P160 less cost per share of P72 = P88 x 1,250 shares = P110,
- B Selling price, P100 less cost per share of P36 = P64 x 2,500 shares = P160,
- C P250,000 par x 5% x 4 years = P50,_
Problem 12 The INVESTMENT account, as of December 31, 2007, appearing in the records JOY CORPORATION is as follows:
Date Particular Debit Credit January 1 Balance 188, January 31 Sold Ventanilla Stock 21, March 31 Bought Don Dave Common 12, June 30 Dividend on Suson Common 10, July 31 Sold Suson Common 8, August 31 Sold Jasmin bonds 22, September 30 Interest on Sucuahi Mortgage 500
The audit working papers of the preceding year show that the account balances as of January 1, 2007, consisted of the following:
Ventanilla Company – Common 1,000 shares, purchased in June 1997 at P20 per share, P20,000. 2,000 shares, purchased in August 1999 at P16 per share, P32,000. 1,500 shares, purchased in May 2002 at P22 per share, P33,
Don Dave Company – Common 2,000 shares. Purchased in January 2003 at P33 per share, P66,
Suson Company – Common 100 shares purchased in August 2003 at P73 per share, P7,
Jasmin Company 5% bonds 2 bonds, P10,000 each purchased in July 2001 at par, P20, (Interest dates February 1 and August 1).
Sucuahi Company chattel mortgage on machinery 5, P10,000 mortgage taken in September 2004 in settlement of a receivable, P10,
Your examination discloses the following information:
- In January 2007, 1,000 shares of the Ventanilla company common stock purchased in May 2002 were sold for P21,364 net.
- In March 2007, 500 shares of Don Dave common stock were purchased at P24 per share plus brokerage, for P12,125.
- In June 2007, the Suson Company paid a 100% stock dividend on common.
- In July 2007, JOY CORPORATION sold to its president, for P125 per share, 100 shares of Suson common stock, for which the president gave his check for P8,750 and a letter in which he agreed to pay the balance upon demand of the treasurer of JOY CORPORATION.
- On August 2007, the Jasmin Company redeemed its 5% bonds at 110 plus accrued interest.
- In September 2007, JOY CORPORATION received one year interest on the P10, chattel mortgage of Sucuahi.
Question
- The adjusted balance of Gain or Loss of Sale/Redemption on Investment at December 31, 2007 is: a. P 8,214 b. P 10,214 c. P 10,850 d. P 10,
- The adjusted balance of Investment at December 31, 2007 is: a. P 157,728 b. P 155,411 c. P 154,775 d. P 152,
- The Investment at December 31, 2007 is: a. Overstated by P 2,953 c. Overstated by P5, b. Overstated by P 2,317 d. Overstated by P3,
- Investment in Ventanilla Company common stock at year-end is: a. P 65,000 b. P 63,000 c. P 63,636 d. P 52,
- Investment in Don Dave Company common stock at year-end is: a. P 78,125 b. P 66,000 c. P 61,625 d. P 49,
- Investment in Suson Company common stock at year-end is: a. P 7,300 b. P 3,650 c. P 2,500 d. P 1,
Solution
1. OE: Cash 21, _Investment – Ventanilla 21, CE: Cash 21, Loss on sale 636 Investment – Ventanilla 22, (P22 x 1,000 shares) Adj: Loss on sale 636 Investment – Ventanilla 636
- No adjustment
- Dividend income 10,_ _Investment – Suson 10,
- OE: Cash 8,_ _Investment – Suson 8, CE: Cash 8, Receivable – others 3, Investment – Suson 3, (P7,300 x 100/200) Gain on sale 8, Adj: Investment – Suson 5, Receivable – others 3, Gain on sale 8,
- OE: Cash 22,_ _Investment – Jasmin 22, CE: Cash 22, Investment – Jasmin 20, Gain on sale 2, Interest income 83 Adj: Investment – Jasmin 2, Gain on sale 2, Interest income 83
- Investment – Sucuahi 500_ _Interest income 500 Answer:
- A 2. C 3. A 4. B 5. A 6. B_
The excess cost over book value was attributed to goodwill. Louie reported net income for the year ended December 31, 2007 of P300,000. Louie Company paid cash dividends of P100,000 on July 1, 2007. As of December 31, 2007 Marlisa reported, in its balance sheet, a P700,000 balance of an Investment of Louie Stocks.
Question
- Marlisa Company‟s December 31, 2007 balance sheet should report the marketable equity securities at: a. P 427,000 b. P 412,000 c. P 410,000 d. P 402,
- In its 2007 income statement, Marlisa should report a (an): a. Gain on market recovery of P8,000. b. Gain on market recovery of P10,000. c. Unrealized loss of P13,000. d. Unrealized loss of P15,000.
- If Marlisa Company exercised significant influence over Louie Company, the amount of net investment revenue Marlisa Company should report from its investment in Louie would be a. P 30,000 b. P 80,000 c. P 90,000 d. P 110,
- If Marlisa Company exercised significant influence over Louie Company, the carrying value of its investment in Louie at December 31, 2007 would be a. P 810,000 b. P 780,000 c. P 760,000 d. P 750,
- If Marlisa Company did not exercise significant influence over Louie Company and properly accounted for the long-term, investment under the cost method. The amount of net investment revenue Marlisa Company should report from its investment in Louie would be a. P 30,000 b. P 80,000 c. P 90,000 d. P 110,
- If Marlisa Company did not exercise significant influence over Louie Company and properly accounted for the long-term investment under the cost method, the carrying value of its investment in Louie at December 31, 2007 would be a. P 780,000 b. P 750,000 c. P 700,000 d. P 500,
Solution For Marketable Equity Securities Total Cost 425, Total Market 412, Required Allowance – Dec. 31 13, Less: Allowance – Jan. 1 23, Recovery 10,
Allowance in market decline 10, Gain on market recovery 10,
For Investment If acquired significant influence Investment 90, Income from investment 90, To record share of income from the investee (P300,000 x 30%)
Dividend income 30, Investment 30, To adjust the dividend received (P100,000 x 30%)
Income from investment 10, Investment 10, To record amortization of excess over cost (P200,000/20 years)
If acquired NO significant influence There will be no adjustment since the company used the cost method in accounting for the investment in the books. Answer:
1. B 2. B 3. B 4. C 5. A 6. C
Problem 15 On July 1 of the current year, AISAH Company acquired 25% of the outstanding shares of common stock of Adonis Co., at a total cost of P1,400,000. The underlying equity (net assets) of the stock acquired by AISAH Company was only P1,200,000. AISAH Company was willing to pay more than book value for the Adonis Company stock for the following reasons:
a. Adonis Company owned depreciable plant assets (10-year remaining economic life) with a current fair value of P120,000 more than their carrying amount.
b. Adonis Company owned land with a current fair value of P600,000 more than its carrying amount.
c. AISAH Company believed Adonis Company possessed enough goodwill to justify the remainder of the cost.
Adonis Company earned net income of P1,080,000 evenly over the current year ended December 31. On December 31, Adonis Company declared and paid a cash dividend of P210,000 to common stockholders. Market value of Adonis Company‟s share of the stock at December 31 is P1,500,000. Adonis Company closes its accounting records on December
- As of December 31, 2007, the Investment in Adinois common has a balance of P1,400,000.
AISAH Company has a portfolio of current marketable equity securities. Information on cost and market value is as follows: Cost Market December 31, 2006 P 950,000 950, December 31, 2007 840,000 820,
AISAH Company has not recorded yet any allowance for market decline in its marketable securities. Marketable Securities at December 31, 2007 has a balance of P840,000.
Presented below is an amortization schedule related to AISAH Company‟s 5-year, P100, bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004, for P108,660.
Date Cash Interest Bond Premium Carrying Value Received Income Amortization of bonds 12/31/04 108, 12/31/05 P 7,000 P 5,433 P 1,567 107, 12/31/06 7,000 5,354 1,646 105, 12/31/07 7,000 5,272 1,728 103, 12/31/08 7,000 5,186 1,814 101, 12/31/09 7,000 5,095 1,904 100,
