Chapter #7

Equity Investments

TRUE OR FALSE

1. In the absence of actual fair value of a share right, the theoretical fair value is used and computed as fair value of share
ex-rights minus the subscription price and the total is divided by the number of rights needed to buy one share. True
2. A bonus issue in the form of another class of share capital is treated similar to stock dividends. False
3. A share split does not affect the equity of a shareholder in the issuing corporation, nor does it affect the issuing
corporation's total shareholders' equity. True
4. The designation as to whether the equity investment is at FVPL or OCI depends upon whether the securities are
trading or nontrading. True
5. Equity securities that give the holder the power to govern the financial and operating policies of an entity so as .to
obtain benefits from its activities are designated as Investment in Joint Venture. False
6. If an investor makes an election to designate the non-trading equity investment as at FVOCI, the investment shall be
recorded upon acquisition at purchase price plus directly attributable transaction costs. True
7. When an equity investment as at FVOCI is sold, the unrealized gains and losses – OCI shall be subsequently reversed in
profit or loss. False
8. A liquidating dividend received on equity investments at FVPL is not credited to an income account but to the
investment account. True
9. Financial assets at FVPL are classified as part of current assets, while investments at FVOCI are generally classified as
non-current assets. True
10. Equity investments at fair value are no longer tested for impairment. True
11. When reclassifying investment in associate to investment at fair value, the securities shall be transferred at fair value
at the date of reclassification and the difference between the fair value of the retained investment and its previous
carrying amount is gain or loss reported in profit or loss or OCI depending on the classification of investment at fair
value either at FVPL or FVOCI. False
12. A parent company is an entity that exercises control over another company, known as subsidiary, through majority
ownership of the subsidiary's voting shares. True
13. The number of share warrants distributed is equal to the number of shares held by the shareholder. True
14. The exercise of one share warrant would enable the holder to acquire one share. False
15. When dividends are distributable in the form of the investee's non-cash assets, the investor records the assets
received as dividend revenue at the asset's fair value. True
16. A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another
corporation. True
17. The equity method is not required when the associate has been acquired and held with a view to disposal within
twelve months from date of classification as held for sale. True
18. Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the
investee. False
19. If an associate has outstanding cumulative preference shares held by outside interests, the investor computes share of
profit or loss after adjusting for the preference dividends, whether or not the dividends have been declared. True
20. An entity loses significant influence over an investee when it loses the power to participate in the financial and
operating policy decisions of that investee. True
21. The investor’s share of the profit or loss of the investee is recognized in the investor’s profit or loss. True
22. All dividends received by an investor from the investee decrease the investment’s carrying value under the equity
method. True
23. Under the fair value method, the investor reports as revenue its share of the net income reported by the investee.
False
24. An associate is an entity over which the investor has significant influence. True
25. Goodwill arising from an investment in associate is recognized separately. False
26. An investment of more than 50 percent of the voting stock of an investee should lead to a presumption of significant
influence over an investee. False
27. The maximum difference for the investor and associate’s reporting dates is three months and the length of difference
between the two reporting dates shall be the same from period to period. True
28. An entity’s interest in an associate is determined solely on the basis of existing ownership interests and, generally,
does not reflect the possible exercise or conversion of potential voting rights and other derivate instruments. True
29. On the date the significant influence is lost, the investor shall measure any retained investment in associate at fair
value. True
30. Significant influence over an investee may be indicated by material intercompany transactions and interchange of
managerial personnel. True
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MULTIPLE CHOICE – THEORIES

1. Any instrument representing ownership shares and the right to acquire ownership shares is
A. debt security
B. equity security.
C. shareholders’ equity.
D. marketable security.

2. The market value of an investee’s ordinary share increased by 20% during the year. How would this increase in the
market value of the ordinary share affect the investment account under each of the following appropriate classification?
Equity Investments at FVPL Investment in Associate
A. increase increase
B. increase no effect
C. no effect no effect
D. no effect increase

3. A corporation declares and distributes dividend that is a result of current earnings. How will the receipt of the dividends
affect the investment balance of the investor under each of the following classification?
Equity Investments at FVOCI Investment in Associate
A. no effect decrease
B. increase decrease
C. no effect no effect
D. decrease no effect

4. An investor uses the equity method to account for investment in associate. The purchase price implies a fair value of
the investee's depreciable assets in excess of the investee's net asset carrying values. The investee's amortization of the
excess
A. decreases the investment account.
B. decreases the goodwill account.
C. increases the investment income account.
D. does not affect the carrying amount of the investment.

5. An unrealized holding gain or loss on a company’s equity investments at fair value through other comprehensive income
should be reflected in the current year financial statements as
A. direct adjustment to retained earnings.
B. income or loss on the statement of comprehensive income.
C. a disclosure in the notes to the financial statements.
D. other comprehensive income in the equity section of the statement of financial position.

6. Sarah Company’s 2021 dividend revenue included only a part of the dividends received from its investment in Jean
Company. Sarah has an investment in Jean Company, which is designated at fair value through profit or loss. The balance
of the dividend reduced Sarah’s carrying amount for its investment in Jean. This reflects the fact that Sarah accounts for
investment in Jean as an
A. equity investment at FVOCI and all of Jean's 2021 dividends represent earnings after acquisition.
B. equity investment at FVPL and only a portion of Jean's 2021 dividend represents earnings after Sarah's acquisition.
C. investment in associate, and Jean incurred a loss in 2021.
D. investment in associate, and its carrying amount exceeded the proportionate share of Jean's market value.

7. When an investor uses the equity method to account for investment in associate, the investment account will be
increased when the investor recognizes
A. a proportionate interest in the profit of the investee.
B. a cash dividend received from the investee.
C. impairment of the goodwill related to the purchase.
D. depreciation related to the excess of market value over the carrying amount of the investee's depreciable assets at
the date of purchase by the investor.

8. Unrealized holding gains and losses which are taken to profit or loss are from securities that are classified as
A. held to maturity.
B. investment in associate.
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 C. equity investments at FV through profit or loss.
D. equity investments at FV through other comprehensive income.

9. Ryan, Inc., owns 35% of Shekaina Corporation. During the calendar year 2021, Shekaina had net earnings of P300,000
and paid dividends of P30,000. Ryan mistakenly recorded these transactions using the fair value method rather than
the equity method of accounting. What effect would this have on the following:
Investment Account Net Income Retained Earnings
A. Understate Overstate Overstate
B. Overstate Understate Understate
C. Overstate Overstate Overstate
D. Understate Understate Understate

10. Which of the following statements is correct regarding the disposal of equity investments?
A. No gain or loss is recognized on disposal of equity investments at fair value through profit or loss.
B. No gain or loss is recognized on disposal of investment in associates.
C. A gain or loss is recognized on the disposal of investment in associates for the difference between the net disposal
proceeds and the carrying amount of the investment.
D. A gain or loss is recognized on the disposal of equity investments at fair value for the difference between the net
disposal proceeds and the acquisition cost of the equity investment.

11. The following transactions occurred for Enrico Company in 2021:

January 1 Purchased 5% of EDT ordinary shares.
March 1 Purchased additional ordinary shares and increased the equity ownership to 45%.
September 1 EDT declared and paid a cash dividend of P1.00 per share.

How much income from the investment should Enrico report for the year 2021?
A. The total dividend received.
B. 5% of EDT's income from January 1 to February 28 plus 45% of EDT's income from March 1 to December 31.
C. 45% of EDT's income from March 1 to December 31 only.
D. 45% of EDT's income for the current year.

12. X owns 60% of the voting rights of Y, Z owns' 19% of the voting rights of Y, and the remainder are dispersed among
the public. Z also is the sole supplier of raw materials to Y and has a contract to supply certain expertise regarding the
maintenance of Y's equipment. Which of the following statements is correct?
A. Y is an associate of Z.
B. Y is considered a subsidiary of Z.
C. Y and Z are affiliated entities since both are subsidiaries of X.
D. Y and Z have no business relationship.

13. An entity has bought a 25% share in another entity with a view to selling that investment within six months. The
investment has been classified as held-for-sale in accordance with PFRS 5. How should the investment be treated in
the final year accounts?
A. It should be 'equity accounted.
B. The assets and liabilities should be presented separately from other assets in the statement of financial position
under PFRS 5.
C. The investment should be dealt with under PAS 29 Financial Reporting in Hyperinflationary Economies.
D. Purchase accounting should be used for this investment.

14. Justo Jude holds 40% of the ordinary shares of PRIA Company and properly classifies this as Investment in Associate.
PRIA Company has been incurring significant losses in the past years. Justo Jude Company has no commitment to
financially support the operations of PRIA.

In accounting for its investment in PRIA, Justo Jude should

A. recognize a provision equal to the resulting negative balance of the investment to bring the investment account to
zero balance.
B. consistently use the equity method even if the investment account results in a credit balance.
C. discontinue using the equity method when the balance is equal to the original cost of the investment.
D. discontinue using the equity method when the investment account is reduced to zero.

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15. Company X owns 22% of Company Y and is entitled to appoint two directors to the board, which consists of eight
members. The remaining 78% Of the voting rights are held by two other companies; each of which is entitled to
appoint three directors. The board makes decisions on the basis of a simple majority. Because board meetings are
often held at very short notice, Company X does not always, have representation on the board. Often the suggestions
of the representative of Company X are ignored, and the decisions of the board seem to take little notice of any
representations made by the directors from Company X.

Which of the following statements is true?

A. The investment must be classified as Investment in Associate and Company X should use the equity method as
evidenced by the 22% shareholding and representation of 2 seats in the board.
B. Company X is unable to exercise significant influence, as its directors seem to be ignored at board meetings.
Therefore, the equity method should not be used.
C. The investment should be accounted for either using the equity method or the fair value method at the option of
Company X.
D. Company X is unable to exercise significant influence, therefore, the cost method should be used.

16. Under the equity method of accounting for investments, an investor recognizes its share of the profit in the period in
which the
A. investor sells the investment.
B. investee declares a dividend.
C. investee pays dividend.
D. profit is reported by the investee in its financial statements.

17. These investments are initially recorded at purchase price plus transaction costs.
A. Equity investments at fair value.
B. Investment in associates.
C. Equity investments at FVPL and investment in associates.
D. Equity investments at FVOCI and investment in associates.

18. Transactions costs directly attributable to financial instruments include

A. fees and commissions paid to agent, levies by regulatory authorities, transfer taxes and duties.
B. debt premiums or discounts.
C. financing costs.
D. internal administrative costs.

19. It is the ability to participate in the financial and operating policy decisions of the investee
A. Significant influence
B. Control
C. Joint control
D. Undue influence

20. Which statement is incorrect concerning the equity method?

A. The investment in associate is initially recorded at cost.
B. The investment in associate is increased or decreased by the investor's share of the profit or loss of the investee
after the date of acquisition.
C. The investor's share of the profit or loss of the investee is not recognized in the investor's profit or loss.
D. Distributions received from the investee reduce the carrying amount of the investment.

21. It is an entity over which the investor has significant influence and is neither a subsidiary nor an interesting joint
venture.
A. Associate
B. Venturer
C. Subsidiary
D. Affiliate

22. Changes in market value of equity investments at FVPL shall be

A. shown as deduction from or addition to shareholders' equity.
B. included in the determination of profit of the period in which they occur.
C. ignored.
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 D. shown as a prior period adjustment.

23. The existence of significant influence by an investor is usually evidenced in one or more of the following ways, except
A. provision of essential technical information.
B. interchange of managerial personnel.
C. participation in the policy making processes.
D. representation in the shareholders' meeting.

24. Which statement is correct concerning equity investments at fair value?

A. Cash dividends received are treated as reduction of investment balance.
B. Property dividends received are treated as income.
C. Unrealized gain on investments at FVPL is reported in equity.
D. Gain or loss on sale of equity investments at fair value through profit or loss is the difference between the net selling
price and the original cost of the investment.

25. When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following
statements applies?
A. The investor should always use the equity method to account for its investment.
B. The investor should use the equity method to account for its investment unless circumstances indicate that it is
unable to exercise "significant influence" over the investee.
C. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant
influence"' over the investee.
D. The investor should always use the fair value method to account for its investment.

26. Any difference between the acquisition cost of an investment accounted under the equity method and the carrying
amount of the investment acquired requires an adjustment in recording share in income from associates.

Which of the following will not require such an adjustment?

(1) Excess attributable to depreciation of depreciable assets
(2) Excess attributable to amortization of intangible assets
(3) Excess attributable to goodwill
(4) Excess attributable to land

A. (1) and (2)

B. (3) and (4)
C. (2), (3), and (4)
D. (1), (2), (3), and (4)

27. When the investor properly discontinues the use of the equity method,
A. the investment account is adjusted and any adjustment is included in other comprehensive income.
B. the carrying value of the investment is adjusted to conform with its recoverable amount.
C. the carrying value of the investment at the date it ceases to be an associate shall be regarded as its cost on initial
measurement as a financial asset.
D. the fair market value of the investment at the date it ceases to be an associate shall be regarded as its cost on initial
measurement as equity investment at fair value.

28. Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses
as other comprehensive income and as a separate component of stockholders' equity are
A. Investment at FVOCI where a company has holdings of less than 20%.
B. Investment at FVPL where a company has holdings of less than 20%.
C. Securities where a company has holdings of between 20% and 50%.
D. Securities where a company has holdings of more than 50%.

29. Which of the following is not correct in regard to trading securities?

A. They are held with the intention of selling them in a short period of time.
B. Unrealized holding gains and losses are reported as part of net income.
C. Any discount or premium is not amortized.
D. All these statements are correct.

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30. What should happen when the financial statements of an associate are not prepared to the same date as the investor's
accounts?
A. The associates should prepare financial statements for the use of the investor at the same date as those of the
investor.
B. The financial statements of the associate prepared up to a different accounting date will be used as normal.
C. Any major transactions between the date of the financial statements of the investor and that of the associate should
be accounted for.
D. As long as the gap is not greater than three months, there is no problem.

31. When a company has acquired a "passive interest" in another corporation, the acquiring company should account for
the investment
A. by using the equity method.
B. by using the fair value method.
C. by using the effective interest method.
D. by consolidation.

32. At which of the following dates has the. shareholder theoretically realized income from dividend?
A. Date of record
B. Date the dividend is paid
C. Date the dividend is credited to the investor's bank account
D. Date the dividend is declared.

33. How does a share dividend of the same class affect the following:
Investment Account Cost per Share
A. increase increase
B. decrease decrease
C. no effect decrease
D. no effect increase

34. Shares received in lieu of cash dividend are recorded as

A. income at the cash dividend that would have been received.
B. income at fair value of the shares received.
C. share dividends.
D. income at par value of the shares received.

35. Cash received in lieu of share dividends is recorded as

A. return of investment.
B. partly income and partly return of investment.
C. if the share dividends are received and subsequently sold at the cash received and gain or loss is recognized.
D. dividend income.

36. What is the effect of a share split up?

Number of Shares Cost per Share
A. increase increase
B. decrease decrease
C. increase decrease
D. decrease increase

37. How is goodwill arising on the acquisition of an associate dealt with in the financial statements?
A. It is amortized.
B. It is impairment tested individually.
C. It is written off against profit or loss.
D. Goodwill is not recognized separately within the carrying amount of the investment.

38. What accounting method should be used for an investment in an associate where it is operating under severe long-
term restrictions—for example where the government of a company has temporary control over the associate?
A. Fair value method should be used.
B. The equity method should be applied if significant influence can be exerted.
C. The associate should be shown at cost.
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 D. Proportionate consolidation should be used.

39. The Standard does not require the equity method to be applied when the associate has been acquired and held with a
view to its disposal within a certain time period. What is the period within which the associate must be disposed of?
A. Six months.
B. Twelve months.
C. Two years.
D. In the near future.

40. How is the impairment test for investment in associate be carried out?
A. The goodwill is separated from the rest of the investment and is impairment tested individually.
B. The entire carrying amount of the investment is tested for impairment under PAS 36 Impairment of Assets by
comparing its recoverable amount with its carrying amount.
C. The carrying value of the investment should be compared with its market value.
D. The recoverable amounts of all investments in associates should be assessed together to determine whether there
has been an impairment on all investments.

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MULTIPLE CHOICE – PROBLEMS

A. Jam Company bought the ordinary shares of Mad Company designated as equity securities at fair value through other
comprehensive income, as follows:

June 20, 2020 1,000 shares for P101,600

November 5, 2020 3,000 shares at P104 per share

On January 25, 2021, Jam Company received cash dividend of P4.50 per share. On June 14, 2021, it received a 10%
bonus issue and on July 18, 2021, Jam Company sold 1,500 shares at P95 per share. Market values of Mad Company
ordinary shares are as follows:

December 31, 2020 P106.70 per share

December 31, 2021 P96.00 per share

(1) At how much would the equity investment be reported at December 31, 2020?
A. P431,600
B. P426,800
C. P413,600
D. P384,000

(2) How much is the dividend revenue reported in Jam Company's statement of comprehensive income for the year
ended December 31, 2021?
A. P19,800
B. P18,000
C. P13,500
D. P4,500

(3) What is the revised carrying amount per share of Mad Company ordinary share after the receipt of bonus issue on
June 14, 2021?
A. P97.00
B. P94.00
C. P96.00
D. P95.00

(4) How much is the gain (loss) on the sale of Mad Company ordinary shares on July 18,
2021?
A. P4,500
B. P3,000
C. P1,500
D. P0

(5) What is the amount transferred to retained earnings if Jam Company opted to transfer the unrealized gain or loss
relating to the shares sold?
A. P11,100
B. P5,500
C. P5,100
D. P1,500

(6) At how much would the remaining equity investment be reported at December 31, 2021?
A. P299,100
B. P278,400
C. P240,000
D. P214,000

B. During 2021, Strawberry Corporation purchased several equity securities, all of which are designed as equity
investments at fair value through profit or loss. The cost and market values at December 31, 2021 were as follows:

Security Cost Market

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 AB Company ordinary (200 shares) P 28,000 P 34,000
CD Company ordinary (1,000 shares) 170,000 153,000
EF Company ordinary (2,000 shares) 315,000 295,000

Appropriate valuation entry was made on December 31, 2021. On January 31, 2022, Strawberry Corporation sold
1,000 ordinary shares of CD Company at P155 per share, incurring P900 in broker’s commission and taxes.

On December 31, 2022, the market values of the ordinary shares of AB Company and EF Company were P150 and
P153 per share, respectively.

(7) What is the unrealized gain (loss) reported in profit or loss for the year 2021?
A. P31,000
B. (P31,000)
C. P43,000
D. (P43,000)

(8) How much was the gain or loss on the sale of CD shares?
A. P1,100 gain
B. P2,000 gain
C. P15,000 loss
D. P15,900 loss

(9) What is the equity investment at FVPL balance reported at December 31, 2022 statement of financial position?
A. P239,000
B. P329,000
C. P336,000
D. P343,000

C. On April 5, 2021, Paul Company purchased P50 par, 10,000 ordinary shares of George Company at P80 per share. The
shares are designated as equity investments at fair value through other comprehensive income. On October 26, 2021,
Paul received 10,000 rights to purchase an additional 2,000 shares at P90 per share. The shares rights received had an
expiration date of February 1, 2022.

(10) How much should be the income recognized upon receipts of share rights?
A. P0
B. P10,000
C. P20,000
D. P40,000

(11) How much is the investment income, assuming that all of the share rights are sold at its market value of P5
each?
A. P50,000
B. P20,000
C. P10,000
D. P0

(12) Assuming that all of the rights are exercised at which time the market value per ordinary share was P 98,
what is the total cost of the new investment arising from the exercise of these rights?
A. P196,000
B. P180,000
C. 160,000
D. P100,000

(13) Refer to item no. 12, how much investment income should be recorded by Paul?
A. P36,000
B. P16,000
C. P8,000
D. P0

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D. On July 16, 2021, Habagat Company acquire 1,000 ordinary shares of Ondoy Company at P42 per share plus broker’s
fees of P900. Ondoy ordinary shares are traded and were primarily held by Habagat for profit taking opportunities.
Ondoy declared and issued a stock dividend of one Ondoy preference share for every 10 ordinary shares held. Market
values per share of the ordinary and preference are P 40 and P 100, respectively.

(14) How much is the dividend revenue recognized by Habagat?

A. P0
B. P4,000
C. P10,000
D. P42,000

E. Alexis Company bought the shares of Gabriel Company classified as equity investments at fair value through other
comprehensive income, as follows:

April 17, 2020 1,000 shares at 84

July 16, 2020 2,000 shares at P90

Market value per share of Gabriel Company shares at December 31, 2020 was P92.00. The following were the
transactions for 2021:

January 10 Received cash dividend of P4.00 per share

June 20 Received 5% bonus issue
December 10 Sold 1,200 shares at P105 per share

(15) How much is the total dividend revenue for the year 2021?
A. P0
B. P12,000
C. P13,800
D. P25,800

(16) How much is the gain on the sale of shares on December 10?
A. P15,600
B. P18,000
C. P20,857
D. P0

F. During 2019, Mark Company acquired 11,000 ordinary shares of Raian Company’s 200,000 shares that are widely
distributed. The shares are not intended to be traded in the near term and Mark Company does not have the ability to
exercise significant influence over the operating and financial policies of Raian Company. The market value of these
shares had been changing for the last three years as follows:

December 31, 2019 - P235,000

December 31, 2020 - P241,000
December 31, 2021 - P222,000

These shares were acquired in 2019 for P231,000 plus broker’s commission of P2,310.

(17) How much is the unrealized loss on the equity investment recognized in profit or loss of 2021?
A. P19,000
B. P11,310
C. P9,000
D. P0

(18) At how much will the equity investments be reported in Mark Company’s December 31, 2021 statement of
financial position?
A. P233,310
B. P222,000
C. P241,000
D. 235,000

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G. Regine, Inc. owns 500 ordinary shares of Velasquez Company which has several hundred thousand shares publicly
traded. These 500 shares were purchased by Regine in early part of 2021 for P200 per share. On August 20, 2021,
Velasquez distributed 500 rights to Regine. Regine was entitled to buy one new share of Velasquez ordinary shares at
P180 and two share rights. On September 1, 2021, when the market value of Velasquez ordinary share was P203,
Regine exercised all the rights and received 250 ordinary shares.

(19) How much is the investment income recognized by Regine Inc. upon exercise of the rights?
A. P11,500
B. P5,750
C. P750
D. P0

H. Pomeranz Company holds ordinary shares of David, Inc. The shares are designated as equity investments at fair value
through other comprehensive income and were acquired as follows:

Lot A (August 16, 2019) 750 shares for P67,500

Lot B (July 1, 2020) 1,250 shares for P118,750

The market values of the David Inc. ordinary shares are P92 per share on December 31, 2019 and P105 per share on
December 31, 2020. In 2021, Pomeranz Company received 2,000 rights to purchase David, Inc. ordinary shares at
P110 per share. Four rights are required to purchase one share. Pomeranz exercised 1,000 rights at which time, each
ordinary share is selling at P124. Subsequently, all the other rights are sold at P4.00 each.

(20) What is the total cost of the investment acquired through the exercise of rights?
A. P124,000
B. P110,000
C. P31,000
D. P27,500

(21) How much is the total investment income arising from the stock rights?
A. P7,500
B. P4,000
C. P3,500
D. P0

I. At December 31, 2020, Sultan Company reported the following equity investments at fair value through profit or loss.

Cost Fair Value

Axe Corp., 1,000 shares, P2.40 convertible preference P 40,000 P 42,000
Purl, Inc., 6,000 ordinary shares 60,000 66,000
Day Company, 2,000 ordinary shares 55,000 40,000
Total equity investments at fair value P 155,000 P 148,000

During 2021, Sultan disposed the following securities:

• January 18 - sold 2,500 shares of Purl for P13 per share.
• June 1 - sold 500 shares of Day Company, after a 10% bonus issue was received, for P21 per share.
• October 1 - converted 500 shares of Axe preference shares into 1,500 of Axe ordinary, when the market
price was P60 per preference share and P21 per ordinary share.

The following 2021 dividend information pertains to shares owned by Sultan.

• February 14 - Day issued a 10% bonus issue, when the market price of Day’s ordinary share was P22 each.
• P2.40 preference share, to shareholders of record and for payment on March 9 and September 9,
respectively. Axe did not pay dividends on its ordinary shares during 2020.
• June 30 - Purl paid a P1.00 per share dividend on its ordinary shares.

Market prices per share of the equity securities were as follows:

December 31, 2021 December 31, 2020

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 Axe Corp. preference P56 P42
Axe Corp. ordinary 20 18
Purl, Inc. ordinary 11 11
Day Company ordinary 22 20

All of the given shares are based on major stock exchanges.

(22) How much dividend revenue is reported in Sultan’s profit or loss for the year ended December 31, 2021?
A. P5,900
B. P3,500
C. P2,400
D. P0

J. During 2021, Carpenters Corporation purchased equity securities and carried them at fair value through other
comprehensive income. Pertinent data follow:

Earth Ordinary Wind Ordinary Fire Ordinary

Cost P 36,000 P 80,000 P 180,000
Market values, 12/31/21 40,000 60,000 186,000

(23) The unrealized loss reported in Carpenters 2021 profit or loss is

A. P0
B. P6,000
C. P10,000
D. P20,000

K. Paul Company presented the following information pertaining to its investments in equity securities.

Security FVPL FVOCI

Cost P 1,000,000 P 1,000,000
Market value
December 31, 2021 1,050,000 980,000
December 31, 2020 950,000 920,000

(24) What amount should Paul Company report as unrealized gain in its 2021 profit or loss?
A. P160,000
B. P110,000
C. P100,000
D. P50,000

(25) What amount should Paul Company report as unrealized gains/losses in the shareholders’ equity of its
December 31, 2021 statement of financial position?
A. P60,000 credit
B. P20,000 debit
C. P80,0000 debit
D. P20,000 credit

L. A company had various equity investments at fair value through profit or loss transactions during 2020 and 2021. The
acquisition cost of all the securities in its portfolio during 2020 was P532,000. At December 31, 2020 and December 31,
2021, the market values of these equity investments were P541,000 and P512,000, respectively. In 2022, all of these
securities were sold for P550,000.

(26) Assuming no other transactions are noted regarding these financial assets at fair value through profit or loss,
what is the amount of unrealized gain/loss reported in the 2021 income statement relating to these securities?
A. P29,000 loss
B. P20,000 loss
C. P29,000 gain
D. P20,000 gain

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 (27) What is the gain on sale reported in A Company’s 2022 income statement?
A. P38,000
B. P18,000
C. P9,000
D. P0

(28) Assuming that the securities held by A Company are classified as at fair value through other comprehensive
income, what is the gain on sale reported in A Company’s 2021 income statement?
A. P38,000
B. P18,000
C. P9,000
D. P0

M. Lani Company holds the following investments in Misalucha Enterprise:

Preference Shares - 50,000 shares of 250,000 shares issued and outstanding, P100 par, 7% cumulative,
nonparticipating
Ordinary Shares - 30,000 shares

The following dividend information are available:

Share 2021 2020

Preference Shares P 4,000,000 Cash Dividend None
Ordinary Shares 5% Share Dividend, quoted price of share at P10 None

(29) How much dividend income should be reported by Lani Company in 2021?
A. P0
B. P280,000
C. P350,000
D. P800,000

N. On March 31, 2021, Gray Company purchased 120,000 ordinary shares of Len Company for P1,700,000, representing
30% of Len Company’s outstanding ordinary shares and an underlying equity of P1,400,000 in Len Company’s net assets
on that date. The excess of the acquisition cost over the equity acquired cannot be attributed to any tangible asset. As a
result of Gray’s 30% ownership of Len Company, Gray has the ability to exercise significant influence over Len
Company’s financial and operating policies.

On March 1, June 1, September 1 and December 1, all of 2021, Len Company paid quarterly dividend of P0.50 per
ordinary share on each of these dates. Len Company’s profit for the year ended December 31, 2021 was P1,200,000 that
was earned evenly throughout the year. At December 31, 2021, each ordinary share of Len Company was selling at P16.

(30) What is Gray Company’s income from associates for the year 2021?
A. P360,000
B. P330,000
C. P300,000
D. P270,000

(31) What is the investment carrying amount at December 31, 2021?

A. P1,920,000
B. P1,790,000
C. P1,730,000
D. P1,700,000

(32) Assume the excess of acquisition cost over the underlying equity acquired is due to a piece of equipment with
a remaining life of 5 years on the date of investment acquisition, and a straight-line depreciation basis, what is
the investment carrying amount at December 31, 2021?
A. P1,920,000

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 B. P1,790,000
C. P1,745,000
D. P1,730,000

O. On July 1, 2020, Jude Company purchased 10,000 shares of Rigby Company ordinary shares for P510,000 plus broker’s
fees of P5,100. The shares represented 25% of the outstanding shares of Rigby and Jude has an ability to exercise
significant influence over the financial and operating policies of Rigby. The acquisition cost reflected book value of the
investee’s net assets as of that date. Rigby Company reported profit of P850,000 (evenly earned) for the year ended
December 31, 2020. At December 31, 2020, Rigby declared and paid cash dividends of P320,000.

At January 1, 2021, Jude Company sold one-half of the investment in Rigby for P275,000 less broker’s fees of P2,750.
Jude Company does not have the intention to dispose the remaining securities in the immediate future. For the year
ended December 31, 2021, Rigby Company reported profit of P980,000 and declared and paid cash dividends of
P450,000.

Market value per share of Rigby Company ordinary shares were as follows:
December 31, 2020 – P55 December 31, 2021 – P49

(33) How much was the investment acquisition cost at July 1, 2020?
A. P515,100
B. P510,000
C. P509,400
D. P504,900

(34) What is the investment carrying amount at December 31, 2020?

A. P647,600
B. P550,000
C. P541,350
D. P536,250

(35) How much was the gain or loss on sale of investment on January 1, 2021?
A. P1,575 loss
B. P1,575 gain
C. P4,325 loss
D. P4,325 gain

(36) What was the carrying amount of the remaining equity investment at December 31, 2021?
A. P275,000
B. P270,675
C. P250,000
D. P245,000

P. On April 1, 2021, Car Company purchased 25,000 ordinary shares of Way Company at an amount that reflected book
value as of that date. At the time of purchase, Way Company had 100,000 ordinary shares outstanding. Car had no
ownership interest in Way before the purchase. The first quarter statement ending March 31, 2021 of Way Company
had profit of P480,000. For the year ended December 31, 2021, Way Company reported profit of P2,400,000. Way
Company paid Car Company dividends of P60,000 on June 1 and P80,000 on December 31, 2021. The carrying amount
of the investment in Way Company at December 31, 2021 is P4,840,000.

(37) What was Car Company’s acquisition cost of its investment in Way Company on April 1, 2021?
A. P4,360,000
B. P4,500,000
C. P4,840,000
D. P5,180,000

Q. On July 1, 2021, Ron Company purchased 25% of Buck Company’s ordinary shares. No goodwill resulted from the
acquisition; however, the purchase difference of P1,000,000 was allocated to an undervalued equipment with a
remaining useful life of five years. Ron Company appropriately carries this investment using equity method and the

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 balance of the investment account was P12,000,000 at December 31, 2021. Buck Company reported profit of
P20,000,000 for the year ended December 31, 2021 and paid Ron Company dividends of P1,000,000 on December 31,
2021.

(38) How much did Ron Company pay for its 25% interest in Buck Company?
A. P10,600,000
B. P10,400,000
C. P9,900,000
D. P9,650,000

R. On January 1, 2021, BeeGees Company acquired a 30% interest in Al Company for P2,430,000. On this date, Al
Company’s shareholders’ equity was P5,000,000. At acquisition date, the carrying amount of Al Company’s identifiable
net assets approximated their fair values, except for the following:

Excess of Fair Value Over Carrying Value

Land P 2,000,000
Inventory 600,000
Machinery 500,000

All of the inventories that are undervalued at January 1, 2021 was sold during the year. The machinery is being
depreciated using the straight-line method and had a remaining useful life of 4 years at January 1, 2021. For the year
2021, Al company reported profit of P1,520,000 and paid its shareholders dividends of P650,000.

(39) What is the carrying amount of the investment in associates at December 31, 2021?
A. P2,473,500
B. P2,691,000
C. P2,653,500
D. P2,430,000

S. On January 1, 2021, Spinners Company purchased 10% of Sharon Company’s outstanding ordinary shares for P200,000.
Spinners Company is the largest single shareholder in Sharon Company and the officers of Spinners Company are the
majority members of Sharon Company’s board of directors. Sharon Company reported profit of P1,500,000 for 2021
and paid dividends of P900,000. Market value of Sharon Company’s ordinary shares at December 31, 2021 is P265,000.

(40) In its December 31, 2021 statement of financial position, what amount should Spinners Company report as its
investment in Sharon Company?
A. P350,000
B. P260,000
C. P200,000
D. P265,000

T. Billy Corporation owns 25% of Joel Company’s ordinary shares. Joel Company’s outstanding share capital at December
31, 2021 is as follows:

12% cumulative preference share capital, P100 par P1,000,000

Ordinary share capital, P50 par (140,000 shares) 7,000,000

Joel Company reported profit of P900,000 for the year ended December 31, 2021 and paid the required annual dividend
on preference shares and P3.00 per share on its ordinary shares.

(41) What amount should Billy Corporation record as share in income of Joel Company for the year ended
December 31, 2021?
A. P420,000
B. P225,000
C. P195,000
D. P105,000

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U. On April 30, 2021, Marie Company purchased for cash 18,000 of the 60,000 voting shares of Robbie Company for
P650,000. The amount exceeded the underlying equity acquired in the net assets of Robbie Company by P150,000. The
excess is attributable to undervaluation of Robbie Company’s land and equipment by P250,000 and P100,000,
respectively. At April 30. 2021, the equipment had a remaining useful life of 5 years. The remaining excess was
attributable to goodwill.

During the year 2021, Robbie Company reported profit of P600,000, of which P120,000 was earned during January
through April. Robbie Company declared and distributed a dividend of P4.00 per share on June 30, 2021. Market price
of Robbie Company shares at December 31, 2021 is P40 per share.

(42) How much goodwill is included in the carrying amount of the investment?
A. P150,000
B. P105,000
C. P71,250
D. P45,000

(43) What is the carrying amount of the investment in associates at December 31, 2021?
A. P708,500
B. P716,000
C. P718,000
D. P720,000

V. On October 1, 2020, Michael Company purchased 30,000 ordinary shares of Jackson Company at P180 per share that
reflected book value as of that date. At the time of purchase, Jackson had 100,000 ordinary shares outstanding. Michael
Company had no ownership interest in Jackson Company before the purchase. The nine months ending September 30,
2020, Jackson Company recorded profit of P2,960,000. For the year ended December 31, 2020, Jackson Company
reported profit of P4,800,000. Jackson Company paid Michael Company dividends of P120,000 on December 31, 2020.

For the year 2021, Jackson reported profit of P2,800.000 and paid dividends of P1,700,000 to its ordinary shareholders.

On January 2, 2022, Michael Company sold 20,000 ordinary shares of Jackson Company for P250 per share. For year
ended December 31, 2022, the reported profit of Jackson Company was P4,000,000 and dividends of P40,000 was paid
to Michael Company. Market value of the remaining shares at this time is P2,300,000.

(44) What is the investment carrying value at December 31, 2021?

A. P6,162,000
B. P5,970,000
C. P5,832,000
D. P5,400,000

(45) What is the gain (loss) on the sale of 20,000 shares at January 2, 2022?
A. P1,400,000
B. P1,020,000
C. P1,000,000
D. P892,000

(46) What is the amount at which the investment is reported on the statement of financial position at December
31, 2022?
A. P5,270,000
B. P2,500,000
C. P2,414,000
D. P2,300,000

W. On July 1, 2021, Larmaine Company acquired a 25% interest in the outstanding share of Dovi Company at a total cost of
P1,750,000. The underlying equity of the shares acquired by Larmaine Company was P1,500,000. The difference was
due to the following:

a. Land with current fair value of P750,000 more than its carrying amount.

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 b. Depreciable plant assets with current fair value of P150,000 more than carrying amount.
c. Inventories which are undervalued by P20,000.

All other identifiable assets of Dovi Company have fair values equivalent to their book values. The depreciable plant
assets have remaining useful lives of 10 years from the date of acquisition of the investment. All of the inventories have
been sold as of December 31, 2021.

Larmaine Company received P100,000 dividends from Dovi Company in 2021. Dovi Company reported P1,350,000
profit during the year ended December 31, 2021. Interim reports from Dovi Company revealed that it earned P650,000
during the first two quarters of 2021. There are no differences in accounting policies between the two companies, nor
do differences in reporting dates exist. Assume that there is no indication of impairment in the shares as of December
31, 2021.

(47) How much was the income from associate reported in Larmaine Company’s profit and loss for the year ended
December 31, 2021?
A. P161,875
B. P166,250
C. P168,125
D. P175,000

X. On January 1, 2020, Allyssa Company acquired 30% of the voting share capital of Ruby Company for P5,000,000 which
was equal to the book value of interest acquired. The investee reported net profit of P4,000,000 for 2020 and P6,000,000
for 2021 but paid no dividends during the two-year period. On July 1, 2022, Allyssa Company sold one-half of the
investment for net proceeds of P4,480,000. The fair value of the remaining investment was P4,500,000 on July 1, 2022
and P4,850,000 on December 31 2022. The remaining investment is to be held at fair value through other
comprehensive income.

(48) How much is the unrealized gain on equity investment reported in the 2022 other comprehensive income?
A. P2,230,000
B. P1,880,000
C. P950,000
D. P350,000

Y. The Harvard Company acquired a 30% equity interest in Baywatch Company for P4,000,000 on January 1, 2020. In the
year 2020, Baywatch Company earned profits of P800,000 and paid no dividends. In the year 2021, Baywatch Company
incurred losses of P320,000 and paid P100,000 dividends.

(49) In Harvard’s consolidated statement of financial position at December 31, 2021, what should be the carrying
amount of interest in Baywatch Company?
A. P4,000,000
B. P4,114,000
C. P4,144,000
D. P4,380,000

Z. On January 1, 2020, Jaya, Inc. acquired as a long-term investment for P1,400,000, a 40% interest in Ramsey Company
when the fair value of Ramsey’s net assets was P3,500,000. Due to the COVID-19 pandemic, Ramsey Company
experienced difficulty in continuing its business and reported the following net losses:

2021 P 1,000.000
2022 1,400,000
2023 1,600,000
2024 800,000

In order to sustain its operations, Jaya made cash advances of P400,000 to Ramsey Company in 2023. On December 31,
2024, it is not expected that Jaya will provide further financial support for Ramsey.

(50) What amount should be reported as loss from investment in 2024?

A. P320,000

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B. P800,000
C. P200,000
D. P120,000

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