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Chapter 7 – Investments in Equity Securities and Debt Securities

CHAPTER 7
INVESTMENTS IN EQUITY SECURITIES AND DEBT SECURITIES

PROBLEMS

7-1 (Dusit, Inc.)


Classified as available for sale securities
a. Purchase price (10,000 shares x P33.50) P335,000
Broker’s commission 1,980
Total cost P336,980

b. Purchase price (7,000 shares x P26.50) P185,500.00


Broker’s commission 4,910.00
Transfer taxes (¼ x 1% x 185,500) 463.75
Total cost P190,873.75

c. Purchase price P58,000


Transfer fees and other costs 1,500
Total cost to be allocated P59,500

Market values:
Ordinary shares 150 x 100 P15,000
Preference shares 300 x 150 45,000
Total P60,000

Allocation to:
Ordinary shares 59,500 x 15/60 P14,875
Preference shares 59,500 x 45/60 P44,625

d. Market value of ordinary shares


2,000 shares x P200 P400,000

Classified as Trading Securities


a. Purchase price (10,000 shares x P33.50) P335,000

b. Purchase price (7,000 shares x P26.50) P185,500

c. Allocation to Ordinary Shares


58,000 x 15/60 P 14,500
Allocation to Preference Shares
58,000 x 45/60 P 43,500

d. Market value of ordinary shares


2,000 shares x P200 P400,000

7-2 (A Company)
a. Cash 18,000
Dividend Revenue 18,000
2,400 shares x 7.50
Cost per share:
B Corp. Ordinary (no change) P100

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Chapter 7 – Investments in Equity Securities and Debt Securities

b. Memo entry. Received additional 600 shares of B Corp. ordinary shares as


stock dividends.

Revised cost per share:


B Corp. Ordinary (3,000 shares) P 80
c. Available for Sale Securities-B Corp. Preference 80,000
Available for Sale Securities-B Corp. Ordinary 80,000
Market values: Ordinary (2,400 x 125) 300,000
Preference (600 x 250) 150,000
Allocation: Ordinary 240,000 x 300/450 160,000
Preference 240,000 x 150/450 80,000
Costs per share:
B Corp. Ordinary (2,400 shares) P 67
B Corp. Preference (600 shares) P133

d. Memo entry. Received additional shares of B Corp. ordinary shares on a 4-for-1


stock split.
Revised cost per share:
B Corp. Ordinary = P240,000/9,600 shares
P 25

e. Available for Sale Securities-C Ordinary 20,000


Dividend Revenue 20,000
2,400/6 = 400 shares x 50
Costs per share:
B Corp. Common (2,400 shares) P100
C Corp. Common (400 shares) P 50

7-3 (Victoria Court)


Classified as FVPL
Cash 170,000
Gain on Sale of Trading Securities 10,000
Trading Securities 160,000
To record sale of Y Co. Common

Unrealized Loss on Trading Securities 72,000


Trading Securities 72,000
To record valuation at end of year.

Unrealized Holding
MV12/31/08 Market12/31/09 Gains(Losses)
X Co. P330,000 P288,000 P(42,000)
Z Co. 350,000 320,000 (30,000)
Total P680,000 P608,000 P(72,000)

Classified as available for sale securities


Cash 170,000
Loss on Sale of Available for Sale Securities 30,000
Market Adjustment-AFS Securities 40,000
Available for Sale Securities 200,000
Net Unrealized Gain/Loss on AFS Securities 40,000

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Chapter 7 – Investments in Equity Securities and Debt Securities

To record sale of Y Co. Common

Net Unrealized Gain/Loss on AFS Securities 72,000


Market Adjustment-AFS Securities 72,000
To record valuation at end of year.

Unrealized Holding
Cost Market Gains(Losses)
X Co. P330,000 P288,000 P(42,000)
Z Co. 300,000 320,000 20,000
Total P630,000 P608,000
Required balance in Market Adjustment Account – cr P(22,000)
Balance before adjustment (10,000 + 40,000) – dr 50,000
Required adjustment P 72,000

7-4 (Inn Corporation)


(1) Sales price (15,000 x 60 ) P900,000
Cost of shares sold:
12,000 shares P650,000
3,000 shares (1,300,000 x 3,000/24,000) 162,500 812,500
Gain on sale P 87,500

(2) Sales price P900,000


Cost of shares sold (1,800,000 x 15,000/36,000) 750,000
Gain on sale P150,000

(3) Sales price P900,000


Cost of shares sold:
12,000 shares P500,000
3,000 shares (1,300,000 x 3,000/24,000) 162,500 662,500
Gain on sale P237,500

7-5 (Melody Corporation)


a. 2007 Lot (4 x 750) P 3,000
2008 Lot (4 x 1,250) 5,000
Total cost of stock rights received P 8,000

b. Cost of stock rights exercised:


2005 Lot P 3,000
2006 Lot (750 x 4) 3,000 P 6,000
Cash paid (300 shares x P80) 24,000
Total cost of new shares acquired thru stock rights P30,000
Cost per share (8,400 / 300 shares) P 100

c. Sales price of stock rights (500 x 4.50) P 2,250


Cost of stock rights sold
2008 Lot (500 x 4) 2,000
Gain on sale P 250

d. Available for sale securities balance at December 31, 2009:


2007 Lot (60,000 – 3,000) P 57,000
2008 Lot (110,000 – 5,000) 105,000
2009 Lot 30,000 P192,900
Market value at December 31, 2009 (98 x 2,300 shares) 225,400

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Chapter 7 – Investments in Equity Securities and Debt Securities

Balance in unrealized gain/loss account at December 31, 2009 P 32,500

7-6 (Anti Corporation)


a. Stock Rights – Pro Corp. Ordinary 50,000
Trading Securities – Pro Corp. Ordinary 50,000
10,000 x 5
b. Cash 50,000
Stock Rights – Pro Corp. Ordinary 50,000

c. Trading Securities – Pro Corp. Ordinary 150,000


Stock Rights – Pro Corp. Ordinary 50,000
Cash 100,000
10,000/5 = 2,000 shares
2,000 x 50 = 100,000

Trading Securities – Pro Corp. Ordinary 140,000


Unrealized Gain on Trading Securities 140,000

Market value, 12/31/06 (12,000 shares x 75) 900,000


Carrying value, 12/31/07 (10,000 shares x 66) 660,000
Cost of stock rights received ( 50,000)
Cost of new shares from exercise 150,000 760,000
Unrealized gain 140,000

7-7 (EDSA Company)


(a)
1. 150 – 135 = P5.00
2+1
2. 2,000 x 5 = P10,000
3. 5,500 – (1,000 x 5) = P500 Gain

(b) 1. 145 – 135 = P5.00


2
2. 2,000 x 5 = P10,000

7-8 (Tolits Corporation)


2009
a. Available for Sale Securities – Diana Ordinary 54,000
Cash 54,000

b. Memorandum entry. Received 500 additional


shares of Diana ordinary shares as a result of 2-
for-1 split.

c. Available for Sale Securities – Smith Preference 121,200


Cash 121,200
(1,000 x 120) + 1,200

d. Cash 15,000
Gain on Sale of AFS Securities 1,500

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Chapter 7 – Investments in Equity Securities and Debt Securities

Available for Sale Securities – Diana Ordinary 13,500


(54,000 / 1,000) x 250 shares = 13,500

e. Stock Rights – Diana Ordinary 2,250


Available for Sale Securities – Diana Ordinary 2,250
750 shares x 3

f. Available for Sale Securities – Diana Ordinary 13,725


Stock Rights – Diana Ordinary 1,350
Cash 12,375
(60% x 750) x 3; 225 x 55
Cash 900
f. Stock Rights – Diana Ordinary 900
(40% x 750) x 3

g. Cash (100 x 56) 5,600


Loss on sale of AFS Securities 500
Available for Sale Securities – Diana Ordinary 6,100
13,725/ 225 = 61; 61 x 100 = 6,100

h. Cash (1,000 x 100 x 8%) 8,000


Dividend Revenue 8,000

i. Market Adjustment – AFS Securities 2,175


Unrealized Gains/Losses on AFS Securities 2,175

Market CV Unreal
Diana 1 (750 sh) 46,500 38,250 8,250
Diana 2 (125 sh) 7,750 7,625 125
Smith (1,000 x 115) 115,000 121,200 (6,200)
Total 169,250 167,075 2,175

b. Gain on sale of AFS Securities P1,500


Loss on sale of AFS Securities ( 500)
Dividend revenue 8,000
Total income recognized in profit or loss in 2006 P9,000

7-9 (X Corporation)
2008
Jan. 1 Available for Sale Securities – Y Co. Ordinary 300,000
Cash 300,000

Dec. 31 Net Unrealized Gains/Losses on AFS Securities 25,000


Market Adjustment – AFS Securities 25,000
5,000 x (60 – 55)
2009
Dec. 31 Market Adjustment – AFS Securities 25,000
Impairment Loss – AFS Securities 40,000
Net Unrealized Gains/Losses on AFS Securities 25,000
Available for Sale Securities – Y Co. Ordinary 40,000
5,000 x (60-52)

7-10 (Carlo Company)


2009
Apr. 1 Cash (5,000 x 25) 125,000

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Chapter 7 – Investments in Equity Securities and Debt Securities

Loss on Sale of Trading Securities 14,000


Trading Securities – Avi Ordinary 139,000

May 15 Available for Sale Securities – Ghio Preference 30,550


Cash 30,550

July 10 Memorandum entry. Received 4,000 additional


Darrel ordinary shares representing a 20% bonus
issue. Shares now held are 24,000.

Nov. 30 Cash (1 x 24,000) 24,000


Dividend Revenue 24,000
Dec. 31 Unrealized Loss on Trading Securities 9,000
Trading Securities – Avi Ordinary 9,000
(5,000 x 26) – 139,000

31 Market Adjustment – AFS Securities 110,650


Net Unrealized Gains/Losses on AFS Securities 110,650
116,650 – 6,000 balance

FV Cost Unrealized
Darrel 480,000 364,000 116,000
Ghio 31,200 30,550 650
Total 511,200 394,550 116,650

7-11 (Hostel Company)


(a) 1. Investment in Associates 2,000,000
Cash 2,000,000

2. Investment in Associates 300,000


Income from Associates 300,000
20% x 1,500,000

3. Memo. Received 2,000 additional shares of


Atlanta ordinary as 10% bonus issue. Shares
now held are 22,000.

4. Investment in Associates 600,000


Income from Associates 600,000
20% x 3,000,000

5. Cash 200,000
Investment in Associates 200,000
20% x 1,000,000

(b) Investment cost P2,000,000


Share in income – 2009 300,000
Share in income – 2010 600,000
Share in dividends (200,000)
Carrying amount, December 31, 2010 P2,700,000

7-12 (Byron, Inc.)


2009
Jan. 1 Investment in Associates – Pirates Ordinary 5,160,000
Cash 5,160,000

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Chapter 7 – Investments in Equity Securities and Debt Securities

Dec. 31 Investment in Associates – Pirates Ordinary 1,080,000


Income from Associates (30% x 3,600,000) 1,080,000

31 Cash (30% x 400,000) 120,000


Investment in Associates – Pirates Ordinary 120,000

7-13 (Barbie, Inc.)


(a).
2009
Mar. 1 Investment in Associates – Kitchie 1,365,000
Cash 1,365,000
Dec. 31 Cash (30% x 800,000) 240,000
Investment in Associates – Kitchie 240,000

31 Investment in Associates – Kitchie 800,000


Income from Associates 800,000
(3.2M x 10/12) x 30%

31 Income from Associates – Kitchie 37,500


Investment in Associates – Kitchie 37,500
(30% x 750,000) / 5 yrs. = 45,000
45,000 x 10/12 = 37,500

(b) Acquisition cost, March 1, 2009 P1,365,000


Cash dividends received ( 240,000)
Income from associates 800,000
Adjustment in reported income ( 37,500)
Investment carrying value, December 31, 2009 P1,887,500

Income reported by Barbie from its investment in associates:


(800,000 – 37,500) P 762,500

7-14 (Richmonde Corporation)


(a)
2008
Jan. 1 Available for Sale Securities – Pen, Inc. 900,000
Cash 900,000

Dec. 31 Cash 200,000


Dividend Revenue 200,000
10% x 2,000,000

31 Market Adjustment – AFS Securities 480,000


Net Unrealized Gains/Losses on AFS Securities 480,000
2009
Jan. 1 Investment in Associates – Pen, Inc. 1,300,000
Net Unrealized Gains/Losses on AFS Securities 480,000
Market Adjustment – AFS Securities 480,000
Retained Earnings 400,000
Available for Sale Securities – Pen, Inc. 900,000
Acquisition cost 900,000
Share in income (10% x 6M) 600,000
Share in dividends (10% x 2M) (200,000)

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Chapter 7 – Investments in Equity Securities and Debt Securities

Carrying amount, 12/31/05 1,300,000

1 Investment in Associates – Pen, Inc. 2,600,000


Cash 2,600,000

Dec. 31 Investment in Associates – Pen, Inc. 1,950,000


Income from Associates (30% x 6,500,000) 1,950,000

31 Cash 900,000
Investment in Associates (30% x 3,000,000) 900,000

(b) Cost transferred from Available for Sale Securities 1,300,000


Additional investment 2,400,000
Share in income 1,950,000
Share in dividends (900,000)
Carrying amount, December 31, 2009 4,750,000

7-15 (E Corporation)
(a)
2008
Jan. 1 Investment in Associates – F Company 8,250,000
Cash (50,000 x 165) 8,250,000

Aug. 1 Cash 210,000


Investment in Associates – F Company 210,000

Dec. 31 Investment in Associates – F Company 170,000


Income from Associates 170,000
25% x 680,000
2009
Dec. 31 Cash 210,000
Investment in Associates – F Company 210,000

31 Investment in Associates – F Company 250,000


Income from Associates – F Company 250,000
25% x 1,000,000
2010
Jan. 2 Cash (20,000 x 170) 3,400,000
Investment in Associates – F Company 3,300,000
Gain on Sale of Investment in Associates 100,000
Acquisition cost 8,250,000
Share in income (2006) 170,000
Share in dividends (2006) (210,000)
Share in dividends (2007) (210,000)
Share income (2007) 250,000
Investment carrying amount 8,250,000
Portion sold 40%
Cost of investment sold 3,300,000

2 Available for Sale Securities – F Company 4,950,000


Investment in Associates – F Company 4,950,000
8,250,000 – 3,300,000

Dec. 31 Cash 120,000


Dividend Revenue 120,000

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Chapter 7 – Investments in Equity Securities and Debt Securities

31 Market Adjustment-AFS Securities 750,000


Net Unrealized Gains/Losses on AFS Securities 750,000
(30,000 x 190) - 4,950,000 = 750,000

(b). 2008 2009 2010


Cost/Carrying Value, beg of year P8,250,000 P8,210,000 P8,250,000
Income from associates 170,000 250,000
Cash dividends received (210,000) (210,000)
Sale of shares (3,300,000)
Market adjustment 750,000
Carrying value, end of year P8,210,000 P8,250,000 P5,700,000

7-16

1. A and B
2. A
3. B and C
4. A and B
5. B
6. C
7. C
8. A
9. B
10. A, B and C
11. C
12. A
13. B
14. A
15. C

7-17 (Abu Company)


(a)
Premium
Date Interest Received Interest Revenue Amortization Carrying Value
01/01/07 8,274,646
12/31/07 1,200,000 1,158,450 41,550 8,233,096
12/31/08 1,200,000 1,152,633 47,367 8,185,729
12/31/09 1,200,000 1,146,002 53,998 8,131,731
12/31/10 1,200,000 1,138,442 61,558 8,070,173
12/31/11 1,200,000 1,129,827* 70,173* 8,000,000
*rounded off.
(b)
2007
Jan. 1 Held to Maturity Securities 8,274,646
Cash 8,274,646

Dec. 31 Cash 1,200,000


Held to Maturity Securities 41,550
Interest Revenue 1,158,450

2008
Dec. 31 Cash 1,200,000
Held to Maturity Securities 47,367
Interest Revenue 1,152,633

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Chapter 7 – Investments in Equity Securities and Debt Securities

7-18 (South Company)


a. Journal entries in 2006 and 2007
(1) Securities are classified as financial assets at fair value through profit and loss.
2008
June 1 Trading Securities – State Corp. Bonds 3,691,500
Cash 3,691,500

Dec. 1 Cash 160,000


Interest Revenue (4M x 8% x ½) 160,000

31 Interest Receivable 26,667


Interest Revenue (4M x 8% x 1/12) 26,667

31 Trading Securities – State Corp. Bonds 188,500


Unrealized Gain on Trading Securities 188,500
4M x 0.97 = 3,880,000
3,880,000 – 3,691,500 = 188,500
2009
Jan. 1 Interest Receivable 26,667
Interest Revenue 26,667

June 1 Cash 160,000


Interest Revenue 160,000

Dec. 1 Cash 160,000


Interest Revenue 160,000

31 Interest Receivable 26,667


Interest Revenue 26,667

Dec. 31 Trading Securities – State Corp. Bonds 80,000


Unrealized Gain on Trading Securities 80,000
4M x 0.99 = 3,960,000
3,960,000 – 3.880,000 = 80,000
(3) Securities are classified as held-to-maturity securities.
To facilitate computation, a partial amortization table is presented below.
Interest Interest Amortization HTM
Date Received Revenue of Discount Carrying Value
June 1, 2008 3,691,500
Dec 1, 2008 160,000 184,575 24,575 3,716,075
June 1, 2009 160,000 185,804 25,804 3,741,879
Dec. 1, 2009 160,000 187,094 27,094 3,768,973
June 1, 2010 160,000 188,449 28,449 3,797,422
Dec. 1, 2010 160,000 189,871 29,871 3,827,293
June 1, 2011 160,000 191,365 31,365 3,858,658
Dec. 1, 2011 160,000 192,933 32,933 3,891,591

2008
June 1 Held to Maturity Securities – State Corp. Bonds 3,691,500
Cash 3,691,500

Dec. 1 Cash 160,000


Held to Maturity Securities – State Corp. Bonds 24,575
Interest Revenue (see above table) 184,575

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Chapter 7 – Investments in Equity Securities and Debt Securities

31 Interest Receivable 26,667


Held to Maturity Securities – State Corp. Bonds 4,301
Interest Revenue 30,968
160,000 x 1/6 = 26,667; 25,804 x 1/6 = 4,301

2009
Jan. 1 Interest Revenue 30,968
Interest Receivable 26,667
Held to Maturity Securities – State Corp. 4,301
Bonds

June 1 Cash 160,000


Held to Maturity Securities – State Corp. Bonds 25,804
Interest Revenue(see above table) 185,804

Dec. 1 Cash 160,000


Held to Maturity Securities – State Corp. Bonds 27,094
Interest Revenue (see above table) 187,094

31 Interest Receivable 26,667


Held to Maturity Securities – State Corp. Bonds 4,742
Interest Revenue 31,409
160,000 x 1/6 = 26,667; 28,449 x 1/6= 4,742

(3) Securities are classified as available for sale securities.


To facilitate computation, a partial amortization table is presented below.
Interest Amortization HTM
Date Received Interest Revenue of Discount Carrying Value
June 1, 2008 3,691,500
Dec 1, 2008 160,000 184,575 24,575 3,716,075
June 1, 2009 160,000 185,804 25,804 3,741,879
Dec. 1, 2009 160,000 187,094 27,094 3,768,973
June 1, 2010 160,000 188,449 28,449 3,797,422
Dec. 1, 2010 160,000 189,871 29,871 3,827,293
June 1, 2011 160,000 191,365 31,365 3,858,658
Dec. 1, 2011 160,000 192,933 32,933 3,891,591
2008
June 1 Available for Sale Securities – State Corp. Bonds 3,691,500
Cash 3,691,500

Dec. 1 Cash 160,000


Available for Sale – State Corp. Bonds 24,575
Interest Revenue (see above table) 184,575

31 Interest Receivable 26,667


Available for Sale Securities – State Corp. Bonds 4,301
Interest Revenue 30,968
160,000 x 1/6 = 26,667
25,804 x 1/6 = 4,301

31 Market Adjustment – AFS Securities 159,624


Net Unrealized Gain/Loss on AFS Securities 159,624
4M x 0.97 = 3,880,000
Amortized cost
3,691,500+ 24,575 + 4,301 = 3,720,376

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Chapter 7 – Investments in Equity Securities and Debt Securities

Market Adjustment P 159,624


2009
Jan. 1 Interest Revenue 30,968
Interest Receivable 26,667
Available for Sale Securities – State Corp. Bonds 4,301

June 1 Cash 160,000


Available for Sale Securities – State Corp. Bonds 25,804
Interest Revenue(see above table) 185,804

Dec. 1 Cash 160,000


Available for Sale Securities – State Corp. Bonds 27,094
Interest Revenue (see above table) 187,094

31 Interest Receivable 26,667


Available for Sale Securities – State Corp. Bonds 4,742
Interest Revenue 31,409
160,000 x 1/6 = 26,667
28,449 x 1/6 = 4,742

Dec 31 Market Adjustment – Available for Sale Securities 26,661


Unrealized Gain or Loss on AFS 26,661
Market value (4M x 99%) P3,960,000
Amortized Cost (3,768,973 + 4,742) 3,773,715
Cumulative UG/L P 186,285
Before adjustment 159,624
Increase in UG/L P 26,661

2. Journal entry/entries to record sale of investment on November 1, 2011.


(a) Securities are classified as financial assets at fair value through profit and loss.
2011
Nov. 1 Cash 3,925,000
Loss on Sale of Trading Securities 128,333
Interest Revenue 133,333
Trading Securities – State Corp. Bonds 3,920,000
Acc. Int. = 4M x 8% x 5/12 = 133,333
Sales price (3,925,000–133,333) 3,791,667
Carrying value (4 M x 0.98) 3,920,000
Loss on sale 128,333
(b) Securities are classified as held-to-maturity securities.
2011
Nov. 1 Held to Maturity Securities – State Corp. Bonds 27,444
Interest Revenue 27,444
32,933 x 5/6 = 27,444

1 Cash 3,925,000
Loss on Sale of Held to Maturity Securities 94,435
Interest Revenue 133,333
Held to Maturity Securities–State Corp. Bonds 3,886,102
CV of HTM Securities sold:
As of June 1, 2011 3,858,658
Amortization June 1 to
Nov. 1, 2011 27,444
As of Nov. 1, 2011 3,886,102
Sales price 3,791,667

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Chapter 7 – Investments in Equity Securities and Debt Securities

Loss on sale 94,435

(c) Securities are classified as available for sale securities.


2011
Nov. 1 Available for Sale Securities – State Corp.Bonds 27,444
Interest Revenue 27,444

1 Cash 3,925,000
Loss on Sale of Available for Sale Securities 94,435
Net Unrealized Gain/Loss on AFS Securities 87,479
Interest Revenue 133,333
Available for Sale Securities–State CorpBonds 3,886,102
Market Adjustment – AFS Securities 87,479
Sales price (3,925,000–133,333) 3,791,667
Amortized Cost 3,886,102
Loss 94,435

Amortized Cost 12/1/08 P3,827,293


Discount Amort.
12/1/08 – 12/31/08
31,365 x 1/6 5,228
Amortized Cost 12/31/08 P3,832,521
MV 12/31/08 4M x 98% 3,920,000
Unrealized Gain on 12/31/08 P 87,479

7.19 Raffy Company)


To facilitate computation, a partial amortization table is presented below.
Interest Interest Revenue Amortization HTM
Date Received of Discount Carrying Value
June 1, 2007 5,353,150
Dec. 31, 2007 350,000 312,267 37,733 5,315,417
Dec. 31, 2008 600,000 531,542 68,458 5,246,959
Dec. 31, 2009 600,000 524,696 75,304 5,171,655
Dec. 31, 2010 600,000 517,166 82,834 5,088,821

2007
June 1 Held to Maturity Securities – Blessie Corp. Bonds 5,353,150
Interest Revenue (5M x 12% x 5/12) 250,000
Cash 5,603,150
Dec. 31 Cash 600,000
Interest Revenue 562,267
Held to Maturity Securities – Blessie 37,733
2008
Dec. 31 Cash 600,000
Interest Revenue 531,542
Held to Maturity Securities – Blessie 68,458
2009
Dec. 31 Cash 600,000
Interest Revenue 524,696
Held to Maturity Securities – Blessie 75,304
2010
Sept. 1 Interest Receivable (3M x 12% x 8/12) 240,000
Held to Maturity Securities – Blessie 33,134
Interest Revenue (517,166 x 3/5 x 8/12) 206,866

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1 Cash (3,090,000 + 240,000) 3,330,000


Gain on sale of HTM Securities 20,141
Interest Receivable 240,000
Held to Maturity Securities – Blessie 3,069,859
CV of HTM securities sold:
As of 12/31/07 (5,171,655 x 3/5) 3,102,993
Amort from 1/1/08-9/1/08 33,134
CV as of 9/1/08 3,069,859
Sales price 3,090,000
Gain on sale 20,141

1 Available for Sale Securities – Blessie 2,068,662


Held to Maturity Securities 2,068,662
5,171,655 – 3,102,993 = 2,068,662

Dec. 31 Cash 240,000


Interest Revenue 206,866
Available for Sale Securities – Blessie 33,134
2M x 12% = 240,000
5,171,655 – 3,102,993 = 2,068,662
2,068,662 x 10% = 206,866
240,000 – 206,866 = 33,134

Dec 31 Market Adjustment – AFS 34,472


Unrealized Gain or Loss on AFS 34,472
Amortized cost
2,068,662 – 33,134 = P2,035,528*
Market value 2M x 103.5% 2,070,000
Market Adjustment P 34,472
*or 5,088,821 x 2/5 = P2,035,528
Note: Instead of recognizing the unrealized gain or loss at the date of reclassification on
September 1, 2010 (the company demonstrating no ability to hold the securities until
maturity, hence the securities were reclassified as AFS), and adjusting the account again
at yearend, a single adjustment at yearend is made in the above entries. Both methods
would achieve the same effect of reflecting the AFS to market at balance sheet date
through the equity account Unrealized Gain or Loss on AFS.

7-21
1. B and C
2. A
3. B and C
4. A
5. B and C
6. A
7. A
8. A
9. B
10. B and C
11. C
12. B and C
13. A
14. A
15. B

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Chapter 7 – Investments in Equity Securities and Debt Securities

MULTIPLE CHOICE QUESTIONS


Theory
MC1 B MC5 D MC9 D
MC2 B MC6 D MC10 B
MC3 A MC7 A MC11 C
MC4 C MC8 D

Problems
MC12 B 535,000 – 525,000 = 10,000
MC13 D 307,500 + 269,500 = 577,000; (600 x 440) + (2,000 x 138) = 540,000
577,000 – 540,000 = 37,000; 12,900 + 13,500=26,400; 37,000–26,400=10,600
MC14 C 10,000 x 150 = 1,500,000; 20% x 3M = 600,000
10,000 x 50 = 500,000; 1,500,000 + 600,000 – 500,000 = 1,600,000
MC15 A 1,000 x 50 = 150,000 + 2,250 = 152,250; 152,250 – (1,000 x 10) = 142,250
MC16 C 3,000 x 120 = 360,000; 560,000 x 3,000/6,000 = 280,000
360,000 – 280,000 = 80,000
MC17 D 360,000 x 600/3600 = 60,000; 200,000 + 60,000 = 260,000
360,000 – 260,000 = 100,000
MC18 B 500 x 25 = 12,500 – 500 = 12,000
500 x 20 = 10,000; 12,000 – 10,000 = 2,000 gain
MC19 D 960-500 = 460 + 600 = 1,060; 1,060/10 = 106 shares
MC20 B 88 ÷ 1.10 = 80
MC21 A 352,000 – (4,400 x 4) = 334,400; 334,400 / 4,400 sh = 76
MC22 D See No. 21
MC23 B 1,200,000 – (3 x 40,000) + (25% x 640,000) = 1,240,000
MC24 B 40% x 450,000 = 180,000
150,000 ÷ 12 = 12,500; 180,000 – 12,500 = 167,500
MC25 A 25,000 x 180 = 4,500,000; 25% x (2,400,000 – 480,000) = 480,000
4,500,000 + 480,000 – 60,000 – 60,000 = 4,860,000
MC26 D 4,860,000 x 15/25 = 2,916,000
MC27 B 10,000 x 200 = 2,000,000; 4,860,000 x 10/25 = 1,944,000
2,000,000 – 1,944,000 = 56,000
MC28 A
MC29 C 500,000 + 1,500,000 + (10% x 3M) = 2,300,000
MC30 B 40% x 1,200,000 = 480,000; (40% x 900,000) ÷ 18 = 20,000
40% x 100,000 = 40,000; 480,000 – 20,000 – 40,000 = 420,000
MC31 C 4,000,000 + 420,000 – (40% x 200,000) = 4,340,000
MC32 B (1,000 x 140) + (900 x 170) + (800 x 200) = 453,000
(1,000 x 150) + (900 x 180) + (800 x 220) = 488,000
488,000 – 453,000 = 35,000; 35,000 – 20,000 = 15,000
MC33 A See No. 33
MC34 A
MC35 C 8,750,000 x 5% = 437,500
MC36 C 3,692,000 x 5% = 184,600; 4M x 4% = 160,000
184,600 – 160,000 = 24,600; 3,692,000 + 24,600 = 3,716,600
MC37 C See No. 36
MC38 B 912,400 x 10% = 91,240; 1,000,000 x8% = 80,000
91,240-80,000 = 11,240; 912,400 + 11,240 = 923,640
MC39 D 7,850,000 – (8M x .08 x 6/12) = 7,530,000; 7,383,000 x 5% = 369,150
8M x 4% = 320,000; 369,150 – 320,000 = 49,150
7,383,000 + 49,150 = 7,432,150; 7,432,150 x 5% = 371,608
371,608 – 320,000 = 51,608; 7,342,150 + 51,608 = 7,483,758
7,530,000 – 7,483,758 = 46,242
MC40 D
MC41 B 500,000 x 4% = 20,000

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Chapter 7 – Investments in Equity Securities and Debt Securities

MC42 D 460,000 – 472,500 = 12,500

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