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 12/31/06
Trading P 150,000 P 155,000 P 100,000
Available-for-sale 150,000 130,000 126,000

Questions
1. 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 50,000

2. 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 100,000
Market value – 12/31/07 155,000
Unrealized holding gain P 55,000
2. A
Cost P 150,000
Market value – 12/31/07 130,000
Unrealized holding loss P 20,000

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 12/31/07
Held-to-maturity
Security ABC P 100,000 P 95,000

Trading Security
Security DEFP 150,000 P 100,000 155,000

Available-for-sale
Security GHI 190,000 165,000 P 175,000
Security JKL 170,000 175,000 160,000

Security ABC was purchased at par. All declines in fair values are considered to be
temporary.

Questions
1. 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 105,000

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2. 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 155,000

3. 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 175,000

4. 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)

5. 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)

6. 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 5,000

Solution
1. C Cost since the security is considered as held-to-maturity
2. D Market value at year-end
3. A Market value at year-end
4. C
Selling Price P 175,000
Cost 190,000
Loss P( 15,000)
5. A
Market value – 1/1/07 P 100,000
Market value – 12/31/07 155,000
Unrealized holding gain P 55,000
6. D
Cost P 170,000
Market value – 12/31/07 175,000
Holding gain P 5,000

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 700,000 725,000
Security B 210,000 200,000
Totals 910,000 925,000

Securities Available for Sale:

Security C 500,000 560,000
Security D 850,000 865,000
Totals 1,350,000 1,425,000

Securities to be Held to Maturity:

Security E 970,000 980,000
Security F 412,000 409,000
Totals 1,382,000 1,389,000

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.

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Questions
1. The amount of investment to be reported as current assets is:
a. P 2,465,000 b. P 2,455,000 c. P 2,380,000 d. P 1,485,000

2. The amount of investment to be reported as non-current assets is:

a. P 1,389,000 b. P 1,382,000 c. P 1,277,000 d. P 1,274,000

3. The unrealized gain (or loss) component of income before taxes is:
a. P 15,000 b. P 75,000 c. P 97,000 d. P 100,000

4. The unrealized gain (or loss) component of shareholders‟ equity is:

a. P 82,000 b. P 75,000 c. P 60,000 d. P 12,000

Solution
1. B
Security A P 725,000 at mv
Security B 200,000 at mv
Security C 560,000 at mv
Security E 970,000 at cost
Total P 2,465,000
2. C
Security D P 865,000 at mv
Security F 412,000 at cost
Total P 1,277,000
3. A
Trading security – cost P 910,000
Trading security – mv 925,000
Holding gain P 15,000
4. B
Available-for-sales security – cost P 1,350,000
Available-for-sales security – mv 1,425,000
Holding gain P 75,000

Problem 4
Marc Corporation had investments in marketable debt securities costing P650,000 that were
classified as available-for-sale. On June 30, 2007, Marc Corporation decided to hold the
investments to maturity and accordingly reclassified them from the held-to-maturity
category on that date. The investments‟ market value was P575,000 at December 31,
2006; P530,000 at June 30, 2007; and P490,000 at December 31, 2007.

Questions
1. What amount of loss from investments should Marc Corporation report in its 2007
income statement?
a. P 0 b. P 45,000 c. P 85,000 d. P 120,000

2. What amount should Marc Corporation report as net unrealized loss on marketable debt
securities in its 2007 statement of stockholders‟ equity?
a. P 160,000 b. P 120,000 c. P 45,000 d. P40,000

Solution
Entry: Valuation allowance 75,000
Unrealized holding loss (SHE) 75,000
To close the valuation allowance of last year.

MES – HTM 530,000

Unrealized holding loss (SHE) 120,000
MES – SAS 650,000
1. a 2. b (Note: the unrealized holding loss should be amortized over the life
of the security)

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Problem 5
Quiters has investments in shares of common stock of NeverWin Company, bought as
follows:
2003 1,000 shares – P 140,000
2005 500 shares – P 90,000

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
1. The investment in stock at year-end is:
a. P 222,023 b. P 221,031 c. P 220,971 d. P 219,334

2. 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 108,889

3. 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 81,931

4. The gain on sale of investment at year-end is:

a. P 14,971 b. P 14,221 c. P 13,333 d. P 12,583

5. 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 2,700
Dividend income 2,700
Investment in Stock Rights 8,070
Investment in stock 8,070
(2/57 x P230,000 = P8,070)
July 20 Investment in stock 44,070
Cash 36,000
Investment in stock rights 8,070
1999 Purchase
Nov 15 Cash (60,000 – 750) 59,250 1,000 140,000
Investment in stock 45,029 x 3 ______ Split
(1,000 rights/3,000 rights x P135,088) 3,000 140,000
Gain on sale 14,221 _____ ( 4,912) Stock rights
3,000 135,088
Answer:
1. C 2. B 3. C 4. B 5. A

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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
1. The entry to record the conversion of preferred stock to common stock on July 15, 2003
is:
a. Investment – preferred stock 47,500
Loss on conversion of stock 1,500
Investment – common stock 49,000
b. Investment – common stock 49,000
Investment – preferred stock 49,000

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 c. Investment – common stock 47,500
Loss on conversion of stock 1,500
Investment – preferred stock 49,000
b. Memorandum entry

2. The entry to record the December 4, 2005 transaction is:

a. Memorandum entry
b. Investment – common stock 16,200
Cash 16,200
c. Investment – common stock 16,200
Dividend income 16,200
d. Investment – common stock 16,200
Common stock 16,200

3. The cost of shares purchased through exercise of rights on April 15, 2007 is:
a. P 6,473 b. P 6,391 c. P 5,000 d. P 3,527

4. Gain on sale of the rights is:

a. P 1,761 b. P 1,473 c. P 1,294 d. P 1,244

5. Gain on sale of the stocks is:

a. P 5,900 b. P 4,636 c. P 4,580 d. P 3,844

6. The audited balance of investment in common stock at December 31, 2007 is:
a. P 139,796 b. P 138,344 c. P 95,081 d. P 89,344

7. The number of rights Roelito Company received from Joondee Company is:
a. 39,600 rights b. 30,000 rights c. 3,960 rights d. 3,000 rights

8. The cost of the rights received is:

a. P 4,897 b. P 5,507 c. P 5,557 d. P 6,890

Solution
Sept 6, 2000 Investment – common 48,500
Cash 48,500
July 15, 2003 Investment – common 49,000
Investment – preferred 49,000
Aug 7, 2005 Memo entry
Sept 6, 2005 Investment – common 53,000
Cash 53,000
Dec 4, 2005 Investment – common 16,200
Dividend income 16,200
(shares outstanding – 3,000/10 = 300 shares x P54)
Dec 2, 2006 Memo entry
Apr 4, 2007 Stock rights 5,557
Investment – common 5,557
(Total investment to date – P166,700 x 2/60 = P 5,557)
Apr 15, 2007 Investment – common 6,473
Cash 5,000
Stock rights 1,473
(2/60 x 53,000 = P1,767 x 1,000 rights/1,200 rights)
Cash 5,328
Stock rights 4,084
(P5,557 – P1,473)
Gain on sale 1,224

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June 12, 2007 Cash 32,400
Investment – common 27,820
[6,473 + (500/1200 x P51,233)]
Gain on sale 4,580
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 125,000

IstheKEY Company, 10,000 shares of common stock (a 2% interest) 160,000
2Success Company, 25,000 shares of common stock (a 10% interest) 700,000
Marketable equity securities, at cost P 985,000
Less: Valuation allowance 50,000
Marketable equity securities, at market P 935,000

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

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 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 1.30
(dividend was paid on 10/1/07

 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
1. 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 113,000

2. 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 140,000

3. 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 2,175,000

4. 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

5. 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

6. Gain on sale of stock rights is:

a. P 3,600 b. P 2,800 c. P 1,200 d. P 0

7. 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.

8. 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 4,125
Dividend income 4,125
Stock rights 16,000
Investment – IstheKey 16,000
(1.50/15 x P160,000)
Cash 18,800
Stock rights 16,000
Gain on sale of stock rights 2,800
Investment – 2Success 1,520,000
Cash 1,520,000

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Investment – 2Success 35,000
Retained earnings 35,000
To record share of income from 2Success for 2006 (10% x P350,000)

Investment – 2Success 131,000

Income from investment 131,000
6 mos. ended June 30 200,000 x 10% = P 10,000
6 mos. ended Dec. 31 370,000 x 30% = 111,000
P 131,000
Dividend income 97,500
Investment – 2Success 97,500
To adjust the dividend received
Allowance for market decline 47,500
Unrealized loss on market decline 47,500
Market Cost
Attitude 23 x 5,500 shares = P 126,500 P 125,000
Isthekey 14 x 10,000 shares = 140,000 144,000
Total P 266,500 P 269,000

Required Allowance 2,500

Less: Beginning bal. 50,000
Recovery 47,500

Answer:
1. A 2. D 3. A 4. D 5. C 6. B 7. C 8. A

Problem 8
At December 31, 2006, ABARCA SUGAR CORPORATION properly reported as trading the
following equity securities:
Cost Market
Shan Lily Co., 1,000 shares, P2.40
convertible preferred stock 40,000 42,000
Azenith Corp., 6,000 shares of common 60,000 66,000
Ronette Co., 2,000 shares of common 55,000 40,000

On January 2, 2007, ABARCA SUGAR CORPORATION purchased 100,000 shares of Nagasaki

Ryuco Company common stock for P1,700,000, representing 30% of Nagasaki‟s outstanding
common stock and an underlying equity of P!,400,000 in Nagasaki‟ net assets on January 2.
ABARCA SUGAR had no other financial transactions with Nagasaki during 2006. AS a result
of ABARCA SUGAR‟s ownership of Nagasaki, ABARCA SUGAR has the ability to exercise
significant influence over Nagasaki‟s financial and operating policies.

During 2007, ABARCA SUGAR disposed of the following securities:

 January 18 - sold 2,500 shares of Azenith Corporation for P13 per share.
 June 1 - sold 500 shares of Ronette Company, after a 10% stock dividend was
received, for P21 per share.
 October 1 - converted 500 shares of Shan Lily Company‟s preferred stock into 1,500
shares of Shan Lily‟s common stock, when the market price was P60 per share for the
preferred stock and P21 per share for the common stock. The conversion has no
economic substance.

The following 2007 dividend information pertains to stock owned by ABARCA SUGAR:

 February 14 - Ronette issued a 10% stock dividend, when the market price of
Ronette‟s common stock was P22 per share.

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 April 5 and October 5 - Shan Lily paid dividends of P1.20 per share on its P2.40
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 12/31/06
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:

1. 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 60.00

2. 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 50,000

3. The number of shares acquired by ABARCA SUGAR through conversion of Shan Lily stock
is:
a. 300 b. 500 c. 1,500 d. 3,000

4. 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 27,500

5. 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 P3,250

6. 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 41,250

7. 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 1,545,000

8. 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

9. 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 360,000

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10. 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 1,700,000
Cash 1,700,000
Jan 18 Cash 32,500
MES – Azenith 25,000
Gain on sale 7,500
Feb 14 Memorandum entry
Apr 5 Cash 1,200
Dividend income 1,200
June 1 Cash 10,500
Loss on sale 2,000
MES – Ronette 12,500
June 30 Cash 3,500
Dividend income 3,500
Oct 1 Investment – common
Shan Lily 20,000
Investment – preferred
Shan Lily 20,000
Oct 5 Cash 1,200
Dividend income 1,200
March 1, June 1, September 1, and December 1 for Nagasaki shares
Cash 200,000
Investment – Nagasaki 200,000
(P0.50 x 100,000 shares = 50,000 x 4 quarters = P200,000
Dec 31 Investment – Nagasaki 360,000
Income from investment 360,000
(P1,200,000 x 30% = P 360,000)
Market Value Cost
Shan Lily preferred stock P 56 x 500 shares = P28,000 P20,000
Shan Lily common stock P 20 x 1,500 shares = 30,000 20,000
Azenith common P 11 x 3,500 shares = 38,500 35,000
Ronette P 22 x 1,700 shares = 37,400 42,500
P133,900 P117,500
Valuation Allowance__________
Recovery * 23,400 Beg. Bal. 7,000
_____ _____
Ending bal. 16,400
* squeeze figure
Answer:
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 100,000
Mar 15 Purchased 2,000 of ABS-CBN common at P15 per share 30,000
Oct 5 Purchased additional 2,000 shares of Piltel common 36,000
Nov 4 Sold 2,000 stock rights ( 3,000)
P 163,000
Additional information:

1. 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

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 holder to acquire 1 additional share of common stock for P18 per share on or before
December 31, 2007.

2. The company exercised its rights to acquire 2,000 additional Piltel common shares on
October 5, 2007.

3. On November 4, HOPE COMPANY sold 2,000 stock rights at P1.50 each.

4. At the end of the year, shares were quoted in the stock exchange as follows:

Piltel Common P 18
ABS-CBN common 14
Question
1. Ending balance per audit of Piltel common at year-end is:
a. P 140,000 b. P 138,000 c. P 133,000 d. P 126,000

2. Ending balance per audit of ABS-CBN common at year-end is:

a. P 28,000 b. P 30,000 c. P 36,000 d. P 38,000

3. Ending balance of investment at year-end is:

a. P 154,000 b. P 163,000 c. P 170,000 d. P 172,000

4. Allowance for market decline in value of investment at year-end is:

a. P 0 b. P 10,000 c. P 9,000 d. P 3,000

5. Gain or loss on stock rights transaction is:

a. P 0 b. P 2,000 c. P 1,000 d. P 500

6. Stock rights at December 31, 2007 is:

a. P 0 b. P 2,000 c. P 1,000 d. P 500

Solution
1. Stock rights 5,000
Investment – Piltel 5,000
(1/2 x P100,000)
2. OE: Investment – Pitel 36,000
Cash 36,000
CE: Investment – Piltel 38,000
Cash 36,000
Stock rights 2,000
Adj: Investment – Piltel 2,000
Stock rights 2,000
3. OE: Cash 3,000
Investment – Pittel 3,000
CE: Cash 3,000
Stock rights 2,000
Gain on sale of rights 1,000
Adj: Investment – Piltel 3,000
Stock rights 2,000
Gain on sale of rights 1,000
4. Loss on market decline 9,000
Allowance for market decline 9,000
MV Cost
Piltel P18 x 7,000 shares = P 136,000 P 133,000
ABS-CBN P14 x 2,000 shares = 28,000 30,000
P 154,000 P 163,000 = P9,000
5. Loss on expiration of the rights 1,000
Stock rights 1,000

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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 P100
per share. The proceeds was credited to the Investment account.

Questions
1. 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 595,000

2. 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 250,000

3. 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 72.00

4. 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 36.00

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5. 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

6. 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.

7. 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.

8. 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 75,000

9. 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 75,000

10. Cash dividends received from 2001 to 2004 totaled

a. P 100,000 b. P 75,000 c. P 50,000 d. P 55,000

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 12,500
04.01.01 500 shares 50,000 12.31.02 -do- 12,500
12.31.06 2,500 shares 275,000 12.31.03 -do- 12,500
12.31.04 -do- 12,500
June’ 07 Sold, 2,500 shs. 250,000
06.30.07 Bal. 2,500 shs. P245,000

(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.’06 Sold, 1,250 shs. P 90,000
04.01.01 500 shares 50,000

01.31.06 Bal. 2,500 shares P180,000 June’07 Sold, 2,500 shs. 90,000
Dec.’06 Stock split,2,500 shs --

06.30.07 Bal., 2,500 shares P 90,000

1. A
2. A
3. D P270,000 / 3,750 shares = P72.00
4. D P180,000 / 5,000 shares = P36.00
5. A 6. C 7. A
8. C Selling price, P160 less cost per share of P72 = P88 x 1,250 shares = P110,000
9. B Selling price, P100 less cost per share of P36 = P64 x 2,500 shares = P160,000
10. C P250,000 par x 5% x 4 years = P50,000

14
Problem 11
The Stock Investment account of YAP, Inc. showed the following details:

STOCK INVESTMENT
1/01 Beg. bal. (2,000 shrs) 40,000 2/28 Cash dividend 1,000
3/31 Purchased 300 shrs 4,500 4/01 Sale of stock rights 3,000
6/30 Sale of 230 shares 5,000

1. A cash dividend of P0.50 per share was received on Feb. 28. The adjusting entry is:
DEBIT CREDIT
a. Stock Investment 1,000 Dividend Income 1,000
b. Retained earnings 1,000 Dividend Income 1,000
c. Dividend income 1,000 Stock investment 1,000
a. None of the above

2. On March 15, stock rights were received entitling shareholders to purchase one share for
every five held at P15 per share. Market values on this date were: shares, P20; rights,
P5. The adjusting entry to recognize the cost allocated to the right is:
DEBIT CREDIT
a. Stock rights 8,000 Stock investment 8,000
b. Stock rights 10,000 Stock investment 10,000
c. Stock rights 5,000 Stock investment 5,000
b. none of the above

3. On March 31, 300 shares were purchased with the partial exercise of these rights. The
adjusting entry, after the adjustment in No. 14 above has been effected, is
DEBIT CREDIT
a. Stock investment 9,000 Stock rights 9,000
b. Stock investment 6,000 Stock rights 6,000
c. Stock rights 6,000 Stock investment 6,000
e. none of the above

4. On April 1, the remaining rights were sold for P3,000. The adjusting entry is:
DEBIT CREDIT
a. Stock investment 3,000 Gain on sale of rights 3,000
b. Stock investment 3,000 Stock rights 2,000
Gain on sale of rights 1,000
c. Stock investment 2,000 Stock rights 3,000
Loss on sale of rights 1,000
a. none of the above.

5. On June 30, 230 share were sold for P5,000 (use average cost method). The adjusting
entry is
DEBIT CREDIT
a. Cash 5,000 Stock investment 4,250
Gain on sale of stock 750
b. Stock investment 4,250 Gain on sale of stock 4,250
c. Stock investment 750 Gain on sale of stock 750
d. none of the above.

Answer
1. A 2. A 3. B 4. B 5. C

15
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 188,300
January 31 Sold Ventanilla Stock 21,364
March 31 Bought Don Dave Common 12,125
June 30 Dividend on Suson Common 10,000
July 31 Sold Suson Common 8,750
August 31 Sold Jasmin bonds 22,083
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, P33,000

Don Dave Company – Common

2,000 shares. Purchased in January 2003 at P33 per share, P66,000

Suson Company – Common

100 shares purchased in August 2003 at P73 per share, P7,300

Jasmin Company 5% bonds

2 bonds, P10,000 each purchased in July 2001 at par, P20,000
(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,
P10,000

Your examination discloses the following information:

1. In January 2007, 1,000 shares of the Ventanilla company common stock purchased in
May 2002 were sold for P21,364 net.

2. In March 2007, 500 shares of Don Dave common stock were purchased at P24 per
share plus brokerage, for P12,125.

3. In June 2007, the Suson Company paid a 100% stock dividend on common.

4. 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.

5. On August 2007, the Jasmin Company redeemed its 5% bonds at 110 plus accrued
interest.

16
6. In September 2007, JOY CORPORATION received one year interest on the P10,000
chattel mortgage of Sucuahi.

Question
1. 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 10,714

2. The adjusted balance of Investment at December 31, 2007 is:

a. P 157,728 b. P 155,411 c. P 154,775 d. P 152,692

3. The Investment at December 31, 2007 is:

a. Overstated by P 2,953 c. Overstated by P5,036
b. Overstated by P 2,317 d. Overstated by P3,056

4. Investment in Ventanilla Company common stock at year-end is:

a. P 65,000 b. P 63,000 c. P 63,636 d. P 52,000

5. 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 49,500

6. Investment in Suson Company common stock at year-end is:

a. P 7,300 b. P 3,650 c. P 2,500 d. P 1,450

Solution
1. OE: Cash 21,364
Investment – Ventanilla 21,364
CE: Cash 21,364
Loss on sale 636
Investment – Ventanilla 22,000
(P22 x 1,000 shares)
Adj: Loss on sale 636
Investment – Ventanilla 636
2. No adjustment
3. Dividend income 10,000
Investment – Suson 10,000
4. OE: Cash 8,750
Investment – Suson 8,750
CE: Cash 8,750
Receivable – others 3,750
Investment – Suson 3,650
(P7,300 x 100/200)
Gain on sale 8,850
Adj: Investment – Suson 5,100
Receivable – others 3,750
Gain on sale 8,850
5. OE: Cash 22,083
Investment – Jasmin 22,083
CE: Cash 22,083
Investment – Jasmin 20,000
Gain on sale 2,000
Interest income 83
Adj: Investment – Jasmin 2,083
Gain on sale 2,000
Interest income 83
6. Investment – Sucuahi 500
Interest income 500
Answer:
1. A 2. C 3. A 4. B 5. A 6. B

17
Problem 13
Siacor Inc. acquired 30% of Lozano Co.‟s voting stock for P200,000 on January 2, 2007.
Siacor‟s 30% interest in Lozano gave Siacor the ability to exercise significant influence over
Lozano‟s operating and financial policies. During 2007, Lozano earned P80,000 and paid
dividends of P50,000. Lozano reported earnings of P100,000 for the six months ended June
30, 2008, and P200,000 for the year enden December 31, 2008. On July 1, 2008, Siacor
sold half of its stock in Lozano for P150,000 cash. Lozano paid dividends of P60,000 on
October 1, 2008.

1. Before income taxes, what amount should Siacor include in its 2007 income statements
as a result of investment?
a. P15,000 b. P24,000 c. P50,000 d. P80,000

2. In Siacor‟s December 31, 2007 balance sheet, what should be the carrying amount of
this investment?
a. P200,000 b. P209,000 c. P224,000 d. P230,000

3. In its 2008 income statement, what amount should Siacor report as gain from the sale of
half of its investment?
a. P24,500 b. P30,500 c. P35,000 d. P45,500

Solution
1. B
P80,000 x 30% = P24,000
2. B
Purchase price 200,000
+ income from investment 24,000
- dividends ( 15,000)
Ending balance – 12/31/03 209,000
3. B
Beginning balance – 1/1/04 209,000
+ income from investment 30,000
(100,000 x 30%) _______
Balance – June 30 239,000

Selling price 150,000

Cost (239,000 x 1/2 ) 119,500
Gain on sale 30,500

Problem 14
During 2006, Marlisa Company purchased marketable equity securities as trading securities.
At December 31, 2006, the balance in the allowance to reduce marketable equity securities
to market was P23,000. Pertinent information at December 31, 2007 is as follows:

Security Cost Market Value

Helen common P 245,000 P 230,000
Maritess common 180,000 182,000
P 425,000 P 412,000

On January 1, 2007, Marlisa Company paid P700,000 for 100,000 shares of Louie Company
representing 30% of Louie‟s outstanding common stock. The following computations was
made by Marlisa Company:
Purchase price P 700,000
30% equity in book value of Louie‟s net
assets 500,000
Excess of cost over book value P 200,000

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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
1. 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 402,000

2. 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.

3. 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 110,000

4. 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 750,000

5. 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 110,000

6. 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 500,000

Solution
For Marketable Equity Securities
Total Cost 425,000
Total Market 412,000
Required Allowance – Dec. 31 13,000
Less: Allowance – Jan. 1 23,000
Recovery 10,000

Allowance in market decline 10,000

Gain on market recovery 10,000

For Investment
If acquired significant influence
Investment 90,000
Income from investment 90,000
To record share of income from the investee (P300,000 x 30%)

Dividend income 30,000

Investment 30,000
To adjust the dividend received (P100,000 x 30%)

19
 Income from investment 10,000
Investment 10,000
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
31. 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 950,000 950,000
December 31, 2007 840,000 820,000

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, P100,000

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
12/31/04 108,660
12/31/05 P 7,000 P 5,433 P 1,567 107,093
12/31/06 7,000 5,354 1,646 105,447
12/31/07 7,000 5,272 1,728 103,719
12/31/08 7,000 5,186 1,814 101,905
12/31/09 7,000 5,095 1,904 100,000

20
As of December 31, 2007, the Investment in bonds is recorded in the balance sheet at
P108,660.

Questions
1. The Investment in Adonis Company common at year-end is:
a. P 1,473,000 b. P 1,478,500 c. P 1,480,500 d. P 1,481,000

2. The income from investment in the Adonis Company common at year-end is:
a. P 131,000 b. P 133,500 c. P 159,250 d. P 185,500

3. The marketable securities at December 31, 2007 is:

a. P 820,000 b. P 840,000 c. P 930,000 d. P 950,000

4. The amortization of investment in bonds at year-end is:

a. P 1,728 b. P 4,941 c. P 6,669 d. P 7,000

5. Interest income from the investment in bonds at year-end is:

a. P 7,000 b. P 5,354 c. P 5,272 d. P 5,186

6. The investment in bonds at year-end is:

a. P 108,660 b. P 105,447 c. P 103,719 d. P 100,000

Solution
Cost P 1,400,000
Net Asset Acquired 1,200,000
Excess over cost P 200,000
Undervalue of asset 180,000
(720,000 x 25%) ________
Implied Goodwill P 20,000

Adj # 1:Income from investment 2,000

Investment 2,000
Undervaluation of depreciable asset - P1,500
[(P120,000 x 25%) / 10 x 6/12)
Implied goodwill (P20,000/20 x 6/12) - 500
Total P2,000
Adj # 2:Investment 135,000
Income from investment 135,000
(P1,080,000/12 mos. x 6 mos. x 25%)
Adj # 3:Dividend income 52,500
Investment 52,500
(P210,000 x 25%)
Adj # 4:Unrealized loss in market decline 20,000
Allow. for unrealized loss in market decline 20,000
Cost - P840,000
Market - 820,000
Allow. –P 20,000
Adj # 5:Retained earnings (2005 & 2006) 3,213
Interest income (2007) 1,728
Investment 4,941
Answer:
1. C 2. B 3. A 4. A 5. C 6. c

21
Problem 16
Roxanne Company‟s permanent investment consists of the following:

3-year 8% P100,000 face value Paul Bonds (cost) P 96,500

Cash surrender value of life insurance of the president 15,000
Available-for-sale securities held for long-term appreciation
of value (at cost) 180,000

The cost and market value of these securities are presented here:

Cost Market
Sony Incorporate 80,000 90,000
Macky Corporation 60,000 60,000
Ruela Company 40,000 20,000

Additional information:

1. According to the company‟s treasurer, investment in Paul bonds was acquired at the
beginning of the year with the intention of selling it when the need for additional working
capital arises. Interest at 8% is received annually every January 1. Accrued interest on
these bonds had been recorded. Effective interest rate for this type of securities is 10%.
The fair market value of Paul Bonds at the end of the year is P 98,000.

2. As part of additional compensation, the company insured the life of its president for a
total coverage of P2 million pesos. Insurance premium paid during the year amounted
to P54,000. Increase in cash surrender value of 5,000 was credited to insurance
expense account.

3. Subsequent event review revealed that the year-end market decline of Ruela Company
stock was other than temporary.

Questions
1. The total Available-for-sale securities of Roxanne Company at year-end is:
a. P 170,000 b. P 180,000 c. P 185,000 d. P 268,000

2. The Paul bonds at year-end is:

a. P 98,150 b. P 98,000 c. P 96,500 d. P 100,000

3 The cash surrender value of life insurance at year-end is:

a. P 15,000 b. P 20,000 c. P 69,000 d. P 0

4. The Held-to-maturity securities at year-end is:

a. P 98,150 b. P 98,000 c. P 96,500 d. P 0

Solution
Current MES
3-Year 8% P100,000 Paul bonds - P 96,500

Long-term Investment
Cash surrender value of life insurance - P 15,000
Long-term MES, at market - 170,000
Total - P185,000

ANSWER:
1. C 2. C 3. A 4.A 5. C

22
Problem 17
On January 1, 2007, Michelle Co. bought 30% of the outstanding common stock of Manila
Corporation. Michelle Co. accounts for this investment by the equity method. At the date of
acquisition of the stock, Manila Corporation‟s net assets had a carrying value of
P11,800,000. Assets with an average remaining life of 5 years have a current market value
that is P2,600,000 in excess of their carrying values. The remaining difference between the
purchase price and the value of the underlying stockholders‟ equity cannot be attributed to
any tangible asset. At the end of 2007, Manila Corporation reports net income of
P3,600,000. During the 2007, Manila Corporation declared and paid cash dividends of
P400,000. The balance of Michelle‟s investment in Manila Corporation is P5,922,000 at
December 31, 2007.

Questions
1. What is the total adjustment to share of income for 2007?
a. P 198,000 b. P 156,000 c. P 256,000 d. P 562,000

2. What is the total dividend income for 2007?

a. P 0 b. P 78,000 c. P 107,400 d. P 120,000

3. What is the acquisition cost of Michelle Company‟s investment in Manila Corporation?

a. P 6,198,000 b. P 5,118,000 c. P 3,540,000 d. P 1,920,000

Solution
Investment
Acquisition cost * 5,118,000 Amort. of
Share of income 1,080,000 depreciable
assets ** 156,000
Dividends *** 120,000

_________
6,198,000 276,000

Ending bal. 5,922,000

* Squeeze figure
** P2,600,000 x 30% = 780,000/5 years = P156,000
*** P400,000 x 30%
Answer:
1. B 2. A 3. B

Problem 18
The following entries were made by the accountant of LECIRAM COMPANY:

2007
Jan 2 Investment in bonds 11,120,000
Cash 11,120,000
Purchase of P10,000,000, 18% bonds at 102plus accrued interest and broker’s fee.
Bonds mature January 1, 2010.

Jan 3 Cash 900,000

Interest income 900,000
Interest received on 18% investment in bonds. (This same entry was made when
interest was received on July 1, 2007).

23
July 1 Investment in preferred stock 10,020,000
Premium paid on preferred stock 200,000
Cash 10,220,000
Purchase of 100,000 shares of 8% P100 preferred stock of Al Corp. at 102; broker’s
fee, P20,000

Dec 1 Investment in common stock 5,000,000

Cash 5,000,000
Purchase of 50,000 shares P100 par common stock of Randy Co. at P100 per share
after a P1 per share dividend had been declared by Randy Co. No broker’s fee.

Dec 31 Cash 800,000

Premium paid on preferred stock 200,000
Dividend income 600,000
Dividend received on preferred stock investment

Dec 31 Cash 50,000

Investment in common stock 50,000
P1 per share on investment in common stock

Question
1. What is the total interest income on investment in bonds for 2007?
a. P 1,827,500 b. P 1,800,000 c. P 1,772,500 d. P 927,500

2. What is the carrying value of the investment in bonds at December 31, 2007?
a. P 11,092,500 b. P 10,247,500 c. P 10,200,000 d. P 10,192,500

3. What entry should be made to correct the acquisition entry on Jan. 2, 2007?
a. Interest income 900,000 c. Interest income 900,000
Investment in bonds 900,000 Interest Receivable 900,000

b. Broker‟s fees exp. 20,000 d. Interest income 900,000

Investment in bonds 20,000 Broker‟s fee exp. 20,000
Investment in bonds 920,000

4. What is the adjusting entry to record the accrual of interest on December 31, 2007?
a. Interest receivable 900,000 c. Interest receivable 900,000
Interest income 900,000 Retained earnings 900,000
b. Interest income 900,000 d. No adjusting entry
Retained earnings 900,000

5. What adjusting entry should be made to correct the acquisition on July 1?

a. Broker‟s fees exp. 20,000 c. Invest. in pref. 200,000
Invest. In pref. 20,000 Premium on PS 200,000
b. Broker‟s fees exp. 20,000 d. No adjusting entry
Premium on PS 20,000

6. What is the dividend income on preferred stock investment for 2007?

a. P 0 b. P 200,000 c. P 600,000 d. P 800,000

24
7. What adjusting entry should be made at December 31, 2007, to correct the investment in
common stock account?
a. Dividend income 50,000 c. Retained earnings 50,000
Invest. In CS 50,000 Invest. in CS 50,000
b. Retained earnings 50,000 d. No adjusting entry
Dividend income 50,000

Solution
Adjustments:
Jan 2 Interest income 900,000
Investment - bonds 900,000
Jan 3 No adjustments
July 1 Investment – preferred 200,000
Premium paid on
preferred stock 200,000
Dec 1 Dividend income 50,000
Investment – common 50,000
Dec 31 Premium paid on pref.
stock 200,000
Dividend income 200,000
Dec 31 Investment – common 50,000
Dividend income 50,000
Interest income 27,500
Investment – bonds 27,500
To record amortization of premium. (P220,000/8 years = P27,500)
Answer:
1. C 2. D 3. A 4. A 5. C 6. D 7. D

Problem 19
The following two subsidiary accounts reflect the marketable securities of HOPE COMPANY
for the year 2008:
DREAM BIG COMPANY
Date Transactions Shares Ref. Debit Credit
Jan. 10 Purchase 20,000 CD P 1,900,000
31 Raised to market
value, offset to
retained earnings GJ 100,000
Mar 30 Sale at P150 (10,000) CR P 1,500,000
June 10 Stock dividend at par 10,000 GJ 1,000,000
July 28 Sale at P110 10,000 _________ 1,100,000
TOTALS P 3,000,000 P 2,600,000

AIM HIGH COMPANY

Date Transactions Shares Ref. Debit Credit
Sept. 05 Purchase 20,000 CD P 1,000,000
28 Cash dividends to
stockholders or record
Sept 15, declared Aug.
15 CR P 50,000
Oct. 01 Purchases 50,000 CD 2,500,000
05 Sale at P65 20,000 CR 1,000,000
Nov. 30 Cash collected for sale
made on Nov. 10, after
a Nov. 1 declaration of
P5 cash dividend per
share to stockholders

25
 on record as of
December 1. 20,000 CR 3,300,000
Dec. 15 Cash dividend received 20,000 CR __________ 150,000
TOTAL P 3,500,000 P 4,500,000

On January 2, 2008, HOPE COMPANY purchased 39,000 shares of GOB BLESS YOU
COMPANY‟s 200,000 shares of outstanding common stock for P1,170,000. On that date,
the carrying value of the acquired shares on GOD BLESS YOU COMPANY‟s books was
P810,000. HOPE COMPANY attributed the excess of cost over carrying amount to goodwill.
HOPE COMPANY‟s policy is to amortize intangible over 10 years.

During 2008, HOPE COMPANY gained
directors. GOD BLESS YOU COMPANY
December 31, 2008, and declared and
December 31, 2008, GOD BLESS YOU
share.
a seat on GOD BLESS YOU COMPANY‟s board of
reported earnings of P800,000 for the year ended
paid cash dividends of P200,000 during 2008. On
COMPANY‟s common stock was trading at P30 per

Questions
1. The gain on sale of 10,000 shares of DREAM BIG COMPANY on March 30 is:
a. P 0 b. P 500,000 c. P 550,000 d. P 1,500,000

2. The gain on sale of 10,000 shares of DREAM BIG COMPANY on July 28 is:
a. P 150,000 b. P 337,500 c. P 525,000 d. P 625,000

3. The adjusted balance of the HOPE COMPANY‟s Investment in DREAM BIG COMPANY on
December 31, 2008 is:
a. P 525,000 b. P 500,000 c. P 475,000 d. P 375,000

4. The gain on sale of 20,000 shares of AIM HIGH COMPANY on October 5 is:
a. P 300,000 b. P 314,500 c. P 350,000 d. P 1,028,500

5. The gain on sale of 20,000 shares of AIM HIGH COMPANY on November 10 is:
a. P 1,000,000 b. P 2,200,000 c. P 2,300,000 d. P 2,400,000

6. The adjusted balance of the HOPE COMPANY‟s Investment in AIM HIGH COMPANY on
December 31, 2008 is:
a. P 1,000,000 b. P 1,200,000 c. P 1,300,000 d. P 1,500,000

7. The gain on investment of HOPE COMPANY from the Investment in GOD BLESS YOU
COMPANY at December is:
a. P 81,000 b. P 120,000 c. P 156,000 d. P 990,000

8. The adjusted balance of the HOPE COMPANY‟s Investment in GOD BLESS YOU COMPANY
at December 31, 2008 is:
a. P 1,251,000 b. P 1,287,000 c. P 1,170,000 d. P 1,320,000

Solution
DREAM BIG COMPANY
Retained earnings 100,000
MES 100,000
OE: Cash 1,500,000
MES 1,500,000
CE: Cash 1,500,000
MES 950,000
Gain on sale 550,000

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Adj: MES 550,000
Gain on sale 550,000
Dividend income 1,000,000
MES 1,000,000
OE: Cash 1,100,000
MES 1,100,000
CE: Cash 1,500,000
MES 475,000
Gain on sale 625,000
Adj: MES 625,000
Gain on sale 625,000

AIM HIGH COMPANY

OE: MES 1,000,000
Cash 1,000,000
CE: MES 950,000
Dividend Income 50,000
Cash 1,000,000
Adj: Dividend income 50,000
MES 50,000
OE: Cash 50,000
MES 50,000
CE: Cash 50,000
Dividend income 50,000
Adj: MES 50,000
Dividend income 50,000
OE: Cash 1,300,000
MES 1,000,000
Gain on sale 300,000
CE: Cash 1,300,000
MES 950,000
Gain on sale 350,000
Adj: MES 50,000
Gain on sale 50,000
OE: Cash 3,300,000
MES 3,300,000
CE: Cash 3,300,000
MES 1,000,000
Gain on sale 2,200,000
Dividend income 100,000
Adj: MES 2,300,000
Gain on sale 2,200,000
Dividend income 100,000
MES 150,000
Dividend income 150,000

GOB BLESS YOU COMPANY

MES 1,170,000
Cash 1,170,000
MES 156,000
Investment income 156,000

Cash 39,000
MES 39,000
Answer:
1. C 2. D 3. C 4. C 5. B 6. D
7. B 8. B

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Problem 20
The following are the transaction of DE GRACIA COMPANY for its Marketable Securities:

Marketable Securities

Jan 1 Beginning balance 58,000

Mar 15 Purchase 1,000 shares of Grace (common)

at P20, plus P2,000 commission for broker 20,000

Apr 30 Sold 500 shares of El Salvador at P1, less P15

commission for broker 485

May 11 Purchased 10,000 shares (par P1) of President

Company at P0.90 plus P90 commission for
broker 9,090

June 30 Received 100% stock dividend from Prince Co.

July 30 Purchase 50 shares of De Gracia at P140, plus

P70 commission for broker 7,000

Oct 1 Sold Ronald bonds; 10 bonds P10,400, plus

accrued interest to date, and less P50
commission for broker 10,650

Nov 15 Sold 20 shares of Prince Company at P20, no

commission involved 400

Nov 30 Proceeds from sale of stock rights 4,000

Dec 1 Liquidating dividend from Alta Company 400

Dec 10 Sold 15 shares of Grace (common) at P55, less

Commission of P15. 810

Additional Information:

1. The beginning balances is detailed as follows:

Prince common, 100 shares; par P50 5,000
El Salvador common, 70,000 shares; par P10 20,000
Ronald bonds, (face P1,000), 20 bonds, 12%, payable
Jan. 1 and July 1 22,000
Alta Company, 200 shares 1,000
Rhinna common, 5,500 shares, Par P2 10,000
58,000

2. Grace issued stock rights to stockholders entitling them to subscribe at par, 1 new share
for every 10 shares held on October 31, 2007. Market values at date of issuance of
rights were:
Stock, ex-right P72 per share
Stock rights 8 per share

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3. The following commission were unpaid and unrecorded as at December 31, 2007:
P2,000 for the purchase of Grace stocks
P 70 for the purchase of De Gracia stocks

4. The following information was obtained relative to dividends which were not in the
books:
Company Date declared Kind Rate Remarks
Prince Company 12/15/07 Cash 20% Received 1/16/08
President Company 12/03/07 Stock 10% Received 1/19/08
Rhinna Company 01/15/08 Cash 10% Received 1/31/08

Question
1. The entry to adjust the March 15 transaction on the purchase of 1,000 share of Grace
common is:
a. Marketable securities 2,000
Commission expense 2,000
b. Marketable securities 2,000
Commission payable 2,000
c. Marketable securities 2,000
Cash 2,000
d. No adjustment

2. The entry to adjust the sale of 500 shares of El Salvador on April 30 is:
a. Marketable securities 372
Gain on sale of MS 372
b. Marketable securities 342
Cash 342
c. Marketable securities 342
Gain on sale of MS 342
d. No adjustment

3. The entry to adjust the purchase of 50 shares of De Gracia common on July 30 is:
a. Marketable securities 70
Commission payable 70
b. Treasury stock 7,070
Marketable securities 7,000
Commission payable 70
c. Treasury stock 7,000
Marketable securities 7,000
d. No adjustment

4. The entry to adjust the sale of 20 shares of Prince common on October 1 is:
a. Loss on sale of MS 650
Marketable securities 350
Interest income 300
b. Loss on sale of MS 350
Marketable securities 350
c. Loss on sale of MS 600
Marketable securities 300
Interest income 300
d. No adjustment

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5. The gain on sale of stock rights is:
a. P 2,000 b. P 1,800 c. P 1,750 d. P 1,500

6. The entry to adjust the liquidating dividend on December 1 is:

a. Loss on investment 600
Marketable securities 600
b. Cash 600
Dividend income 600
c. Marketable securities 600
Dividend income 600
d. Marketable securities 600
Cash 600

7. Dividend receivable at year-end is:

a. P 3,900 b. P 2,900 c. P 2,800 d. P 1,800

8. Gain on sale of marketable securities at year-end is:

a. P 855 b. P 513 c. P 342 d. P 105

9. Loss on sale of marketable securities at year-end is:

a. P 100 b. P 650 c. P 750 d. P 1,350

10. The marketable securities at year-end is:

a. P 73,350 b. P 73,950 c. P 74,150 d. P 74,750

Solution
1. Marketable securities 2,000
Broker’s commission payable 2,000
To adjust the March 15 transaction.
2. Marketable securities 342
Gain on sale of MS 342
To adjust the April 30 transaction.
Selling price P 485
Cost 143
Gain on sale P 342
3. Treasury stock 7,070
Marketable Securities 7,000
Brokers’ commission payable 70
To adjust the July 30 transaction.
4. Loss on sale of MS 650
Marketable securities 350
Interest income 300
To adjust the October 1 transaction.
Selling price (P10,400 – P50) P 10,350
Cost of the bonds (P22,000/20 x 10) 11,000
Loss on sale P 650
5. Loss on sale of MS 100
Marketable securities 100
To adjust the Nov.15 transaction.
Selling price P 400
Cost 500
Loss on sale P 100
6. Stock rights 2,200
Marketable securities 2,200
To record the transaction that transpired on October 31.
Marketable securities 4,000
Stock rights 2,200
Gain on sale of Stock rights 1,800
To adjust the transaction on Nov. 30

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7. Loss on investment 600
Marketable securities 600
To adjust the transaction on Dec. 1
8. Marketable securities 513
Gain on sale of MS 513
To adjust the transaction on Dec. 10
Selling price P 810
Cost 297
Gain on sale P 513
9. Dividend receivable 1,800
Dividend income 1,800
To record the dividend declared by Prince Company
P 50 x 180 shares x 20% = P 1,800
Answer:
1. B 2. C 3. B 4. A 5. B 6. A 7. D 8. A 9. C 10. B

Problem 21
In connection with your audit of the financial statement of the William Company for the
year 2007, the following investment in stock and dividend income accounts were presented
to you:
Investment in Stock
Debit Credit
June 18, 2006 10,000 shares common par
value P50, Samson Company 390,000
April 30, 2007 5,000 shares Samson Company
received as stock dividend 250,000
May 20, 2007 Sold 5,000 shares @ P25 125,000
Dec. 10, 2007 Sold 2,000 shares @ P60 120,000

Dividend Income
April 30, 2007 Stock dividend 250,000
Nov. 30, 2007 Samson Company common 50,000

The following information was obtained during your examination:

1. The balance in the investment in stock account at December 31, 2006 per your last
year„s working papers, was P390,000.

2. From independent sources, you determine the following dividend information:

Type of Date Date of Date of

Dividend Declared Record Payment Rate
Stock March 15, 2007 April 1, 2007 April 30, 2007 50%
Cash Nov. 1, 2007 Nov. 15, 2007 Nov. 28, 2007 P5/share
Cash Dec. 1, 2007 Dec. 15, 2007 Jan. 2, 2008 20%

3. Closing market quotation as at December 31, 2007:

Bid Asked
Samson Company common 13¾ 16½

Questions:
Based on the above and the result of your audit, answer the following:

1. How much is the gain (loss) on the May 20, 2007 sale?
a. P (70,000) b. P (5,000) c. P 5,000 d. P 0

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2. How much is the gain on the December 10, 2007 sale?
a. P 68,000 b. P 48,000 c. P 42,000 d. P 0

3. How much is the total dividend income for the year 2007?
a. P 400,000 b. P 300,000 c. P 150,000 d. P 50,000

4. How much is the adjusted balance of investment in stock as of December 31, 2007?
a. P 208,000 b. P 145,000 c. P 117,000 d. P 110,000

5. How much is the Allowance for Unrealized loss as of December 31, 2007?
a. P 98,000 b. P 35,000 c. P 7,000 d. P 0

Solution
Adjustments
Dividend income 250,000
Investment 250,000
-------------------------------------------------
OE: Cash 125,000
Investment 125,000
CE: Cash 125,000
Loss on sale 5,000
Investment 130,000
Adj: Loss on sale 5,000
Investment 5,000
-------------------------------------------------
OE: Cash 120,000
Investment 120,000
CE: Cash 120,000
Investment 52,000
Gain on sale 68,000
Adj: Investment 68,000
Gain on sale 68,000
-------------------------------------------------
Computation for the dividend income:
P5 x 10,000 shares = P 50,000
10,000 shares x P50 x 20% = 100,000
Total = P 150,000
Answer:
1. B 2. A 3. C 4. A 5. D

Problem 22
Macky Corporation‟s accounting records showed the following investment at January 1,
2007:
Common stock
Johny Corp (1,000 shares) P 10,000
Sony Corp (5,000 shares) 100,000
Real estate:
Parking lot (leased to Ruel Co.) 300,000
Other:
Trademark (at cost, less accumulated amortization 25,000
Total investment P435,000

Macky owns 1% of Johny and 30% of Sony. Maky‟s directors constitute a majority of Sony‟s
directors. The Ruel lease, which commenced on January 1, 2002, is for ten year, at an
annual rental of P48,000. In addition, on January 1, 2002, Ruel paid a nonrefundable
deposit of P50,000, as well as security deposit of P8,000 to be refunded upon expiration of
the lease. The trademark was licensed to Nappy Co. for royalties of 10% of sales of the
trademark items. Royalties are payable semiannually on March 1 (for sales in July though

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December of the prior year), and on September 1 for the sales in January through June of
the same year).

During the year ended December 31, 2007, Macky received cash dividends of P1,000 from
Johny, and P15,000 from Sony, whose 2007 net incomes were P75,000 and P150,000
respectively. Macky also received P48,000 rent from Ruel in 2007 and the following royalties
from Nappy:
March 1 September 1
2006 P3,000 P5,000
2007 4,000 7,000

Nappy estimated that sales of the trademark items would total to P20,000 for the last half
of 2007.

Questions
1. In Macky‟s 2007 income statement, how much should be reported for royalty revenue?
a. P 14,000 b. P 13,000 c. P 11,000 d. P 9,000

2. In Macky‟s 2007 income statement, how much should be reported for rental revenue?
a. P 43,000 b. P 48,000 c. P 53,000 d. P 53,800

3. In Macky‟s 2007 income statement, how much should be reported as the total
investment income?
a. P 63,000 b. P 78,000 c. P 108,000 d. P 111,000

Solution
1. D
Royalty revenue for the 1st half of 2007 P 7,000
Royalty revenue for the 2nd half of 2007 2,000 (P20,000 x 10%)
Total royalty revenue P 9,000
2. C
Annual rental revenue P 48,000
Nonrefundable deposit (50,000/10) 5,000
Total rental revenue P 53,000
3. C
Royalty revenue P 9,000
Rental revenue 53,000
Dividend income 1,000
Share of income from equity investment 45,000 (P150,000 x 30%)
Total investment income P 108,000

Problem 23
In January of year 1, Divine Power paid P400,000 for 10,000 shares of Thy Grace voting
common stock, representing 15% interest in Thy Grace. At this date, the net assets of Thy
Grace totaled P2,000,000. The fair values of Thy Grace‟s identifiable assets and liabilities
were equal to their book values. Divine Power did not have the ability to exercise significant
influence over the operating and financial policies of Thy Grace. Divine Power received
dividend of P0.70 per share from Thy Grace on October, year 1. Thy Grace reported net
income of P250,000 for year ended December 31, year 1. The stock classified as available-
for-sale. Market price for the 10,000 shares was P450,000.

In July of year 2, Divine Power paid P1,500,000 for 30,000 additional shares of Thy Grace‟s
voting shares, which represents a 25% interest in Thy Grace. The fair value of Thy Grace‟s
identifiable assets, net of liabilities, was equal to their book values of P4,600,000. As a
result of this transaction, Divine Power has the ability to exercise significant influence over

33
the operating and financial policies of Thy Grace. Divine Power received dividend of P0.80
per share from Thy Grace on April, year 2, and P1.35 per share from Thy Grace on October,
year 2. Thy Grace reported net income for the six month ended July 31, year 2 for P200,000
and P300,000 for the year ended December 31, Year 2.
The market value of the stock at the end of Year 2 is P52.

Questions:
1. Amount of income from investment in Thy Grace that should be reported by Divine
Power in its year 1 Income Statement is:
a. P 7,000 b. P 37,500 c. P 57,000 d. P 87,500

2. The carrying value of the investment in Thy Grace that should be reported by Divide
Power in its year 1 Balance Sheet is:
a. P 393,000 b. P 400,000 c. P 443,000 d. P 450,000

3. Amount of income from investment in Thy Grace that should be reported by Divine
Power in its year 2 Income Statement:
a. P 48,500 b. P 70,000 c. P 120,000 d. P 71,500

4. The carrying value of the investment in Thy Grace that should be reported by Divide
Power in its year 1 Balance Sheet is:
a. P 1,916,500 b. P 1,923,500 c. P 1,938,500 d. P 2,080,000

Solution:
Year 1 AFS 400,000
Cash 400,000
Cash 7,000
Dividend income 7,000
Year 2 Cash 8,000
Dividend income 8,000
AFS 1,500,000
Cash 1,500,000
RE – beg 7,000
AFS 7,000
AFS – equity 37,500
RE – beg 37,500
Dividend income 8,000
AFS 8,000
Cash 54,000
AFS 54,000
AFS 30,000
Income from invest. 30,000
AFS 40,000
Income from invest. 40,000

34