Pre-Test 9

Answer this test wisely and show your solution. (5 Points)

1. On January 2, 2009, Chandler Company acquired 5,000 ordinary shares of Grand Corporation for
P340,000 including P10,000 transaction cost. Chandler Company intends to hold the investment
indefinitely. At the end of 2009, Grand Company paid P10 cash dividend to all of its
shareholders. In June 2010, there was a complete turnaround in Grand’s operation due to
financial crisis, its management decided to dissolve and complete the dissolution by paying all its
shareholder P65 per share as liquidating dividends on December 31, 2012. The present rate of
return for a similar instrument as of December 31, 2010 is 10%.

Question 1: What is the carrying value of Chandler’s investment in Grand Company that should be
reported in its 2010 financial statement?
a. P244,177 c. P268,593
b. P298,454 d. P340,000
Answer: C
Expected cash inflow (P65 x P5,000 shares) P325,000
x Present value factor of 10% after 2 yrs 0.82644
FMV of the investment – 12.31.10 P268,593

Question 2: What amount of impairment loss should Chandler Company recognize in 2010?
a. P21,407 c. P61,407
b. P51,407 d. P71,407
Answer: D
FMV of Investment – 12.31.10 P268,593
Less: Carrying value of investment P340,000
Impairment loss P 71,407

Investment in Associate
2. On January 2, 2010, Power Company purchased 15% of Plant Corporation’s ordinary shares for
P3,000,000. This investment did not give Power the ability to exercise significant influence over
Plant Corporation. During 2010, Plant reported net income of P1,750,000 and paid cash dividends
of P1,000,000 on its ordinary shares. As of December 31, 2010, the market value of Plant
Corporation’s shares is not clearly and readily determinable. What is the balance in Power’s
investment in plant Corporation’s account at December 31, 2010?
a. P3,000,000 c. P3,112,500
b. P3,150,000 d. P3,262,500
Answer: A
Note: PAS 28, paragraph 6, states that if an investor holds, 20% or more of the voting power of the
investee, it is presumed that the investor does have significant influence, unless it can be clearly
demonstrated otherwise.
 3. On January 2, 2010, Moore Company purchased 10% of Dem Corporation’s ordinary shares for
P3,000,000. This investment did not give Moore the ability to exercise significant influence over
Dem but intends to hold the investment indefinitely. During 2010, Dem reported net income of
P1,750,000 and paid cash dividends of P1,000,000 on its ordinary shares. What is the amount of
income from investment that Moore should recognize in its investment in Dem Corporation at
December 31, 2010?
a. P100,000 c. P150,000
b. P200,000 d. P350,000
Answer: A
Dividends P1,000,000
x % of interest 10%
Dividend Income P 100,000

4. On January 1, 2009, Oval Company purchased 10% of the outstanding ordinary share of Tin
Corporation for P800,000, when the fair value of Tin’s net assets was P4,000,000. Oval does not
have the ability to exercise significant influence over the operating and financial policies of Tin.
The following data concerning Tin are available for 2010:
12.31,09 12.31,10
Net income P1,200,000 P1,000,000
Dividends declared & paid 0 2,500,000

Question 1: In its income statement for the year ended December 31, 2010, how much should Oval report
from this investment?
a. None c. P100,000
b. P220,000 d. P250,000
Answer: B
Cumulative net income P2,200,000
x % of interest 10%
Investment Income P 220,000

Question 2: What is the carrying value of Oval’s investment in Tin as of December 31, 2010?
a. P770,000 c. P800,000
b. P830,000 d. P460,000
Answer: A
Original cost P800,000
Less: Return of investment
Total Dividends declared P2,500,000
Less: Cumulative net income P2,200,000
Excess P 300,000
x % of interest 10% P 30,000
Carrying Value of investment P770,000

Note: The investor recognizes income only to the extent that it receives distributions from the
accumulated net profits of the investee arising subsequent to the date of acquisition by the investor.
Distributions received in excess of such profits are considered a recovery of investment and are recorded
as a reduction of the cots of the investment.

5. On January 2, 2010, Hope, Inc. acquired 20% of the outstanding ordinary shares of Peace
Company for P700,000 investment gave Hope the ability to exercise significant influence over
Peace. The book value of the acquired shares was P600,000. The excess of the over book value
was attributed to a depreciable asset which was undervalued on Peace’s balance sheet and which
had 10- years useful life remaining. For the year ended December 31, 2010, Peace reported net
income after tax of P180,000 and paid cash dividends of P60,000 on its ordinary. Income tax rate
is 32%. How much is the carrying value of Hope’s investment in Peace at December 31, 2010?
a. P678,000 c. P690,000
b. P714,000 d. P717,200
Answer: B
Acquisition cost P700,000
Add/Deduct:
Net understatement of dep’r (10,000)
Share in NI (180,000 x 20%) 36,000
Share in Dividends (60,000 x 20%) (12,000)
Carrying Value P714,000

Acquisition cost P700,000

Less: BV of net assets P600,000
Net Excess P100,000
÷ Remaining life of asset 10 years
Net understatement of dep’r P 10,000