ACCOUNTING FOR INVESTMENTS

THEORIES
1. It is any contract that gives rise to both a financial asset of one entity and
a financial liability or an equity instrument of another entity
a. Financial instrument
b. Equity instrument
c. Debt instrument
d. Derivative instrument

2. A financial asset is any asset that is (choose incorrect answer)

a. Cash
b. Contractual right to receive cash or another financial asset from
another entity
c. A contractual right to exchange financial instruments under
conditions that are potentially unfavorable - favorable
d. An equity of another entity

3. It is any contract that evidences residual interest in the assets of an entity

after deducting all of its liabilities
a. Equity instrument
b. Debt instrument
c. Loan and receivable
d. Loans receivable

4. Financial assets include all of the following except

a. Prepaid expenses
b. Cash on bank
c. Trade accounts receivable
d. Loans receivable

5. A financial liability is any liability that is a contractual obligation

I. To deliver cash or other financial asset to another entity

II. To exchange financial instruments with another entity under
conditions that are potentially unfavorable
a. I only
b. II only
c. Both I and II
d. Neither I and II
6. These are assets held by an enterprise for the accretion of wealth, for
capital appreciation or for other benefits accruing to the investing
enterprise

a. Investments
b. Inventories
c. Property, plant and equipment
d. Current assets
7. When current investments are carried at market value
a. Unrealized gains or losses are not recognized
b. Unrealized gains and losses are recognized and included in equity
c. Unrealized gains and losses are recognized and included in
determination of income
d. Current assets

8. Long-term investments are

a. Acquired primarily for accretion of wealth
b. Readily realizable
c. Classified as current assets
d. Intended to be held for more than one year

9. Specifically, these securities represent ownership shares such as

common stock, preferred stock and other capital stock

a. Equity securities
b. Debt securities
c. Marketable securities
d. Current investments

10. It is the date on which the stock and transfer book of the corporation is
closed for registration. Only those stockholders registered as of this date
are entitled to receive dividends
a. Date of declaration
b. Date of record
c. Date of payment
d. Date of mailing
 CHAIN PROBLEMS
PROBLEM NO. 1

On January 2, 2014, Choco Company acquired 20% of the 400,000 shares of outstanding
common stock of Milk Corporation for P30 per share. The purchase price was equal to
Milk’s underlying book value. Choco plans to hold this stock to influence the activities of
Milk.

The following data are applicable for 2014 and 2015:

Milk dividends (paid Oct. 31)Milk earningsMilk stock market price at year-end

2014 P 40,000 140,000 32

2015 P 48,000 160,000 31

On January 2, 2016, Choco Company sold 20,000 shares of Milk stock for P31 per share.
During 2016, Milk reported net income of P120,000, and on October 31, 2016, Milk paid
dividends of P20,000. At December 31, 2016, after a significant stock decline, which is
expected to be temporary, Milk’s stock was selling for P22 per share. After selling the
20,000 shares, Choco does not expect to exercise significant influence over Milk, and
the shares are classified as available for sale.

QUESTIONS:

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

1. Carrying value of Investment in Milk as of December 31, 2014 a. P12,020,000 c.

P2,420,000b. P 2,500,000 d. P2,388,000

2. Carrying value of Investment in Milk as of December 31, 2015 a. P2,442,400 c.

P12,042,400b. P2,612,000 d. P 2,372,000

3. Gain or loss on sale of Investment in Milk on January 2, 2016

a. P2,390,600 loss c. P33,000 loss

b. P 9,400 gain d. P27,000 gain

4. The income from investment in BBB, Inc. in 2015 is a. P 3,000 c. P4,000 b. P24,000 d. P 0

5. Net unrealized loss on available for sale securities as of December 31, 2016
a. P671,800

b. P511,800

c. P639,000 d. P459,000

123

Suggested Solution: Question No. 1

Acquisition cost (400,000 x 20% x P30) Dividends received(P40,000 x

20%) Investment income (P140,000 x 20%) Carrying value, 12/31/04

Question No. 2

Carrying value, 12/31/04 (see no. 1) Dividends received (P48,000 x 20%)

Investment income (P160,000 x 20%) Carrying value, 12/31/05

Question No. 3

Sales proceeds (20,000 x P31)Less carrying value of investment sold

(P2,442,400 x 20/80) Gain on sale of investment

Question No. 4

Dividend income (P20,000 x 15%*)

* [20% (20,000/400,000 x 100%)] Question No. 5

P2,400,000 (8,000) 28,000 P2,420,000 P2,420,000

(9,600) 32,000 P2,442,400

P620,000 610,600

9,400 P3,000

P2,442,400 610,600 1,831,800 1,320,000 P 511,800

Carrying value, 12/31/05Less carrying value of investment soldCarrying value, 12/31/06
- before reclassification Fair value of AFS, 12/31/06 [(80,000 - 20,000) x P22] Unrealized
loss on AFS

Answers:1)C; 2)A; 3)B; 4)A, 5)B PROBLEM NO. 10

You were able to gather the following in connection with your audit of Obando, Inc. On
December 31, 2015, Obando reported the following available for sale securities:

124

ERAP Corp., 10,000 shares of common stock (a 1%

interest)GMA Corp., 20,000 shares of common stock

(a 2% interest)FVR Corp., 50,000 shares of common stock

(a 10% interest) Total

Additional information:

Cost

P 250,000

320,000

1,400,000 P1,970,000

Market

P 220,000

300,000

1,350,000 P1,870,000

Unrealized loss

P 30,000 20,000

50,000 P100,000
 • On April 1, 2016, ERAP issued 10% stock dividend when the market
price of its stock was P24 per share.

• On September 15, 2016, ERAP paid cash dividend of P0.75 per share.

• On August 30, 2016, GMA 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 of
stock and P1.50 per right. Obando sold all rights on December 1, 2016 for net proceeds
of P37,600.

• On July 1, 2016, Obando paid P3,040,000 for 100,000 additional shares
of FVR Corp.’s common stock which represented a 20% investment in FVR. The fair
value of all of FVR’s identifiable assets net of liabilities was equal to their carrying
amount of P12,700,000. As a result of this transaction, Obando owns 30% of FVR and
can exercise significant influence over FVR’s operating and financial policies.

• Obando’s initial 10% interest of 50,000 shares of FVR’s common stock

was acquired on January 2, 2015 for P1,400,000. At that date, the net assets of FVR
totaled P11,600,000 and the fair values of FVR‘s identifiable assets net liabilities were
equal to their carrying amount.

• Market prices per share of the securities which are all listed in the
Philippine Stock Exchange, are as follows: ERAP Corp. – common GMA Corp. – common
FVR Corp. – common

12/31/2016P23 P22

12/31/2015

125

14 15 31 27

• FVR reported net income and paid dividends of:Net income

Dividend per share None None

P1.30
 Year ended December 31, 2015Six months ended June 30, 2016Six months ended
December 31, 2016

(dividend was paid on 10/1/2016)

P700,000 400,000

740,000

• There were no other intercompany transactions between Obando and FVR.

QUESTIONS:

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

1. Net unrealized gain or loss on available for sale securities as of

December 31, 2016a. P95,000 gain c. P 5,000 lossb. P37,000 loss d. P55,000 loss

2. Net adjustment to Retained Earnings as of January 1, 2016 as a result of

the purchase of additional shares of stock of FVR Corp.a. P 70,000 c.
P58,000b. P210,000 d. P 0

3. Net investment income from FVR Corp. for year ended December 31,
2016 a. P237,500 c. P262,000 b. P225,000 d. P305,000

4. Carrying amount of Investment in FVR Corp. as of December 31, 2016 a. P4,674,500 c.

P4,577,000b. P4,677,000 d. P4,540,500 5. Gain on sale of stock rights on December 1,
2016

a. P 0 b. P2,050

Suggested Solution: Question No. 1 c.

P7,600

d. P5,600

Available-for-sale securities, 1/1/06 Receipt of stock rights from GMA,

8/30

(P300,000 x 1.5/15)Reclassification of Investment in FVR AFS, 12/31/06 before mark-to-

market
P 1,870,000

(30,000) (1,350,000) 490,000

126

Fair value of AFS, 12/31/06:GMA [(10,000 x 1.1) x 23] P253,000 ERAP (20,000 x 14)
280,000

Decrease in unrealized loss on AFS Unrealized loss on AFS, 12/31/05 (P100,000 - P2,000
- P50,000)

(see note below)

Unrealized loss, 12/31/06 - as adjusted

533,000 43,000

48,000 5,000

Note: Alternatively, the unrealized loss on AFS can be computed by comparing the total
fair value and total cost of AFS as of December 31, 2016. Incidentally, the journal entries
to record the receipt of stock rights and reclassification of the investment in FVR follow:

Stock rights P 32,000 Available for sale securities (P300,000 x 1.5/15)

Unrealized loss on AFS (P20,000 x 1.5/15)

P30,000 2,000

Investment in associateAvailable for sale securities

Unrealized loss on AFS

Questions No. 2 to 4

Reclassification of investment in FVR (see no. 1) Retroactive adjustment (cost to equity

method):

Share in NI for 2015 (P700,000 x 10%) Adjusted balance, 1/1/06Cost of additional

100,000 sharesNet investment income for 2016:
Share in NI for six months ended 6/30 (P400,000 x 10%)

Share in NI for six months ended 12/31 [P740,000 x (10%+20%)]

Dividends received[(50,000 shares + 100,000 shares) x 1.3]

P1,400,000P1,350,000

50,000

P1,400,000

70,000 1,470,000 3,040,000

262,000

(195,000) P 4,577,000

(2)

(3)

(4)

Carrying value of investment in FVR, 12/31/06

P40,000 222,000

Note: The excess of cost over the book value of net assets acquired will be attributed to
Goodwill. Therefore, the excess will not affect the investment income and the carrying
value of the investment since Goodwill is not amortized.

127

Question No. 5

Sales proceedsLess cost of stock rights (see no. 1) Gain on sale of stock rights

Answers:1)C; 2)A; 3)C; 4)C, 5)D PROBLEM NO. 11

P37,600 32,000 P 5,600

 Paombong Corporation purchased P200,000 8% bonds for P184,557 on January 1, 2014.
Paombong classified the bonds as available for sale. The bonds were purchased to yield
10% interest. Interest is payable semiannually on July 1 and January 1. The bonds
mature on January 1, 2009. Paombong uses the effective interest method to amortize
premium or discount. On January 2, 2016, Paombong sold the bonds for P185,000 after
receiving interest to meet its liquidity needs.

The market values of the bonds are as follows:

December 31, 2014 P190,449 December 31, 2015 186,363

QUESTIONS:

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

1. Interest income for the year 2014a. P14,869 c. P18,517 b. P16,000 d. P18,456

2. Unrealized gain on AFS as of December 31, 2014

a. P3,436

b. P3,375

3. Interest income for the year 2015

a. P18,775

b. P15,272

c. P5,892 d. P 0

c. P16,000 d. P18,701

4. Unrealized gain or loss on AFS as of December 31, 2015

a. P8,053 gain c. P3,351 gain

b. P3,486 loss d. P1,806 loss

5. Realized gain or loss on sale of AFS on January 2, 2016

a. P6,861 loss

b. P4,714 loss
c. P4,849 loss

d. P9,416 gain 128

Suggested Solution:

Question No. 1

The following amortization schedule will be useful in computing for the requirements:

Date 01/01/04 07/01/04 12/31/04 07/01/05 12/31/05 07/01/06

12/31/06 07/01/07 12/31/07 07/01/08 12/31/08

Effective Nominal interest interest

P9,228 P8,000 9,289 8,000 9,354 8,000 9,421 8,000 9,492 8,000 9,567
8,000 9,645 8,000 9,728 8,000 9,814 8,000 9,905 8,000

Discount amortization

P1,228 1,289 1,354 1,421 1,492 1,567 1,645 1,728 1,814 1,905

Carrying value

P184,557 185,785 187,074 188,428 189,849 191,341 192,908 194,553

196,281 198,095 200,000

P 9,228 9,289 P18,517

1/1/04 to 6/30/04 (see amortization schedule) 7/1/04 to 12/31/04 (see amortization

schedule) Total interest income for 2014

Note: PAS 39 par. 55(b) states that a gain or loss on an availableforsale financial asset
shall be recognized directly in equity, through the statement of changes in equity,
except for impairment losses and foreign exchange gains and losses, until the financial
asset is derecognized, at which time the cumulative gain or loss previously recognized in
equity shall be recognized in profit or loss. However, interest calculated using effective
interest method shall be recognized in profit or loss.

Question No. 2

Fair value the bonds, 12/31/04Carrying value, 12/31/04 (see amortization schedule)
Unrealized gain on AFS, 12/31/04
Question No. 3

1/1/05 to 6/30/05 (see amortization schedule) 7/1/05 to 12/31/0 (see amortization

schedule) Total interest income for 2015

P190,449 187,074 P 3,375

P 9,354 9,421 P18,775

129

Question No. 4

Fair value the bonds, 12/31/05Carrying value, 12/31/05 (see amortization schedule)
Unrealized loss on AFS, 12/31/05

Incidentally, the adjusting entry on 12/31/05 follows:

P186,363 189,849

(P

3,486)

Unrealized gain on AFS Unrealized loss on AFS

Available for sale securities

Question No. 5

Sales proceedsUnrealized loss on AFSNetCarrying value, 12/31/05 (fair value) Realized

loss on sale of AFS

P 3,375 3,486

P6,861P185,000

( (P

3,486) 181,514 186,363

4,849)
 Note: PAS 39 par. 26 states that on derecognition of a financial asset in its entirety, the
difference between (a) the carrying amount and (b) the sum of the consideration
received and any cumulative gain or loss recognized directly in equity, shall be
recognized in profit or loss. Incidentally, the journal entry to record the sale is:

CashRealized loss on sale of AFS

Available for sale securities Unrealized loss on AFS

Answers:1)C; 2)B; 3)A; 4)B, 5)C PROBLEM NO. 12

P185,000 4,849

P186,363 3,486

On June 1, 2015, Pandi Corporation purchased as a long term investment 4,000 of the
P1,000 face value, 8% bonds of Violet
Corporation. The bonds were purchased to yield 10% interest. Interest is payable semi-
annually on December 1 and June 1. The bonds mature on June 1, 2011. Pandi uses the
effective interest method of amortization.
On November 1, 2016, Pandi sold the bonds for a total consideration of P3,925,000.
Pandi intended to hold these bonds until they matured, so year-to-year market
fluctuations were ignored in accounting for bonds.

130

QUESTIONS:

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

(Round off present value factors to four decimal places)

1. The purchase price of the bonds on June 1, 2015 is a. P3,645,328 c. P3,696,736 b.

P3,691,132 d. P3,624,596

2. The interest income for the year 2015 isa. P215,850 c. P212,829 b.
P215,521 d. P211,612

3. The carrying value of the investment in bonds as of December 31, 2015

is
a. P3,725,919 c. P3,719,986

b. P3,649,541 d. P3,671,490

4. The interest income for the year 2016 isa. P306,607 c. P311,218 b. P310,715 d.
P304,748

5. The gain on sale of investment in bonds on November 1, 2016 is a. P21,196

b. P80,235

Suggested Solution: Question No. 1

PV of principal (P4,000,000 x 0.5568)PV of interest [(P4,000,000 x 4%) x

8.8633] Purchase price

Question No. 2

June 1 to Nov. 30 (P3,645,328 x 10% x 6/12) Dec. 1 to Dec. 31 (P3,667,594 a

a
x 10% x 1/12) Total interest income for 2015 Computation of carrying
value,12/1/05:

Carrying value, 6/1/05 Add discount amortization,

6/1/05 to 11/30/05:Effective interest (P3,645,468 x 10% x 6/12)

Nominal interest (P4,000,000 x 8% x 6/12) Carrying

value, 12/1/05 c. P 27,632 d. P104,045

P2,227,200 1,418,128 P3,645,328

P182,266 30,563 P212,829

P182,266 160,000

P3,645,328

22,266 P3,667,594

131
Question No. 3

Carrying value, 12/1/05 (see no. 2) Add discount amortization,

12/1/05 to 12/31/05:Effective interest (P3,667,594 x 10% x 1/12)

Nominal interest (P4,000,000 x 8% x 1/12)

Carrying value, 12/31/05

Question No. 4

Jan. 1 to May 31 (P3,667,594 x 10% x 5/12) June 1 to Nov. 1 (P3,690,974 b

b
x 10% x 5/12) Total interest income for 2016 Computation of carrying
value,6/1/06:

Carrying value, 12/1/05 Add discount amortization,

12/1/05 to 5/31/06Effective interest (P3,667,594 x 10% x 6/12)

Nominal interest (P4,000,000 x 8% x 6/12)

Carrying value, 6/1/06

Question No. 5

Total proceedsLess accrued interest (P4,000,000 x 8% x 5/12) Sales proceedsLess

carrying value, 11/1/06 (see below)Gain on sale on investment in bonds

Computation of carrying value,11/1/06:

Carrying value, 6/1/06 (see no. 4) Add discount amortization,

6/1/06 to 11/1/06Effective interest (P3,690,974 x 10% x 5/12) Nominal interest

(P4,000,000 x 8% x 5/12)

Carrying value, 11/1/06 Answers:1)A; 2)C; 3)D; 4)A, 5)B

P3,667,594 P30,563

26,667

3,896 P3,671,490
P152,816 153,791 P306,620

P3,667,594 P183,380

160,000

P3,925,000 133,333 3,791,667 3,711,432 80,235

23,380 P3,690,974

132

P153,791 133,333

P3,690,974

20,468 P3,711,432

PROBLEM NO. 13

On May 1, 2013, Plaridel Corporation acquired P1,600,000 of J & B

Corporation 9% bonds at 97 plus accrued interest. Interest on bonds is payable

semiannually on March 1 and September 1, and bonds mature on September 1, 2016.
Plaridel intends to hold these bonds until they matured.

Due to an isolated event that is beyond Plaridel’s control, is nonrecurring and could not
have been reasonably anticipated by Plaridel, the company sold bonds of P480,000 for
103 plus accrued interest on May 1, 2014.

On July 1, 2015, bonds of P640,000 were exchanged for 90,000 shares of J & B
Corporation, common, no par value, quoted on the market on this date at P8 per share.
Interest was received on bonds to date of exchange.

On September 1, 2016, remaining bonds were redeemed and accrued interest was
received.

QUESTIONS:
 Based on the above and the result of your audit, determine the following:

(Use the straight line amortization method)

1. Total interest income for 2013 is

a. P96,000 c. P105,600 b. P86,400 d. P106,800

2. The carrying value of the investment in bonds as of December 31, 2013

is

a. P1,561,600 c. P1,562,800 b. P1,540,000 d. P1,564,000

3. The gain on sale of the bonds on May 1, 2014 is

a. P 0 c. P 2,880 b. P4,320 d. P24,480

4. The gain on exchange the bonds on July 1, 2015 is

a. P 0 c. P57,920 b. P86,720 d. P73,280

5. Total cash received by the company on September 1, 2016 is

a. P501,600 b. P523,200 c. P480,000 d. P508,800

Suggested Solution: Question No. 1

Nominal interest (P1,600,000 x 9% x 8/12) Discount amortization for

2013 (P48,000 x 8/40) Total interest income for 2013

Question No. 2

Carrying value, 5/1/03 (P1,600,000 x 97%) Add discount amortization for 2013 (see no.
1) Carrying value, 12/31/03

Question No. 3

Selling price (P480,000 x 1.03) Less carrying value of bonds sold:

Face valueLess unamortized bond discount, 5/1/04

to 9/1/06 (P48,000 x 480/1,600 x 28/40) Gain on sale of investment in bonds

P 96,000 9,600 P105,600

P1,552,000 9,600 P1,561,600

P494,400

469,920 P 24,480

P480,000 10,080

PAS 39 par. 52 states that whenever sales or reclassifications of more than an

insignificant amount of heldtomaturity investments do not meet any of the conditions in
par. 9, any remaining heldtomaturity investments shall be reclassified as available for
sale. Since the sale of the bonds on May 1, 2014 is due to an isolated event that is
beyond
Plaridel’s control, is nonrecurring and could not have been reasonably anticipated by
Plaridel, the investment is not required to be reclassified as available for sale.

Question No. 4

Fair value of stocks received (P90,000 x P8) Less carrying value of bonds exchanged:

Face valueLess unamortized bond discount, 7/1/05

to 9/1/06 (P48,000 x 640/1,600 x 14/40) Gain on exchange of bonds

Question No. 5

Face value of remaining bonds (P1,600,000 - P480,000 - P640,000)

P640,000 6,720

P720,000

633,280 P 86,720

P480,000 21,600 P501,600

Interest, 3/1/06 to 9/1/06 (P480,000 x 9% x 6/12) Total cash received, 9/1/06

Answers:1)C; 2)A; 3)D; 4)B, 5)A 134

PROBLEM NO. 14

Pulilan Company’s accounting records showed the following investments at January 1,

2016:

Common stock:Jang Company (1,000 shares) Geum Company (5,000 shares)

Parking lot (leased to Jewel Company) TrademarkTotal investments Additional

information:

P 500,000 5,000,000 2,500,000 2,000,000 P10,000,000

• Pulilan owns 1% of Jang and 30% of Geum. During the year ended
December 31, 2016, Pulilan received cash dividends of P350,000 from Jang and
P750,000 from Geum, whose 2016 net earnings were P4,000,000 and P10,000,000
respectively.

• The Jewel lease which commenced on January 1, 2015 is for 5 years at

an annual rental of P1,250,000. In addition, on January 1, 2015, Jewel paid a
nonrefundable deposit of P400,000 as well as a security deposit of P250,000, to be
refunded upon expiration of lease. Pulilan received P1,250,000 rent from Jewel in 2016.

• The trademark was licensed to Palace Company for royalties of 10% of

sales of the trademark items. Royalties are payable semiannually on March 1, for sales
in July through December of the prior year, and on September 1, for sales in January
through June of same year. On March 1, 2015 and 2016, Pulilan received royalties of
P500,000 and P750,000, respectively. On September 1, 2015 and 2016, Pulilan received
royalties of P1,000,000 and P1,500,000 respectively. Palace Company’s sales of the
trademarked items totaled P4,000,000 for the last half of 2016. QUESTIONS: Based on
the above and the result of your audit, determine the following:

1. Total income from investments in equity securities

a. P3,350,000

b. P1,100,000

2. Rent income for 2016 a. P1,250,000

b. P1,330,000

c. P4,100,000 d. P3,000,000

c. P1,650,000 d. P1,380,000

135

3. Royalty income for 2016 a. P1,500,000

b. P2,000,000

Suggested Solution: Question No. 1 c.

P2,500,000

d. P1,900,000

Dividend income from JangInvestment income from Geum (P10,000,000 x 30%) Total
income from investments in equity securities

Question No. 2

Annual rentalAmortization of lease bonus (P400,000/5) Rent income for 2016

Question No. 3

January to June 2016July to December 2016 (P4,000,000 x 10%)

Royalty income for 2016

Answers: 1) A; 2) B; 3) D

THEORIES:
1. A
2. C
3. A
4. A
5. C
6. A
7. C
8. D
9. A
10. B