INVESTMENTS

Problem 4-1

Jon Snow Company purchased 10,000 shares of JS Corp.’s ordinary shares at P50 share on
January 3, 2021 and classified the investment as fair value investment. On August 31, 2021, Jon
Snow received 5,000 shares of JS ordinary shares in lieu of cash dividend of P25 per share. On
this date, the JS Corp.’s ordinary share has a quoted market price of P30 per share. The fair value
of JS Corp.’s ordinary share on Dec. 31, 2021 is P 45 per share.

How much is the total income that should be reported in the statement of comprehensive income
for the year 2021?
a. 0
b. 150,000
c. 250,000
d. 175,000

Problem 4-2

Arya Stark, Inc. bought 40% of AS Corp.’s outstanding ordinary shares on January 2, 2021, for
P4,000,000. The carrying amount of AS’s net assets at that date totaled P9,000,000. Fair values
and carrying amounts were the same for all items except for a machinery, for which fair value
exceeded its carrying amount by P900,000. The machinery has an estimated remaining useful life
of 15 years. During 2021, AS Corp.’s reported net income of P1,200,000 and paid a total P 200,000
cash dividend. During 2022, AS Corp.’s reported a net profit of P825,000 and Arya Stark received
a cash dividend of P40,000.

1. How much from the acquisition cost is attributable to goodwill?

a. 0
b. 376,000
c. 400,000
d. 40,000

2. How much is the carrying value of investment on December 31, 2022?

a. 4,642,000
b. 4,376,000
c. 4,666,000
d. 4,650,000

Problem 4-3

On October 1, 2021, Varys Company purchased a P2,000,000 face value 10% debt instrument
for P1,977,800 and classified this as investment at fair value through profit or loss. The effective
rate for this type of investment is 12%. The debt instrument pays interest semi-annually on June
1 and December 1. On December 31, 2021, the fair market value of the instruments is 97.
1. How much is the interest income for the year 2021?
a. 116,667
b. 50,000
c. 59,334
d. 47,778

2. How much is the unrealized gain or loss that should be taken to profit or loss for the year
2021?
a. 28,867
b. 37,800
c. 47,800
d. 38,270

Problem 4-4

On January 1, 2021, Lannister Company purchased 3,000 of the P1,000 face value, 9%, 5-year
debt instruments of JL Company. The debt instruments mature on January 1, 2022 and pay
interest annually beginning December 31, 2021. The debt instruments were purchased to yield
an 11% rate of interest. The bonds were classified as Investment at amortized cost. Present value
factors were as follows:

PV factor of 11% after 5 periods .5935

PV factor of ordinary annuity of 11% after 5 periods 3.6959

On July 1, 2022, Lannister sold P1,000,000 face value at a prevailing market rate of 10.5%. As a
result of the sale, the management decided to change its current business model to a business
model in managing the financial assets wherein any changes in fair value of the investment are
taken to profit or loss. The fair value of investment on December 31, 2022 is 10% and remained
unchanged at the end of 2023.

1. How much is the carrying value of investment that should be reported in the statement of
financial position on December 31, 2022?
a. 2,853,558
b. 1,950,242
c. 1,926,118
d. 1,902,372

2. How much is interest income for the year 2023?

a. 180,000
b. 209,261
c. 195,024
d. 190,237

Problem 4-5

On January 1, 2021, Daenerys Targaryen Corp. acquired 20,000 shares of the 125,000
outstanding of DT Company’s ordinary shares for P5,000,000. Daenerys Targaryen does not have
any significant influence nor control over the financial and operating policy of DT. DT Company
reported during 2021 a total net income of P4,000,000 and distributed dividends of P400,000. On
January 1, 2022, Daenerys Targaryen purchased additional 10,000 ordinary shares at P260 per
share. The net assets of DT are fairly valued. During 2022, DT Company reported net income of
P2,000,000 and distributed a total dividend of P100,000.

1. What is the carrying value of Investment on December 31, 2022?

a. 7,800,000
b. 8,256,000
c. 8,700,000
d. 5,456,000

Problem 4-6

On January 1, 2021, Little Finger Corp. acquired 200,000 shares of the 625,000 outstanding
shares of LF Corp.’s ordinary shares for P3,200,000. LF Corp. reported during 2021 a total net
income of P4,000,000. LF Corp. also distributed total dividends at year end of P1,000,000. On
January 1, 2022, LF Corp. received P7,500,000 arising from additional shares sold by LF Corp.
which Little Finger did not purchase any of these shares. The shares were sold at P20/share. LF
Corp. reported during 2022 a net income of P2,500,000 and distributed a total dividends of
P400,000.

1. How much is the total net dilution gain/loss that should be recognized by Little Finger Corp.?
a. 668,000
b. 840,000
c. 60,000
d. 90,000

2. What is the carrying value of Investment in LF Corp. on December 31, 2022?

a. 3,912,000
b. 4,100,000
c. 4,000,000
d. 4,520,000

Problem 4-7

On January 2, 2021, Baratheon Company decided to convert one of its building into an investment
property that is to be carried at fair value. The building was previously used as an owner-occupied
property. The building was acquired on January 1, 2019 at a cost of P10,000,000 with an
estimated useful life of 10 years using the straight-line method. The fair value of the building on
January 2, 2021 was reliably valued at P7,500,000.

What amount should be taken directly to equity on the date of transfer?

a. 0
b. 500,000
c. 1,500,000
d. 7,500,000
Problem 4-8

On January 1, 2020, Stark Company purchased a debt instrument for P8,711,250. The market
rate for this type of investment is 8.25%. The debt instrument pays a contract rate of 5% on the
face value of P10,000,000 at the end of each financial year for five years. The effective rate is
7.5% as a result of transaction cost paid by Stark amounting to P277,700. The fair values of the
debt instrument are 98 and 101 on December 31, 2020 and December 31, 2021, respectively.
The business model in managing the financial assets is to collect contractual cash flows and to
sell the debt instrument in an open market.

1. How much is the carrying value of the investment on December 31, 2021?
a. 10,100,000
b. 9,800,000
c. 9,350,355
d. 9,492,058

2. How much is the total amount of income recognized in the statement of comprehensive
income for the year 2021?
a. 112,766
b. 300,000
c. 987,234
d. 800,000

Problem 4-9

On January 31, 2021, Greyjoy Corp. acquired 35,000 shares of the 125,000 ordinary shares
outstanding of GJ Inc. at P25 per share. The book value of GJ Inc.’s net assets on this date
amounted to P3,000,000. All identifiable assets had fair values equal their book values. GJ
reported total comprehensive income in 2021 at P550,000 which is net of a foreign translation
loss amounting to P500,000. It also distributed total dividends at year-end amounting to
P500,000. Fair value of shares on December 31, 2021 was at P34 per share.

On January 1, 2022, Greyjoy sold 15,000 shares at fair value existing at the end of 2021. During
2022, Greyjoy reported net income of P800,000 and distributed total dividends amounting to
P100,000. Fair value per share on December 31, 2022 is P37.

1. How much is the total net amount of income that should be reported in profit or loss for the
year ended 2022 assuming the investment was reclassified to FVOCI?
a. 166,000
b. 201,500
c. 261,500
d. 245,500
2. How much is the total net amount of income that should taken to profit or loss for the year
ended 2022 assuming the investment was reclassified to FVPL?
a. 166,000
b. 201,500
c. 261,500
d. 245,500

Problem 4-10

Drogon Company purchased 150,000 ordinary shares of the 750,000 ordinary shares and 50,000
preference shares of the 200,000, P100 par, 12% cumulative preference shares of DRGN
Company. On December 31, 2021, DRGN company reported net income of P3,000,000 and
declared dividends to preference shareholders.

How much is the total income taken to 2021 profit or loss statement related to the Investment
in Associate?

a. 120,000
b. 720,000
c. 600,000
d. 480,000