Investment in Equity Securities

Problems – Multiple Choices

FELIX LIWAG DOMINGO, CPA, CMA

1. On January 1, 20x3, Abel Company purchase 40,000 shares of Cain at P100 per share. The
investment is measured at fair value through other comprehensive income. Brokerage fees
amounted to P120,000. A P5 dividend per share of Cain has been declared on December 15,
20x2, to be paid on March 31, 20x3 to shareholders of record on January 31, 20x3. No other
transactions occurred in 20x3 affecting the investment in Cain shares. What is the initial
measurement of the investment?

a. 4,120,000 c. 3,920,000
b. 4,000,000 d. 3,800,000

 Answer (c) is correct.

Purchase price (40,000 × 100) 4,000,000
Add: Brokerage fees 120,000
Total 4,120,000
Less: Dividend (40,000 × 5) (200,000)
Cost of investment 3,920,000
2. On January 1, 20x3, Adam Company purchase as a long-term investment 100,000 ordinary
shares of Mill Company for P40 per share. On December 31, 20x3, the market price of Mill’s
share was P35, reflecting a temporary decline in market price. On December 28, 20x4, Adam
Company sold 80,000 shares of Mill Company for P30 per share. For the year ended
December 31, 20x4, what amount be reported as loss on disposal of long-term investment?

a. 1,000,000 c. 800,000
b. 900,000 d. 400,000

 Answer (c) is correct.

Sale price (80,000 × 30) 2,400,000
Less: Cost of investment sold (80,000 × 40) (3,200,00)
Loss on disposal of investment (800,000)
3. Cash Company purchased 10,000 shares representing 2% ownership of Retail Company on
February 15, 20x3. Cash Company received a stock dividend of 2,000 shares on March 31,
20x3, when the carrying amount per share was P350 and the market value per share was
P400. Retail Company paid a cash dividend of P15 per share on September 15, 20x3. In the
income statement for the year ended October 31, 20x3, what should be reported as dividend
income?

a. 980,000 c. 180,000
b. 880,000 d. 150,000

 Answer (c) is correct.

Number of original shares 10,000
Add: Stock dividend 2,000
Total shares 12,000
Multiply by: Cash dividend per share × P15
Dividend income P180,000
4. During 20x3, Long Company bought the shares of Boddy Company as follows:

June 1 20,000 shares @ P100 2,000,000

December 1 30,000 shares @ P120 3,600,000
5,600,000
The transactions for 20x4 are:

January 10 Received cash dividend at P10 per share

January 20 Received 20% stock dividend
December 10 Sold 30,000 shares at P125 per share

If the FIFO approach is used, what is the gain on sale of the shares?

a. 1,150,000 c. 150,000
b. 950,000 d. 550,000
 Answer (a) is correct.
FIFO Approach Jun 1, 20x3 Dec 1, 20x3
Original shares 20,000 30,000
Stock Dividend – 20% 4,000 6,000
Total shares 24,000 36,000

Sales price (30,000 × P125) 3,750,000

Less: Cost of shares sold
For Jun 1, 20x3 (24,000 shares) 2,000,000
For Dec 1, 20x3 [6,000 shares × (3,600,000 × 600,000 (2,600,000)
6/36)]
Gain on sale 1,150,000
5. Walmart Company owns 20,000 shares of Home Sale Company’s 200,000 shares of P100 par,
6% cumulative non-participating preference share capital and 10shares representing 2%
ownership of Home Sale’s ordinary share capital. During 20x3, Home Sale declare and paid
preference dividends of P2,400,000. No dividends had been declared or unpaid during 20x2. In
addition, Walmart received 5% stock dividend on ordinary share from Home Sale when the
quoted market price of Home Sale’s ordinary share was P10. What amount should be reported
as dividend income in the 20x3 income statement?

a. 120,000 c. 240,000
b. 125,000 d. 245,000

 Answer (c) is correct. Dividend income on preference share (2,400,000 × 20/200)

P240,000
6. Day Company received dividends from share investment during the year ended December 31,
20x3 as follows:
● A stock dividend of 40,000 shares from Par Company on July 31, 20x3 when the market
price of Par’s share was P20. Day owns less than 1% of Par’s share capital.
● A cash dividend of P150,000 from Love Company in which Day owns a 25% interest. A
majority of Love’s directors are also directors of Day.

What amount of dividend revenue should be reported in 20x3?

a. 230,000 c. 80,000
b. 150,000 d. 0

 Answer (d) is correct. Stock dividend from Par Company is not an income. The cash
dividend from Love Company is not also an income because the interest is 25% and
therefore the equity model is used.
7. Worry Company provided the following data for 20x3:
● On September1, Worry received a P500,000 cash dividend from Seen Company in which
Worry owns a 30% interest.
● On October 1, Worry a P60,000 liquidating dividend from King Company. Worry owns a
5% interest in King.
● Worry owns 2% interest in Bow Company, which declared a P2,000,000 cash dividend on
November 15, 20x3 payable on January 15, 20x4.

What amount should be reported as dividend income for 20x3?

a. 600,000 c. 100,000
b. 560,000 d. 40,000

 Answer (d) is correct. Cash dividend from Bow Company (2,000,000 × 20%) P40,000
8. During 20x3, Neil Company held 30,000 shares of Brock Company’s 100,000 outstanding
shares and 6,000 of Drake Company’s 300,000 outstanding shares. During the year, Neil
received P300,000 cash dividend from Brock, P15,000 cash dividend and 3% stock dividend
from Drake. The closing price of Drake share is P150. What amount should be reported as
dividend revenue for 20x3?

a. 342,000 c. 442,000
b. 315,000 d. 15,000

 Answer (d) is correct. Cash dividend from Drake Company P15,000

9. On March 1, 20x3, Evan Company purchase 10,000 ordinary shares of LBC at P80 per share.
On September 30, 20x3, Evan received 10,000stock rights to purchase an additional 10,000
shares at P90 per share. The stock rights had an expiration date on February 1, 20x4. On
September 30, 20x3, LBC’s share had a market value of P95 and the stock right had a market
value of P5. What amount should be reported on September 30, 20x3 for investment in stock
rights?

a. 150,000 c. 50,000
b. 100,000 d. 60,000

 Answer (c) is correct. Stock rights are initially measured at fair value, (10,000 shares × 5)
P50,000
10. Rice Company owned 30,000 ordinary shares of Wood Company acquired on July 31, 20x3, at
a total cost of P1,100,000. On December 1, 20x3, Rice received 30,000 stock rights from
Wood. Each right entitles the holder to acquire one share at P45. The market price of Wood’s
share on this date was P50 and the market price of each stock right was P10. Rice sold its right
on December 31, 20x3 for P450,000 less a P10,000 commission. What amount should be
reported as gain from the sale of the rights?

a. 150,000 c. 250,000
b. 140,000 d. 240,000

 Answer (b) is correct.

Net sale price (450,000 – 10,000) 440,000
Less: Initial cost of rights sold (30,000 × 10) (300,000)
Gain on sale of rights 140,000
11. Adam Company owned 50,000 ordinary shares of Blend Company. These 50,00 shares were
purchased by Adam in 20x1 for P120 per share. On August 30, 20x3, Blend distributed 50
stock rights to Adam and was entitled to buy one new share of Blend Company for P90 cash
and two of these rights. On August 30, 20x3, each share had a market value of P130 and each
right had a market value of P20. What total cost should be recorded for the new shares that are
acquired by exercising the rights?

a. 2,250,000 c. 3,050,000
b. 3,250,000 d. 5,500,000

 Answer (b) is correct.

Cash paid for new share (25,000 shares × 90) 2,250,000
add: Initial cost of rights sold (50,000 × 20) 1,000,000
Total cost of new shares 3,250,000
12. Dome Company issued rights to subscribe to its stock, the ownership of 4 shares entitling the
shareholders to subscribe for 1 share at P100. Bean Company owns 50,000 shares of Dome
Company with total cost of P5,000,000. The share is quoted right-on at 125. The stock rights
are accounted for separately. What is the cost of the new investment if all of the stock rights
are exercised by Bean Company?

a. 1,500,000 c. 1,562,000
b. 1,250,000 d. 1,450,000

 Answer (a) is correct. Theoretical value of right [(125 – 100) ÷ (4 + 1)] P5

Cash paid for new share [50,000 shares ÷ 4) × 100] 1,250,000
add: Initial cost of rights sold (50,000 × 5) 250,000
Total cost of new shares 1,500,000
13. On January 1, 20x3, Mylene Company purchased 50,000 shares of another entity for
P3,600,000. On December 1, 20x3, the entity received 50,000 stock rights from the investee.
Each right entitled shareholder to acquire one share for P85. The market price of the investee’s
share was P100 immediately before the rights were issued and P90 immediately after the rights
were issued. On December 1, 20x3, the entity exercised all stock rights. On December 31,
20x3, the entity sold 25,000 shares at P90 per share. The stock rights are not accounted
separately. The FIFO approach is used. What is the gain on sale of investment that should be
recognized in 20x3?

a. 450,000 c. 287,500
b. 700,000 d. 125,000
 Answer (a) is correct.
Shares Costs
Original investment 50,000 3,600,000
New investment acquired through stock rights (50,000 × 50,000 4,250,000
85)
Total 100,000 7,850,000

FIFO Approach
Sales price (25,000 × P90) 2,250,000
Less: Cost of shares sold (3,600,000 × 25/50) (1,800,000)
Gain on sale 450,000
Items 14 to 15 are based on the following information:

On January 1, 20x1, Chris Company purchased 20,000 shares of Bay Company, P100 par, at P110
per share. On March 1, 20x1, Bay Company issued rights to Chris Company, each permitting the
purchase of ¼ shares at par. No entry was made. The bid price of the share was 140 and there
was no quoted price for the rights. On April 1, 20x1, Chris Company paid for the new shares
charging the payment to the investment account. Since Chris Company felt that it had been
assessed by Bay Company, the dividends received from Bay Company in 20x1 and 20x2 (10% on
December 31 of each year) are credited to the investment account until the debit was fully offset.

On January 1, 20x3, Chris Company received 50% stock dividend from Bay Company. On same
date, the shares received as stock dividend were sold at P160 per share and the proceeds were
credited to income. On December 31, 20x3, the share of Bay Company were split 2 for 1. Chris
Company found that each new share was worth P5 more than the P110 paid for the original shares.
Accordingly, Chris Company debited investment account with the additional shares received at
P110 per share and credited income. On June 30, 20x4, Chris Company sold one-half of the
investment at P92 per share and credited the proceeds to the investment account.
14. What is the balance of the investment on December 31, 20x4 as it was kept by Chris
Company?

a. 3,150,000 c. 2,200,000
b. 2,650,000 d. 4,950,000

 Answer (b) is correct.

Shares Costs
1/1/20x1 Purchase shares (20,000 × 110) 20,000 2,200,000
4/1/20x1 Rights exercise [(20,000 × ¼) × 100) 5,000 500,000
12/31/20x1 Dividend received [(25,000 × 10%) × 100] 0 (250,000)
12/31/20x2 Dividend received [(25,000 × 10%) × 100] 0 (250,000)
12/31/20x3 Additional stocks received (25,000 × 110) 25,000 2,750,000
6/30/20x Investment sold (25,000 × 92) (25,000) (2,300,000)
25,000 2,650,000
15. Using the “average method”, what is the correct balance of the investment on December 31,
20x4?

a. 2,200,000 c. 900,000
b. 1,800,000 d. 0

 Answer (c) is correct.

Shares Costs
1/1/20x1 Purchase shares (20,000 × 110) 20,000 2,200,000
4/1/20x1 Rights exercise [(20,000 × ¼) × 100) 5,000 500,000
1/1/20x3 Stock dividend (25,000 × 50%) 12,500 0
Balance 37,500 2,700,000
1/1/20x3 Sale [2,700,000 × 12,500/37,500)] (12,500) (900,000)
Balance 25,000 1,800,000
12/31/20x3 Stock split (2 to 1) 25,000 0
Balance 50,000 1,800,000
6/30/20x Sale (1,800,000 × 1/2) (25,000) (900,000)
Balance 25,000 900,000