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CHAPTER 6 - Audit of Investments

Problem 1
The following data pertains to Rainbow Corporations investments in marketable securities:

Trading
Available-for-sale

Cost
P 150,000
150,000

Market Value
12/31/07
12/31/06
P 155,000
P 100,000
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
Market value 12/31/07
Unrealized holding gain
2. A
Cost
Market value 12/31/07
Unrealized holding loss

P 100,000
155,000
P 55,000
P 150,000
130,000
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
12/31/06

Held-to-maturity
Security ABC
Trading Security
Security DEFP 150,000
Available-for-sale
Security GHI 190,000
Security JKL 170,000

2007 activities
Purc.
Sales
P 100,000

P 95,000

P 100,000
165,000
175,000

Security ABC was purchased at par.


temporary.

Fair value
12/31/07

155,000
P 175,000
160,000
All declines in fair values are considered to be

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

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

700,000
210,000
910,000

725,000
200,000
925,000

500,000
850,000
1,350,000

560,000
865,000
1,425,000

Securities to be Held to Maturity:


Security E
970,000
Security F
412,000
Totals
1,382,000

980,000
409,000
1,389,000

Trading Securities:
Security A
Security B
Totals
Securities Available for Sale:
Security C
Security D
Totals

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.

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.

1.

MES HTM
530,000
Unrealized holding loss (SHE)
120,000
MES SAS
650,000
2. b (Note: the unrealized holding loss should be amortized over the life
of the security)

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
brokers 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
Nov 15 Cash (60,000 750)
59,250
Investment in stock
45,029
(1,000 rights/3,000 rights x P135,088)
Gain on sale
14,221
Answer:
1. C
2. B

3. C

4. B

5. A

1999 Purchase
1,000
140,000
x
3 ______
3,000 140,000
_____ ( 4,912)
3,000 135,088

Split
Stock rights

Problem 6
Roelito Company has a fiscal year ending June 30. A summary of Roelitos 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

c. Investment common stock


Loss on conversion of stock
Investment preferred stock
b. Memorandum entry

47,500
1,500
49,000

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
Solution
Sept 6, 2000
July 15, 2003
Aug 7, 2005
Sept 6, 2005
Dec 4, 2005
Dec 2, 2006
Apr 4, 2007
Apr 15, 2007

c. P 5,557

Investment common
48,500
Cash
48,500
Investment common
49,000
Investment preferred
49,000
Memo entry
Investment common
53,000
Cash
53,000
Investment common
16,200
Dividend income
16,200
(shares outstanding 3,000/10 = 300 shares x P54)
Memo entry
Stock rights
5,557
Investment common
5,557
(Total investment to date P166,700 x 2/60 = P 5,557)
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

d. P 6,890

June 12, 2007

Cash

Answer:
1. B
2. C

32,400
Investment common
27,820
[6,473 + (500/1200 x P51,233)]
Gain on sale
4,580

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

P 125,000
160,000
700,000
P 985,000
50,000
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 (exright) 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 Companys common stock which represented a 20% investment in 2Success
Company. The fair value of all of the 2Success Companys 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 Companys operating and financial policies.

DreamBig Companys initial 10% interest of 25,000 shares of 2Success Companys


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 2Successs
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

2Success Company reported net income and paid dividends of:


Year ended December 31. 2006
Six months ended June 30, 2007
Six months ended December 31, 2007
(dividend was paid on 10/1/07

Year Ended
P350,000
200,000
370,000

Div. per Share


none
none
P 1.30

There were no other intercompany transactions between DreamBig Company and


2Success Company and there were no impairment of 2Success Companys asset at yearend.

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

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

6. Gain on sale of stock rights is:


a. P 3,600
b. P 2,800

d. P

c. P 1,200

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
Stock rights
16,000
Investment IstheKey
(1.50/15 x P160,000)
Cash
18,800
Stock rights
Gain on sale of stock rights
Investment 2Success
1,520,000
Cash

4,125
16,000
16,000
2,800
1,520,000

Investment 2Success
35,000
Retained earnings
35,000
To record share of income from 2Success for 2006 (10% x P350,000)
Investment 2Success
Income from investment
6 mos. ended June 30
6 mos. ended Dec. 31

131,000

131,000
200,000 x 10% = P 10,000
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
Less: Beginning bal.
Recovery
Answer:
1. A
2. D

3. A

2,500
50,000
47,500
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 Nagasakis 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 SUGARs ownership of Nagasaki, ABARCA SUGAR has the ability to exercise
significant influence over Nagasakis 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 Companys preferred stock into 1,500
shares of Shan Lilys 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
Ronettes common stock was P22 per share.

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. Nagasakis net income for the year ended
December 31, 2007 was P1,200,000.

At December 31, 2007, ABARCA SUGARs management intended to hold Nagasakis stock on
a long term basis with the remaining investments considered temporary. Market prices per
share of the marketable equity securities were as follows:
Shan Lily Co., preferred stock
Shan Lily Co., common stock
Azenith Corp., common stock
Ronette Co., common stock
Nagasaki Ryuco, Co., common

12/31/07
P 56
20
11
22
16

12/31/06
P 42
18
11
20
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

10

10. ABARCA SUGARs 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
Shan Lily preferred stock P 56 x 500 shares
= P28,000
Shan Lily common stock P 20 x 1,500 shares
= 30,000
Azenith common
P 11 x 3,500 shares
= 38,500
Ronette
P 22 x 1,700 shares
= 37,400
P133,900
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

Cost
P20,000
20,000
35,000
42,500
P117,500

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

11

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
ABS-CBN common

P 18
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
Piltel
P18 x 7,000 shares = P 136,000
ABS-CBN P14 x 2,000 shares = 28,000
P 154,000
5. Loss on expiration of the rights 1,000
Stock rights
1,000

12

Cost
P 133,000
30,000
P 163,000 = P9,000

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 MAEs 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

13

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
10. Cash dividends received from 2001 to 2004 totaled
a. P 100,000
b. P 75,000
c. P 50,000

75,000

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
04.01.01
500 shares
50,000 12.31.02
-do12.31.06
2,500 shares
275,000 12.31.03
-do12.31.04
-doJune 07
Sold, 2,500 shs.
06.30.07
Bal. 2,500 shs.
P245,000

P 12,500
12,500
12,500
12,500
250,000

(2) Investment account showing how the transactions should have been recorded:

01.07.00
04.01.01

INVESTMENT IN CHERRY MAE CHEMICALS CORP. COMMON STOCK


2,000 Shares
P220,000 Jan.06
Sold, 1,250 shs.
500 shares
50,000

01.31.06
Dec.06

Bal. 2,500 shares


Stock split,2,500 shs

P180,000
--

06.30.07

Bal., 2,500 shares

P 90,000

1.
2.
3.
4.
5.
8.
9.
10.

14

A
A
D
D
A
C
B
C

June07

Sold, 2,500 shs.

P270,000 / 3,750 shares = P72.00


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

P 90,000

90,000

Problem 11
The Stock Investment account of YAP, Inc. showed the following details:
1/01 Beg. bal. (2,000 shrs)
3/31 Purchased 300 shrs

STOCK INVESTMENT
40,000
2/28 Cash dividend
4,500
4/01 Sale of stock rights
6/30 Sale of 230 shares

1,000
3,000
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
January 1
Balance
January 31
Sold Ventanilla Stock
March 31
Bought Don Dave Common
June 30
Dividend on Suson Common
July 31
Sold Suson Common
August 31
Sold Jasmin bonds
September 30 Interest on Sucuahi Mortgage

Debit
188,300

Credit
21,364

12,125
10,000
8,750
22,083
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
CE: Cash
21,364
Loss on sale
636
Investment Ventanilla
(P22 x 1,000 shares)
Adj: Loss on sale
636
Investment Ventanilla
2. No adjustment
3. Dividend income
10,000
Investment Suson
4. OE: Cash
8,750
Investment Suson
CE: Cash
8,750
Receivable others
3,750
Investment Suson
(P7,300 x 100/200)
Gain on sale
Adj: Investment Suson
5,100
Receivable others
3,750
Gain on sale
5. OE: Cash
22,083
Investment Jasmin
CE: Cash
22,083
Investment Jasmin
Gain on sale
Interest income
Adj: Investment Jasmin
2,083
Gain on sale
Interest income
6. Investment Sucuahi
500
Interest income
Answer:
1. A
2. C
3. A
4. B
5. A

21,364
22,000
636
10,000
8,750
3,650
8,850
8,850
22,083
20,000
2,000
83
2,000
83
500
6. B

17

Problem 13
Siacor Inc. acquired 30% of Lozano Co.s voting stock for P200,000 on January 2, 2007.
Siacors 30% interest in Lozano gave Siacor the ability to exercise significant influence over
Lozanos 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 Siacors 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
+ income from investment
- dividends
Ending balance 12/31/03
3. B
Beginning balance 1/1/04
+ income from investment
(100,000 x 30%)
Balance June 30
Selling price
Cost (239,000 x 1/2 )
Gain on sale

200,000
24,000
( 15,000)
209,000
209,000
30,000
_______
239,000
150,000
119,500
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
Helen common
Maritess common

Cost
P 245,000
180,000
P 425,000

Market Value
P 230,000
182,000
P 412,000

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

18

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 Companys 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
a.
b.
c.
d.

its 2007 income statement, Marlisa should report a (an):


Gain on market recovery of P8,000.
Gain on market recovery of P10,000.
Unrealized loss of P13,000.
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
Total Market
Required Allowance Dec. 31
Less: Allowance Jan. 1
Recovery

425,000
412,000
13,000
23,000
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 Companys 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 Companys 5-year, P100,000
bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004, for
P108,660.
Date
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09

20

Cash
Received
P 7,000
7,000
7,000
7,000
7,000

Interest
Income

Bond Premium
Amortization

P 5,433
5,354
5,272
5,186
5,095

P 1,567
1,646
1,728
1,814
1,904

Carrying Value
of bonds
108,660
107,093
105,447
103,719
101,905
100,000

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

d. P 100,000

Solution
Cost
Net Asset Acquired
Excess over cost
Undervalue of asset
(720,000 x 25%)
Implied Goodwill

c. P 103,719

P 1,400,000
1,200,000
P 200,000
180,000
________
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 Companys permanent investment consists of the following:
3-year 8% P100,000 face value Paul Bonds (cost)
Cash surrender value of life insurance of the president
Available-for-sale securities held for long-term appreciation
of value (at cost)

P 96,500
15,000
180,000

The cost and market value of these securities are presented here:
Sony Incorporate
Macky Corporation
Ruela Company

Cost
80,000
60,000
40,000

Market
90,000
60,000
20,000

Additional information:
1. According to the companys 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
3

c. P

96,500

d. P 100,000

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
Long-term Investment
Cash surrender value of life insurance
Long-term MES, at market
Total
ANSWER:
1. C
2. C

22

3. A

4.A

5. C

- P 96,500
- P 15,000
- 170,000
- P185,000

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 Corporations 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 Michelles 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

d. P 120,000

c. P 107,400

3. What is the acquisition cost of Michelle Companys 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 **
Dividends ***
_________
6,198,000

156,000
120,000
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 brokers 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; brokers
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 brokers fee.
Dec 31 Cash

800,000
Premium paid on preferred stock
Dividend income
Dividend received on preferred stock investment
50,000
Investment in common stock
P1 per share on investment in common stock

200,000
600,000

Dec 31 Cash

50,000

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. Brokers fees exp.
20,000
d. Interest income
900,000
Investment in bonds
20,000 Brokers 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. Brokers fees exp. 20,000
c. Invest. in pref.
200,000
Invest. In pref.
20,000
Premium on PS
200,000
b. Brokers 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
Date
Sept. 05
28

Oct. 01
05
Nov. 30

Transactions
Purchase
Cash
dividends
to
stockholders or record
Sept 15, declared Aug.
15
Purchases
Sale at P65
Cash collected for sale
made on Nov. 10, after
a Nov. 1 declaration of
P5 cash dividend per
share to stockholders

AIM HIGH COMPANY


Shares Ref.
Debit
20,000
CD
P 1,000,000

50,000
20,000

CR
CD
CR

Credit

50,000

2,500,000
1,000,000

25

Dec. 15

on
record
as
of
December 1.
Cash dividend received
TOTAL

20,000
20,000

CR
CR

__________
P 3,500,000

3,300,000
150,000
P 4,500,000

On January 2, 2008, HOPE COMPANY purchased 39,000 shares of GOB BLESS YOU
COMPANYs 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 COMPANYs books was
P810,000. HOPE COMPANY attributed the excess of cost over carrying amount to goodwill.
HOPE COMPANYs 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 COMPANYs board of


reported earnings of P800,000 for the year ended
paid cash dividends of P200,000 during 2008. On
COMPANYs 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 COMPANYs 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 COMPANYs 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 COMPANYs 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
MES
OE: Cash
MES
CE: Cash
MES
Gain on sale

26

100,000
1,500,000
1,500,000

100,000
1,500,000
950,000
550,000

Adj: MES
Gain on sale
Dividend income
MES
OE: Cash
MES
CE: Cash
MES
Gain on sale
Adj: MES
Gain on sale

550,000
1,000,000
1,100,000
1,500,000
625,000

AIM HIGH COMPANY


OE: MES
Cash
CE: MES
Dividend Income
Cash
Adj: Dividend income
MES
OE: Cash
MES
CE: Cash
Dividend income
Adj: MES
Dividend income
OE: Cash
MES
Gain on sale
CE: Cash
MES
Gain on sale
Adj: MES
Gain on sale
OE: Cash
MES
CE: Cash
MES
Gain on sale
Dividend income
Adj: MES
Gain on sale
Dividend income
MES
Dividend income

1,000,000
950,000
50,000
50,000
50,000
50,000
50,000
1,300,000
1,300,000
50,000
3,300,000
3,300,000

2,300,000
150,000

GOB BLESS YOU COMPANY


MES
Cash
MES
Investment income
Cash
MES
Answer:
1. C
7. B

1,170,000
156,000

550,000
1,000,000
1,100,000
475,000
625,000
625,000

1,000,000
1,000,000
50,000
50,000
50,000
50,000
1,000,000
300,000
950,000
350,000
50,000
3,300,000
1,000,000
2,200,000
100,000
2,200,000
100,000
150,000

1,170,000
156,000

39,000
39,000
2. D
8. B

3. C

4. C

5. B

6. D

27

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
May 11

Sold 500 shares of El Salvador at P1, less P15


commission for broker

485

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

Oct 1

Nov 15

7,000

Sold Ronald bonds; 10 bonds P10,400, plus


accrued interest to date, and less P50
commission for broker

10,650

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

5,000
20,000
22,000
1,000
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

28

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
common is:
a. Marketable securities
Commission expense
b. Marketable securities
Commission payable
c. Marketable securities
Cash
d. No adjustment

15 transaction on the purchase of 1,000 share of Grace


2,000
2,000
2,000
2,000
2,000
2,000

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
a. Loss on sale of MS
Marketable securities
Interest income
b. Loss on sale of MS
Marketable securities
c. Loss on sale of MS
Marketable securities
Interest income
d. No adjustment

20 shares of Prince common on October 1 is:


650
350
300
350
350
600
300
300

29

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

d. P 74,750

c. P 74,150

Solution
1. Marketable securities
2,000
Brokers 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

30

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
April 30, 2007
Nov. 30, 2007

Dividend Income
Stock dividend
Samson Company common

250,000
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
years working papers, was P390,000.

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


Type of
Dividend
Stock
Cash
Cash

Date
Declared
March 15, 2007
Nov. 1, 2007
Dec. 1, 2007

Date of
Record
April 1, 2007
Nov. 15, 2007
Dec. 15, 2007

Date of
Payment
April 30, 2007
Nov. 28, 2007
Jan. 2, 2008

Rate
50%
P5/share
20%

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


Bid
Asked
Samson Company common
13
16
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

31

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 Corporations 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. Makys directors constitute a majority of Sonys
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

32

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 Mackys 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 Mackys 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 Mackys 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
Royalty revenue for the 2nd half of 2007
Total royalty revenue
P
2. C
Annual rental revenue
P
Nonrefundable deposit (50,000/10)
Total rental revenue
P
3. C
Royalty revenue
Rental revenue
Dividend income
Share of income from equity investment
Total investment income

7,000
2,000 (P20,000 x 10%)
9,000
48,000
5,000
53,000
P

9,000
53,000
1,000
45,000 (P150,000 x 30%)
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 Graces 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 availablefor-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 Graces
voting shares, which represents a 25% interest in Thy Grace. The fair value of Thy Graces
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

Year 2

34

AFS

Cash
Cash
Dividend income
Cash
Dividend income
AFS
Cash
RE beg
AFS
AFS equity
RE beg
Dividend income
AFS
Cash
AFS
AFS
Income from invest.
AFS
Income from invest.

400,000
7,000
8,000

400,000
7,000

8,000
1,500,000
1,500,000
7,000
7,000
37,500
37,500
8,000
8,000
54,000
54,000
30,000
30,000
40,000
40,000