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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
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.
II.
a.
b.
c.
d.

To deliver cash or other financial asset to another entity


To exchange financial instruments with another entity under
conditions that are potentially unfavorable
I only
II only
Both I and II
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.
b.
c.
d.

Equity securities
Debt securities
Marketable securities
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

CHAINPROBLEMS
PROBLEMNO.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 Milks 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, Milks 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
SuggestedSolution:QuestionNo.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
QuestionNo.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
QuestionNo.3
Sales proceeds (20,000 x P31)Less carrying value of investment sold
(P2,442,400 x 20/80) Gain on sale of investment
QuestionNo.4
Dividend income (P20,000 x 15%*)
*[20%(20,000/400,000x100%)]QuestionNo.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

P
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)BPROBLEMNO.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 FVRs 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 FVRs operating and financial policies.
Obandos initial 10% interest of 50,000 shares of FVRs 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 FVRs
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
SuggestedSolution:QuestionNo.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)
(seenotebelow)
Unrealized loss, 12/31/06 - as adjusted
P
533,000 43,000
48,000 5,000

Note:Alternatively,theunrealizedlossonAFScanbecomputedbycomparingthetotal
fairvalueandtotalcostofAFSasofDecember31,2016.Incidentally,thejournalentries
torecordthereceiptofstockrightsandreclassificationoftheinvestmentinFVRfollow:
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
QuestionsNo.2to4
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:Theexcessofcostoverthebookvalueofnetassetsacquiredwillbeattributedto
Goodwill.Therefore,theexcesswillnotaffecttheinvestmentincomeandthecarrying
valueoftheinvestmentsinceGoodwillisnotamortized.
127
QuestionNo.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)DPROBLEMNO.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
SuggestedSolution:
QuestionNo.1
Thefollowingamortizationschedulewillbeusefulincomputingfortherequirements:
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:PAS39par.55(b)statesthatagainorlossonanavailableforsalefinancialasset
shallberecognizeddirectlyinequity,throughthestatementofchangesinequity,except
forimpairmentlossesandforeignexchangegainsandlosses,untilthefinancialassetis
derecognized,atwhichtimethecumulativegainorlosspreviouslyrecognizedinequity

shallberecognizedinprofitorloss.However,interestcalculatedusingeffectiveinterest
methodshallberecognizedinprofitorloss.
QuestionNo.2
Fair value the bonds, 12/31/04Carrying value, 12/31/04 (see
amortization schedule) Unrealized gain on AFS, 12/31/04
QuestionNo.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
QuestionNo.4
Fair value the bonds, 12/31/05Carrying value, 12/31/05 (see
amortization schedule) Unrealized loss on AFS, 12/31/05
Incidentally,theadjustingentryon12/31/05follows:
P186,363 189,849
(P
3,486)

Unrealized gain on AFS Unrealized loss on AFS


Available for sale securities
QuestionNo.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:PAS39par.26statesthatonderecognitionofafinancialassetinitsentirety,the
differencebetween(a)thecarryingamountand(b)thesumoftheconsiderationreceived
andanycumulativegainorlossrecognizeddirectlyinequity,shallberecognizedin
profitorloss.Incidentally,thejournalentrytorecordthesaleis:
CashRealized loss on sale of AFS
Available for sale securities Unrealized loss on AFS
Answers:1)C; 2)B; 3)A; 4)B, 5)CPROBLEMNO.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:
(Roundoffpresentvaluefactorstofourdecimalplaces)
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
SuggestedSolution:QuestionNo.1
PV of principal (P4,000,000 x 0.5568)PV of interest [(P4,000,000 x 4%) x
8.8633] Purchase price
QuestionNo.2
June 1 to Nov. 30 (P3,645,328 x 10% x 6/12) Dec. 1 to Dec. 31
(P3,667,594a x 10% x 1/12) Total interest income for 2015
a

Computationofcarryingvalue,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
QuestionNo.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
QuestionNo.4
Jan. 1 to May 31 (P3,667,594 x 10% x 5/12) June 1 to Nov. 1
(P3,690,974b x 10% x 5/12) Total interest income for 2016
b

Computationofcarryingvalue,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
QuestionNo.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
Computationofcarryingvalue,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
PROBLEMNO.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 Plaridels 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:
(Usethestraightlineamortizationmethod)
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

SuggestedSolution:QuestionNo.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
QuestionNo.2
Carrying value, 5/1/03 (P1,600,000 x 97%) Add discount amortization
for 2013 (see no. 1) Carrying value, 12/31/03
QuestionNo.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

PAS39par.52statesthatwheneversalesorreclassificationsofmorethanan
insignificantamountofheldtomaturityinvestmentsdonotmeetanyoftheconditionsin
par.9,anyremainingheldtomaturityinvestmentsshallbereclassifiedasavailablefor
sale.SincethesaleofthebondsonMay1,2014isduetoanisolatedeventthatisbeyond
Plaridelscontrol,isnonrecurringandcouldnothavebeenreasonablyanticipatedby
Plaridel,theinvestmentisnotrequiredtobereclassifiedasavailableforsale.
QuestionNo.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
QuestionNo.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)A134

PROBLEMNO.14
Pulilan Companys 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 Companys 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
SuggestedSolution:QuestionNo.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
QuestionNo.2
Annual rentalAmortization of lease bonus (P400,000/5) Rent income for
2016
QuestionNo.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