1. On January 2, 2014, Frodo Inc. acquired 20% of the outstanding ordinary shares of Arwen Company for P700,000.

This investment gave Frodo the ability to exercise significant influence over Arwen. The book value of the acquired
shares was P600,000. The excess cost over book value was attributed to a depreciable asset which was undervalued
on Peaces balance sheet and which had ten years useful life remaining. For the year ended December 31, 2014,
Arwen reported net income after tax of P180,000, unrealized gain on its investment at fair value to other
comprehensive income of P100,000; remeasurement loss on defined benefit pension plan of P200,000 and paid cash
dividend of P60,000.

How much is the carrying value of Hopes investment in Peace at December 31, 2014?

2. Selene Company issued rights to subscribe to its stock, the ownership of 4 shares entitling the shareholders to
subscribe for 1 share at P100. Luna Company owns 50,000 shares of Selene Company with total cost of P5,000,000.
The share is quoted right-on at 125.

What is the cost of the new investment if all of the stock rights are exercised by the investor?

3. Galadriel Corporation acquired 30% of Gimli Companys 100,000 voting stock on Janaury 2, 2014 for P2,000,000
when the net assets of Gimli Company was P6,000,000. Galadriel earned P1,000,000 and P1,500,000 in 2014 and
2015, respectively. Gimli Company paid dividends of P300,000 in 2014 and P500,000 in 2015. Market value of Gimlis
ordinary sahres is P80 and P90 per share for December 2014 and 2015 respectively.

On Janaury 2, 2015, Galadriel Company sold 40% of its investment at the prevailing market price of P80 per share.

a. What total amount of gain or loss should Galadriel Company recognize on January 2, 2015 in its profit or loss?
b. If after the sale, Galadriel Company designated the retained investment as investment at fair value to other
comprehensive income, what amount of unrealized gain or loss should be reported in its December 31, 2015?
c. If after sale, the retained investment was reclassified as investment to profit or loss, what total amount
should be reported in the profit or loss related to the security throughout the year 2015?

4. Haymitch Company has 40,000 shares of equity instrument of Sand Corporation. These shares were acquired at P40
per share on January 2, 2014. On December 31, 2014, Haymitch Company sold 30,000 shares of its investment in
Effie Corporation at the prevailing fair value of P50 per share. The remaining securities were sold on December 15,
2015 for P60 per share.

What amount of gain or loss should be reported in the companys profit or loss as a result from selling the
security?

5. On November 1, 2015, Katniss Company invested P600,000 in equity securities representing 20,000 ordinary shares
of Gale Company. The investment was classified as equity securities to profit or loss since the company intends to
sell the security for a short-term profit. On December 31, 2014, this investment has a market value of 580,000. On
January 15, 2016, Katniss Company sold the investment for P630,000.

What amount of realized gain should Katniss Company recognize on the disposal of the trading security?
6. During 2015, Primrose Company purchased marketable securities designated as fair value to other comprehensive
income. At December 31, 2015, the balance in the fair value adjustment account was P350,000 credit. There were
no security transactions during 2015. Pertinent data on December 31, 2015 are:
Securities Historical Cost Market
C P 1,500,000 P 1,425,000
P 1,250,000 1,200,000
A 2,250,000 2,087,500
Total P 5,000,000 P 4,712,500

a. By what total amount the financial instrument had increased its value in 2015?
b. What amount of unrealized loss should Primrose Company report in its 2015 shareholders equity?

7. Lars Company with a business model of collecting all the contractual cash flows pertaining to interest and principal
of outstanding debt instruments, purchased at face on January 2, 2014 a 6-year 12% P5,000,000 face value bond.

Lars Company is in dire need of cash to finance the acquisition of a long-lived asset to be used in its continuing
operation. On December 1, 2015, the company unitarily decided to dispose partly its debt investment. The sale was
completed on December 31, 2015 and the company managed to sell 25% of the debt instrument at the prevailing
rate of 14%.

On January 1, 2016, the management made an assessment on the companys business model in managing their
financial asset (debt instrument) and has decided to reclassify the debt instrument from amortized cost valuation to
fair value to profit or loss due frequent disposals.

a. What total amount of gain or loss should the company recognize as a result of transfer?
b. What is the amount of gain or loss from the sale of the securities?

8. On January 1, 2010, Eisley Company purchased 10% P10,000,000 10-year bonds with interest payable on December
31 of each year. The bonds purchase price is P10,811,100. The effective interest rate was 8.75%. The company has a
business model of collecting all contractual cash flows on all its debt securities. On December 31, 2015, when the
bonds amortized cost was P10,407,192 and a fair value at a market rate of 7.75% of P10,749,340, the company sold
P1,000,000 bonds at the current fair value.

Since the company sold more than an insignificant amount of its debt security investment the management has
decided to reclassify the debt instrument to investment measured at fair value to profit or loss because the business
model is no longer appropriate.

a. What is the amount of gain or loss from the sale should the company recognize?
b. At what amount should the investment at fair value through profit or loss account initially recognized on
January 1, 2016?

9. On January 1, 2104, Jedi Corporation purchased 2,000 of the P1,000 face value, 9%, 10-year bonds of Sith Inc. The
bonds mature on January 1, 2024, and pay interest annually beginning January 1, 2015. At the time of acquisition
the market rate of interest of similar debt instrument is 11%.

What is the fair value of the debt instrument at the time of acquisition?

10. Naberrie Company purchased a debt security instruments with a face value of P5,000,000 on July 1, 2014. The 5-
year 12% bonds were issued on January 2, 2014 and will mature on January 2, 2019. Interest is payable annually
every December 30. Market rate of interest for a similar debt instrument at the time of acquisition is 10% that is also
the market rate of interest for a similar debt instrument at the time the instrument was issued.

What is the fair value of the debt instrument at the time of acquisition?
11. In January 2014, Aragorn Company acquired 20% of the outstanding ordinary shares of Gandalf Company for
P2,457,600. This investment gave Aragorn Company the ability to exercise significant influence over Gandalf. The
book value of the acquired share was P2,022,400. The excess of cost over book value was attributed to the building
which was undervalued on Gandalfs balance sheet and that had a remaining useful life of ten years.

For the year ended December 31, 2014, Gandalf Company reported net of tax income of P504,000 and paid cash
dividends of P112,000 on its ordinary share. Income tax rate is 32%.

a. By what amount did Gandalf Companys building was understated?

b. What is the proper carrying value of Aragorns investment in Gandalf at December 31, 2014?

12. On January 1, 2015, Cupid Company purchased bonds with face amount of P5,000,000 at a cost of P4,700,000 to be
held as financial asset at amortized cost. The stated interest is 10% payable annually every December 31. The bonds
mature in 4 years.

What amount of interest income should be reported for the year ended December 31, 2015 under the effective
interest method?

13. On January 1, 2015, Lancy Company purchased serial bonds with face amount of P3,000,000 and stated 12% interest
payable annually every December 31. The bonds are to be held as financial asset at amortized cost with a 10%
effective yield. The bonds mature at an annual instalment of P1,000,000 every December 31.

What is the present value of the serial bonds on January 1, 2015?

14. On January 2, 2014, Legolas Company purchased 25% of Boon Comporations ordinary shares; no goodwill resulted
from the purchase. Legolas appropriately carried this investment at equity and the balance in Legolas investment
account at December 31, 2014 was P1,900,000. Boon Company reported net income of P1,200,000 for the year
ended December 31, 2014 and paid ordinary share dividends totalling P480,000 during 2014.

How much did Legolas Company pay for its 25% interest in Boon Company?