Exercise Problems

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OOFINANCIAL ASSETS AT FAIR VALUE

Problem 1

On January 1, 2019, Levea Company purchased marketable equity securities to be held as "trading" for
P5,000,000. The entity also paid commission, taxes, and other transaction costs amounting to P200,000
The securities had a market value of P5,500,000 on December 31, 2019 and the transaction costs that
would be incurred on sale are estimated at P110,000. No securities were sold during 2019. What
amount of unrealized gain or loss on these securities should be reported in the 2019 income statement?

a. 500,000 unrealized gain

b. 500,000 unrealized loss

c. 300,000 unrealized gain

d. 400,000 unrealized gain

Solution:

Fair Value 5,500,000

Acquisition cost- trading 5,000,000

Unrealized Gain-included in profit or loss 500,000

Problem 2

Mintaro Company acquired a financial instrument for P4,000,000 on March 31, 2021. The financial
instrument is classified as financial asset at fair value through other comprehensive income. The direct
acquisition costs incurred amounted to P700,000. On December 31, 2021, the fair value of the
instrument is P5,500,000 and the transaction costs that would be incurred on the sale of the investment
are estimated at P600,000. What gain should be realized in other comprehensive income for the year
ended December 31, 2021?

a. 200,000

b. 900,000

c. 800,000

d. 0

Fair Value- December 31, 2021 5,550,000

Acquisition cost (4,000,000 + 700,000) 4,700,000

Unrealized gain – other comprehensive income 800,000


Problem 3

On December 31, 2020, Fay Company appropriately reported a P100,000 unrealized loss. There was no
change in 2021 in the composition in the portfolio of marketable equity securities held as financial asset
at fair value through other comprehensive income. Pertinent data are as of follows:

Market value

Security Cost December 31, 2021

A 1,200,000 1,300,000

B 900,000 500,000

C 1,600,000 1,500,000

3,700,000 3,300,000

What amount of loss on these securities should be included in the statement of comprehensive income
for the year ended December 31, 2021 as component of other comprehensive income?

a. 400,000

b. 300,000

c. 100,000

d. 0

Solution:

Market Value – (12-31-21) 3,300,000

Market Value – (12-31-20) (3,700,000 -100,000) 3,600,000

Unrealized loss in 2021 (300,000)

Unrealized loss (12-31-20) (100,000)

Cumulative unrealized loss (400,000)

EQUITY

Problem 4

On January 1, 2018, ABC Company purchased 40,000 shares of RST at P100 per share. The investment in
measurement at fair value through other comprehensive income. Brokerage fees measured to
P120,000. A P5 dividend per share of RST had been declared on December 15, 2017 to be paid on March
31, 2018 to shareholders of record on January 31, 2018. No other transactions occurred in 2018
affecting the investment in RST shares.

What is the initial measurement of the investment?

a. 4,120,000
b. 4,000,000

c. 3,920,000

d. 3,800,000

Solution:

Purchase price (40,000 x 100) 4,000,000

Brokerage fee 120,000

Total 4,120,000

Less: Purchased dividend (40,000 x 50) 200,000

Cost of Investment 3,920,000

Problem 5

Care Company received dividends from its share investments during the year ended December 31, 2011
as follows:

• A stock dividend of P4,000 shares from Part Company on July 31, 2011 when the market price of
Part's share was P20. Care owns less than 1% of Part's share capital.

• A cash dividend of P150,000 from Shark Company in which Day owns a 25% interest. Majority of
Shark’s director are also directors of Care.

What amount of dividend revenue should Care report in its 2011 income statement?

a. 230,000

b. 150,000

c. 80,000

d. 0

The share dividend from Part Company is not an income. The cash dividend from Shark Company is not
also an income but a reduction of investment because the interest is 25% and therefore the equity
method is used.

Problem 6

On March 1, 2016 Chris Company purchased 10,000 ordinary shares of LV Corp. at P80 per share. On
September 30, 2016, Chris received 10,000 stock rights to purchase an additional 10,000 shares at P90
per share. The stock rights had an expiration date on February 1, 2017. On September 30, 2016, LVC's
share had a market value P95 and the stock right has a market value of P5.
What amount should Chris report in its September 30, 2016 statement of financial position for
investment in stock rights?

a. 150,000

b. 100,000

c. 50,000

d. 60,000

SOLUTION:

Initial measurement of stock rights (10,000 rights x 5 ) 50,000

Under PFRS 9, stock rights are now initially measured at fair value.

INVESTMENT IN ASSOCIATE

Problem 7

On January 1, 2020, Elite Company paid P 18,000,000 for 50,000 ordinary shares of Craze Company
which represent a 25% interest in the in the net assets of Craze. The acquisition cost is equal to the
carrying amount of the net assets acquired. Elite has the ability to exercise significant influence over
Craze. Elite received a dividend of P35 per share from Craze in 2020. Craze reported net income of
P9,600,000 for the year ended December 31, 2020. In the December 31, 2020 statement of financial
position, what amount should be reported as investment in Craze Company?

a. 22,150,000

b. 20,400,000

c. 18,650,000

d. 18,000,000

SOLUTION:

Acquisition cost- January 1 18,000,000

Add: Share in Net Income (50,000x9,600,000) 2,400,000

Total 20,400,000

Less: Cash dividend received (50,000x P35) 1,750,000

Carrying amount of investment – December 31 18,650,000

Problem 8

On July 1, 2015, Denver Company purchased 30,000 shares of Eagle Company's 100,000 outstanding
ordinary shares for P200 per share. On December 15, 2015, Eagle paid P400,000 in dividends to its share
ordinary shareholders. Eagle's net income for the year ended December 31, 2015 was P1,200,000,
earned evenly throughout the year. In its 2015 income statement, what amount of income from the
investment should Denver report?

a. 360,000

b. 180,000

c. 120,000

d. 60,000

SOLUTION:

Share in Net income from July 1 to December 31, 2015 (1,200,000x6/12x30%) 180,000

Interest acquired (30,000/100,000) 30%

Problem 9

On January 1, 2012, Cheetah Company purchased 30% interest in Pod Company for P2,500,000. On this
date Pod's shareholders' equity was P5,000,000. The carrying amount of Pod's identifiable net assets
approximated their fair values, except for land whose fair value exceeded its carrying amount by
P2,000,000. Pod reported net income of P1,000,000 for 2012 and paid no dividends. Cheetah accounts
for this investment using the equity method. In its December 31, 2012 statement of financial position,
what amount should Cheetah report as investment in associate?

a. 2,100,000

b. 2,200,000

c. 2,800,000

d. 2,760,000

SOLUTION:

Acquisition Cost 2,500,000

Less: Carrying amount of net assets acquired (30%x 5,000,000) 1,500,000

Excess of cost over carrying amount 1,000,000

Less: Amount attributable to undervaluation of land(30%x2,000,000) 600,000

Goodwill-not amortized 400,000

Acquisition cost, January 1 2,500,000

Add: Share in net income (30% x 1,000,000) 300,000


Carrying amount of investment 2,800,000

The excess of cost attributable to the land is not amortized because the land is nondepreciable.

Problem 10

On January 1, 2020, Bonus Company acquired 10% of the outstanding ordinary shares of Bill Company.
On January 1, 2021, Bonus gained the ability to exercise significant influence over financial and
operating control of Bill by acquiring an additional 20% of Bill's outstanding ordinary shares.

The two purchases were made at prices proportionate to the value assigned to Bill's net assets, which
equaled their carrying amounts. For the years ended December 31, 2020 and 2021, Bill reported the
following:

2020 2021

Dividend paid 2,000,000 3,000,000

Net income 6,000,000 6,500,000

What total amount of revenue should Bonus Company include in profit or loss for the year ended
December 31, 2021?

a. 1,000,000

b. 1,950,000

c. 2,350,000

d. 1,550,000

SOLUTION:

2021 Investment income (6,500,000 x 30%) 1,950,000

2020 investmen income ( 10% x 6,000,000) 600,000

Less: Dividend income recorded in 2021

(10% x 2,000,000) 200,000

Effect of change in equity method 400,000

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