INTERMEDIATE ACCOUNTING 1 – (Investment)

1. The following are taken from the records of Lunch Co. as of year-end.
Cash 10,400 Investment in subsidiary 44,000

Accounts receivable 12,000 Treasury shares 44,800

Allowance for bad debts (1,600) Investment in bonds 9,600

Note receivable 4,000 Land 112,000

Interest receivable 1,600 Building 208,000

Claim for tax refund 9,600 Accum. depreciation (52,000)

Advances to suppliers 4,800 Investment property 40,000

Inventory 60,000 Biological assets 24,000

Prepaid expenses 4,000 Intangible assets 56,000

Petty cash fund 800 Deferred tax assets 48,000

Investment in equity Cash surrender value 9,600

securities 10,400

Investment in associate 16,000 Sinking fund 16,000

How much are the total financial assets disclosed in the notes?

Use the following information for the next three questions:

On January 1, 20x1, ABC Co. purchased 1,000 shares of XYZ, Inc. for ₱250,000. Commission paid to broker
amounted to ₱10,000. The equity securities were designated by management to be measured at fair value
through profit or loss. On December 31, 20x1, the shares are quoted at ₱200 per share. It was estimated that
transaction cost of ₱20 per share will be incurred if the shares were sold on that date.

2. How much is the unrealized gain (loss) on change in fair value recognized in the 20x1 profit or loss?

3. On January 3, 20x2, all the shares were sold at ₱300 per share. Commission paid for the sale amounted to ₱60,000.
How much is the realized gain (loss) from the sale?

4. If ABC Co. uses an allowance account to account for changes in fair values, how much is the balance of this account
on December 31, 20x1?

Use the following information for the next three questions:

On Jan. 1, 20x1, Three Co. purchased 10,000 shares of AM, Inc. for ₱1,000,000. Three Co. paid broker’s
commission of ₱15,000 on the acquisition. Three Co. made an irrevocable choice to subsequently measure the
shares at fair value through other comprehensive income. The quoted prices per share on Dec. 31, 20x1 and
Dec. 31, 20x2 were ₱90 and ₱108, respectively. On Jan. 3, 20x3, Three Co. sold all the shares at ₱105 per share.
Three Co. paid broker’s commission of ₱16,000 on the sale.

5. How much is the unrealized gain (loss) recognized in Three Co.’s 20x1 profit or loss?
6. How much is the unrealized gain (loss) recognized in Three Co.’s 20x2 other comprehensive income?
1|Page
7. How much is the cumulative gain (loss) transferred to retained earnings on Jan. 3, 20x3?

8. On January 1, 20x1, ABC Co. purchased ₱1,000,000 bonds at a price that reflects a yield rate of 14%. The bonds
mature on January 1, 20x4 and pay 12% annual interest. The bonds are classified as held for trading securities. On
December 31, 20x1, the bonds are selling at a yield rate of 10%. How much is the unrealized gain (loss) on the
change in fair value recognized in ABC’s 20x1 profit or loss?

9. On January 1, 20x1, Impressed Co. acquired 8%, ₱1,000,000 face amount, 4-year ‘term’ bonds for ₱936,603. The
bonds are measured at amortized cost and have a yield rate of 10%. How much is the carrying amount of the
investment on December 31, 20x2?

10. On October 1, Dennis Company purchased ₱200,000 face value, 12% bonds at 98 plus accrued interest and
brokerage fees and classified them as amortized cost assets. Interest is paid semiannually on January 1 and July
1. Brokerage fees for this transaction were ₱700. At what amount should this acquisition of bonds be recorded?

11. On August 1, 2004, Bettis Company acquired ₱120,000 face value, 10% bonds of Hanson Corporation at 104 plus
accrued interest. The bonds were dated May 1, 2004, and mature on April 30, 2009, with interest payable each
October 31 and April 30. The bonds are classified as subsequently measured at amortized cost. What entry should
Bettis make to record the purchase of the bonds on August 1, 2004?

12. On April 30, 20x1, Heidelberg Co. acquired ₱100,000 face amount, 10% bonds dated January 1, 20x1 at 102. The
purchase price includes accrued interest. How much is the initial carrying amount of the investment?

13. On January 1, 20x1, Honey Co. intends to buy 3-year, zero-coupon bonds with face amount of ₱3,000,000 and
maturity value of ₱3,993,000. The effective interest rate is 16%. The bonds will be measured at amortized cost.
How much is estimated purchase price of the bonds on January 1, 20x1?

14. On January 1, 20x1, Santa Co. acquired 10%, ₱1,000,000 bonds at 92. Commission paid to brokers amounted to
₱9,100. The bonds are classified as investment measured at amortized cost. Principal is due on December 31, 20x3
but interest is due annually every December 31. The carrying amount of the investment on December 31, 20x1 is
most approximately equal to
.

15. On January 1, 20x1, Solicit Co. acquired 12%, ₱1,000,000 bonds for ₱1,049,737. The principal is due on January 1,
20x4 but interest is due annually every December 31. The bonds are classified as investment measured at
amortized cost. The yield rate on the bonds is 10%. On September 30, 20x2, all the bonds were sold at 110.
Commission paid to the broker amounted to ₱10,000. How much is the gain (loss) on the sale?

16. On January 1, 20x1, MX Co. purchased 10%, ₱3,000,000 bonds for ₱3,105,726. The bonds are classified as financial
asset measured at amortized cost. Principal on the bonds mature as follows:
December 31, 20x1 1,000,000

December 31, 20x2 1,000,000

December 31, 20x3, 1,000,000

Total 3,000,000

2|Page
Interest is due annually at each year-end. The effective interest rate on the bonds is 8%. How much is the
current portion of the investment on December 31, 20x1?

Use the following information for the next five questions:

The bonds are to be held under a “hold to collect and sell” business model. Information on fair values is as
follows:

December 31, 20x1…………………………….98

December 31, 20x2……………………………102

December 31, 20x3……………………………100

17. How much is the carrying amount of the investment on December 31, 20x1?

18. How much is the unrealized gain (loss) recognized in other comprehensive income in 20x1?

19. How much is the interest income recognized in 20x2?

20. How much is the unrealized gain (loss) recognized in other comprehensive income on December 31, 20x2?

21. Disregard the previous questions. Assume the bonds were sold for ₱900,000 on July 1, 20x2. How much is the
total gain (loss) on the sale, including any reclassification adjustment to profit or loss?

22. On January 1, 20x1, Staircase Glass Co. purchased 10%, ₱1,000,000 callable bonds for ₱966,199. The bonds mature
in 4 years’ time. Interest is due annually every Dec. 31. The investment is classified as financial asset measured at
amortized cost. The effective interest rate is 12%. If the carrying amount of the investment on December 31, 20x1
is ₱982,143, what is the expected holding period for the investment?

Use the following information for the next two questions:

On January 1, 20x1, ABASE Co. purchased 20,000 out of the 100,000 total outstanding shares of PRAISE, Inc.
for ₱4,000,000. PRAISE’s assets and liabilities approximate their fair values. In 20x1, PRAISE, Inc. reported
profit of ₱12,000,000 and declared and paid cash dividends of ₱800,000. In 20x2, PRAISE reported loss of
₱8,000,000, declared and issued 10% stock dividends, and reported gain on property revaluation of ₱2,000,000
and loss on exchange differences on translation of foreign operations of ₱400,000.

23. How much are the amounts reported in ABASE Co.’s 20x1 (1) statement of profit or loss and (2) statement of
financial position?

24. How much are the amounts reported in ABASE Co.’s 20x2 (1) statement of profit or loss and (2) statement of
financial position?

3|Page
25. On January 1, 20x1, ABET Co. purchased 25% interest in the ordinary shares of ENCOURAGE, Inc. for ₱8,000,000.
ENCOURAGE’s assets and liabilities approximate their fair values except for inventories with carrying amount
of ₱2,000,000 and fair value of ₱400,000 and depreciable asset with carrying amount of ₱12,000,000 and fair value
of ₱20,000,000. The remaining useful life of the depreciable asset is 10 years. ENCOURAGE’s net assets have a
book value of ₱20,000,000. ENCOURAGE reported ₱4,800,000 profit in 20x1 and declared and paid dividends of
₱2,000,000 on December 31, 20x1. How much are the (1) implied goodwill on the investment; (2) share in the
associate’s profit in 20x1; and (3) carrying amount of the investment on Dec. 31, 20x1?

26. AFFICIONADO Co. owns 15,000 shares out of the 100,000 outstanding shares of FAN, Inc. As of year-end,
AFFICIONADO holds 20,000 stock rights which enable AFFICIONADO to acquire additional shares from FAN
on a “2 rights for 1 share” basis. The stock rights are exercisable immediately. However, AFFICIONADO Co.’s
management does not intend to exercise the stock rights. FAN does not have any other stock rights outstanding
aside from those held by AFFICIONADO. FAN reports year-end profit of ₱4,000,000 and declares cash dividends
of ₱400,000. The investment has a carrying amount of ₱1,200,000 before any year-end adjustment. At what amount
should the investment be reported in AFFICIONADO Co.’s year-end financial statements?

27. AUSTERE Co. owns 20% of SEVERE, Inc.’s ordinary shares. SEVERE also has outstanding cumulative 6%
preference shares of ₱8,000,000, none of which is held by AUSTERE. Dividends are in arrears for three years as of
year-end. SEVERE reported year-end profit of ₱4,000,000 and declared no dividends. How much is AUSTERE
Co.’s share in the profit of the associate?

28. On January 1, 20x1, ALLEVIATE Co. acquired 30,000 ordinary shares representing 30% interest in LESSEN Co.’s
net assets for ₱12,000,000. At the time of acquisition, LESSEN’s net assets had a fair value of ₱40,000,000 and a
carrying amount of ₱32,000,000. The difference between the fair value and the carrying amount is attributable to
a building which has a remaining useful life of 10 years. In 20x1, LESSEN reported profit of ₱4,000,000 and paid
cash dividends of ₱2,400,000. LESSEN’s shares were selling at ₱400 per share on December 31, 20x1.

On July 1, 20x2, ALLEVIATE sold 60% of its investment in LESSEN at the prevailing market price of ₱480 per
share. The retained interest does not give ALLEVIATE significant influence over LESSES; thus, ALLEVIATE
reclassified the remaining investment to held for trading securities. LESSEN reported interim profit of
₱2,000,000 for the six months ended June 30, 20x2. LESSEN reported total profit of ₱4,800,000 in 20x2 and
declared ₱4,000,000 cash dividend on December 31, 20x2. LESSEN’s shares were selling at ₱540 per share on
December 31, 20x2.

How much is the total investment-related income recognized in ALLEVIATE’s profit or loss in 20x2?

29. Porky Co. owns 40% of Watwat, Inc.’s ordinary shares. On July 1, 20x2, Porky Co. sells half of its investment in
Watwat shares for ₱800,000. The adjusted balances of the related accounts immediately before the sale are as
follows:
 Investment in associate ₱2,400,000
 Cumulative share in Watwat’s revaluation gains 1,000,000

Porky retains significant influence over Watwat after the sale.

How much of the cumulative share in Watwat’s revaluation gains is derecognized on July 1, 20x2?

4|Page
30. On January 1, 20x1, POSTULATE Co. acquired 10,000 shares representing a 10% interest in DEMAND, Inc.’s
100,000 outstanding shares for ₱3,200,000. In 20x1, DEMAND reported profit of ₱20,000,000 and declared and
paid dividends of ₱4,000,000. The investment was initially classified as investment in held for trading securities.
The fair value of the shares on December 31, 20x1 was ₱340 per share.

On July 1, 20x2, POSTULATE Co. acquired additional 15,000 shares of DEMAND, Inc. at ₱280 per share (the
fair value on this date), resulting to an increase in its ownership interest to 25%. The transaction did not give
rise to any goodwill or negative goodwill. In 20x2, DEMAND reported profit of ₱24,000,000, of which
₱16,000,000 were earned in the second half of the year. In addition, DEMAND declared and paid dividends of
₱4,000,000 on December 31, 20x2. The DEMAND shares were quoted at ₱360 per share on December 31, 20x2.

How much are the (1) total amount recognized in profit or loss in 20x2 in relation to the investment; and (2)
carrying amount of the investment on Dec. 31, 20x2?

-end of examination-

5|Page