ARTS CPA Review

(Academic Review and Training School, Inc.)

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INVESTMENTS

PRACTICAL ACCOUNTING I MICHAEL B.

BONGALONTA,CPA,MICB,MBA

SAMPLE PROBLEMS

A. INVESTMENT IN EQUITY SECURITY (PAS 39)

PROBLEM 1(adapted): On January 1, 2012, ABC Company purchased 40,000 shares of

RST at P100 per share. The investment is measured at fair value through other
comprehensive income. Brokerage fees amounted to P120,000. A P5 dividend per share of
RST had been declared on December 15, 2011, to be paid on March 31, 2012 to
shareholders of record on January 31, 2012. No other transactions occurred in 2012
affecting the investment in RST shares. What is the initial measurement of the investment?

a. P4,120,000 c. P4,000,000
b. P3,920,000 d. P3,820,000

PROBLEM 2 (adapted): Christopher Company completed the following transactions in

relation to its long-term investment in Bay Company:

On January 1, 2010, Christopher Company purchased 20,000 shares of Bay Company, P100
par, at P110 per share. On March 1, 2010, Bay Company issued rights to Christopher
Company, each permitting the purchase of 1/ 4 share at par. No entry was made. The bid
price of the share was 140 and there was no quoted price for the rights. Christopher
Company was advised that it would “lose out on the investment if it did not pay in the
money for the rights.” Thus, on April 1, 2010, Christopher Company paid for the new shares
charging the payment to the investment account. Since Christopher Company felt that it
had been assessed by Bay Company, the dividends received from Bay Company in 2010 and
2011 (10% on December 31 of each year) are credited to the investment account until the
debit was fully offset. On January 1, 2012, Christopher Company received 50% stock
dividend from Bay Company. On the same date, the shares received as stock dividend were
sold at P160 per share and the proceeds were credited to income. On December 31, 2012,
the shares of Bay Company were split 2 for 1. Christopher Company found that each new
share was worth P5 more than the P110 paid for the original shares. Accordingly,
Christopher Company debited the investment account with the additional shares received at
P110 per share and credited income. On June 30, 2013, Christopher Company sold one-half
of the investment at P92 per share and credited the proceeds to the investment account.
What is the balance of the investment on December 31, 2013 as it was kept by Christopher
Company?

a. P 2,650,000 c. P3,000,000
b. P 2,605,000 d. P3,650,000

PROBLEM 3 (adapted): South Western Company received dividends from its ordinary
share investments during the year 2011 as follows:

· A stock dividend of 10,000 shares from R Company when the market price of R’s
share was P10.
· A cash dividend of P1,500,000 from S Company in which South Western owns 15%
interest.
· 5,000 shares of T Company in lieu of cash dividends of P20 per share. The market
price of T Company’s share was P150. South Western holds originally 50,000 shares
of T Company. South Western owns 5% interest in T Company.

What amount of dividend revenue should South Western report in its 2011 income
statement?
 a. P 2,250,000 c. P1,500,000
b. P 750,000 d. P2,350,000

PROBLEM 4 (adapted): Wray Company provided the following data for 2012:

 On September 1, Wray received a P500,000 cash dividend from Seco Company in

which Wray owns a 30% interest.
 On October 1, Wray received a P60,000 liquidating dividend from King Company.
Wray owns a 5% interest in King.
 Wray owns a 2% interest in Bow Company, which declared a P2,000,000 cash
dividend on November 15, 2012 payable on January 15, 2013.

What amount should Wray report as dividend income for 2012?

a. P 150,000 c. P100,000
b. P 250,000 d. P40,000

PROBLEM 5 (adapted): On January 1, 2012, Mylene Company purchased 50,000 shares

of another entity for P3,600,000. On October 1, 2012, Mylene received 50,000 stock rights
from the investee. Each right entitles the shareholder to acquire one share for P85. The
market price of the investee’s share was P100 immediately before the rights were issued.
On December 1, 2012, Mylene exercised all stock rights. On December 31,2012, Mylene
sold 25,000 shares at P90 per share. The stock rights are not accounted for separately. If
the FIFO approach is used, what is the gain on sale of investment that should be recognized
in 2012?
a. P 450,000 c. P300,000
b. P 540,000 d. P345,000

PROBLEM 6 (adapted): Adam Company owns 50,000 shares of Bland Company. These
50,000 shares were purchased by Adam in 2009 for P120 per share. On August 30, 2011,
Bland distributed 50,000 sock rights to Adam. Adam was entitled to buy one new share of
Bland Company for P90 cash and two of these rights. On August 30, 2011 each share had a
market value of P130 and each right had a market value of P20. What total cost should be
recorded for the new shares that Adam acquired by exercising the rights?
a. P 1,000,000 c. P3,250,000
b. P 2,250,000 d. P3,045,000

PROBLEM 7 (adapted): Stone Company had the following transactions pertaining to

short-term investments in equity securities.

Jan. 1 Purchased 800 shares of Orear Company stock for $8,400 cash plus brokerage
fees of $240.
June 1 Received cash dividends of $.50 per share on Orear Company stock.
Sept. 15 Sold 200 shares of Orear Company stock for $2,200 less brokerage fees of $60.
Dec. 1 Received cash dividends of $.50 per share on Orear Company stock.

Instructions:
(a) Journalize the transactions.
(b) Indicate the income statement effects of the transactions.

PROBLEM 8 (adapted): Data pertaining to dividends from Edmonds Company’s ordinary

share investments for the year 2011 follow:
· On October 1, Edmonds received P600,000 liquidating dividends from A Company.
Edmonds owns a 10% interest in A Company.
· Edmonds owns 20% interest in B Company which declared and paid a P4,000,000
cash dividend to shareholders on December 31, 2011.
· On December 31, Edmonds received from C Company a dividend in kind of one share
of D Company for every 4 C Company shares held. Edmond holds 100,000 C
Company shares which have a market price of P50 per share on December 1. The
market price of D Company share is P10.

What amount should Edmonds report as dividend income in its 2011 income statement?
a. P 300,000 c. P330,000
b. P 200,000 d. P250,000
PROBLEM 9 (adapted): During 2011, Kundura Company purchased shares of another
entity as follows:
January 1 20,000 shares at P100 2,000,000
July 1 30,000 shares at P120 3,600,000
The transactions for 2012 are as follows:

Jan. 1 Received 20% stock dividend.

Aug. 1 Received cash dividend of P10 per share.
Dec. 1 Sold 30,000 shares at P125 per share.

What is the total income from the investment that should be reported in the 2012
income statement?
a. P 1,570,000 c. P1,700,000
b. P 1,750,000 d. P1,600,000

B. INVESTMENT IN ASSOCIATES (PAS 28)

PROBLEM 10 (adapted): Tresh Company purchased 42,000 shares of common stock of

Long Corporation as a long-term investment for $1,000,000. During the year, Long
Corporation reported net income of $500,000 and paid dividends of $200,000.

Instructions: Assume that the 42,000 shares represent a 25% interest in Long
Corporation.
1. Prepare the journal entry to record the investment in Long stock.
2. Prepare any entries that Tresh Company should make in accounting for its
investment in Long stock during the year.
3. What is the balance of the Stock Investments account on Tresh Company's books at
the end of the year?

PROBLEM 11 (adapted): Information pertaining to long-term investments in stock in 2002

by Tate Corporation follows:

Acquired 10% of the 250,000 shares of common stock of Carlsen Company at a total
cost of $8 per share on January 1, 2002. On July 1, Carlsen Company declared and paid a
cash dividend of $2 per share. On December 31, Carlsen's reported net income was
$654,000 for the year. Obtained significant influence over Voss Company by buying 25% of
Voss's 80,000 out-standing shares of common stock at a total cost of $22 per share on
January 1, 2002. On June 15, Voss Company declared and paid a cash dividend of $1.50
per share. On December 31, Voss's reported net income was $280,000. Prepare all
necessary journal entries for 2002 for Tate Corporation.

PROBLEM 12 (adapted): On January 1, 2011, Bing Company purchased 30,000 shares of

Latt Company’s 200,000 outstanding ordinary shares for P6,000,000. On that date, the
carrying amount of the acquired shares on Latt’s books was P4,000,000. Bing attributed the
excess of cost over carrying amount to patent. The patent has a remaining useful life of 10
years. During 2011, Bing’s officers gained a majority on Latt’s board of directors. Latt
reported earnings of P5,000,000 for the year ended December 31, 2011, and declared and
paid dividend of P3,000,000 during 2011. On December 31, 2011, Latt’s ordinary share was
trading over-the-counter at P15. What is the carrying amount of the investment in Latt’s
Company on December 31, 2011?
a. P 6,750,000 c. P5,800,000
b. P 6,100,000 d. P6,300,000

PROBLEM 13 (adapted): On January 1, 2011, Kean Company purchased 30% interest in

Pod Company for 2,500,000. On this date Pod’s shareholders’ equity was 5,000,000. 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 2011 and paid no dividends. Kean accounts for this investment
using the equity method. In its December 31, 2011 statement of financial position, what
amount should Kean report as investment in associate?

a. P 3,000,000 c. P2,800,000
 b. P 3,200,000 d. P2,500,000

PROBLEM 14 (adapted): Sage Company bought 40% of Eve Company’s outstanding

ordinary shares on January 1, 2011, for P4,000,000. The carrying amount of Eve’s net
assets at the purchase date totaled P9,000,000. Fair values and carrying amounts were the
same for all items except for plant and inventory, for which fair values exceeded their
carrying amounts by P900,000 and P100,000 respectively. The plant has an 18-year life. All
inventories were sold during 2011. During 2011, Eve reported net income of P1,200,000
and paid a P200,000 cash dividend. What amount should Sage report as investment
income in its income statement for the year ended December 31, 2011?
a. P 420,000 c. P440,000
b. P 480,000 d. P400,000

PROBLEM 15 (adapted): On January 1, 2011, Mega Company acquired 10% of the

outstanding ordinary shares of Penny Company. On January 1, 2012, Mega gained the
ability to exercise significant influence over financial and operating control of Penny by
acquiring an additional 20% of Penny’s outstanding ordinary shares. The two purchases
were made at prices proportionate to the value assigned to Penny’s net assets, which
equaled their carrying amounts. For the years ended December 31, 2011 and 2012, Penny
reported the following:

2011 2012
Dividend paid 2,000,000 3,000,000
Net income 6,000,000 6,500,000

What total amount of revenue should Mega Company include in profit or loss for the year
ended December 31, 2012?
a. P 2,150,000 c. P1,950,000
b. P 2,530,000 d. P2,350,000

PROBLEM 16 (adapted): Aye Company acquired 30% of the issued share capital of Bee
Company for P1,000,000 on January 1,2011. The accumulated profits of Bee Company on
this date totaled P2,000,000. The entities prepare their financial statements on December
31 of each year. The abbreviated statement of financial position of Bee Company on
December 31, 2012 is as follows:

Sundry net assets 6,000,000

Share Capital, P10 par 1,000,000
Share Premium 2,000,000
Retained Earnings 3,000,000

The fair value of the net assets of Bee Company at the date of acquisition was P5,000,000.
The recoverable amount of the net assets of Bee Company is deemed to be P7,000,000 on
December 31, 2012. What is the carrying amount of the investment in Bee Company on
December 31, 2012?
a. P 1,800,000 c. P1,300,000
b. P 1,500,000 d. P2,000,000

PROBLEM 17 (adapted): On January 1, 2011, Ronald Company purchased 40% of the

outstanding ordinary shares of New Company, paying P6,400,000 when the carrying
amount of net assets of New Company equaled P12,500,000. The difference was attributed
to equipment which had a carrying amount of P3,000,000 and a fair market value of
P5,000,000 and to building which had a carrying amount of P2,500,000 and a fair market
value of P4,000,000. The remaining useful life of the equipment and building was 4 years
and 12 years, respectively. During 2011, New Company reported net income of P5,000,000
and paid dividends of P2,500,000. What amount should be reported as investment income
in 2011?

a. P 2,000,000 c. P1,950,000
b. P 1,800,000 d. P1,750,000
PROBLEM 18 (adapted): On Jan. 2, 2014, Hope, Inc. acquired 20% of the outstanding
ordinary shares of Peace Company for P700,000. This investment gave Hope the ability to
exercise significant influence over Peace. The book value of the acquired shares was
P600,000. The excess of cost over book value was attributed to a depreciable asset which
was undervalued on Peace’s balance sheet and which had ten years useful life remaining.
For the year ended December 31, 2014, Peace reported net income after tax of P180,000,
unrealized gain on investment through other comprehensive income of P100,000; foreign
trasnlation loss of P200,000 and paid cash dividends of P60,000 on its ordinary. Compute
the carrying amount of the investment as of December 31, 2014.
a. P 964,000 c. P690,000
b. P 469,000 d. P694,000

PROBLEM 19 (adapted): In Jan. 2014, Compact Corporation acquired 20% of the

outstanding ordinary shares of ABC company for P2,457,600. This investment gave
Compact Company the ability to exercise significant influence over ABC. The book value of
the acquire shares was P2,022,400. The excess of the cost over book value was attributed
to the building which was undervalued on ABC’s balance sheet and that had a remaining
useful life of ten years. For the year ended December 31, 2014, ABC 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 ABC Company’s building was understated?

a. P 3,200,000 c. P2,900,000
b. P 3,000,000 d. P3,400,000

b. What is the proper carrying value of Compact’s investment in ABC at December 31,
2014?
a. P 2,942,840 c. P2,492,480
b. P 2,249,840 d. P2,512,080

C. FINANCIAL ASSET AT FAIR VALUE (PFRS 9)

PROBLEM 20 (adapted): Ryff Corporation's balance sheet at December 31, 2001, showed
the following:
Short-term investments, at fair value $46,500

Ryff Corporation's trading portfolio of stock investments consisted of the following at

December 31, 2001:
Stock Number of Shares Cost
Dixon Common Stock 200 $30,000
Boone Preferred Stock 400 6,000
Golic Common Stock 300 9,000
$45,000

During 2002, the following transactions took place:

Feb. 5 Sold 100 shares of Dixon common stock for $18,000.
Mar. 30 Purchased 25 shares of Golic common stock for $950.
Sept. 9 Purchased 75 shares of Golic common stock for $3,000.

At year end on December 31, 2002, the market values per share were:
Market Value Per Share
Dixon Common Stock $148.00
Boone Preferred Stock $ 14.00
Golic Common Stock $ 25.00

Instructions:
(a) Prepare the journal entries to record the 2002 stock transactions.
(b) On December 31, 2002, prepare any adjusting entry that might be necessary relative
to the trading portfolio.
(c) Show how the stock investments will appear on Ryff Corporation's balance sheet at
December 31, 2002.
PROBLEM 21 (adapted): Otto Corporation has the following trading portfolio of stock
investments as of December 31, 2002.

Security Cost Fair Value

A $17,000 $16,000
B 22,000 26,000
C 34,000 29,000
$73,000 $71,000

On January 22, 2003, Otto Corporation sold security C for $30,000.

Instructions:
(a) Prepare the adjusting entry for Otto Corporation on December 31, 2002, to report the
portfolio at fair value.
(b) Indicate the balance sheet and income statement presentation of the fair value data for
Otto Corporation at December 31, 2002.
(c) Prepare the journal entry for the 2003 sale.

PROBLEM 22 (adapted): Raiza Company a financial asset at its market value of

P3,200,000. Broker fees of P200,000 were incurred in relation to the purchase. At what
amount should the financial asset initially be recognized respectively if it is classified as at
fair value through profit or loss, or as OCI?
a. P 3,200,000 and 3,400,000 c. P3,400,000 and 3,400,000
b. P 3,200,000 and 3,200,000 d. P3,400,000 and 3,200,000

PROBLEM 23 (adapted): On January 1, 2010. Alex 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, 2010 and the transaction costs that would be incurred in
sale are estimated at P100,000. No securities were sold during 2010. What amount of
unrealized gain or loss on these securities should be reported in the 2010 income
statement?

a. P 500,000 unrealized gain c. P 400,000 unrealized gain

b. P 500,000 unrealized loss d. P 400,000 unrealized loss

PROBLEM 24 (adapted): Carmela Company acquired a financial instrument for

P4,000,000 on March 31,2010. 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, 2010, the fair value of the instrument was P5,500,000 and
the transaction costs that would be incurred on the sale of the investment are estimated at
P600,000. What gain/loss would be recognized in other comprehensive income for the year
ended December 31 2010?

a. P 800,000 unrealized gain c. P 1,500,000 unrealized gain

b. P 800,000 unrealized loss d. P 1,500,000 unrealized loss

PROBLEM 25 (adapted): On December 31,2009, Fay Company appropriately reported a

P100,000 unrealized loss. There was no change during 2010 in the composition of Fay’s
portfolio of marketable equity securities held as financial asset fair value through other
comprehensive income. Pertinent data are as follows:

Market value
Security Cost December 31 2010
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 gain/loss on these securities should be included in the statement of
comprehensive income for the year ended December 31,2010 as component of other
comprehensive income?
a. P 600,000 unrealized gain c. P 400,000 unrealized gain
b. P 600,000 unrealized loss d. P 400,000 unrealized loss

PROBLEM 26 (adapted): During 2010, Latvia Company purchased trading equity

securities as a short-term investment. The cost and market value on December 31, 2010
were as follows:
Security Cost Market value
A – 1,000 shares 200,000 300,000
B – 10,000 shares 1,700,000 1,600,000
C – 20,000 shares 3,100,000 2,900,000
5,000,000 4,800,000
Latvia sold 10,000 shares of Security B on January 15,2011.for P130 per share,
incurring P50,000 in brokerage commission and taxes.

What should be reported as loss on sale of trading investment in 2011?

a. P 350,000 gain c. P 300,000 gain
b. P 350,000 loss d. P 300,000 loss

PROBLEM 27 (adapted): On January 1,2010, Lebanon Company purchased equity

securities to be held as “at fair value through other comprehensive income”. On December
31, 2010, the market value were:

Cost Market
Security X 2,000,000 2,400,000
Security Y 3,000,000 3,500,000
Security Z 5,000,000 4,900,000

On July 1,2011, Lebanon Company sold Security X for P2,500,000. What amount of gain
on sale of financial asset should be reported in the 2011 income statement?
a. P 100,000 gain c. P 500,000 gain
b. P 100,000 loss d. P 500,000 loss

PROBLEM 28 (adapted): The following information was extracted from the December 31,
2011 statement of financial position of Gil Company:

Noncurrent assets:
Financial asset at fair value 3,700,000

Shareholders’ equity:
Unrealized loss on financial asset (300,000)

Gil Company paid transaction cost of P100,000 related to the acquisition of the
investment. This amount is capitalized as part of the cost of the investment. The entity
elected to measure the financial asset at fair value through other comprehensive income.
What was the historical cost of the financial asset?
a. P 3,600,000 c. P 4,000,000
b. P 3,800,000 d. P 3,700,000

PROBLEM 29 (adapted): On May 1, 2014, Golden Company purchased a short-term

P4,000,000 face value 9% debt instruments for P3,720,000 excluding the accrued interest
and classified it as trading security. Golden Company incurred and paid P20,000 transaction
cost related to the acquisition of the instrument. The debt instruments mature on January 1,
2017, and pay interest semi-annually on January 1 and July 1. On December 31, the fair
market value of the instrument is P3,880,000. On February 2, 2015, Graham company sold
the trading security for P3,960,000.

a. What is the initial cost of Golden Company’s investment in trading securities?

a. P 3,700,000 c. P 3,702,000
b. P 3,270,000 d. P 3,720,000
b. What amount should Golden Company report for the short-term debt securities on
December 31, 2014?

a. P 3,880,000 c. P 3,808,000
b. P 3,800,000 d. P 3,088,000

PROBLEM 30 (adapted): On January 1, 2014, Sun Company purchased the debt

instruments of Silk Company with a face value of P5,000,000 bearing interest rate of 8% for
P4,621,006 to yield 10% interest per year. The bonds mature on January 1, 2019 and pay
interest annually on December 30. On December 31, 2014 the fair value of the investment
is P4,830,014 which is based on the prevailing market rate of 9%. If the company’s
business model has the objective of trading and making a profit from changes in the fair
value of the securities, what amount of unrealized gain or loss should the company disclose
in December 31, 2014 profit or loss?

a. P 217,008 unrealized gain c. P 378,994 unrealized gain

b. P 217,008 unrealized loss d. P 378,994 unrealized loss

D. FINANCIAL ASSET AT AMORTIZED COST (PFRS 9)

PROBLEM 31 (adapted): On January 2, 2012, Super Company invested in a 10-year 10%

debt instrument with a face value of P3,000,000 in which instrument is to be received every
December 31. The debt instrument has an effective interest rate of 8% and was acquired
for P3,402,000. Super Company has a business model of collecting all the contractual cash
flows related to the instrument. On December 31, 2015, the debt instrument has a
prevailing market rate at 9%.

The following are relevant present value factors:

PV factor of 8% after 6 years 0.630

PV factor of annuity of 8% after 6 years 4.623
PV factor of 9% after 6 years 0.596
PV factor of annuity of 9% after 6 years 4.486

What amount should the debt instrument be reported in December 31, 2015
statement of financial position?
a. P 3,326,990 c. P 3,276,900
b. P 3,726,090 d. P 3,402,000

PROBLEM 32 (adapted): On January 2, 2013, Saint Company invested in a 4-year 10%

bond with a face value of P6,000,000 in which interest is to be paid every December 31.
The bonds has an effective interest rate 0of 9% and was acquired for P6,194,220. During
December 31, 2014, the management of Saint Company decided to dispose P4,000,000
face value debt instrument which will be used to settle an obligation and to finance its
operating costs. The company has a business model of collecting the contractual cash flows
for all their debt security investments, however due to frequent sale and disposal of
investment the management has decided that the business model is no longer appropriate.
On December 31, 2014, the four million face value debt instrument was disposed of when
the market rate of similar instrument was 11%.

PV factor of 11% after 2 years 0.8116

PV factor of annuity of 11% after 2 years 1.7125

a. What is the amortized cost of debt instrument on December 31, 2014?

a. P 6,151,700 c. P 6,149,220
b. P 6,105,353 d. P 6,194,220
b. What is the amount of gain or loss should the company recognize in its 2014 profit or
loss as a result of the transfer?

a. P 69,418 loss to profit or loss c. P 69,418 loss to OCI

b. P 69,418 gain to profit or loss d. P 69,418 gain to OCI

PROBLEM 33 (adapted): On December 31,2013, Outer Company invested in the 5-year

bonds of Inner Corporation. The bonds have a face value of P3,000,000 with 8% interest
payable per year. Outer Company paid P2,772,552 to acquire the instruments. The effective
interest rate for the same instrument at the time of acquisition is 10%. During 2015, Inner
Corporation’s business deteriorated due to political instability and faltering global economy.
After reviewing all available evidence at December 31, 2015, Outer Company determined
that it was probable that Inner would pay back only P2,100,000 at maturity. As a result,
Outer Company decided that the investments in bonds were impaired, and that a loss
should be recorded immediately. Assuming the market rate of interest on December 31,
2015 remains to be at 10%, what amount of impairment loss should Outer Company
recognize on its debt instruments?

a. P 1,273,688 c. P 1,327,688
b. P 2,850,788 d. P 2,508,788

PROBLEM 34 (adapted): On July 1, 2011, Parry Company purchased an 8%, 4-year,

P8,000,000 face value bonds for P7,492,800. The bonds are dated July 1, 2011 and pays
interest every June 30. Effective rate of the bonds is 10%. The company has a business
model of collecting all the contractual cash flows and has no intention of trading and making
profits.

The company did not receive the interest due on June 10, 2012 and it soon became
clear that the issuer was in financial difficulties. On June 30, 2012, the company reviews the
issuer’s financial condition and a prospect for repayment of the loan determines that the
bond is impaired. On the basis of the information available at the time, the company’s best
estimate of future cash flows is a total receipt of P5,000,000 on maturity. The fair value of
the estimated cash flow as of June 30, 2012 is P3,756,600.

On June 30, 2013, on the basis of new information the issuer entity has improved its credit
rating and the basis of the new information, the company’s best estimate of future cash flow
is a total receipt of P7,000,000 on maturity. The fair value of the new cash flow as of June
30,2013 is P5,785,100. What is the amount of impairment reversal should Parry Company
report in its profit or loss for the year-ended June 30, 2013?
a. P 1,253,688 c. P 1,652,840
b. P 2,003,840 d. P 2,028,500

PROBLEM 35 (adapted): On January 1, 2014, David Company purchased Goliath

Corporation’s 9% debt instrument with a face value of P4,000,000 for P3,823,800 to yield
10% interest. The bonds are dated on January 1, 2014 and mature on December 31. 2019,
and pay interest annually on December 31. On January 2, 2016, David Company acquired
an equity instruments in exchange for its investment in debt security. On the date of
exchange, market value of the equity securities was nor clearly determinable, while the debt
instrument was selling at prevailing rate of interest of 11%. If the company has a business
model with the objective of not trading and making profit from changes in fair value, what
amount of gain or loss should David Company recognize as a result of the exchange?(carry
present value factors up to 3 decimal places).

a. P 66,958 gain c. P 68,958 loss

b. P 66,958 loss d. P 66,958 gain

PROBLEM 36 (adapted): Thread Company with a business model of collecting all the
contractual cash flows pertaining to interest and principal of outstanding debt securities,
purchased at face on January 2, 2014, purchased a 6-year 12% P5,000,000 face value of
bond.
Thread Company is in dire need of cash to finance the acquisition of 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 f 14%.

PV factor of 14% after 4 years 0.592

PV factor of 14% after 5 years 0.519
PV factor of annuity of 14% after 4 years 2.914
PV factor of annuity of 14% after 5 years 3.433

On January 1, 2016, the management has the intention of reclassifying the investment
from amortized cost valuation to the fair value to profit or loss valuation.

A. What total amount of gain or loss should the company recognize as a result of
transfer?

a. none c. P 2000 loss

b. P 1,500 loss d. P 1,500 gain

B. What is the amount of gain or loss from the sale of the securities?

a. P 72,000 gain c. P 75,000 loss

b. P 72,000 loss d. P 75,000 gain

PROBLEM 37 (adapted): On October 1, 2011, Yost company purchased 4,000 of the P1,000
face value, 10% bonds of Pell Company for P4,400,000 which includes accrued interest of
P100,000. The bonds, which mature on January 1, 2018, pay interest semi-annually on January 1
and July 1. Yost uses the straight line method of amortization and appropriately recorded the
bonds as held to maturity. What is the carrying amount of the bonds in December 31, 2011
Statement of Financial Position?
a. P 4,380,000 c. P 4,300,000
b. P 4,280,000 d. P 4,288,000

PROBLEM 38 (adapted): On January 1, 2011, Tagbilaran Company purchased bonds with face
value of 2 million pesos. The bonds are dated January 1, 2011 and mature on January 1,
2015. The interest on bonds is 10% payable semi-annually every June 30 and December 31. The
prevailing market rate of interest on the bonds is 12%. The PV of 1 at 6% for 8 periods is .63,
and the PV of an ordinary annuity of 1 at 6% for 8 periods is 6.21. What is the present value of
the bonds on January 1, 2011?
a. P 1,881,000 c. P 1,620,000
b. P 1,260,000 d. P 1,488,000

PROBLEM 39 (adapted): On January 1, 2011, Arabian company purchased serial bonds with
face value of P3,000,000 and stated 12% interest payable annually ever 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 installment of P1,000,000 every December 31. The rounded PV of 1 at 10%
for:
One period 0.91
Two periods 0.83
Three periods 0.75

What is the present value of the serial bonds on January 1, 2011?

a. P 3,116,500 c. P 3,016,800
b. P 3,106,800 d. P 3,080,160

E. INVESTMENT PROPERTY (PAS 40)

PROBLEM 40 (adapted): In 2014, Tremor Company has an investment property with a

carrying amount of P40,000,000 is destroyed by fire. The building element of the property
was carried at P12,000,000. A claim was made for compensation to the company’s insurers,
but has not been agreed at the time the financial statements for 2014 are issued. In 2015,
the claim is agreed and the company receive P20,000,000 in compensation. Also, at the end
of the year 2015, a replacement building is constructed at a cost of P16,000,000.

a. What amount of impairment loss should Tremor Company recognize in its 2014
statement of financial performance?

a. P 12,000,000 c. P 20,000,000
b. P 16,000,000 d. P 8,000,000
b. What amount of insurance claim should Tremor Company recognize in its 2014
statement of financial performance?

a. none c. P 12,000,000
b. P 16,000,000 d. P 8,000,000
c. What amount of insurance claim should Tremor Company recognize in its 2015
statement of financial performance?

a. P 12,000,000 c. P 20,000,000
b. P 16,000,000 d. P 8,000,000
d. What is the carrying value of the investment property in Tremor Company’s statement of
financial position for the year ended December 31, 2015?

a. P 20,000,000 c. P 28,000,000
b. P 16,000,000 d. P 44,000,000

PROBLEM 41 (adapted): On January 2, 2010, Haven Corporation acquired a track of land

that is to be sold in the ordinary conduct of business. The purchase price of the property of
P50,000,000 was paid in cash and a total transaction costs of P500,000 related to nthe
acquisition of the property was also p[aid at a later date. The land was subdivided into
2,000 lots (200 square meters for every lot) for an additional cost of P5,500,000. On
December 31,2010, the market value of the lot was P1,500 per square meter. As of
December 31, 2011, 0nly 20,000 square meters are still unsold and market value of the lot
had increased to P1,600 per square meter. On this date, Haven Corporation decided to
transfer the remaining lots into investment property that is to be carried under the fair
value model. There was no additional cost incurred on the change of intention on the
property. What amount of gain should Haven Corporation recognize as a result of the
transfer?

a. P 22,900,000 c. P 20,920,000
b. P 29,200,000 d. P 29,020,000

PROBLEM 42 (adapted): On January 2, 2014, Grand Company made a test of

impairment on one of its building carried as plant asset. The test on impairment revealed a
recoverable value of P5, 500,000 on that building. The carrying value of this building as of
January 2, 2014 is P8, 000,000 with a remaining useful life of 10 years. On January 2,
2016, Grand Company decided to convert this building into an investment property that is
to be carried at the fair value. The cost of converting the building is insignificant but a result
of the change in the usage, the fair market value of the building was reliably valued at P7,
000 ,000.

a. What amount of unrealized gain/revaluation surplus should Grand Company recognize in

its shareholders’ equity on the date of transfer?

a. P 600,000 c. P 2,600,000
b. P 2,000,000 d. P 0

b. What amount of realized revenue/impairment recovery should Grand Company

recognize in its profit or loss on the date of transfer?

a. P 600,000 c. P 2,600,000
 b. P 2,000,000 d. P 0

PROBLEM 43 (adapted): Act Company acquire investment property with an installment

price of P2,400,000. The acquisition of the property requires a down payment of 20% and a
non-interest bearing note payable ath the end of each year for five years. The prevailing
market rate of interest for similar instrument is 12%. The present value factor of annuity of
12% for four periods is 3.605. Act Company incurred transaction costs amounting to
P50,000 for the property. What is the cost of acquiring the property?
a. P 2,400,000 c. P 1,914,320
b. P 1,384,320 d. P 1,864,320

PROBLEM 44 (adapted): Galore Company ventured into construction of a condominium

in Makati which is rated as the largest state-of-the-art structure. The entity’s board of
directors decided that instead of selling the condominium, the entity would hold this
property for purposes of earning rentals by letting out space to business executives in the
area. The construction of the condominium was completed and the property was placed in
service on January 1, 2012. The cost of the construction was P50,000,000. The useful life of
the condominium is 25 years and its residual value is P5,000,000. An independent valuation
expert provided the following fair value at each subsequent year-end.

December 31, 2012 55,000,000

December 31, 2013 53,000,000
December 31, 2014 60,000,000

1. Under the cost model, Galore Company should report depreciation of investment
property for 2012 at:

a. P 1,800,000 c. P 2,000,000
b. P 2,200,000 d. P 2,500,000

2. Under the fair value model, Galore Company should recognize gain from change in fair
value in 2012 at:

a. P 0 c. P 5,000,000
b. P 1,800,000 d. P 10,000,000

F. FUND AND OTHER INVESTMENTS

PROBLEM 45 (adapted): The following information relates to a bond sinking fund that
Fall Company placed it trust as required by the underwriter:
Bond sinking fund, Jan. 1, 2011 4,500,000
Additional investment in 2011 900,000
Dividends on investments 150,000
Interest revenue 300,000
Administration cost 50,000
Carrying amount of bonds payable 8,000,000

What is the carrying amount of the bond sinking fund on Dec. 31, 2011?
a. P 5,800,000 c. P 8,000,000
b. P 5,850,000 d. P 4,800,000

PROBLEM 46 (adapted): On March 15, 2011, Boggart Company adapted a plan to

accumulate P 5M by September 1, 2015. Boggart plans to make for equal annual deposits to
a fund that will earn interest at 10% compounded annually. Boggart made the first deposit
on September 1, 2011. Future value factors are as follows:

Future value of 1 at 10% for 4 periods 1.46

Future value of an ordinary annuity of 1 at 10% for 4 periods 4.64
Future value of an annuity of 1 in advance at 10% for 4 periods 5.11

What is the annual deposit to the fund?

 a. P 978,500 c. P 1,077,586
b. P 987,500 d. P 1,707,586

PROBLEM 47 (adapted): Bonita Company purchased a P 1M ordinary life insurance policy

on its president. Bonita Company is the beneficiary under the life insurance policy. The
policy year and Bonita’s accounting year coincide. Additional data available for the year
ended December 31, 2011 are as follows:

Cash surrender value, Jan 1 43,500

Cash surrender value, Dec 31 54,000
Annual advance premium paid, Jan 1 20,000
Dividend received, July 1 3,000

What amount should be reported as life insurance expense for 2011?

a. P 6,500 c. P 3,000
b. P 10,500 d. P 7,500

PROBLEM 48 (adapted): The following accounts appear on adjusted trial balance of

Magalpok Company on December 31, 2011:

Petty cash fund 10,000

Payroll fund 100,000
Sinking fund cash 500,000
Sinking fund securities 1,000,000
Accrued interest receivable-Sinking fund securities 50,000
Plant expansion fund 600,000
Cash surrender value 150,000
Investment property 3,000,000
Advances to subsidiary 200,000
Investment in joint venture 2,000,000

What total amount should be reported as noncurrent investment on December 31, 2011?
a. P 5,000,000 c. P 6,500,000
b. P 7,500,000 d. P 7,000,000

PROBLEM 49 (adapted): Slovenia Company insured the life if its president for
P2,000,000, the entity being the beneficiary of an ordinary life insurance policy. The annual
premium is P80,000 and the policy is dated January 1, 2006. The cash surrender value are:

December 31, 2008 15,000

December 31, 2009 19,000

The entity follows the calendar year as its fiscal period. The president dies on October 1,
2009 and policy is settled on December 31, 2009.

1. Slovenia Company should report gain on life insurance settlement in its 2009 income
statement at:
a. P 1,602,600 c. P 1,692,000
b. P 1,966,200 d. P 1,962,000

2. Slovenia Company should report life insurance expense for 2009 at:
a. P 75,000 c. P 67,000
b. P 57,000 d. P 47,000

PROBLEM 50 (adapted): Ivorycathy Company purchased a P 1M life insurance policy on

its president of which Ivorycathy is the beneficiary. Information regarding the policy for the
year ended December 31, 2011 follows:

Cash surrender value, Jan 1 87,000

Cash surrender value, Dec 31 108,000
Annual advance premium paid Jan 1 40,000

During 2011, dividend of P6,000 was applied to increase the cash surrender value of the
policy. What amount should Ivorycathy report as life insurance expense for 2011?
 a. P 21,000 c. P 40,000
b. P 19,000 d. P 16,000

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