Answer Key - Debt and Equity Securities-1 PDF

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Answer Key: ( Equity Securities)GENERAL CONCEPT (PROBLEMS) RDA Company purchased equity securities – 4,000 shares at P40 each on January 1, 2020. The transaction cost during the time of purchase is P10,000. The fair value on December 31, 2020 is P50. The fair value on December 31, 2021- P35. The equ...

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Answer Key: ( Equity Securities) GENERAL CONCEPT (PROBLEMS) 1. RDA Company purchased equity securities – 4,000 shares at P40 each on January 1, 2020. The transaction cost during the time of purchase is P10,000. The fair value on December 31, 2020 is P50. The fair value on December 31, 2021- P35. The equity securities are sold on January 1, 2022 at P42. Compute the following: a. Amount to be DR on Equity investment on the date of purchased if classified as FV-PL and OCI, respectively. P160,000 and P170,000 FV PL ((4,000 sh x P40) = FV OCI 4,000 sh x P40)+10,000 =

P160,000 P170,000

b. Carrying amount of the Investment on December 31, 2020 if classified as FV-PL and OCI, respectively. P200,000 and P200,000 FV PL ((4,000 sh x P50) FV OCI 4,000 sh x P50)

P200,000 P200,000

c. Carrying amount of the investment on December 31, 2021 if classified as FV-PL and OCI, respectively P140,000 and P140,000 FV PL ((4,000 sh x P35) FV OCI 4,000 sh x P35)

P140,000 P140,000

d. Unrealized gain/loss on PL or OCI on December 31, 2021 if classified as FV-PL and OCI, respectively. P(60,000)- PL and P(60,000) – OCI FV PL (P140,000-P200,000) FV OCI (P140,000-P200,000)

P(60,000) P(60,000)

e. Amount of unrealized gain/loss to be reported in statement in changes in equity on December 31, 2021 if classified as FV-PL and OCI, respectively P0 and P(30,000) FV PL FV OCI (P140,000-P170,000)

f.

P0 P(30,000) Accumulated UG/UL

Amount of gain/loss from sale of investment on January 1, 2022 and the appropriate account title if classified as FV-PL and OCI, respectively P28,000 and P28,000 FV PL (4,000x P42) – P140,000 FV OCi (4,000x P42) – P140,000

P28,000 P28,000

g. Total adjustment to Retained Earnings on January 1, 2022 if classified as FV-PL and OCI, respectively P0 and P(2,000) FV PL FV OCI: Gain from sale. – P28,000 Accumulated UL – (30,000)

P0

P(2,000)

2. On December 22, 2019, RDA Company acquired the 1,000 shares of EF Company for P200,000 with the intention of profiting from short term price fluctuations of the said shares. RDA Company was not able to sell the shares immediately. On December 31, 2020, EF Company shares were quote as having a fair value of P175 each. In 2021, RDA Company was able to sell its EF Company shares at P217,000 a. How much is the unrealized gain/loss to be reported in PL in 2020? (25,000) CA on Dec 31, 2020 (P175 x 1,000) CA on Dec 22, 2019 Unrealized Loss

P175,000 (200,000) P(25,000)

b. How much is the gain or loss to be reported in the PL in 2021?P42,000 gain Selling Price CA on Dec 31, 2020 Unrealized Loss

P217,000 (175,000) P42,000

3. On October 1, 2020, RDA Company acquired equity securities of RX Company for P88,000 and classified it as available for sale (FA-FVOCI). Commissions including transfer taxes paid by RDA Company amounted to P2,000. On December 31, 2020, the quoted price for the said instrument was P86,000 while transaction cost (disposal costs) was estimated at P1,400. In 2021, half of the securities was sold for P47,500. The remaining securities were quoted at P44,500 on December 31, 2021. a. The initial cost to be reports as FA-FVTOCI? P90,000 (P88,000+P2,000) b. The unrealized gain/loss to be reported in OCI on 12/31/20? (4,000) CA of OCI (12/31/20) CA on 10/1/20 Unrealized loss

P86,000 (90,000) P(4,000)

c. The net adjustment to be reported to Retained Earnings on 2021? Selling Price CA of OCI (P86,000 x 50% sold) Gain on sale to be closed to RE Acc. UL to be closed to RE (P4,000x50%) Retained Earnigns (net CREDIT)

2,500 CR

P47,500 (43,000) P4,500 (2,000) P2,500

d. The unrealized gain/loss to be reported in OCI on 12/31/21? 1,500 CA of OCI 12/31/21 CA of OCI 12/31/20 (P86,000 x50% Unrealized Gain – OCI

P44,500 (43,000) P1,500

e. The net gain/loss in the equity section of the 12/31/21? (500) Unrealized Gain – OCI 2021 Unrealized Loss – OCI 2020 (4,000x50%) Accumulated Unrealized Loss

P1,500 (2,000) P(500)

4. RDA Company have the following transactions for 2020: a. Invested 10,000 shares at P120 each b. Received cash dividends at P15 each c. Received property dividends at P20 each d. Received 20% share dividends e. Received 5,000 shares for P90 in lieu of cash dividend f. Sold 13,000 shares at P105 REQUIREMENTS: 1. How much is the Dividend income for the year? P800,000 B. Cash Div (10,000 x P15) C. Property Div (10,000 x P20) D. Shares in lieu of Cash (5,000 x P90) Total Dividend Income

P150,000 200,000 450,000 P800,000

2. How much is the total income if the company uses FIFO METHOD?P875,000 Selling Price (13,000 shares x P105) Less: CA of ES (FIFO) 12,000 shares x P100 1,000 shares x P90 Gain on Sales Dividend Income Total income if FIFO

P1,365,000 (1,200,000) (90.000) P75,000 800,000 P875,000

3. How much is the total income if the company uses AVERAGE METHOD? P903,220 Selling Price (13,000 shares x P105) Less: CA of ES (FIFO) – P97.06 x 13,000 shares Average Unit Cost = (P1,200,000+P450,000)/ (12,000sh +5,000sh) = P97.06 Gain on Sale Dividend Incomes Total income if Weighted Average

P1,365,000 (1,261,780)

P103,220 800,000 903,220

4. How much is the balance of Investment in Equity if the company uses FIFO

method?P360,000 (4,000 shares x P90) 5. How much is the balance of investment in Equity if the company uses AVERAGE method?P388,220 (P1,200,000+450,000-1,261,780) 5. RDA Company has several investment in equity investments, determine the amount to be reported as dividend income for 2020 in each class of investment. a. RDA Company owns a 15% interest in Lemon Company which declared a P1,200,000 cash dividend on November 15, 2020 to stockholders of record on December 31, 2020 payable on January 15, 2021. P1,200,000x 15% = P180,000 b. Received from KIWI Company P330,000 in lieu of 20% stock dividend. RDA Company owns 12,000 of the total 100,000 outstanding shares of KIWI Company which it has acquired for P1,800,000. c. APPLE Company declared a 10% stock dividends on July 15, 20202 at which time APPLE Companys share was quoted at P8 per share. FB Company owns 10,000 APPLE Company shares. d. Received 2,000 common shares of BANANA Company in lieu of cash dividend. The market price of BANANA Company’s share was P150 2,000 shares x P150 = P300,000 e. Received P800,000 from ORANGE Company which was considered as a liquidating dividend f. RDA Company received from MELON Company a dividend in kind of one share of PEACH Company common stock for every 5 MELON Compnay common shares. RDA Company holds 50,000 MELON Company shares. PEACH Company shares were currently selling at P20 per share. (50,000shares/5shares) x P20 = P200,000 g. RDA Company owns 3,000 of POMELO Company’s P10 par 12% cumulative preferred stocks of which 10,000 were issued and outstanding. No dividend had been declared or paid since 2019. POMELO Company declared dividend to cover all dividends in arrears. 3,000 shares x P10 x 12% x 2yrs = P7,200

h. RDA Company owns 1,000 of PEAR Company’s P20 par, 8% cumulative, fully participating preference shares of which 2,500 were issued and outstanding, as well as 5,000 of PEAR Company’s P5 par value ordinary shares of which 40,000 were issued and outstanding. No dividends were declared in 2019. Total cash dividends declared on December 30, 2020 amounted to P350,000. PS – P29,280; OS – P34,600 (please refer to our live discussion) i. Cash dividend of P450,000 from BERRY Company in which RDA Company owns a 25% interest giving RDA a significant influence over BERRY Company j. Cash dividends of P200,000 was received from GRAPES Company representing 10% share in the total cash dividend declared in December 2020. P200,000 How much is the total dividend income? P951,080 6. RDA Company had the following transactions for 2020: a. Invested 50,000 shares at P42 per share b. Received rights to purchase additional shares for every 4 shares own at P100. The share rights has a market value of P6.00 REQUIREMENTS: a. SCENARIO A: If all rights are exercised, how much is the total cost of new Investment in Equity securities if it is accounted for separately and not accounted for separately? P1,550,000 and P1,250,000 Accounted For Separately: Share Rights (50,000 rights x P6.00 Additional Shares (50,000/4) x P100 Total New Cost of Investment

P300,000 1,250,000 P1,550,000

Not Accounted for Separately: Additional Shares (50,000/4) x P100

P1,250,000

b. SCENARIO B: If rights are not exercised but sold for P5.00, how much is the carrying amount of Investment in Equity Securities if it is accounted for separately and not accounted for separately? P1,800,000 and P1,850,000

Accounted For Separately: Investment in ES (50,000 sh x P42) Less: Share rights (50,000 rights x P6) – when rights received Investment in ES (the sale of rights no effect on Investment in ES)

P2,100,000 (300,000) P1,800,000

Not Accounted for Separately Investment in ES (50,000 shares x P42) Less: Sale of Share rights (5,000 rights x P5.00) Investment in ES

P2,100,000 (250,0000) P1,850,000

c. SCENARIO C: If all rights are not exercised, how much is the carrying amount of Investment property in Equity Securities, if it is accounted for separately and not accounted for separately? P1,800,000 and P2,100,000 Accounted For Separately: Investment in ES (50,000 sh x P42) Less: Share rights (50,000 rights x P6) – when rights received Investment in ES (the expiry of rights – no effect

P2,100,000 (300,000) P1,800,000

Not Accounted for Separately Investment in ES (50,000 shares x P42)

P2,100,000

7. RDA Company issued rights to subscribe to new share at P150 per share in the ratio of one new share for every five rights held. The share has market value of P190 and the right has a market value of P10. The investor held 15,000 shares acquired at a total cost of P1,800,000. The share rights are accounted for separately. a. The carrying amount of Investment in Equity shares at the date of acquisition ? P1,800,000 b. The amount to b DR to share rights upon declaration? P150,000 = (15,000 rights x P10) c. How much is the new investment in equity shares upon exercised of rights? P600,000 Accounted For Separately: Share Rights (15,000 rights x P10 Additional Shares (15,000/5) x P150 Total New Cost of Investment

P150,000 450,000 P600,000

Not Accounted for Separately: Additional Shares (15,000/5) x P150

P450,000

d. Assume the rights are not exercised but sold for P15, how much will be the carrying amount of the investment in equity securities? P1,650,000 Accounted For Separately: Investment in ES Less: Share rights (15,000 x P10) – when rights received Investment in ES (the sale of rights – no effect

P1,800,000 (150,000) P1,650,000

Not Accounted for Separately Investment in ES Less: Share rights sold (15,000sh x P15)

P1,575,000

= P1,800,000 = (225,000)

e. Assume the rights are not exercised and eventually expired, how much will be the carrying amount of the investment in equity securities? P1,650,000

f.

Accounted For Separately: Investment in ES Less: Share rights (15,000 x P10) – when rights received Investment in ES (the sale of rights – no effect

P1,800,000 (150,000) P1,650,000

Not Accounted for Separately Investment in ES

P1,800,000

Redo letter c-e and assume the share rights are not accounted for separately. P450,000; P1,575,000, P1,800,000

8. PPT (SHARE RIGHTS) RDA invested 50,000 shares at P42 per share. a. How much will be DR to Share Rights and the Carrying Amount of Investment in Equity

Securities if the entity received the rights to purchase additional shares for every 4 shares own at P100, assuming the share are quoted at P125 right on. P250,000 and P1,850,000 FV of Share rights = (P125-P100)/(P4+1) No. of Share rights Share rights (Asset) Investment in ES (50,000sh x P42) – P250,000

P5 50,000 P250,000 P1,850,000

b. How much will be DR to Share Rights and the Carrying Amount of Investment in Equity Securities if the entity received the rights to purchase additional shares for every 4 shares own at P100, assuming the shares are quoted at P125 ex-right.P312,500 and P1,787,500 FV of Share rights = (P125-P100)/P4 No. of Share rights Share rights (Asset) Investment in ES (50,000sh x P42) – P312,500

P6.25 50,000 P312,500 P1,787,500

Theories: 1. A financial instrument is any contract that gives rise to a. A financial asset b. A financial liability c. A financial asset of one entity and a financial liability of another entity d. A financial asset of one entity and a financial liability or equity instrument of another entity. 2. Which of the following cannot be considered a financial asset? a. Cash b. A contractual right to receive cash or another financial asset from another entity. c. A contractual right to exchange financial instrument with another entity under conditions that are potentially unfavourable d. An equity instrument of another entity. 3. Financial assets include all of the following, except a. Prepaid expenses b. Cash in bank c. Trade account receivable d. Loans receivable 4. Financial liabilities include all of the following, except a. Trade accounts payable b. Notes payable c. Bonds payable d. Income tax payable 5. Which of the following is true? I - When equity shares of the same class are acquired on different dates and different cost, the entity shall determine the cost of shares using the average method only. II - Dividend income from the cash dividends will be recognized on the date of payment a. I only b. II only c. Both statements are true d. Both Statements are false

6. In which of the following circumstances is derecognition of a financial asset not appropriate? a. The contractual rights to the cash flows of the financial asset have expired.

b. The financial asset has been transferred and substantially all the risk and rewards of ownership of the transferred asset have also been transferred c. The financial asset has been transferred and the entity has retained substantially all the risk and rewards of ownership of the transferred asset. d. The financial asset has been transferred and the entity has neither retained nor transferred substantially all the risk and rewards of ownership of the transferred asset but the entity has lost control of the transferred asset. 7. Which of the following transfers of financial asset would qualify for derecognition? a. A sale of a financial asset where the entity retains an option to buy the asset back at current fair value on the repurchase date. b. A sale of a financial asset where the entity agrees to repurchase the asset in one year for a fixed priced plus interest c. A sale of a portfolio of short-term accounts receivable where the entity guarantees to compensate the buyer for any losses in the portfolio. d. A loan of a security to another entity. 8. Disclosure of fair value of the financial instruments is required when a. It is practicable to estimate the fair value b. The entity maintains accurate cost records c. Aggregate fair value is material d. Individual fair value is material 9. Disclosure of credit risk of financial instrument does not include a. The amount of accounting loss that the entity would incur should any party to the financial instrument fail to perform. b. The policy of requiring collateral c. The class of financial instrument held d. The specific names of the parties associated with the financial instrument 10. Disclosure of information about significant concentrations of credit risk required for a. All financial instruments b. Financial instruments with off statement of financial position credit risk c. Financial instruments with off statement of financial position market risk d. Financial position risk of accounting loss 11. Which of the following is not a characteristic of a financial asset held for trading? a. It is acquired principally for the purpose of selling or repurchasing it in the near term. b. On initial recognition, it is part of a portfolio of financial assets that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking c. It is a derivative that is not designated as an effective hedging instrument d. It is a derivative that is designated as an effective hedging instrument 12. Transaction cost include a. Fees and commission paid to agent, levies by regulatory authorities, transfer taxes and duties b. Debt premiums or discounts c. Financing cost d. Internal administrative costs 13. Which of the following statements is correct

I - Dividend on is between the date of record and the date of payment II - Ex Dividend is between the date of declaration and the record date a. I only b. II only c. Both statements are true d. Both statements are false

14. Which of the statements is true concerning recognition of unrealized gains and losses? a. Unrealized gains and losses on financial assets held for trading shall be included in profit or loss b. Unrealized gains and losses on financial assets measured at amortized cost are not recognized. c. Unrealized gains and losses on financial assets at fair value through other comprehensive income are not recognized in the income statement d. All of these statements are true 15. Which of the following statements is correct I - Financial assets representing a contractual right to receive cash in the future include trade receivables, notes receivables and loans receivables. II - Prepaid expenses, Leased assets and physical assets are not considered as financial assets a. I only b. II only c. both statements are true d. both statements are false 16. The irrevocable election to present subsequent changes in fair value in other comprehensive income is applicable only to a. Investment in equity instrument that is not held for trading b. Investment in equity instrument that is held for trading c. Financial asset measured at amortized cost d. Financial asset measured at fair value 17. Which of the following statements is correct I - The debt investment can be classified as FA-FVPL, FA – OCI or amortized cost II - The equity investment can be classified as FA-FVPL or FA – OCI only a. I only b. II only c. both statements are true d. Both statements are false 18. What is the reclassification date for purposes of reclassifying financial assets? a. End of the current year reporting period b. First day of the next reporting period following the change in business model c. Date when management decided to change the business model for managing financial assets. d. No definition of reclassification date as this would depend on the judgment of management 19. What is the best evidence of fair value of a financial instrument? a. The original cost b. The estimated value determined using discounted cash flow technique c. The quoted price, if an active market exists for the financial instrument d. The present value of the contractual cash flows less impairment

20. Unrealized gains and losses on trading investment are reported in a. Equity b. Net income c. Other Comprehensive income d. Retained earnings 21. Which of the following statements is correct I - Equity security encompasses any instrument representing ownership shares and rights, warrants or options to acquire dispose of ownership shares at a fixed or determinable price. II - Redeemable preference share is not an equity security but a debt security a. I only b. II only c. Both statements are true d. Both statements are false 22. Debt investment not held for collection are reported at a. Amortized cost b. Fair value c. The lower of amortized cost and fair value d. Net realizable value 23. 1st statement: Gold Bullion deposited in bank is not a financial...