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Chapter 36Financial asset at fair valueMeasurement-FVPL and FVOCIProblem 1On January 1, 2016, Alexis Company purchasedmarketable equity securities to be held as “trading” for5,000,000. The entity also paid transaction costamounting to 200,000.The securities had a market value of 5,500,000 onDecember...

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Chapter 36 Financial asset at fair value Measurement-FVPL and FVOCI

Cost Unrealized loss-2016 Market value- December 31, 2016

Problem 1 On January 1, 2016, Alexis Company purchased marketable equity securities to be held as “trading” for 5,000,000. The entity also paid transaction cost amounting to 200,000. The securities had a market value of 5,500,000 on December 31, 2016 and the transaction cost that would be incurred on sale is estimated at 100,000. No securities were sold during 2016. What amount of unrealized gain or loss on these securities should be reported in the 2016 income statement? a. 500,000 gain b. 500,000 loss c. 300,000 gain d. 400,000 gain Answer: a Fair value 5,500,000 Acquisition cost –Trading 5,000,000 Unrealized gain including in profit and loss 500,000

Problem 3 During 2016, Latvia Company purchased trading securities with the following cost and market value on December 31, 2016: 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 The entity sold 10,000 shares of security B on January 15, 2017 for 150 per share. 1. What amount of unrealized gain or loss should be reported in the income statement for 2016? a. 200,000 loss b. 200,000 gain c. 300,000 loss d. 300,000 gain 2. What amount should be reported as loss on sale of trading investment in 2017? a. 200,000 gain b. 200,000 loss c. 100,000 gain d. 100,000 loss

Problem 2 During 2016, Garr Company purchased marketable equity securities as a trading investment. For the year ended December 31, 2016, the entity recognized unrealized loss of 230,000. There were no security transactions during 2017. The entity provided the following information on December 31, 2017: Security Cost Market Value A 2,450,000 2,300,000 B 1,800,000 1,820,000 In the 2017 income statement, what amount should be reported as unrealized gain or loss? a. Unrealized gain of 100,000 b. Unrealized loss of 100,000 c. Unrealized loss of 130,000 d. Unrealized gain of 130,000 Answer: A Market value-December 31, 2017 Carrying amount 2016 Unrealized gain in 2017

4,120,000 4,020,000 100,000

Answer 1- A Total market value- December 2016 Total cost- December 2016 Unrealized loss in 2016 Answer 2- D Sale price (10,000 x 150) Carrying amount of B shares Loss on sale of trading investment

4,250,000 230,000 4,020,000

4,800,000 5,000,000 200,000 1,500,000 1,600,000 100,000

Problem 4 Carmela Company acquired non trading equity instrument for 4,000,000 on March 31, 2016. The equity instrument is classified as financial asset at fair value through other comprehensive income. The transaction cost incurred amounted to 700,000. On December 31, 2016, the fair value of the instrument was 5,500,000 and the transaction cost that would be incurred on the sale of the investment is estimated at 600,000. What amount of gain should be recognized in other comprehensive income for the year ended December 31, 2016?

a. 200,000 b. 900,000 c. 800,000 d. 0

Answer 1- A Total cost Unrealized loss in 2016 Market value-12/31/16

3,700,000 (100,000) 3,600,000

Answer: C Fair value- December 2016 Acquisition cost Unrealized gain- OCI

5,500,000 4,700,000 800,000

Acquisition cost Transaction cost Total acquisition cost

4,000,000 700,000 4,700,000

Answer 2- B Market value- December 31, 2017 Market value- December 31, 2016 Unrealized loss 2017 Unrealized loss-December 31, 2016 Cumulative unrealized loss-2017

3,300,000 3,600,000 (300,000) (100,000) (400,000)

Answer 3-C Market value-12/31/17 Original acquisition cost Cumulative unrealized loss

3,300,000 3,700,000 (400,000)

Problem 5 On December 31, 2016, Fay Company appropriately reported a 100,000 unrealized loss. There was no change during 2017 in the composition of the portfolio of nontrading equity securities held at fair value through other comprehensive income. Security A B C

Cost 1,200,000 900,000 1,600,000 3,700,000

Market value 2017 1,300,000 500,000 1,500,000 3,300,000

1. What is the market value of the investment on December 31, 2016? a. 3,600,000 b. 3,700,000 c. 3,500,000 d. 3,800,000 2. What amount of loss on these securities should be included in the statement of comprehensive income fot the year ended December 31, 2017 as component of other comprehensive income? a. 400,000 b. 300,000 c. 100,000 d. 0 3. What cumulative amount of loss on these securities should be reported in the statement of changes in equity for the year ended December 31, 2017 as component of other comprehensive income? a. 100,000 b. 200,000 c. 400,000 d. 0

Problem 6 Benquet Company began operations on January1, 2016. The following information pertains to the December 31, 2016 portfolio of equity securities: Trading Non-trading Aggregate cost 4,000,000 6,000,000 Aggregate market value 3,700,000 5,500,000 Aggregate lower cost 3,500,000 5,300,000 The market declines are judged to be other than temporary. The non-trading securities are designated at fair value through other comprehensive income. What amount should be reported as total loss on these securities in the income statement for 2016? a. 800,000 b. 500,000 c. 300,000 d. 0 Answer: C Trading Aggregate market value 3,700,000 Cost 4,000,000 Unrealized loss (300,000)

Non-trading 5,500,000 6,000,000 (500,000)

Problem 7 Judicious Company acquired an entity investment a number of years ago for 3,000,000 and classified it as fair value through other comprehensive income. On December 31, 2016, the cumulative loss recognized in other comprehensive income was 400,000 and the carrying amount of the investment was 2,600,000.

On December 31, 2017 the issuer of the equity investment was in severe financial difficulty and the fair value of the equity investment had fallen to 1,200,000. What cumulative amount of unrealized loss should be reported as component of other comprehensive income in the statement of changes in equity for the year ended December 31, 2017? a. 1,400,000 b. 1,800,000 c. 1,000,000 d. 0 Answer: B Market value (2017) Historical cost Cumulative unrealized loss

1,200,000 3,000,000 (1,800,000)

Problem 8 On January 1, 2016, Lebanon Company purchased equity securities to be held at fair value through other comprehensive income. On December 31, 2016, the cost and 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, 2017, the entity sold Security X for 2,500,000. What amount should be recognized directly in retained earnings as a result of the sale of financial asset in 2017? a. 500,000 b. 100,000 c. 400,000 d. 0 Answer: A Sale price- Security X 2,500,000 Historical cost- Security X 2,000,000 Cumulative credit to retained earnings (500,000) Problem 9 On January 1, 2016, Caraga Company purchased equity securities to be held as financial assets measured at fair value through other comprehensive income. Security R Security S Security T

Cost 3,000,000 4,000,000 5,000,000

Market-12/31/16 Market-12/31/17 3,200,000 3,500,000 3,700,000 4,600,000 4,700,000

On January 31, 2017, the entity sold security R for 3,500,000.

1. What amount should be recognized directly in retained earnings? a. 500,000 b. 300,000 c. 200,000 d. 0 2. What cumulative unrealized gain or loss on the remaining financial assets should be reported in the statement of changes in equity on 2017? a. 600,000 gain b. 600,000 loss c. 300,000 gain d. 300,000 loss Answer 1: A Sale price-Security R Historical cost- Security R Cumulative credit to retained earnings

3,500,000 3,000,000 (500,000)

Answer 2: B Market value Security S-12/31/17 Market value Security T- 12/31/17 Total market value Historical cost S and T Cumulative unrealized loss-12/31/17

3,700,000 4,700,000 8,400,000 9,000,000 (600,000)

Problem 10 At the beginning of the current year, Remington Company acquired 200,000 ordinary shares of Universal Company for 9,000,000. At the time of purchase, Universal Company had outstanding 800,000 shares with carrying amount of 36,000,000. The following events took place during the current year: Universal Company reported net income of 1,800,000 fo the current year. Remington Company received from Universal Company a dividend of 0.75 per ordinary share. The market value of Universal Company share had temporarily declined to 40. Remington Company has elected irrevocably to measure the investment at fair value through other comprehensive income. What is the carrying amount of the investment at year end? a. 9,000,000 b. 8,000,000 c. 9,300,000 d. 9,450,000

Answer: B Market value at year end (200,000x40) Acquisition cost Unrealized loss on financial asset-OCI

8,000,000 9,000,000 (1,000,000)

Problem 11 Neal Company held the following financial assets as trading investments on December 31, 2016: Cost 100,000 shares of Company A non-redeemable preference share capital, par value 75

775,000

7,000 shares of Company B preference share capital, par value 100, subject to mandatory redemption by the issue at par on December 31, 2017 690,000 1,465,000

Market value

825,000

625,000 1, 450,000

On December 31, 2016, what is the total carrying amount of the investments? a. 1,400,000 b. 1,450,000 c. 1,465,000 d. 1,475,000 Answer: B The nonredeemable preference share is an equity security. The non-redeemable preference share is a debt security whether debt or equity security, financial assets held for trading are measured at fair value through profit or loss. Problem 12 Trinidad Company provided the following portfolio of equity investments measured at fair value through other comprehensive income; Aggregate cost- December 31, 2016 1,700,000 Unrealized gain- December 31, 2016 40,000 Unrealized loss- December 31, 2016 260,000 Net realized gain during 2016 300,000 On January 1, 2016, the entity reported an unrealized loss of 15,000 as a component of other comprehensive income. In the 2016 statement of changes in equity, what cumulative amount should be reported as unrealized loss on these securities? a. 260,000 b. 220,000 c. 205,000 d. 0

Answer: B Unrealized loss Unrealized gain Cumulative net realized loss- 2016 Unrealized loss- January 1, 2016 Increase in unrealized loss

260,000 40,000 220,000 15,000 205,000

Problem 13 Gil Company provided the following information on December 31, 2016 regarding equity investment: Non-current assets: Financial asset-FVOCI 3,700,000 Shareholder’s equity: Unrealized loss- OCI (300,000) The entity paid transaction cost of 100,000 related to the acquisition of the investment. The entity elected to measure the equity investment at fair value through other comprehensive income. What was the historical cost of the financial asset? a. 3,700,000 b. 3,400,000 c. 3,900,000 d. 4,000,000 Answer: D Historical cost (3,700,000+300,000)

4,000,000

Problem 14 On July 1, 2016, Bellirose Company purchased 1,000,000 face value 8% bonds for 910,000 plus accrued interest to yield 10%. The bonds mature on January 1, 2021, pay interest annually on January 1, and are classified as trading securities. On December 31, 2016, the bonds had a market value of 945,000. On February 15, 2017, the entity sold the bonds for 920,000. On December 31, 2016, what amount should be reported for trading securities? a. 910,000 b. 920,000 c. 945,000 d. 950,000

Answer: C Financial asset held for trading- FVPL

945,000

Chapter 37 Investment inequity Securities Dividend, share split and stock right Problem 1 On January 1, 2016, ABC Company purchased 40,000 shares at 100 per share to be held for trading. Brokerage fees amounted to 120,000. A 5-peso dividend per share had been declared on December 15, 2015 to be paid on March 31, 2016 to shareholders of record on January 31, 2016. No other transactions occurred in 2016 affecting the investment. What is the initial measurement of the investment? a. 4,120,000 b. 4,000,000 c. 3,920,000 d. 3,800,000 Answer: D Purchase price (40,000x100) Less: Purchased dividend (40,000x5) Cost of investment

4,000,000 200,000 3,800,000

Problem 2 On January 1, 2016, Adam Company purchased as a long term investment unlisted 100,000 ordinary shares of Mill Company for 40 a share. On December 28, 2016, Adam Company sold 80,000 shares of Mill Company for 50 a share. For the year ended December 31, 2016, what amount should be reported as gain on disposal of long term investment? a. 200,000 b. 900,000 c. 800,000 d. 400,000 Answer: C Sale price (80,000x50) Cost of investment (80,000x40) Gain on disposal of investment

4,000,000 (3,200,000) 800,000

Problem 3 Cobb Company purchased 10,000 shares representing 2% ownership of Roe Company on February 15, 2016. Cobb Company received a stock dividend of 2,000 shares on March 31, 2016, when the carrying amount per share was 350 and the market value per share was 400. Roe Company paid a cash dividend of 15 per share on September 15, 2016. In the income statement for the year ended October 31, 2016, what amount should be reported as dividend income? a. 980,000 b. 880,000 c. 180,000 d. 150,000

Answer: C Original shares Stock dividend Total shares Dividend Income (12,000x15)

10,000 2,000 12,000 180,000

Problem 4 During 2016, Lawan Company bought the shares of Burwood Company as follows: June 1 December 1

20,000 shares at 100 30,000 shares at 120

2,000,000 3,600,000 5,600,000

Transactions for 2017 January 10 Received a cash dividend at 10 per share January 20 Received 20% stock dividend December 10 Sold 30,000 shares at 125 per share If the FIFO approach is used, what is the gain on sale of the shares? a. 1,150,000 b. 950,000 c. 150,000 d. 550,000 Answer:A FIFO approach Original shares Stock dividend-20% Total shares Sale price (30,000x125) Cost of shares sold: From June 1 (24,000 shares) From December 1 (6,000 shares) Gain on sale

June 1 20,000 4,000 24,000

Dec 1 30,000 6,000 36,000 3,750,000

2,000,000

600,000 2,600,000 1,150,000

Problem 5 Wood Company own 20,000 shares of Arlo Company’s 200,000 shares of P100 par, 6% cumulative, non-participating preference share capital and 10,000 shares representing 2% ownership of Arlo’s ordinary share capital. During 2016, Arlo declared and paid preference dividends of 2,400,000. No dividends had been declared or paid during 2015. In addition, Wood received a 5% stock dividend on ordinary share from Arlo when the quoted market price of Arlo’s ordinary share was 10. What amount should be reported as dividend income for 2016? a. 120,000 b. 125,000 c. 240,000 d. 245,000

Answer: C Dividend income on preference share (20,000/200,000=10%x2,400,000)

Answer: D Cash dividend from Amal (6,000/300,000=2% interest)

240,000

Problem 6 Day Company received dividends from share investments during the year ended December 31, 2016 as follows:  A stock dividend of 4,000 shares from Parr Company on July 31, 2016, when the market price of Parr’s share was 20. Day owns less than 1% of Parr’s share capital.  A cash dividend of 150,000 from Lark Company in which Day owns a 25% interest. A majority of Lark’s directors are also directors of Day. What amount of dividend revenue should be reported in 2016? a. 230,000 b. 150,000 c. 80,000 d. 0 Answer: D The stock dividend from Parr Company is not an income. Problem 7 Wray Company provided the following data for 2016:  On September 1, Wray received a 50,000 cash dividend from Seco Company in which Wray owns a 30% interest.  On October 1, Wray received a 60,000 liquidating dividend from King Company. Wray owns a 5% interest in King.  Wray owns a 2% interest in Bow Company which declared a 2,000,000 cash dividend on November 15, 2016 payable on January 15, 2017. What amount should be reported as dividend income for 2016? a. 600,000 b. 560,000 c. 100,000 d. 40,000 Answer: D Cash dividend from Bow Company (2%x 2,000,000)

40,000

Problem 8 During 2016, Neil Company held 30,000 shares of Brock Company’s 100,000 outstanding shares and 6,000 shares of Amal Company’s 300,000 shares. During the year, Neil Company received P300,000 cash dividend from Brock, 15,000 cash dividend and 3% stock dividend from Amal. The closing of Amal share is 150. What amount should be reported as dividend revenue for 2016? a. 342,000 b. 315,000 c. 442,000 d. 15,000

15,000

Problem 8 On March 1, 2016, Evan Company purchased 10,000 ordinary shares at 80 per share. On September 30, 2016, Evan received 10,000 stock rights to purchase an additional 10,000 shares at 90 per share. The stock rights had an expiration date on February 1, 2017. On September 30, 2016, the share had a market value P95 and the stock right had a market value of P5. What amount should be reported on September 30, 2016 for investment in stock rights? a. 150,000 b. 100,000 c. 50,000 d. 60,000 Answer: C Initial measurement at fair value (10,000 rights x 5)

50,000

Problem 10 Rice Company owned 30,000 ordinary shares of Wood Company acquired on July 31, 2016, at total cost of 1,100,000. On December 1, 2016, Rice received 30,000 stock rights from Wood. Each right entitles the holder to acquire one share at 45. The market price of Wood’s share on this date was P50 and the market price of each right was P10. Rice sold the rights on December 31, 2016 for 450, 000 less a 10,000 commission. What amount should be reported as gain from the sale of rights? a. 150,000 b. 140,000 c. 250,000 d. 240,000 Answer: B Net sale price (450,000-10,000) Initial cost of rights sold (30,000 x 10) Gain on sale of rights

440,000 (300,000) 140,000

Problem 11 Adam Company owned 50,000 ordinary shares of Bland Company. These 50,000 shares were purchased by Adam for P120 per share. On August 30, 2016, Bland distributed 50,000 stock 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, 2016, 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 are acquired by exercising the rights? a. 2,250,000 b. 3,250,000 c. 3,050,000 d. 5,500,000 Answer: B Initial cost of rights (50,000x20) Cash paid for new shares (25,000x90) Total cost of new shares

1,000,000 2,250,000 3,250,000

Problem 12 Excelsia Company issued rights to subscribe to its stock, the ownership of 4 shares entitling the shareholders to subscribe for 1 share at P100. Jealina Company owns 50,000 shares of Excelsia Company with total cost of 5,000,000. 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? a. 1,500,000 b. 1,250,000 c. 1,562,500 d. 1,450,000 Answer: A Theoretical value of right (125-100/4+1) Initial cost of rights (50,000 x 5) Cash paid for new shares (50,000/4=12,500x100) Cost of new investment

5.00 250,000 1,250,000 1,500,000

Problem 13 On January 1, 2016, Mylene Company purchased 50,000 shares of another entity for 3,600,000. On October 1, 2016, the entity received 50,000 stock rights from the investee. Each right entitled the shareholder to acquire one share for P85. The market price of the investee’s share was P100 immediately before the rights were issued and P90 immediately after the rights were issued. On December 1, 2016, the entity exercised all stock rights. On December 31, 2016, the entity sold 25,000 shares at P90 per share. The stock rights are not accounted for separately. The FIFO approach is used. What is the gain on sale of investment that should be recognized in 2016?

a. 450,000 b. 700,000 c. 287,5...