Palmones Adrio B - dissudvsd PDF

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PALMONES, ADRIO B.- INVESTMENT IN EQUITY SECURITIESTHEORIES:1). It is the date on which the stock and transfer book of the entity is closed for registration. Only those shareholders registered as of this date are entitled to received dividends.a. Date of declaration b. Date of record c. Date of paym...

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PALMONES, ADRIO B. - INVESTMENT IN EQUITY SECURITIES THEORIES: 1). It is the date on which the stock and transfer book of the entity is closed for registration. Only those shareholders registered as of this date are entitled to received dividends. a. Date of declaration b. Date of record c. Date of payment d. Date of mailing the dividend check 2). At which of the following dates has the shareholder theoretically realized income from dividend? a. The date of the dividend is declared b. The date of record c. The date the dividend check is mailed by the entity d. The date the dividend check is received by the shareholder. 3). Property dividends are recorded as a. Dividend income at carrying amount of the property b. Dividend income at fair value of the property c. Return of investment and therefore credited to investment account d. Memorandum entry only 4). Liquidating dividends are credited to a. Income b. Retained earnings c. Investment account d. Share capital 5).What is the effect of stock dividend of the same class? a. Increase in investment account and increase in cost per share b. Decrease in investment account and decrease in cost per share c. No effect on investment account but decrease in cost per share d. No effect on investment account but increase in cost per share 6). When stock dividends of different class are received

a. No formal entry is made but only a memorandum b. Cash is debited and dividend income is credited c. A new investment account is debited and dividend income is credited d. A new investment account is debited and the original investment account is credited 7). Shares received in lieu of cash dividend are recorded as a. Income at fair value of the shares received b. Income at par value of the share received c. Income at the cash dividend that would have been received d. Stock dividends 8).Cash received in lieu of stock dividends is accounted for as a. Dividend income b. Return of investment c. Partly dividend income and partly return of investment d. If the stock dividends are received and subsequently sold at the cash received and gain or loss is recognized 9).What is the effect of share split up? a. Increase in number of shares and increase in cost per share b. Decrease in number of shares and decrease in cost per share c. Increase in number of shares and decrease in cost per share d. Decrease in number of shares and increase in cost per share 10). An investor owns 10% of the ordinary shares of an investee throughout the year. The investee has no preference shares outstanding. The investor’s interest gives the right to a. Be paid 10% of the investee’s profits in cash year. b. Receive dividend equal to 10% of the par value each year. c. Receive dividends equal to 10% of the total dividend paid by the investee for the year to shareholders. d. Keep investee from issuing any additional shares unless the investor is willing to buy 10% of the newly issued shares. 11.

When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment a. by using the equity method. b. by using the fair value method. c. by using the effective interest method.

d. by consolidation.

12.

Bista Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? a. b. c. d.

13.

Fair Value Method No Effect Increase No Effect Decrease

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method a. Income b. A reduction of the investment c. Income d. A reduction of the investment

14.

a reduction of the carrying value of the investment. additional paid-in capital. an addition to the carrying value of the investment. dividend income.

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. b. c. d.

16.

Equity Method Income A reduction of the investment A reduction of the investment Income

Byner Corporation accounts for its investment in the common stock of Yount Company under the equity method. Byner Corporation should ordinarily record a cash dividend received from Yount as a. b. c. d.

15.

Equity Method Decrease Decrease No Effect No Effect

investor sells the investment. investee declares a dividend. investee pays a dividend. earnings are reported by the investee in its financial statements.

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? a. The investor should always use the equity method to account for its investment. b. The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee. c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. d. The investor should always use the fair value method to account for its investment.

17.

When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be a. b. c. d.

18.

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are a. b. c d.

19.

available-for-sale securities where a company has holdings of less than 20%. trading securities where a company has holdings of less than 20%. securities where a company has holdings of between 20% and 50%. securities where a company has holdings of more than 50%.

Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2007, Marin had net earnings of $300,000 and paid dividends of $30,000. Dane mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively? a. b. c. d.

20.

its original cost. its fair value at the date of the transfer. the higher of its original cost or its fair value at the date of the transfer. the lower of its original cost or its fair value at the date of the transfer.

Understate, overstate, overstate Overstate, understate, understate Overstate, overstate, overstate Understate, understate, understate

All of the following are requirements for disclosures related to financial instruments except a. disclosing the fair value and related carrying value of the instruments. b. distinguishing between financial instruments held or issued for purposes other than trading. c. combining or netting the fair value of separate financial instruments. d. displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges.

Sources: Theory of Accounts, Conrado Valix, CPA Intermediate accounting 12th edition, Kieso

Problems: 1). On January 1, 2011, 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, 2010, to be paid on March 31, 2011 to shareholders of record on January 31, 2011. No other transactions occurred in 2011 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 1 Answer c Purchase price (40,000x100) 4,000,000 Brokerage 120,000 Total 4,120,000 Less: Purchase dividend (40,000 x 5) 200,000 Cost of investment 3,920,000 2). On January 1,2011, Adam Company purchased as a long-term investment 100,000 ordinary shares of Mill Company for P40 a share. On December 31, 2011, the market price of Mill’s share was P35, reflecting a temporary decline in market price. On December 28, 2012, Adam sold 80,000 shares of Mill’s Company for P30 a share. For the year ended December 31, 2012, what amount should be reported as loss on disposal of long-term investment? a. b. c. d.

1,000,000 900,000 800,000 400,000

Solution 2 Answer c Sales price (80,000 x 30) Cost of investment sold (80,000 x 40) Loss on disposal of investment

2,400,000 (3,200,000) ( 800,000)

3). Cobb Company purchased 10,000 shares representing 2% ownership of Roe Company on February 15, 2011. Cobb received a stock dividend of 2,000 shares on March 31, 2011, when the carrying amount per share on Roe’s books was P350 and the market

value per share was P400. Roe paid a cash dividend of P15 per share on September 15, 2011. In the income statement for the year ended October 31, 2011, what amount should Cobb report as dividend income? a. b. c. d.

980,000 880,000 180,000 150,000

Solution 3 Answer c Original shares Stock dividend Total shares

10,000 2,000 12,000

Dividend income (12,000 x P15)

180,000

4). During 2011, Lawan Company bought the shares of Burwood Company as follows: June 1 December 1

20,000 shares @ P100 30,000 shares @ P120

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

The transactions for 2012 are: January 10 Received cash dividend at P10 per share. January 20 Received 20% stock dividend. December 10 Sold 30,000 shares at P125 per share. If the FIFO approach is used, what is the gain on the sale of the shares? a. b. c. d.

1,150,000 950,000 150,000 550,000

Solution 4 Answer a FIFO Approach Original shares Stock dividend – 20% Total shares Sales price (30,000 x 125) Cost of shares sold:

June 1 20,000 4,000 24,000

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

From June 1 (24,000 shares) From Dec. 1 (6,000 shares) (6,000/36,000 x 3,600,000) Gain on sale

2,000,000 600,000

Average approach Sale price Cost of shares sold (30,000/60,000 x 5,600,000) Gain on sale

2,600,000 1,150,000

3,750,000 2,800,000 950,000

5). Wood Company owns 20,000 shares of Arlo Company’s 200,000 shares of P100 par, 6% cumulative, nonparticipating preference share capital and 10,000 shares representing 2% ownership of Arlo’s ordinary share capital. During 2011, Arlo declared and paid preference dividends of P2,400,000. No dividends had been declared or paid during 2010. In addition, Wood received a 5% stock dividend on ordinary share from Arlo when the quoted market price of Arlo’s ordinary share was P10. What amount should Wood report as dividend income in its 2011 income statement? a. b. c. d.

120, 000 125,000 240,000 245,000

Solution 5 Answer c Dividend income on preference share (20,000/200,000 = 10% x 2,400,000)

240,000

6). Day Company received dividends from its share investments during the year ended December 31, 2011 as follows: *

*

A stock dividend of 4,000 shares from Parr Company on July 31, 2011 when the market price of Parr’s share was P20. Day owns less than 1% of Parr’s share capital. A cash dividend of P150,000 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 Day report in its 2011 income statement? a. b. c.

230,000 150,000 80,000

d.

0

Solution 6 Answer d The stock dividend from Parr Company is not and income. The cash dividend from Lark Company is not also an income because the interest is 25% and therefore the equity method is used.

7). Wray Company provided the following data for 2011: * * *

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 5% interest in King. Wray owns a 2% interest in Bow Company , which declared a P2,000,000 cash dividend on November 15, 2011 payable on January 15, 2012.

What amount should Wray report as dividend income for 2011? a. b. c. d.

600,000 560,000 100,000 40,000

Solution 7 Answer d Cash dividend from Bow Company (2% x 2,000,000)

40,000

8). During 2011, Neil Company held 30,000 shares of Brock Company’s 100,000 outstanding shares and 6,000 shares of Amal Company’s 300,000 outstanding shares. During the year, Neil received P300,000 cash dividend from Brock, P15,000 cash dividend and 3% stock dividend from Amal. The closing price of Amal share is P150. What amount should be reported as dividend revenue for 2011? a. b. c. d.

342,000 315,000 442,000 15,000

Solution 8 Answer d Cash dividend from Amal (6,000/300,000 = 2% interest)

15,000

The cash dividend of P300,000 from brock company is not an income because the interest is 30% and therefore the equity method is used 9). On March 1, 2011, Evan Company purchased 10,000 ordinary shares of LVC at P80 per share. On September 30, 2011, Evan 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, 2012. On September 30, 2011, LVC’s share had a market value P 95 and the stock right had a market value of P5. What amount should Evan report in its September 30, 2011 statement of financial position for investment in stock rights? a. b. c. d.

150,000 100,000 50,000 60,000

Solution 9 Answer c Initial measurement of stock rights (10,000 rights x 5)

50,000

10). Rice Company owns 30,000 ordinary shares of Wood Company acquired on July 31, 2011, at a total cost of P1,100,000. On December 1, 2011, Rice received 30,000 stock rights from Wood. Each right entitles the holder to acquire one share at P 45. The market price of Wood’s share on this date was P50 and the market price of each right was P10. Rice sold its rights on December 31, 2011 for P450,000 less a P10,000 commission. What amount should be reported as gain from the sale of the rights? a. b. c. d.

150,000 140,000 250,000 240,000

Solution 10 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

11). Adam Company owns 50,000 ordinary 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 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, 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. b. c. d.

2,250,000 3,250,000 3,050,000 5,550,000

Solution 11 Answer b Initial cost of rights (50,000 x 20) Cash paid for new shares (25,000 x 90) Total cost of new shares

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

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 P5,000,000. The share is quoted right-on at 125. The stock rights are accounted for separately. What is the cost of the new investment if all of the stock rights are exercised by Jealina Company? a. b. c. d.

1,500,000 1,250,000 1,562,500 1,450,000

Solution 12 Answer a Theoretical value of right (125 – 100 / 4 + 1)

5.00

Initial cost of rights (50,000 x 5) Cash paid for new shares (50,000 / 4 = 12,500 x 100) Cost of new investment

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

13). On January 1, 2011, Mylene Company purchased 50,000 shares of another entity for P3,600,000. On October 1, 2011, 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 and P90 immediately after the rights were issued. On December 1, 2011, Mylene exercised all stock rights. On December 31, 2011, 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 2011?

a. 450,000 b. 700,000 c. 287,500 d. 125,000 Solution 13 Answer a

Original investment New investment acquired through stock rights (50,000 x 85) Total

Shares 50,000

Cost 3,600,000

50,000 100,000

4,250,000 7,850,000

FIFO Approach Sale price (25,000 x 90) Cost of shares (25,000 / 50,000 x 3,600,000) Gain on sale

2,250,000 1,800,000 450,000

Average approach Sale price Cost of shares sold (25,000 / 100,000 x 7,850,000) Gain on sale

2,250,000 1,962,500 287,500

14-15). Christopher Company completed the following transactions in relation to its long-term investment in Bay Company: On January 1, 2009, Christopher Company purchased 20,000 shares of Bay Company, P100 par, at P110 per share. On March 1, 2009, Bay Company issued rights to Christopher Company, each permitting the purchase of ¼ 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, 2009, 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 2009 and 2010 (10% on December 31 of each year) are credited to the investment account until the debit was fully offset. On January 1, 2011, Christopher Company received 50% stock dividend from Bay Company. On same date, the shares received as stock dividend were sold at P160 per share and the proceeds were credited to income.

On December 31, 2011, the share 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, 2012, Christopher Company sold one-half of the investment at P92 per share and credited the proceeds to the investment account. 14). What is the balance of the investment on December 31, 2012 as it was kept by Christopher Company? a. b. c. d.

3,150,000 2,650,000 2,200,000 4,950,000

Solution 14 Answer b 1/1/2009 (20,000 x 110) 4/1/2009 ( 5,000 x 100) 12/31/2009 (10% x 2,500,000) 12/31/2010 (10% x 2,500,000) 12/31/2011 (25,000 x 110) 6/30/2012 (25,000 x 92) Investment account per book

Shares 20,000 5,000 25,000 (25,000) 25,000

Cost 2,200,000 500,000 (250,000) (250,000) 2,750,000 (2,300,000) 2,650,000

15). Using the “average method”, what is the correct balance of the investment on December 31, 2012? a. b. c. d.

2,200,000 1,800,000 900,000 0

Solution 15 Answer c 1/1/2009 4/1/2009 1/1/2011 Balance 1/1/2011

(20,000 x 110) (5,000 x 100) ( 50% x 25,000) (12,500 / 37,500 x 2,700,000)

Shares 20,000 5,000 12,500 37,500 (12,500)