FINANCIAL ACCOUNTING 1_2nd ASSIGNMENT

INVESTMENT

Name: ANSWER KEY Date: August 20, 2014

True or False
1. The IASB requires that investments meeting the business model (held-for-collection) and contractual cash
flow tests be valued at fair value. False
2. The IASB requires that companies classify financial assets into two measurement categories – amortized
cost and fair value. True
3. Amortized cost is the initial recognition amount of the investment minus cumulative amortization. False
4. Companies measure debt investments at fair value if the objective of the company’s business model is to
hold the financial asset to collect the contractual cash flows. False
5. The gain on sale of debt investments is the excess of the selling price over the fair value of the bonds. False
6. The Unrealized Holding Gain or Loss–Income account is reported in the other income and expense section
of the income statement. True
7. At each reporting date, companies adjust debt investments’ amortized cost to fair value, with any unrealized
holding gain or loss reported as part of their comprehensive income. False
8. Over the life of a debt investment, interest revenue and the gain on sale are the same using either amortized
cost or fair value measurement. True
9. The fair value option is generally available only at the time a company first purchases the financial asset or
incurs a financial liability. True
10. Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over
the investee. False
11. The Unrealized Holding Gain/Loss—Equity account is reported as a part of other comprehensive income.
True
12. Non-trading equity investments are recorded at fair value, with unrealized gains and losses reported in other
comprehensive income. True
13. An investment of more than 50 percent of the voting stock of an investee should lead to a presumption of
significant influence over an investee. False
14. All dividends received by an investor from the investee decrease the investment’s carrying value under the
equity method. True
15. Under the fair value method, the investor reports as revenue its share of the net income reported by the
investee. False
16. A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in
another corporation. True
17. An impairment loss is the difference between an investments cost and the expected future cash flows. False
18. If a company determines that an investment is impaired, it writes down the amortized cost basis of the
individual security to reflect this loss in value. True
19. Companies account for transfers between investment classifications retroactively, at the end of the
accounting period after the change in the business model. False
*20. A reclassification adjustment is necessary when a company reports realized gains/losses as part of net
income but also unrealized gains/losses as part of other comprehensive income. False

Problem Solving

1. Carsen Company purchased P200,000 of 10% bonds of Garrison Co. on January 1, 2012, paying P211,950.
The bonds mature January 1, 2022; interest is payable each July 1 and January 1. The discount of P11,950
provides an effective yield of 9%. Carsen’s objective is to hold the bonds to collect the contractual cash flows.
Carsen Company uses the effective interest method.
Required: Compute for the following:
a. On July 1, 2012, Carsen Company should decrease its Held-for-collection Debt Investments account
for the Garrison Co. bonds by: P462
b. For the year ended December 31, 2012, Carsen Company should report interest revenue from the
Garrison Co. bonds at: P19,055
2. Instrument Corp. has the following investments which were held throughout 2010–2011:
Fair Value
Cost 12/31/10 12/31/11
Trading P300,000 P400,000 P380,000
Non-trading 300,000 320,000 360,000
Required: Compute for the following
a. What amount of gain or loss would Instrument Corp. report in its income statement for the year ended
December 31, 2011 related to its investments? P20,000 loss
b. What amount would be reported as accumulated other comprehensive income related to investments in
Instrument Corp.’s statement of financial position at December 31, 2010?P20,000 gain
3. The summarized statements of financial position of Goebel Company and Dobbs Company as of December 31,
2010 are as follows:
Goebel Company
Statement of Financial Position
December 31, 2010
Assets P1,200,000

Liabilities P 150,000
Share capital—ordiany 600,000
Retained earnings 450,000
Total equities P1,200,000
Dobbs Company
Statement of Financial Position
December 31, 2010
Assets P900,000

Liabilities P225,000
Share capital—ordiany 555,000
Retained earnings 120,000
Total equities P900,000
Required: Compute for the following
a. If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2010 for P195,000 and
the fair value method of accounting for the investment were used, the amount of the debit to Equity
Investments would have been 195,000
b. If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2010 for P225,000 and
the equity method of accounting for the investment were used, the amount of the debit to Equity Investments
would have been 225,000.
c. If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2010 for P135,000 and
during 2011 Dobbs Company had net income of P75,000 and paid a cash dividend of P30,000, applying the
fair value method would give a debit balance in the Equity Investments account at the end of 2011 of
135,000
d. If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2010 for P202,500 and
during 2011 Dobbs Company had net income of P75,000 and paid a cash dividend ofP30,000, applying the
equity method would give a debit balance in the Equity Investments account at the end of 2011 of 216,000

4. Brown Corporation earns P240,000 and pays cash dividends of P80,000 during 2012. Dexter Corporation owns
3,000 of the 10,000 outstanding shares of Brown.
Required: Compute for the following
a. What amount should Dexter show in the investment account at December 31, 2012 if the beginning of the
year balance in the account was P320,000? P368,000
b. How much investment revenue should Dexter report in 2012? 72,000

5. Rich, Inc. acquired 30% of Doane Corp.'s ordinary shares on January 1, 2010 for P400,000. During 2010,
Doane earned P160,000 and paid dividends of P100,000. Rich's 30% interest in Doane gives Rich the ability to
exercise significant influence over Doane's operating and financial policies. During 2011, Doane earned
P200,000 and paid dividends of P60,000 on April 1 and P60,000 on October 1. On July 1, 2011, Rich sold half
of its shares in Doane for P264,000 cash.
Required: Compute for the following
a. Before income taxes, what amount should Rich include in its 2010 income statement as a result of the
investment? P48,000
b. The carrying amount of this investment in Rich's December 31, 2010 statement of financial position should
be P418,000
c. What should be the gain on sale of this investment in Rich's 2011 income statement? 49,000

6. The following chronological transactions pertain to Earth Company:

1. Purchased 80,000 shares, par 10, at P40 per share as long-term investment.
2. Received a stock dividend of one share for every four owned.
3. Received a cash dividend of P5 per share.
4. Received stock rights to purchase one share at P30 for evry five rights held. On this date, the stock right has
a market value of P5.
5. Sold 40,000 rights at P7 each.
6. Exercised the remaining rights.
7. Sold 80,000 shares at P35 per share.
Required:
a. Prepare all journal entries to record the transactions assuming the stock rights are accounted for separately.
 b. Present the investments in equity securities on December 31, 2012.

a.
1. Investment in Equity Securities 3,200,000
Cash 3,200,000
2. Memo
3. Cash 500,000
Dividend Income 500,000
4. Stock Rights 500,000
Investment in Equity Securities 500,000
5. Cash 280,000
Stock Rights 200,000
Gain on Sale of Rights 80,000
6. Investment in Equity Securities 660,000
Stock Rights 300,000
Cash 360,000
7. Cash 2,800,000
Investment in Equity Securities 2,160,000
Gain on Sale of Investment 640,000
b. Shares Cost
Original Acquisition 20,000 540,000
New Acquisition 12,000 660,000
32,000 1,100,000

7. On January 1,2012 Jam Company reported as long-term investments the following unquoted equity securities:
Dale Company, 5,000 ordinary shares (1% interest) P1,250,000
Ever Company, 10,000 ordinary shares (2% interest) 1,600,000
Fox Company, 25,000 ordinary shares (10% interest) 2,000,000

1. On May 1, 2012, Dale Company issued a 10% stock dividend.

2. ON November 1,2012, Dale Company paid a cash dividend of P20 per share.
3. On January 1,2012, Jam Company paid P5,000,000 for 50,000 additional shares of Fox Company which
represented a 20% investment in Fox Company.
The fair value of all Fox’s identifiable assets net of liabilities was equal to their carrying amount of
P20,000,000.
JAM Company’s initial 10% interest of 25,000 ordinary shares of Fox Company was acquired on January
1,20911 for P2,000,000.at that date, the net assets of Fox Company totaled P16,000,000.
4. Fox Company reported net income of P4,000,000 for 2011 and P6,000,000 for 2012, and paid dividend of
P20 per share in 2012.
5. The equity securities have no determinable fair value because they are unquoted.
Required:
c. Prepare all journal entries in 2012.
d. Present the investments in equity securities on December 31, 2012.

a.
1. Memo
2. Cash 110,000
Dividend Income 110,000
3. Investment in Associate 5,000,000
Cash 5,000,000
#
Investment in Associate 2,000,000
Investment in Associate 2,000,000
#
Investment in Associate 400,000
Gain on Remeasurement to Equity 400,000
4. Investment in Associate 1,800,000
Investment Income 1,800,000
#
Cash 1,500,000
Investment in Associate 1,500,000

b. Noncurrent Assets:
Investment in Equity Securities 2,850,000*
Investment in Associate 7,700,000
*Dale Corporation 1,250,000
Ever Corporation 1,600,000