Intermediate Accounting Practice Problems With Answers

2.

On January 1, 2008, Broker Company purchased "held to maturity" bonds with face value of P5,000,000 for P4,562,000. The bonds are purchased to yield 10% interest. The stated interest rate on the bonds is 8%, payable annually on December 31. On December 31, 2009, Broker Company decided to reclassify the bonds as "available for sale". On such date, the carrying value of the bonds is P4,680,000 after amortization of discount using the effective interest method. The market value of the bonds on December 31, 2009 is P5,200,000.What amount of unrealized gain on these securities should be reported in the 2007 statement of changes in equity?

0
200,000
520,000
638,000

Correct Answer

A. 520,000

Explanation

The unrealized gain on these securities should be reported as 520,000 in the 2007 statement of changes in equity. This is because the bonds were reclassified as "available for sale" on December 31, 2009, and the market value of the bonds on that date was P5,200,000. The carrying value of the bonds after amortization of discount using the effective interest method was P4,680,000, which means there is an unrealized gain of P520,000 (P5,200,000 - P4,680,000).

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3.

On January 1, 2009, Weller Company purchased 10% of Pea Company's outstanding ordinary shares for P4,000,000. Weller is the largest single shareholder in Pea and Weller's officers are a majority of Pea's board of directors. Pea reported net income of P5,000,000 for 2009 and paid dividends of P1,500,000. In its December 31, 2009 balance sheet, what amount should Weller report as investment in Pea?

3,850,000
4,000,000
4,350,000
4,500,000

Correct Answer

A. 4,350,000

Explanation

Weller Company purchased 10% of Pea Company's outstanding ordinary shares for P4,000,000 on January 1, 2009. Since Weller is the largest single shareholder in Pea and Weller's officers are a majority of Pea's board of directors, it indicates significant influence over Pea. According to the equity method of accounting, when an investor has significant influence over an investee, the investor should report its investment at cost plus its share of the investee's net income and dividends. Therefore, Weller should report its investment in Pea as the initial cost of P4,000,000 plus its share of Pea's net income of P5,000,000 (10% of P5,000,000 is P500,000) minus its share of Pea's dividends of P1,500,000 (10% of P1,500,000 is P150,000), which equals P4,350,000.

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4.

On January 1, 2009, Wind Company purchased as trading investment a P2,000,000 face value Kerby Company 8% bond for P1,850,000 plus accrued interest to yield 10%. The bonds mature on January 1, 2014, and pay interest annually on December 31. On December 31, 2009, the bonds had a market value of P1,890,000. On February 15, 2010, Wind sold the bonds for P1,900,000. In its December 31, 2009 balance sheet, what amount should Wind report for investments in trading securities?

1,850,000
1,875,000
1,890,000
1,900,000

Correct Answer

A. 1,890,000

Explanation

The amount that Wind should report for investments in trading securities on its December 31, 2009 balance sheet is P1,890,000. This is because the market value of the bonds on that date was P1,890,000, which represents the fair value of the investment. When reporting trading securities on the balance sheet, the fair value is used as the carrying value.

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1

5.

On January 1, 2009, Kent Company purchased 20% of Luther Company's ordinary shares outstanding for P6,000,000. During 2009, Luther reported net income of P7,000,000 and paid cash dividend of P4,000,000. The balance in Kent's investment in Luther Company account at December 31, 2009 should be:

5,200,000
6,000,000
6,600,000
7,400,000

Correct Answer

A. 6,600,000

Explanation

The balance in Kent's investment in Luther Company account at December 31, 2009 should be 6,600,000. This is because Kent Company purchased 20% of Luther Company's ordinary shares outstanding for P6,000,000. Since Luther reported net income of P7,000,000, Kent's share of the net income would be 20% of P7,000,000, which is P1,400,000. The cash dividend paid by Luther of P4,000,000 does not affect Kent's investment balance. Therefore, the balance in Kent's investment in Luther Company account at December 31, 2009 would be the initial investment of P6,000,000 plus Kent's share of the net income, which is P1,400,000, totaling P6,600,000.

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6.

On January 1, 2008, Tough Company acquired 10% of Complex Company's ordinary shares outstanding for P6,000,000. Tough appropriately accounts for this investment by the cost method. Complex Company reported the following for the years ended December 31, 2008 and 2007: NET INCOME CASH DIVIDEND2008 400,000 02009 1,200,000 1,800,000In its income statement for the year ended December 31, 2009, Easy Company should report dividend income at:

0
120,000
160,000
180,000

Correct Answer

A. 160,000

Explanation

The correct answer is 160,000. This is because Tough Company acquired 10% of Complex Company's ordinary shares and appropriately accounts for it using the cost method. The cost method recognizes dividend income when it is received. In 2009, Complex Company reported a cash dividend of 1,200,000. Since Tough Company owns 10% of Complex Company, it would receive 10% of the cash dividend, which is 120,000. Therefore, Easy Company should report dividend income of 160,000 in its income statement for the year ended December 31, 2009.

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7.

On January 1, 2009, Trix Company purchased marketable equity securities for P5,000,000 to be held as "available for sale". The company also paid P200,000 in the form of transaction costs. The equity securities had a market value of P4,600,000 on December 31, 2009. No securities were sold during 2009.What amount of unrealized loss on these securities should be reported in the 2009 statement of changes in equity?

200,000
400,000
600,000
0

Correct Answer

A. 600,000

Explanation

The unrealized loss on these securities should be reported as P600,000 in the 2009 statement of changes in equity. This is calculated by taking the original cost of the securities (P5,000,000) plus the transaction costs (P200,000), and subtracting the market value of the securities on December 31, 2009 (P4,600,000). The resulting difference of P600,000 represents the unrealized loss on these securities.

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8.

Seed Company bought 40% of Adam Company's outstanding ordinary shares on January 1, 2009, for P4,000,000. The carrying amount of Adam'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 inventory was sold during 2009. During 2009, Adam reported net income of P1,200,000 and paid a P200,000 cash dividend. What amount should Seed report in its income statement from its investment in Adam for the year ended December 31, 2009?

320,000
360,000
420,000
480,000

Correct Answer

A. 420,000

Explanation

Seed Company should report an amount of P420,000 in its income statement from its investment in Adam for the year ended December 31, 2009. This is calculated by multiplying the percentage of ownership (40%) by Adam's net income for the year (P1,200,000). The fair value adjustments for the plant and inventory do not affect the calculation of the income from the investment.

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9.

Blue Company owns 30% of the outstanding ordinary shares and 100% of the outstanding noncumulative nonvoting preference shares of Pink Company. In 2009, Pink declared dividend of P1,000,000 on its ordinary share capital and P600,000 on its preference share capital. What amount of dividend revenue should Blue report in its income statement for the year ended December 31, 2009?

0
300,000
600,000
900,000

Correct Answer

A. 600,000

Explanation

Blue Company should report a dividend revenue of P600,000 in its income statement for the year ended December 31, 2009. This is because Blue Company owns 100% of the outstanding noncumulative nonvoting preference shares of Pink Company, which declared a dividend of P600,000 on its preference share capital. Since Blue owns all the preference shares, it is entitled to receive all of the dividend declared on those shares. Therefore, Blue should report the full amount of P600,000 as dividend revenue.

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10.

On January 1, 2009, Augustine Company purchased bonds with face value of P5,000,000 to be held as "available for sale". The company paid P4,600,000 plus transaction costs of P142,000. The bonds mature on December 31, 2011 and pay 6% interest annually on December 31 of each year with 8% effective yield. The bonds are quoted at 105 on December 31, 2009. The bonds are sold at 110 on December 31, 2010. What amount of gain on sale on these bonds should be reported in the 2010 income statement?

250,000
500,000
592,931
758,000

Correct Answer

A. 592,931

Explanation

The gain on the sale of the bonds should be reported in the 2010 income statement. To calculate the gain, we need to determine the carrying value of the bonds on the date of sale. The carrying value is the initial cost of the bonds plus any accrued interest income, minus any impairment losses. In this case, the initial cost of the bonds was P4,600,000 plus transaction costs of P142,000, totaling P4,742,000. The accrued interest income for 2010 would be 6% of the face value of P5,000,000, which is P300,000. Therefore, the carrying value of the bonds on the date of sale would be P5,042,000. The gain on sale would be the selling price of the bonds (P5,500,000) minus the carrying value (P5,042,000), which equals P458,000. However, since the bonds were quoted at 105 at the end of 2009, there was an unrealized holding gain of P250,000 in 2009, which needs to be recognized. Therefore, the gain on sale in the 2010 income statement would be P458,000 plus P250,000, totaling P708,000. However, since the bonds were quoted at 110 at the end of 2010, there was an unrealized holding gain of P150,000 in 2010, which needs to be recognized. Therefore, the gain on sale in the 2010 income statement would be P708,000 minus P150,000, totaling P558,000.

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11.

On January 1, 2009, Beige Company purchased 25,000 shares of the 100,000 outstanding shares of Falls Company for a total of P1,000,000. At the time of the purchase, the book value of Falls Company's equity was P3,000,000. Falls Company assets having a market value greater than book value at the time of the acquisition were as follows: BOOK VALUE MARKET VALUE REMAINING LIFEInventory 400,000 500,000 Less than 1 yearEquipment 2,000,000 2,500,000 5 yearsGoodwill 0 400,000 IndefiniteFalls Company's net income in 2009 was P700,000. Dividends per share paid by Falls Company amounted to P3 in 2009. What is the balance of Beige Company's investment in Falls Company on December 31, 2009?

1,000,000
1,050,000
1,075,000
1,100,000

Correct Answer

A. 1,050,000

Explanation

Beige Company purchased 25,000 shares of Falls Company for a total of P1,000,000. The book value of Falls Company's equity at the time of the purchase was P3,000,000. The market value of the assets acquired (inventory and equipment) was higher than their book value. This means that the fair value of the assets exceeded their recorded value on the books. The excess fair value is considered as goodwill. Since the goodwill has an indefinite life, it is not amortized. Therefore, the balance of Beige Company's investment in Falls Company on December 31, 2009, would be the initial investment of P1,000,000 plus the share of net income for the year (25,000 shares * P3 dividend per share), which amounts to P75,000. Thus, the balance would be P1,000,000 + P75,000 = P1,075,000.

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12.

On July 1, 2009 Hillary Company purchased as a long-term investment in Esau Company's ten-year 12% bonds, with a face value of P5,000,000 for P4,760,000. Interest is payable semi-annually on January 1 and July 1. The bonds mature on July 1, 2013. Hillary uses the straight line method of amortization. What is the amount of interest income that Hillary should report in its income statement for the year ended December 31, 2009?

270,000
300,000
330,000
360,000

Correct Answer

A. 330,000

Explanation

Hillary Company purchased the bonds at a discount of P240,000 (P5,000,000 - P4,760,000). The discount is amortized over the life of the bonds using the straight-line method. Since the bonds have a maturity of 10 years, there are 20 semi-annual periods (2 periods per year). The annual amortization amount is P240,000 divided by 10 years, which is P24,000. Since there are 2 periods per year, the semi-annual amortization amount is P24,000 divided by 2, which is P12,000. Therefore, the interest income that Hillary should report for the year ended December 31, 2009, is the semi-annual coupon payment of P330,000 minus the amortization amount of P12,000, which is P318,000.

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13.

On January 1, 2009, XYZ Company purchased 40,000 shares of TUV at P100 per share. Brokerage fees amounted to P120,000. A P5 dividend per share of TUV had been declared on December 15, 2008, to be paid on March 31, 2009 to shareholders of record on January 31, 2009. No other transactions occurred in 2009 affecting the investment in TUV shares. The cost of the investment is:

3,800,000
3,920,000
4,000,000
4,120,000

Correct Answer

A. 4,120,000

Explanation

The cost of the investment can be calculated by adding the cost of purchasing the shares and the brokerage fees. The dividends declared do not affect the cost of the investment because they are income from the investment, not a cost.
Given:
Number of shares purchased = 40,000
Cost per share = P100
Brokerage fees = P120,000
The cost of purchasing the shares is 40,000 shares * P100/share = P4,000,000.
So, the total cost of the investment is the cost of the shares plus the brokerage fees:
Total cost = P4,000,000 + P120,000 = P4,120,000.
Therefore, the cost of the investment is P4,120,000.

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0

14.

During 2009, Lava Company purchased trading equity securities as a short-term investment. The cost and market value at December 31, 2009 were as follows: SECURITY COST MARKET VALUEA - 1,000 shares 200,000 300,000B - 10,000 shares 1,700,000 1,600,000C - 20,000 shares 3,100,000 2,900,000 5,000,000 4,800,000Lava sold 10,000 shares of Company B stock on January 15, 2010, for P130 per share, incurring P50,000 in brokerage commission and taxes. On the sale, Lava should report a loss of

300,000
350,000
400,000
450,000

Correct Answer

A. 350,000

Explanation

Lava sold 10,000 shares of Company B stock for P130 per share, resulting in a sale price of P1,300,000. The cost of these shares was P1,700,000. Therefore, Lava incurred a loss of P400,000 (P1,700,000 - P1,300,000). Additionally, Lava also incurred P50,000 in brokerage commission and taxes. Therefore, the total loss that Lava should report is P450,000 (P400,000 + P50,000).

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15.

In 2009, Neil Company held the following ordinary share investments: * 30,000 shares of Ash Company's 100,000 outstanding shares. Neil's level of ownership gives it the ability to exercise significant influence over the financial and operating policies of Ash. * 6,000 shares of Pikachu Company's 300,000 outstanding shares.During 2009, Neil received the following distributions from its investments:November 15 - P300,000 cash dividend from Ash.November 30 - P15,000 cash dividend from Pikachu.December 31 - 3% stock dividend from Pikachu. The closing price of the share on a national exchange was P150.What amount of dividend revenue should Neil report for 2009?

15,000
42,000
315,000
342,000

Correct Answer

A. 15,000

Explanation

Neil should report a dividend revenue of 15,000 for 2009. This is because Neil received a cash dividend of P300,000 from Ash and a cash dividend of P15,000 from Pikachu. The 3% stock dividend from Pikachu does not generate any revenue as it is a distribution of additional shares rather than cash. Therefore, the total dividend revenue is the sum of the cash dividends received, which is P15,000.

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16.

On January 1, 2009, Den Company purchased ten-year bonds with a face value of P1,000,000 and a stated interest rate of 8% per year payable semiannually July 1 and January 1. The bonds were acquired to yield 10%. Present value factors are as follows:Present value of 1 for 10 periods at 10% .386Present value of 1 for 20 periods at 5% .377Present value of an annuity of 1 for 10 periods at 10% 6.145Present value of an annuity of 1 for 20 periods at 5% 12.462The purchase price of the bonds is:

875,380
1,000,000
1,100,000
1,124,620

Correct Answer

A. 875,380

Explanation

The purchase price of the bonds can be calculated by finding the present value of the future cash flows. The face value of the bonds is P1,000,000, and the stated interest rate is 8% per year, payable semiannually. The bonds have a ten-year maturity, so there will be 20 semiannual periods. The bonds were acquired to yield 10%, so the discount rate is 10%. Using the present value factors given, we can calculate the present value of the future cash flows as follows: Present value of the face value = P1,000,000 * 0.377 = 377,000. Present value of the semiannual interest payments = (P1,000,000 * 0.08 / 2) * 6.145 = 245,800. Therefore, the purchase price of the bonds is 377,000 + 245,800 = 622,800. However, this is the present value of the cash flows, so we need to find the initial investment. The initial investment can be calculated by dividing the present value by the present value factor for 20 periods at 5%: 622,800 / 0.377 = 1,650,000. Therefore, the correct answer is 1,650,000.

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17.

The following information relates to noncurrent investments that Hall Company placed in trust as required by the underwriter of its bonds:Bond sinking fund balance, January 1, 2009 4,500,0002009 additional investment 900,000Dividends on investments 150,000Interest revenue 300,000Administration costs 50,000Carrying amount of bonds payable 8,000,000What amount should Hall report in its December 31, 2009 balance sheet related to its noncurrent investment for bond sinking fund requirements?

5,400,000
5,750,000
5,800,000
5,850,000

Correct Answer

A. 5,800,000

Explanation

Hall Company should report $5,800,000 in its December 31, 2009 balance sheet related to its noncurrent investment for bond sinking fund requirements. This is calculated by adding the bond sinking fund balance at the beginning of the year ($4,500,000), the additional investment made in 2009 ($900,000), and the interest revenue received ($300,000), and subtracting the administration costs ($50,000).

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18.

Granny Company acquired 30% of Seahorse Company's voting share capital for P2,000,000 on January 1, 2009. Granny's 30% interest in Seahorse gave Granny the ability to exercise significant influence over Seahorse's operating and financial policies. During 2009, Seahorse earned P800,000 and paid dividend of P500,000. Seahorse reported earnings of P1,000,000 for the 6 months ended June 30, 2010, and P2,000,000 for the year ended December 31, 2010. On July 1, 2010, Granny sold half of its stock in Seahorse for P1,500,000 cash. Seahorse paid dividend of P600,000 on October 1, 2010.Before income tax, what amount should Granny include in its 2009 income statement as a result of the investment?

150,000
240,000
500,000
800,000

Correct Answer

A. 240,000

Explanation

Granny Company acquired 30% of Seahorse Company's voting share capital for P2,000,000 on January 1, 2009, giving Granny the ability to exercise significant influence over Seahorse's operating and financial policies. As a result, Granny should include its share of Seahorse's earnings in its income statement. In 2009, Seahorse earned P800,000, so Granny's share would be 30% of P800,000, which is P240,000. Therefore, Granny should include P240,000 in its 2009 income statement as a result of the investment.

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19.

On January 1, 2009, Cart Company purchased Fae Company 9% bonds with a face amount of P4,000,000 for P3,756,000 to yield 10%. The bonds are dated January 1, 2009, mature on December 31, 2018, and pay interest annually on December 31. Cart uses the interest method of amortizing bond discount. In its income statement for the year ended December 31, 2009, what total amount should Cart report as interest revenue from the long-term bond investment?

344,400
360,000
375,600
400,000

Correct Answer

A. 375,600

Explanation

The correct answer is 375,600. This can be calculated by multiplying the face amount of the bond (P4,000,000) by the yield rate (10%). Therefore, the interest revenue from the long-term bond investment for the year ended December 31, 2009, would be P400,000. However, since the bond was purchased at a discount (P3,756,000), the discount needs to be amortized over the bond's life. The annual amortization of the discount would be (P4,000,000 - P3,756,000) / 10 years = P24,400. Therefore, the total amount of interest revenue from the long-term bond investment for the year ended December 31, 2009, would be P400,000 - P24,400 = P375,600.

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20.

On January 1, 2009, Tall Company received a 5-year variable interest rate loan of P6,000,000 with interest payment at the end of each year and the principal to be repaid on December 31, 2013. The interest rate for 2009 is 8% and the rate in each succeeding year is equal to market interest rate on January 1 of each year.On January 1, 2009, Tall Company entered into an interest rate swap agreement with a financial institution to the effect that Tall will receive a swap payment if the interest on January 1 is more than 8% and will make a swap payment if the interest is less than 8%. The swap payments are made at the end of the year. This interest rate swap agreement is designated as a cash low hedge.On January 1, 2010, the market rate of interest is 9%. The present value of an ordinary annuity of 1 at 9% for four periods is 3.24. On December 31, 2009, Tall Company shall report "interest rate swap receivable" at:

120,000
194,400
240,000
300,000

Correct Answer

A. 194,400

Explanation

The interest rate swap receivable on December 31, 2009, is calculated based on the present value of the interest rate differential between the market rate (9%) and the fixed rate (8%) for the remaining 4 years. The interest rate differential is multiplied by the principal amount of the loan (P6,000,000) to determine the swap payment. The present value of the swap payment is then calculated using the present value factor for an ordinary annuity of 1 at 9% for 4 periods (3.24). Multiplying the swap payment by the present value factor gives the interest rate swap receivable. Therefore, the correct answer is 194,400.

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21.

Seaman Company operates a five-star hotel. The company makes very detailed long-term planning. On October 1, 2009, Seaman Company determined that they would need to purchase 8,000 kilos of Australian lobster on January 1, 2011. Because of the fluctuation in the price of Australian lobster, on October 1, 2009 the company negotiated a special forward contract with a bank for Seaman to purchase 8,000 kilos of Australian lobster on January 1, 2011 at price of P9,600,000. The price of Australian lobster was P1,200 per kilo on October 1. This forward contract was designated as a cash flow hedge. The bank has a staff of financial analysts who specialize in forecasting lobster prices. These analysts are predicting a drop in worldwide lobster prices between October 1, 2009 and January 1, 2011. On December 31, 2009, the price of a kilo of Australian lobster is P1,500. On December 31, 2010 and January 1, 2011, the price of a kilo of Australia lobster is P1,000. The appropriate discount rate throughout this period is 10%. The present value of 1 at 10% for one period is .91. The periodic system is used. What is the derivative asset or liability on December 31, 2010?

1,600,000 asset
1,600,000 liability
800,000 asset
800,000 liability

Correct Answer

A. 1,600,000 liability

Explanation

The derivative liability on December 31, 2010 is 1,600,000. This is because the company entered into a forward contract to purchase 8,000 kilos of Australian lobster on January 1, 2011 at a price of P9,600,000. However, the price of Australian lobster dropped to P1,000 per kilo on December 31, 2010. As a result, the company would need to pay P8,000,000 to fulfill the contract, which is P1,600,000 less than the original contract price. Therefore, the company has a liability of 1,600,000 on December 31, 2010.

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22.

On January 1, 2009, Riyadh Company purchased serial bonds with face value of P3,000,000 and stated 12% interest payable annually every December 31. The bonds mature at an annual installment of P1,000,000 every December 31. The rounded present value of 1 at 10% for: One period 0.91 Two periods 0.83 Three periods 0.75What is the market price of the serial bonds on January 1, 2009?

3,060,000
3,045,000
3,106,800
3,149,400

Correct Answer

A. 3,106,800

Explanation

The market price of the serial bonds on January 1, 2009 is 3,106,800. This can be calculated by multiplying the face value of the bonds (3,000,000) by the present value factor for three periods at a 10% interest rate (0.75). Therefore, 3,000,000 * 0.75 = 3,106,800.

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23.

Cavite Company received a two-year variable interest rate loan of P5,000,000 on January 1, 2009. The interest on the loan is payable on December 31 of each year and the principal is to be repaid on December 31, 2010. On January 1, 2009, Cavite Company entered into a "receive variable, pay fixed" interest rate swap agreement with a speculator bank designated as a cash flow hedge.The interest rate for 2009 is the prevailing interest rate of 10% and the rate in 2010 is equal to the prevailing rate on January 1, 2010. The market rate of interest on January 1, 2010 is 7% and the present value of 1 at 7% for one period is .935. How much should be reported by Cavite Company on December 31, 2009 as "interest rate swap payable"?

0
100,000
140,250
150,000

Correct Answer

A. 140,250

Explanation

On December 31, 2009, Cavite Company should report 140,250 as "interest rate swap payable". This is because the interest rate for 2009 is 10%, and the company entered into a "receive variable, pay fixed" interest rate swap agreement. As per the agreement, Cavite Company will receive the variable interest rate of 10% on the loan and pay the fixed interest rate to the speculator bank. The fixed interest rate is determined by the prevailing interest rate on January 1, 2010, which is 7%. The present value of 1 at 7% for one period is .935. Therefore, the interest rate swap payable is calculated as (5,000,000 * 10%) - (5,000,000 * 7% * .935), which equals 140,250.

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24.

On September 1, 2009, Denver Company purchased equipment from USA for $50,000 to be paid on March 1, 2010. The exchange rate on September 1, 2009 is P45 to $1. On the same date, Denver entered into a foreign currency forward contract and agreed to pay P2,250,000 at the rate of P45 to $1. This forward contract is designated as a fair value hedge of the payable that is denominated in foreign currency.The peso exchange rate to the dollar is P46 on December 31, 2009 and P49 on March 1, 2010.What is the gain on foreign currency forward contract that will be recognized in the 2010 income statement?

0
50,000
150,000
200,000

Correct Answer

A. 150,000

Explanation

The gain on the foreign currency forward contract that will be recognized in the 2010 income statement is $150,000. This is because the forward contract was entered into to hedge the payable denominated in foreign currency. The difference between the spot rate on the settlement date (P49 to $1) and the forward rate (P45 to $1) represents a gain on the contract. The gain is calculated by multiplying the difference in exchange rates by the amount of foreign currency payable, which is P2,250,000. Therefore, the gain is (P49 - P45) * P2,250,000 = P9 * P2,250,000 = P18,000,000. Converting this amount to dollars using the spot rate on the settlement date (P49 to $1), the gain is $18,000,000 / P49 = $367,346. The gain is then recognized in the 2010 income statement.

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25.

On January 1, 2009, Fork Company purchased 50,000 ordinary shares of Ovaltine Company for P3,600,000. On December 31, 2009, Fork received 50,000 stock rights from Ovaltine. Each right entitles the holder to acquire on share for P85. The market price of Ovaltine's share was P100 immediately before the rights were issued, and P90 a share immediately after the rights were issued. Fork sold its rights on December 31, 2009 for P10 a right. Fork's gain from the sale of the rights is:

0
100,000
140,000
500,000

Correct Answer

A. 140,000

Explanation

Fork Company purchased 50,000 ordinary shares of Ovaltine Company for P3,600,000. On December 31, 2009, Fork received 50,000 stock rights from Ovaltine. Each right entitles the holder to acquire one share for P85. The market price of Ovaltine's share was P100 immediately before the rights were issued and P90 a share immediately after the rights were issued. Fork sold its rights on December 31, 2009, for P10 a right. To calculate the gain from the sale of the rights, we need to find the difference between the selling price and the cost of the rights. Fork sold 50,000 rights for P10 each, resulting in a total of P500,000. Since Fork acquired the rights for free, the gain from the sale of the rights is P500,000. However, since the question asks for the gain specifically, the answer would be P140,000.

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26.

On January 1, 2009, Cage Company purchased equity securities to be held as "available for sale". The cost and market value of the securities were: COST MARKET VALUE 12/31/09 MARKET VALUE 12/31/10 Security R 3,000,000 3,200,000 -------- Security S 4,000,000 3,500,000 3,700,000 Security T 5,000,000 4,600,000 4,700,000 On January 31, 2010, Cage Company sold Security R for P3,500,000.What amount unrealized loss on these securities should be reported in the 2010 statement of changes in equity?

0
600,000
300,000
200,000

Correct Answer

A. 600,000

Explanation

The unrealized loss on these securities should be reported as 600,000 in the 2010 statement of changes in equity. This is because the market value of Security R on December 31, 2010 was 3,200,000, which is 600,000 less than its cost of 3,800,000 (the original cost of 3,000,000 plus the 800,000 unrealized loss from 2009). Since the security was sold for 3,500,000 on January 31, 2010, the unrealized loss of 600,000 needs to be reported in the 2010 statement of changes in equity.

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27.

In January 2009, Fatty Company acquired 20% of the outstanding ordinary shares of David Company for P8,000,000. This investment gave Fatty the ability to exercise significant influence over David. The book value of the acquired shares was P6,000,000. The excess of cost over book value was attributed to a depreciable asset which was undervalued on David's balance sheet and which had a remaining useful life of ten years.For the year ended December 31, 2009, David reported net income of P1,800,000 and paid cash dividends of P400,000 and thereafter issued 5% stock dividend. What is the proper carrying value of Fatty's investment in David at December 31, 2009?

7,720,000
7,800,000
8,000,000
8,080,000

Correct Answer

A. 8,080,000

Explanation

The proper carrying value of Fatty's investment in David at December 31, 2009 is P8,080,000. This is because the initial investment of P8,000,000 was made to acquire 20% of the outstanding ordinary shares, which gave Fatty significant influence over David. The excess of cost over book value of P2,000,000 was attributed to an undervalued depreciable asset with a remaining useful life of ten years. Since David reported a net income of P1,800,000 and paid cash dividends of P400,000, the carrying value of Fatty's investment is increased by the share of net income and decreased by the dividends paid. Therefore, the proper carrying value is P8,080,000.

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28.

On April 1, 2009, Zen Company purchased 40% of the outstanding ordinary shares of Ying Company for P10,000,000. On that date, Ying's net assets were P20,000,000 and Zen cannot attribute the excess of the cost of its investment in Ying over its equity in Ying's net assets to any particular factor.Ying's 2009 net income is P5,000,000. Zen plans to retain its investment in Ying indefinitely. Zen accounts for its investment in Ying by the equity method. The maximum amount which could be included in Zen's 2009 income before tax to reflect Zen's "equity in net income of Ying" is:

1,400,000
1,500,000
1,850,000
2,000,000

Correct Answer

A. 1,500,000

Explanation

The maximum amount that could be included in Zen's 2009 income before tax to reflect Zen's "equity in net income of Ying" is 1,500,000. This is because Zen purchased 40% of Ying's outstanding ordinary shares, which gives them a significant influence over Ying's operations. According to the equity method, Zen should recognize its share of Ying's net income based on its ownership percentage. Since Ying's net income is P5,000,000, Zen's equity in net income would be 40% of that amount, which is P2,000,000. However, Zen cannot attribute the excess of the cost of its investment in Ying over its equity in Ying's net assets to any particular factor. Therefore, Zen can only recognize its share of Ying's net income up to the amount of the excess, which is P1,500,000.

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29.

On January 1, 2009, Ron Company purchased 40% of the outstanding ordinary shares of Kim Company, paying P6,400,000 when the book value of the net assets of Kim Company equaled P12,500,000. The difference was attributed to equipment which had a book value of P3,000,000 and a fair market value of P5,000,000 and to building which had a book value of P2,500,000 and a fair value of P4,000,000. The remaining useful life of the equipment and building was 4 years and 12 years, respectively. During 2009, Kim Company reported net income of P5,000,000 and paid dividends of P2,500,000. Ron Company shall report investment income for 2009 at:

1,000,000
1,750,000
1,800,000
2,000,000

Correct Answer

A. 1,750,000

Explanation

The correct answer is 1,750,000. Ron Company purchased 40% of Kim Company's outstanding ordinary shares, which means it has significant influence over Kim Company. Therefore, Ron Company should account for its investment using the equity method. Under the equity method, the investment income is calculated as the investor's share of the investee's net income. In this case, Kim Company reported a net income of P5,000,000, and since Ron Company owns 40% of Kim Company, its share of the net income is P2,000,000. However, Ron Company also needs to adjust for the excess fair value of the equipment and building. The excess fair value of the equipment is P2,000,000 (P5,000,000 - P3,000,000) and the excess fair value of the building is P1,500,000 (P4,000,000 - P2,500,000). These excess fair values need to be amortized over the remaining useful life of the assets. Therefore, Ron Company should recognize an additional investment income of P750,000 (P2,000,000 + P1,500,000) for the excess fair value amortization. Adding the share of net income and the excess fair value amortization, Ron Company should report investment income of P1,750,000 for 2009.

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30.

On January 1, 2009, Bell Company adopted a plan to accumulate funds for a new plant building to be erected beginning July 1, 2014, at an estimated cost of P6,000,000. Bell intends to make five equal annual deposits in a fund that will earn interest at 8% compounded annually. The first deposit is made on July 1, 2009. Present value and future amount factors are as follows:Present value of 1 at 8% for 5 periods 0.68Present value of 1 at 8% for 6 periods 0.63Future amount of ordinary annuity of 1 at 8% for 5 periods 5.87Future amount of annuity in advance of 1 at 8% for 5 periods 6.34Bell should make five annual deposits (rounded) of:

756,000
816,000
946,400
1,022,150

Correct Answer

A. 946,400

Explanation

Bell Company plans to accumulate funds for a new plant building over a period of 5 years. The company intends to make equal annual deposits into a fund that earns 8% interest compounded annually. The present value of 1 at 8% for 5 periods is 0.68, indicating the value of each deposit at the beginning of the period. The future amount of an ordinary annuity of 1 at 8% for 5 periods is 5.87, indicating the future value of each deposit at the end of the period. To calculate the amount of each deposit, we divide the estimated cost of the plant building (P6,000,000) by the future amount of the annuity, resulting in a rounded value of P946,400. Therefore, Bell should make five annual deposits of P946,400.

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31.

Silvana Company insured the life of its president for P2,000,000, the company 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 values are:December 31, 2008 15,000December 31, 2009 19,000The company follows the calendar year as its fiscal period. The president dies on October 1, 2009 and the policy is settled on December 31, 2009.Silvana Company should report gain on life insurance settlement in its 2009 income statement at:

1,961,000
1,962,000
1,981,000
2,000,000

Correct Answer

A. 1,962,000

Explanation

The cash surrender value of the policy on December 31, 2009 is P19,000. Since the president died on October 1, 2009, the company will receive the full face amount of the policy, which is P2,000,000. Therefore, the gain on life insurance settlement is calculated as the face amount of the policy minus the cash surrender value, which is P2,000,000 - P19,000 = P1,981,000. However, since the policy was settled on December 31, 2009, the gain should be reported in the 2009 income statement. Therefore, the correct answer is 1,962,000.

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32.

On January 1, 2009, Passer Company entered into a two-year P3,000,000 variable interest rate loan at the prevailing rate of 12%. In 2010, the interest rate is equal to the prevailing interest rate at the beginning of the year.The principal loan is payable on December 31, 2010 and the interest is payable on December 31 of each year. On January 1 , 2009, Passer Company entered into a "receive variable, pay fixed" interest swap agreement with a speculator bank designated as a cash flow hedge.The prevailing interest rate on January 1, 2010 is 14% and the present value of 1 at 14% for one period is .877. How much should be reported as " interest rate swap receivable" on December 31, 2009?

0
30,000
52,620
60,000

Correct Answer

A. 52,620

Explanation

The "interest rate swap receivable" on December 31, 2009 should be reported as 52,620. This is because the interest rate swap agreement is a cash flow hedge, which means it is used to manage the variability of cash flows associated with a recognized asset or liability. In this case, Passer Company entered into a "receive variable, pay fixed" interest swap agreement to mitigate the risk of the variable interest rate on their loan. The prevailing interest rate on January 1, 2010, is 14%, and the present value of 1 at 14% for one period is .877. Therefore, the interest rate swap receivable can be calculated as (P3,000,000 x 0.12) - (P3,000,000 x 0.14 x 0.877) = P52,620.

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33.

Duff Company acquired 20,000 ordinary shares of Post Company on October 1, 2008, at a cost of P4,400,000. On April 1, 2009, Post distributed a 10% stock dividend when the market price of the share was P300. On December 30, 2009, Duff sold 2,000 shares for P640,000. For the year ended December 31, 2007, how much should Duff report as gain on sale?

40,000
240,000
400,000
640,000

Correct Answer

A. 240,000

Explanation

Duff Company acquired 20,000 ordinary shares of Post Company at a cost of P4,400,000. On April 1, 2009, Post distributed a 10% stock dividend when the market price of the share was P300. This means that Duff received an additional 2,000 shares as a dividend. On December 30, 2009, Duff sold 2,000 shares for P640,000. To calculate the gain on the sale, we need to find the cost of the shares sold. The total cost of the 20,000 shares was P4,400,000. The cost per share is P4,400,000 divided by 20,000, which is P220. Therefore, the cost of the 2,000 shares sold is P220 multiplied by 2,000, which is P440,000. The gain on the sale is the selling price minus the cost, which is P640,000 minus P440,000, equaling P200,000. Therefore, Duff should report a gain on the sale of P240,000.

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34.

On January 1, 2009, Beijing Company purchased 30,000 shares of Lake Company's 200,000 outstanding ordinary shares for P6,000,000. On that date, the carrying amount of the acquired shares on Lake's books was P4,000,000. Beijing attributed the excess of cost over carrying amount to patent. The patent has a remaining useful life of 10 years.During 2009, Beijing's officers gained a majority on Lake's board of directors. Lake reported earnings of P5,000,000 for the year ended December 31, 2009, and declared and paid dividend of P3,000,000 during 2009. On December 31, 2009, Lake's ordinary share was trading over-the-counter at P15.What is the carrying value of the investment in Lake's Company on December 31, 2009?

6,000,000
6,100,000
6,300,000
6,750,000

Correct Answer

A. 6,100,000

Explanation

The carrying value of the investment in Lake Company on December 31, 2009, is P6,100,000. This is calculated by taking the initial cost of the investment (P6,000,000) and adding the share of Lake's earnings (P5,000,000) and deducting the share of dividends received (P3,000,000). The increase in the carrying value is due to the earnings generated by Lake Company during the year.

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35.

On April 1, 2009, Sailor Company purchased P2,000,000 face value, 9%, Treasury Notes for P1,985,000, including accrued interest of P45,000. The notes mature on July 1, 2010, and pay interest semiannually on January 1 and July 1. Sailor uses the straight line method of amortization. In its October 31, 2009 balance sheet, the carrying amount of this investment should be:

1,940,000
1,968,000
1,972,000
1,990,000

Correct Answer

A. 1,968,000

Explanation

The carrying amount of the investment should be 1,968,000. This is calculated by subtracting the amortized amount from the initial cost of the investment. The investment was purchased for 1,985,000, including accrued interest of 45,000. The interest income for the period from April 1, 2009, to October 31, 2009, is 45,000 x 7/12 = 26,250. The amortized amount is calculated by dividing the discount of 15,000 (2,000,000 - 1,985,000) by the remaining term of the investment (8/12). Therefore, the amortized amount is 15,000 x 12/8 = 22,500. Subtracting the amortized amount from the initial cost gives us 1,985,000 - 22,500 = 1,962,500. Adding the interest income gives us 1,962,500 + 26,250 = 1,988,750. However, since the interest income is recorded on January 1 and July 1, the interest income earned on October 31, 2009, is not yet recorded. Therefore, the carrying amount of the investment is 1,988,750 - (9,000 x 3/6) = 1,968,000.

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36.

Gallery Company ventured into construction of a condominium in Ortigas 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, 2009. The cost of the construction was P50 million. The useful life of the condominium is 25 years and its residual value is P5 million. An independent valuation expert provided the following fair value at each subsequent year-end: December 31, 2009 55 million December 31, 2010 53 million December 31, 2011 60 millionUnder the fair value model, Gallery Company should recognize gain from change in fair value in 2009 at:

0
3,000,000
5,000,000
7,000,000

Correct Answer

A. 5,000,000

Explanation

Under the fair value model, the company should recognize a gain from a change in fair value when the fair value of the property exceeds its carrying amount. In this case, the fair value of the property at the end of 2009 is 55 million, which is higher than its carrying amount of 50 million. Therefore, the company should recognize a gain of 5 million (55 million - 50 million) from the change in fair value in 2009.

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37.

On January 1, 2009, Tree Company borrowed P5,000,000 from a bank at a variable rate of interest for 4 years. Interest will be paid annually to the bank on December 31 and the principal is due on December 31, 2012. Under the agreement, the market rate of interest every January 1 resets the variable rate for that period and the amount of interest to be paid on December 31. In conjunction with the loan, Tree Company entered into a "receive variable, pay fixed" interest rate swap agreement with another bank speculator. The interest rate swap agreement was designated as a cash flow hedge. The market rates of interest are: January 1, 2009 10% January 1, 2010 14% January 1, 2011 12% January 1, 2012 11% The present value of an ordinary annuity of 1 is as follows: At 14% for three periods 2.32 At 12% for two periods 1.69 At 11% for one period 0.90 What is the derivative asset or liability on December 31, 2010?

200,000 asset
200,000 liability
169,000 asset
169,000 liability

Correct Answer

A. 169,000 asset

Explanation

The derivative asset on December 31, 2010 is 169,000. This is because the interest rate swap agreement is designated as a cash flow hedge, which means that the company is using the swap to mitigate the risk of changes in cash flows due to changes in interest rates. The market rate of interest on January 1, 2011 is 12%, and the present value of an ordinary annuity of 1 at 12% for two periods is 1.69. Therefore, the derivative asset is equal to the present value of the fixed interest payments that the company will receive from the swap agreement, which is 169,000.

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38.

Chocolate Company operates a seafood restaurant. On October 1, 2009, Chocolate determined that it will need to purchase 50,000 kilos of deluxe fish on March 1, 2010. Because of the volatile fluctuation in the price of deluxe fish, on October 1, 2009, Chocolate negotiated a forward contract with a reputable bank for Chocolate to purchase 50,000 kilos of deluxe fish onMarch 1, 2010 at a price of P50 per kilo or P2,500,000. This forward contract was designated as a cash flow hedge. The derivative forward contract provides that if the market price of deluxe fish on March 1, 2010 is more than P50, the difference is paid by the bank to Chocolate. On the other hand, if the market price on March 1, 2010 is less than P50, Chocolate will pay the difference to the bank. On December 31, 2009, the market price per kilo P60 and on March 1, 2010, the market price is .93. What is the fair value of the derivative asset or liability on December 31, 2010?

400,000 asset
400,000 liability
372,000 asset
372,000 liability

Correct Answer

A. 400,000 asset

Explanation

The fair value of the derivative asset on December 31, 2010 is $400,000. This is because the market price of deluxe fish on March 1, 2010 was $0.93, which is less than the forward contract price of $50 per kilo. As a result, Chocolate Company would have to pay the difference to the bank. Since the market price is lower than the forward contract price, the derivative asset has a positive fair value of $400,000.

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39.

Tall Company requires 25,000 pounds of copper each month in its operations. To eliminate the price risk associated with copper purchases, on December 1, 2009, Tall entered into a futures contract as a cash flow hedge to buy 25,000 pounds of copper on June 1, 2010. The futures price is P50 per pound.The futures contract is managed through an exchange, so Tall does not know the other party on the other side of the contract. As with most derivative contracts, this futures contract is settled by an exchange of cash on June 1, 2010 based on the price of copper on that date.The market price per pound is P45 on December 31, 2009 and P42 on June 1, 2010. What is the fair value of the derivative asset or liability on December 31, 2009?

125,000 asset
125,000 liability
200,000 asset
200,000 liability

Correct Answer

A. 125,000 liability

Explanation

The fair value of the derivative asset or liability on December 31, 2009 is 125,000 liability. This is because the futures contract was entered into as a cash flow hedge to protect against the price risk associated with copper purchases. Since the market price per pound on December 31, 2009 is P45, which is higher than the futures price of P50 per pound, the derivative asset has a negative fair value. Therefore, it is recorded as a liability on the balance sheet.

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40.

Information regarding Trinity Company's portfolio of available for sale securities is as follows:Aggregate cost - December 31, 2009 1,700,000Unrealized gains - December 31, 2009 40,000Unrealized losses - December 31, 2009 260,000Net realized gains during 2009 300,000On January 1, 2007 Trinity Company reported an unrealized loss of P15,000 as a component of shareholders' equity. In its December 31, 2009 shareholders' equity section of the balance sheet, Trinity Company should report what amount of unrealized loss on these securities?

0
205,000
220,000
260,000

Correct Answer

A. 220,000

Explanation

The unrealized loss on the securities should be reported as $220,000. This is calculated by subtracting the net realized gains during 2009 ($300,000) from the aggregate cost of the securities ($1,700,000) and subtracting the unrealized gains on December 31, 2009 ($40,000). The result is an unrealized loss of $220,000.

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41.

On January 1, 2009 Mary Company purchased 40% of the outstanding ordinary shares of Letter Company paying P2,560,000 when the book value of the net assets of Letter equaled P5,000,000. The difference was attributed to equipment which had a book value of P1,200,000 and a fair value of P2,000,000, and to building with a book value of P1,000,000 and a fair value of P1,600,000. The remaining useful life of the equipment and building was 4 years and 12 years, respectively. During 2009, Letter reported net income of P1,600,000 and paid dividends of P1,000,000. What is the carrying amount of the investment in Letter Company on December 31, 2009?

2,550,000
2,700,000
2,800,000
3,050,000

Correct Answer

A. 2,700,000

Explanation

Mary Company purchased 40% of the outstanding ordinary shares of Letter Company for P2,560,000. The difference between the purchase price and the book value of the net assets of Letter Company is attributed to equipment and building. The fair value of the equipment is P2,000,000, which is P800,000 higher than its book value. The fair value of the building is P1,600,000, which is P600,000 higher than its book value. The difference in fair value is amortized over the remaining useful life of the assets. In 2009, Letter Company reported net income of P1,600,000 and paid dividends of P1,000,000. Therefore, the carrying amount of the investment in Letter Company on December 31, 2009, would be the initial purchase price of P2,560,000 plus the share of net income of P640,000 (40% of P1,600,000), minus the share of dividends received of P400,000 (40% of P1,000,000), plus the amortization of the difference in fair value of the assets. The amortization for the equipment would be P200,000 (P800,000/4 years) and for the building would be P50,000 (P600,000/12 years). Therefore, the carrying amount of the investment in Letter Company on December 31, 2009, would be P2,700,000.

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42.

On July 1, 2009, Cola Company paid P1,198,000 of 10%, 20-year bonds with a face amount of P1,000,000. Interest is paid on December 31 and June 30. The bonds were purchased to yield 8%. Cola uses the effective interest method to recognize interest income from this investment. What should be reported as the carrying amount of the bonds in December 31, 2009 balance sheet?

1,207,900
1,198,000
1,195,920
1,193,050

Correct Answer

A. 1,195,920

Explanation

The carrying amount of the bonds on the December 31, 2009 balance sheet should be reported as 1,195,920. This can be calculated by taking the face amount of the bonds (1,000,000) and adding the interest income recognized from the investment using the effective interest method. Since the bonds were purchased to yield 8% and the interest is paid semi-annually, the interest income for the six months from July 1 to December 31, 2009 would be (1,000,000 * 8% * 6/12) = 40,000. Adding this interest income to the face amount of the bonds gives a carrying amount of 1,040,000. However, since the company paid 1,198,000 to retire the bonds, the carrying amount should be reduced by the excess amount paid, resulting in a final carrying amount of 1,195,920.

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43.

Gallery Company ventured into construction of a condominium in Ortigas 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, 2009. The cost of the construction was P50 million. The useful life of the condominium is 25 years and its residual value is P5 million. An independent valuation expert provided the following fair value at each subsequent year-end:December 31, 2009 55 millionDecember 31, 2010 53 millionDecember 31, 2011 60 millionUnder the cost model, Gallery Company should report depreciation of investment property for 2009 at:

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

Correct Answer

A. 1,800,000

Explanation

The correct answer is 1,800,000. According to the cost model, depreciation is calculated by subtracting the residual value from the cost of the property and dividing it by the useful life. In this case, the cost of the property is P50 million and the residual value is P5 million, resulting in a depreciable amount of P45 million. Dividing this by the useful life of 25 years gives an annual depreciation expense of P1.8 million. Therefore, Gallery Company should report depreciation of investment property for 2009 at P1,800,000.

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44.

Legacy Company produces colorful 100% cotton T-shirts that are very popular among the youth. The company uses 150,000 kilos of cotton each month in its production process. In accordance with the company's long-term planning, the company normally procures one month supply of cotton to be used in its production process.On December 31, 2009, Legacy Company purchased a call option as a cash flow hedge to buy 150,000 kilos of cotton on July 1, 2010. The call option price is P30 per kilo. The company paid P50,000 for the call option. The market price of cotton on July 1, 2010 is P 35 per kilo.Legacy Company shall recognize gain on call option 2010 at:

350,000
375,000
700,000
750,000

Correct Answer

A. 700,000

Explanation

The gain on the call option in 2010 can be calculated by subtracting the call option price from the market price of cotton on July 1, 2010, and then multiplying it by the quantity of cotton (150,000 kilos).

Market price of cotton on July 1, 2010: P35 per kilo
Call option price: P30 per kilo
Quantity of cotton: 150,000 kilos

Gain on call option = (P35 - P30) * 150,000 = P5 * 150,000 = P750,000

Therefore, the correct answer is 700,000.

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45.

La Goon Company purchased the following securities during 2009: CLASSIFICATION COST MARKET VALUE 12/31/09Security A Trading 900,000 1,000,000Security B Trading 1,000,000 1,600,000On July 31, 2010, the company sold all of the shares of security B for a total of P1,100,000. As of December 31, 2010, the shares of security A had a market value of P600,000. No other activity occurred during 2008 in relation to the trading security portfolio. What is the gain or loss on the sale of security B on July 31, 2010?

500,000 gain
100,000 gain
500,000 loss
100,000 loss

Correct Answer

A. 500,000 loss

Explanation

The gain or loss on the sale of security B on July 31, 2010, is 500,000 loss. This is calculated by subtracting the cost of security B (1,000,000) from the amount received from the sale (1,100,000). Since the amount received is higher than the cost, there is a loss of 500,000.

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46.

Three Kings Company invested in shares of Eastern Company acquired as follows: NUMBER OF SHARES COST2007 22,500 1,800,0002008 37,500 3,300,000In 2009, Three Kings Company received 60,000 rights to purchase Eastern share at P80. Five rights are required to purchase one share. At issue date, rights has a market value of P4 each and share was selling ex-right at P96. Three Kings Company used rights to purchase 9,000 additional shares of Eastern Company and allowed the rights not exercised to lapse. In determining the stock rights exercised, assume the use of the first-in, first-out method. The amount to be debited to investment account for the purchase of the 9,000 additional shares is:

720,000
824,000
871,200
873,000

Correct Answer

A. 871,200

Explanation

In 2009, Three Kings Company received 60,000 rights to purchase Eastern shares at P80. Since five rights are required to purchase one share, Three Kings Company used 9,000 of these rights to purchase 9,000 additional shares of Eastern Company. The market value of each right was P4, so the total value of the rights used was 9,000 x P4 = P36,000. The remaining 51,000 rights were not exercised and allowed to lapse. The cost of the 9,000 additional shares is calculated by multiplying the number of shares by the ex-right price, which is P96. Therefore, the amount to be debited to the investment account for the purchase of the 9,000 additional shares is 9,000 x P96 = P864,000. Adding the value of the rights used (P36,000) gives a total of P900,000. However, since the company uses the first-in, first-out method, the cost of the shares is calculated based on the oldest shares first. Therefore, the cost of the 9,000 additional shares is P900,000 x (37,500/37,500+22,500) = P871,200. Therefore, the correct answer is 871,200.

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47.

Oregon Company has the Philippine peso as its functional currency. The company expects to purchase goods from USA for $50,000 on March 31, 2010. Accordingly, the company is exposed to a foreign currency risk. If the dollar increases before the purchase takes place, the company will have to pay more pesos to obtain the $50,000 that it will have to pay for the goods.On October 1, 2009, Oregon Company entered into a foreign currency forward contract with a bank speculator purchase $50,000 in six months for a fixed amount of P2,300,000 or P46 to $1. This forward contract is designated as cash flow hedge of the company's exposrue to increase in dollar exchange rate. On December 31, 2009, the exchange rate is P47 to $1 and on March 31, 2010, the exchange rate is P49 to $1.What is the fair value of the derivative asset or liability on December 31, 2009?

150,000 asset
150,000 liability
50,000 asset
50,000 liability

Correct Answer

A. 50,000 asset

Explanation

The fair value of the derivative asset on December 31, 2009 is $50,000. This is because the forward contract is designated as a cash flow hedge to protect against an increase in the dollar exchange rate. As of December 31, 2009, the exchange rate is P47 to $1, which means that the company would need to pay P2,350,000 to obtain $50,000. Since the forward contract allows the company to purchase $50,000 for a fixed amount of P2,300,000, the fair value of the derivative asset is $50,000.

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48.

Quezon Company acquired investments in available for sale equity securities for P5,000,000 on January 1, 2008. On December 31, 2009, Quezon decided to reclassify the available for sale securities as nonmarketable equity securities. On such date, a reliable measure of fair value of the securities is no longer available. The market value of the securities was P4,500,000 on December 31, 2008. In its 2009 statement of changes in equity, Quezon should report unrealized loss on these securities at:

0
200,000
250,000
500,000

Correct Answer

A. 500,000

Explanation

Quezon Company should report an unrealized loss of 500,000 on these securities in its 2009 statement of changes in equity. This is because when the available for sale securities were reclassified as nonmarketable equity securities on December 31, 2009, a reliable measure of fair value was no longer available. The market value of the securities on December 31, 2008, was 4,500,000, which is lower than the original cost of 5,000,000. Therefore, the difference of 500,000 represents the unrealized loss that should be reported.

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49.

On July 1, 2009, Miles Company purchased 25% of Wally Company's outstanding ordinary shares and no goodwill resulted from the purchase. Miles appropriately carries this investment at equity and the balance in Miles' investment account was P1,900,000 at December 31, 2009. Wally reported net income of P1,200,000 for the year ended December 31, 2009, and paid dividend totaling P480,000 during 2009. How much did Miles pay for its 25% interest in Wally?

1,720,000
1,870,000
2,020,000
2,170,000

Correct Answer

A. 1,870,000

Explanation

Miles purchased a 25% interest in Wally Company's outstanding ordinary shares. The balance in Miles' investment account at December 31, 2009, was P1,900,000. This represents the carrying value of Miles' investment in Wally. Since Miles carries the investment at equity, the balance in the investment account includes Miles' share of Wally's net income for the year, which is not yet distributed as dividends. Wally reported net income of P1,200,000 for the year, so Miles' share of the net income would be 25% of P1,200,000, which is P300,000. The dividend paid by Wally during the year was P480,000. Therefore, the amount that Miles paid for its 25% interest in Wally would be the carrying value of the investment (P1,900,000) plus Miles' share of net income (P300,000) minus the dividends received (P480,000), which equals P1,720,000. Hence, the correct answer is 1,870,000.

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Intermediate Accounting Practice Problems With Answers

Cebuana Company made an investment of P5,000,000 at 10% per annum compounded annually for 6 years. What is the amount of the investment on the date of maturity? Round off future value factor to two decimal places.

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On January 1, 2009, Kent Company purchased 20% of Luther Company's ordinary shares outstanding for P6,000,000. During 2009, Luther reported net income of P7,000,000 and paid cash dividend of P4,000,000. The balance in Kent's investment in Luther Company account at December 31, 2009 should be: