Investment Quiz: 20 Questions Part 2

Explanation
The unrealized gain in December 31, 2009 shareholders' equity should be reported as $200,000. This is calculated by subtracting the market value of the equity investments on December 31, 2008 ($2,400,000) from the market value on December 31, 2009 ($3,200,000). The difference of $800,000 represents the increase in value, but since the investments are classified as "available for sale," only the unrealized gain is reported in shareholders' equity, which is $200,000.

Explanation
Banquet Company should report a total loss of $800,000 on these securities in its 2009 income statement. This is because the aggregate lower of cost or market value applied to each security is $3,500,000, and the aggregate market value is $3,700,000. The difference between these two amounts, $200,000, represents an impairment loss. Since the market declines are judged to be "other than temporary," this impairment loss of $200,000 should be recognized as a loss on the income statement. Additionally, the aggregate cost of the securities is $4,000,000, so the total loss is $800,000.

Explanation
The amount of unrealized loss on these securities that Trinity Company should report in its December 31, 2009 shareholders' equity section of the balance sheet is $220,000. This is calculated by subtracting the net realized gains during 2009 ($300,000) from the aggregate cost ($1,700,000), and then adding the unrealized gains ($40,000) and subtracting the unrealized losses ($260,000). The resulting amount is $220,000.

Explanation
Quezon Company should report an unrealized loss of P500,000 on these securities in its 2009 statement of changes in equity. This is because the available for sale securities were reclassified as nonmarketable equity securities, and a reliable measure of fair value was no longer available. As of December 31, 2008, the market value of the securities was P4,500,000, which is P500,000 lower than the original cost of P5,000,000. Therefore, the unrealized loss should be reported as P500,000.

Explanation
The unrealized loss on these securities in the 2009 statement of changes in equity should be reported as 800,000. This is because the market value of the bonds decreased from 7,500,000 on December 31, 2008 to 7,200,000 on December 31, 2009. Since the bonds were reclassified as "held to maturity" on December 31, 2009, any difference between the original cost (8,000,000) and the new classification market value (7,200,000) should be reported as an unrealized loss on the statement of changes in equity. In this case, the difference is 800,000.

Explanation
The correct answer is 0. Since the investments were reclassified from available for sale to held to maturity, any unrealized losses that were previously recognized in other comprehensive income are reversed. Therefore, there is no loss to be reported in the income statement for 2009.

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 market value of the bonds on December 31, 2009 is higher than their carrying value after amortization of the discount. The difference between the market value and the carrying value represents the unrealized gain. In this case, the unrealized gain is P5,200,000 - P4,680,000 = P520,000.

Explanation
The correct answer is 3,000,000. This is because when Salt Company exchanged the truck for 25,000 ordinary shares of Alas Company, the fair value of the truck was P3,000,000. Therefore, the investment in Alas should be reported at its fair value of P3,000,000 on the December 31, 2009 balance sheet.

Explanation
The cost of the investment is calculated by multiplying the number of shares purchased (40,000) by the purchase price per share (P100). This gives us a total cost of P4,000,000. However, we need to subtract the brokerage fees (P120,000) from this total cost to get the actual cost of the investment. Therefore, the correct answer is P3,920,000.

Explanation
In this scenario, Eve Company purchased 100,000 ordinary shares of Miles Company for P40 a share on January 1, 2008. On December 31, 2008, the market price of Miles' share declined to P35. This decline in market price is considered temporary. On December 28, 2009, Eve sold 80,000 shares of Miles Company for P30 a share. The loss on disposal of long-term investment is calculated by subtracting the selling price from the cost of the investment. Therefore, the loss on disposal for Adam in the year ended December 31, 2009, would be 80,000 shares multiplied by (P40 - P30), which equals P800,000.

Explanation
Corn Company should report dividend income of P180,000 in its income statement for the year ended October 31, 2009. This is because Corn purchased 10,000 shares representing 2% ownership of Row Company on February 15, 2009. Corn then received a stock dividend of 2,000 shares on March 31, 2009. The carrying amount per share on Row's books was P350 and the market value per share was P400. Therefore, the dividend income can be calculated as follows: 2,000 shares * P400 (market value per share) = P800,000. However, since Corn only owns 2% of Row Company, the dividend income will be 2% of P800,000, which equals P180,000.

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 sale, we need to determine the cost of the shares sold. The total cost of the shares acquired was P4,400,000. Since Duff received an additional 2,000 shares as a dividend, the cost of each share is P4,400,000/22,000 = P200. Therefore, the cost of the 2,000 shares sold is 2,000 x P200 = P400,000. The gain on sale is the selling price minus the cost, which is P640,000 - P400,000 = P240,000. Therefore, Duff should report a gain on sale of P240,000.

Explanation
Lawin Company bought 20,000 shares of Burnwood Company on June 1 for P100 per share, totaling P2,000,000. Then, on December 1, they bought an additional 30,000 shares for P120 per share, totaling P3,600,000. In 2009, Lawin Company received a cash dividend of P10 per share on January 10 and a 20% stock dividend on January 20. On December 10, they sold 30,000 shares at P125 per share. To calculate the gain on the sale of shares using the FIFO (First-In, First-Out) approach, we consider the first shares purchased (20,000 shares @ P100) and the shares sold (30,000 shares @ P125). The gain is calculated as (30,000 shares x P125) - (20,000 shares x P100) = P1,150,000.

Explanation
Woody Company should report 240,000 as dividend income in its 2009 income statement. This is because they own 20,000 shares of Buzz Company's preference share capital, which declared and paid preference dividends of P2,400,000. Since Woody owns 2% of Buzz's ordinary share capital, they also received a 5% stock dividend on the ordinary shares. Therefore, the total dividend income for Woody in 2009 is P2,400,000 + (5% of P10 * 10,000 shares) = P240,000.

Explanation
Knight Company should report a dividend revenue of 0 in its 2009 income statement. This is because the stock dividend received from Parrot Company is not considered as revenue since Knight owns less than 1% of Parrot's share capital. Additionally, the cash dividend received from Clark Company is not considered as revenue either because a majority of Clark's directors are also directors of Knight, indicating a related party transaction. Therefore, no dividend revenue should be reported.

Explanation
Rex should report P40,000 as dividend income in its income statement for the year ended December 31, 2009. This is because Rex received a P500,000 cash dividend from Silo Company, in which it owns a 30% interest. However, since a majority of Rex's directors are also directors of Silo, this indicates that Rex has significant influence over Silo and therefore should account for the dividend using the equity method. Under the equity method, Rex would recognize its share of Silo's net income, which is 30% of the P500,000 dividend, resulting in P150,000. However, the question asks for the amount to be reported as dividend income, so only the dividend portion should be considered, which is P40,000 (30% of P500,000).

Explanation
Evan Company purchased 10,000 stock rights at a market value of P5 per share. Therefore, the total value of the stock rights is 10,000 * P5 = P50,000. This is the amount that Evan should report in its September 30, 2009 balance sheet for investment in stock rights.