INVESTMENT IN EQUITY – TALUSAN AND USMAN

THEORIES

1. It is any contract that evidences a residual interest in the assets of an entity after deducting all
of its liabilities.

a. Equity instrument
b. Debt instrument
c. Loan and receivable
d. Loans receivable

2. It is the date on which the stock and transfer book of the corporation is closed for registration.
Only those stockholders registered as of this date are entitled to receive dividends.

a. Date of declaration
b. Date of record
c. Date of payment
d. Date of mailing

3. Specifically, these securities represent ownership shares such as common stock, preferred
stock and other capital stock.

a. Equity securities
b. Debt securities
c. Marketable securities
d. Current investments

4. When current investments are carried at market value

a. Unrealized gains or losses are not recognized

b. Unrealized gains and losses are recognized and included in equity
c. Unrealized gains and losses are recognized and included in the determination of income
d. Current assets

5. Long-term investments are

a. Acquired primarily for accretion of wealth

b. Readily realizable
c. Classified as current assets
d. Intended to be held for more than one year
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6. It when the shares are sold, they carry with them the right to receive dividends.

a. Between the date of declaration and the date of record

b. Between the date of declaration and the date of payment
c. Between the date of record and the date of payment
d. Between the date of payment and the date of declaration

7. It is when the shares can be sold and still the original shareholder has the right to receive the
dividends on payment date.

a. Between the date of declaration and the date of record

b. Between the date of declaration and the date of payment
c. Between the date of record and the date of payment
d. Between the date of payment and the date of declaration

8. It is the date when the dividends shall be recognized as revenue.

a. Date of declaration
b. Date of record
c. Date of payment
d. Date of mailing

9. Property dividends are recorded at

a. At cost
b. Present value
c. Fair value
d. Historical cost

10. When equity shares are of the same class acquired on different dates at different costs, a
problem will arise as to the determination of cost of shares sold when only a portion is
subsequently sold. In such a case, the entity shall determine the cost of the shares sold using
either

a. FIFO and average cost approach

b. LIFO and average cost approach
c. FIFO and LIFO
d. FIFO and retail cost approach

11. When the liquidating dividends exceed the cost investment, the difference is
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a. Debited to gain on investment

b. Credited to gain on investment
c. Debited to loss on investment
d. Credited to loss on investment

12. When liquidation is completed and the carrying amount of the investment is not fully
recovered, the balance is

a. Written off as a gain

b. Written off as a loss
c. Recovered
d. None of the above

13. Share dividends of the same class are recorded only by means of

a. Adjusting entry
b. Journal entry
c. Memorandum entry
d. No entry

14. I. Share dividends of the same class do not affect the total cost of the investment but
reduce the cost of the investment per share.

II. Share dividends of the same class affects the total cost of the investment.

a. Only I is true
b. Only II is true
c. Both statements are true
d. Both statements are false

15. From the following, select the most appropriate basis for the valuation of a new investment
when properties or services are exchanged for stock.

a. The par or stated value of the stock received

b. The book value of the property or services exchanged
c. The fair market value of the stock received
d. Either b or c, whichever is more clearly determinable

16. Poster Inc. owns 35 percent of Elliott Corporation. During the calendar year 2002, Elliott had
net earnings of P300,000 and paid dividends of P36,000. Poster mistakenly accounted for the
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investment in Elliott using the cost method rather than the equity method of accounting. What
effect would this have on the investment account and net income, respectively?

a. Understate, overstate
b. Overstate, understate
c. Overstate, overstate
d. Understate, understate

17. This approach means that the share dividends are assumed to be received and subsequently
sold at the cash received.

a. As if approach
b. BIR approach
c. Share split
d. Split down

18. It is a transaction whereby the outstanding shares are called in and replaced by smaller
number, accompanied by an increase in the par or stated value.

a. Share split
b. Split up
c. Split down
d. Special assessment

19. It is transaction whereby the outstanding shares are called in and replaced by a larger number,
accompanied by a reduction in the par or stated value of each share.

a. Share split
b. Split up
c. Split down
d. Special assessment

20. A restructuring of capital by effecting a change in the number of shares without capitalizing
retained earnings or changing the amount of its legal capital.

a. Share split
b. Split up
c. Split down
d. Special assessment
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21. A share right is

a. A legal right granted to shareholders for the renewal of shares to a corporation during a
specific time.
b. A legal right granted to shareholders to sell shares issued by a corporation
c. A legal right granted to employer
d. A legal right granted to shareholders to subscribe for new shares issued by a corporation at a
specified price during a definite period.

22. I. A share right is inherent in every share

II. A shareholder receives one right for every share owned.

a. Only I is true
b. Only II is true
c. Both statements are true
d. Both statements are false

23. The ownership of share rights is evidenced by instrument or certificates called

a. Share option
b. Share warrants
c. Preemptive right
d. Stock right

24. This means that the shares and the right are inseparable and are treated as one. In other
words, the share cannot be sold without also selling the right or vice versa. The shares are
considered to be selling

a. Right-on
b. Right-off
c. Ex-right
d. In-right

25. The warrants evidencing the share rights are issued to the shareholders. The shares are said to
be selling

a. Right-on
b. Right-off
c. Ex-right
d. In-right
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PROBLEM SOLVING

26. Wood Company owns 20,000 shares of Arlo Company's 200,000 shares of PI00 par, 6%
cumulative, nonparticipating preference share capital and 10,000 shares representing 2%
ownership of Arlo's ordinary Share capital.

During 2019, Arlo Company declared and paid preference dividends of P2,400,000. No
dividends had been declared or paid during 2018. In addition, Wood Company received a 5%
share dividend on ordinary share from Arlo Company when the quoted market price of Arlo's
ordinary share was P10.

What amount should be reported as dividend income for 2019?

a. 120,000
b. 125,000
C. 240,000
d. 245,000

SOLUTION (Question 26) Answer c

Dividend income on preference share

(20,000/200,000 = 10% x 2,400,000) 240,000

Use the following information for questions 27, 28 and 29.

During 2018, Lawan Company bought the shares of Burwood Company.

June 1 20,000 shares @ P100 2,000,000
December 1 30,000 shares @ P120 3,600,000
5,600,000
Transactions for 2019
January 10 Received 20% share dividend.
July 20 Received cash dividend of P10 per share.
December 10 Sold 30,000 shares at P125 per share.

27. What amount should be reported as dividend income for 2019?

a. 300,000
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b. 400,000
c. 600,000
d. 500,000

28. What is the gain on the sale of shares under FIFO approach?
a. 950,000
b. 1,150,000
c. 150,000
d. 550,000

29. What is the gain on sale of shares under average approach?

a. 390,000
b. 600,000
c. 950,000
d. 500,000

SOLUTION (Question 27) Answer c

Original shares (20,000 + 30,000) 50,000

Share dividend (20% x 50,000) 10,000
Total Shares 60,000

Dividend income (60,000 x 10) 600,000

SOLUTION (Question 28) Answer b

FIFO approach June 1 December 1

Original shares 20,000 30,000
Share dividend -20% 4,000 6,000
Total shares 24,000 36,000

Sale price (30,000 x 125) 3,750,000

Cost of shares sold:
From June 1 (24,000 shares) 2,000,000
From December 1 ( 6,000 shares)
(6,000/36,000 x 3,600,000) 600,000 2,600,000
Gain on sale 1,150,000

SOLUTION (Question 29) Answer c

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Average approach
Sale price 3,750,000
Cost of shares sold (30,000/ 60,000 x 5,600,000) 2,800,000
Gain on sale 950,000

30. Day Company received dividends from share investments during the current year:
 A share dividend of 4,000 shares from Parr Company when the market price of Parr's
share was P20. Day Company owns less than 1% ofParr's share capital.
 A cash dividend of P150,000 from Lark Company in which Day Company owns a 25%
interest. A majority of Lark's directors are also directors of Day Company.

What amount of dividend revenue should be reported for the current year?
a. 230,000
b. 150,000
c. 80,000
d. 0

SOLUTION (Question 30) Answer d

The share dividend from Parr Company is not an income.

The cash dividend from Lark Company is not also an income but a reduction of investment
because the interest is 25% and therefore the equity method is used.

31. 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.

What is the cost of the new investment if all of the stock rights are exercised by the investor?
a. 1,500,000
b. 1,250,000
C. 1,562,500
d. 1,450,000

Solution (Question 31) Answer a

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Theoretical value of right (125 - 100/4+ 1) 5.00

Initial cost of rights (50,000 x 5) 250,000
Cash paid for new shares (50,000/4 = 12,500 x 100) 1,250,000
Cost of new investment 1,500,000

32. Wray Company provided the following data for the current year. On September 1, Wray
received a PS00,000 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 a 5%
interest in King. Wray owns a 10% interest in Bow Company, which declared and paid
P2,000,000 cash dividend on November 15.

What amount should be reported as dividend income for the curent year?
a. 700,000
b. 560,000
C. 500,000
d. 200,000

Solution (Question 32) Answer d

Cash dividend from Bow Company (10% x 2,000,000) 200,000

The cash dividend from Seco and the liquidating dividend from King are not income but
reduction of the investment account.

33. Adam Company owned 50,000 ordinary shares of Bland Company. These 50,000 shares were
purchased by Adam for P120 per share. On August 30, Bland distributed 50,000 share 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, each share had a market value of P130 and each right had a market
value of P20.

What total cost should be recorded for the new shares that are acquired by exercising the rights?
a. 2,250,000
b. 3,250,000
c. 3,050,000
d. 5,500,000

Solution (Question 33) Answer b

Initial cost of rights (50,000 x 20) 1,000,000

Cash paid for new shares (25,000 x 90) 2,250,000
Total cost of new shares 3,250,000
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34. During the current year, 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 10% share
dividend from Amal. The closing price of Amal share is P150.

What amount should be reported as dividend revenue for the current year?
a. 342,000
b. 315,000
c. 442,000
d. 15,000

Solution (Question 34) 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 but a reduction of the
investment account because the interest is 30% and therefore the equity method is used.

Use the following information for questions 35, 36, 37 and 38.

2017
Jan. 1 Christopher Company purchased 20,000 shares of Bay Company, PI00 par, at
P110 per share.
Mar. 1 Bay Company issued rights to Christopher Company, each permitting the
purchase of 1/4 share at par. No entry was made. The bid price of the share was 140 and
there was no quoted price for the rights
April 1 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 2017 and 2018 were credited to
the investment account until the debit for payment of the new share was fully offset.
Dec. 31 Christopher Company received annual dividend of P250,000 from Bay Company.

2018
Dec. 31 Christopher Company received annual dividend of P250,000 from Bay Company.

2019
Jan 1 Christopher Company received 50% share dividend from Bay Company. On same
date, the shares received as share dividend were sold at P160 per share and the proceeds
were credited to income.
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Dec. 31 The shares 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 P110per share and credited income.

2020
June 30 Christopher Company sold one-half of the investment at P92 per share and
credited the proceeds to the investment account.

35. What is the balance of the investment on December 31, 2020 was kept by Christopher
Company?
a. 3,150,000
b. 2,650,000
C. 2,200,000
d. 4,950,000

36. Using the average method, what is the correct balance of the investment on on December 31,
20220?
a. 2,200,000
b. 1,800,000
C. 900,000
d. 0

37. What is the net adjustment to retained earnings on December31, 2020?

a. 3,650,000 debit
b. 3,150,000 debit
c. 3,650,000 credit
d. 3,150,000 credit

38. What amount of gain on sale of investment should be reported in 2020?

a. 1,400,000
b. 1,100,000
c. 2,500,000
d. 1,900,000

Solution (Question 35) Answer b

Shares Cost
1/1/2017 (20,000x 110) 20,000 2,200,000
4/1/2017 (5,000 x 100) 5,000 500,000
12/31/2017 Dividend received -- (250,000)
12/31/2018 Dividend received -- (250,000)
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12/31/2019 (25,000 x 110) 25,000 2,750,000

6/30/2020 (25,000 x 92) (25,000) (2,300,000)
Investment account per book 25,000 2,650,000

Solution (Question 36) Answer c

Shares Cost
1/1/2017 (20,000 x 110) 20,000 2,200,000
4/1/2017 (5,000 x 100) 5,000 500,000
1/1/2019 (50% x 25,000) 12,500 --
Balance 37,500 2,700,000
1/1/2019 (12,500/37,500 x 2,700,000) (12,500) (900,000)
Balance 25,000 1,800,000
12/31/2019 (2 for 1 split) 25,000 --
Balance 50,000 1,800,000
6/30/2020 (25,000/50,000 x 1,800,000) (25,000) (900,000)
Balance December 31, 2020 25,000 900,000

Proof
Investment balance per book 2,650,000
Debit adjustment 500,000
Credit adjustment (900,000)
Credit adjustment (2,750,000)
Debit adjustment 1,400,000
Adjusted balance December 31, 2020 900,000

Adjusting entries- December 31, 2020

 Dividends received in 2017 and 2018 erroneously' credited to investment.
Equity investment 500,000
Retained earnings 500,000
 Proceeds from sale of investment on January 1, 2019 incorrectly credited to income.
Retained earnings 900,000
Equity investment 900,000

Sale price (12,500 x 160) 2,000,000

Cost of shares sold (12,500/37,500 x 2,700,000) (900,000)
Gain on sale 1,100,000

 Shares received on December 31, 2019 from a 2 for 1 share split erroneously debited to
investment and credited to income (25,000 shares x 110 equals P2,750,000).
Retained earnings 2,750,000
Equity investment 2,750,000
 Proceeds from sale of investment on June 30, 2020 incorrectly credited to investment.
Equity investment 1,400,000
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Gain on sale of investment 1,400,000

Sale price (25,000 x 92) 2,300,000

Cost of shares sold (25,000/50,000 x 1,800,000) (900,000)
Gain on sale of investment 1,400,000

Solution (Question 37) Answer b

Net adjustment to retained earnings

Credit adjustment 500,000
Debit adjustment (900,000)
Debit adjustment (2,750,000)
Net debit adjustment (3,150,000)

Solution (Question 38) Answer a

Sale price (25,000 x 92) 2,300,000

Cost of shares sold (25,000/50,000 x 1,800,000) (900,000)
Gain on sale of investment 1,400,000

39. On March 1, Evan Company purchased 10,000 ordinary shares at P80 per share. On
September 30, Evan Company received 10,000 share rights to purchase an additional 10,000
shares at P90 per share. On September 30, the share had a market value P95 and the share right
had a market value of P5.

What amount should be reported for investment in share rights on September 30?
a. 150,000
b. 100,000
c. 50,000
d. 60,000

Solution (Question 39) Answer c

Initial measurement at fair value (10,000 rights x 5) 50,000

40. Rice Company owned 30,000 ordinary shares of Wood Company acquired on July 31 at a
total cost of P1,100,000. On December 1, Rice received 30,000 share rights from Wood. Each
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right entitles the holder to acquire one share at P45. The market price of Wood's share on this
date was P50 and the market price of each right was P10, Rice sold the rights on December 31
for P450,000 less a P10,000 commission.

What amount should be reported as gain from the sale of the rights?
a. 150,000
b. 140,000
C. 250,000
d. 240,000

Solution (Question 40) Answer b

Net sale price (450,000 - 10,000) 440,000

Initial cost of rights sold (30,000 x 10) (300,000)
Gain on sale of rights 140,000

41.Ferrer company owns 40,000 shares of Hayden Company’s 400,000 shares of P100 par, 6%
cumulative, nonparticipating preference share capital and 20,000 shares representing 2%
ownership of Hayden ordinary share capital.

During 2018, Hayden Company declared and paid preference dividends of 2,200,000. No
dividends had been declared or paid during 2017. In addition, Ferrer Company received a 5%
share dividend on ordinary share from Hayden Company when the quoted market price of
Hayden ordinary share was P10.

What amount should be reported as dividend income for 2018?

a. 120,000
b. 125,000
c. 220,000
d. 225,000

Solution (Question 41) Answer c

Dividend income on preference share (40,000/400,000 = 10% x 2,200,000) 220,000

42. On January 1, 2018, Jorah Company purchased 4,000 shares of another entity at P100 per
share. Transaction costs amounted to P12,000. The investment is measured at fair value through
other comprehensive income. A P5 dividend per share had been declared on December 15, 2017,
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to be paid on March 31, 2018 to shareholders of record on January 31, 2018. No other
transactions occurred in 2018 affecting the investment.

What is the initial measurement of the investment on January 1, 2018?

a. 380,000
b. 392,000
c. 400,000
d. 412,000

Solution (Question 42) Answer b

Purchase price (4,000 x P100) 400,000

Brokerage 12,000
Total 412,000
Less: Dividend purchased (4,000 x P5) 20,000
Acquisition cost 392,000

43. On January 1, 2018, Zoya Company purchased 10,000 ordinary shares at P90 per share. On
December 31, 2018, the entity received 2,000 shares of the investee in lieu of cash dividend of
P10 per share. On this date, the investee’s share has a quoted market price of P60 per share. What
amount should be reported as dividend income for 2018?

a. 120,000
b. 100,000
c. 20,000
d. 0

Solution (Question 43) Answer A

Dividend income (2,000 x 60)

120,000

44. Information pertaining to dividends from The Darkling Company’s investments in ordinary
shares during the year ended December 31, 2019 is as follows:
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 The entity owned a 10% interest in Alina Company, which declared a cash dividend of
P500,000 on November 30, 2019 to shareholders of record on December 31, 2019 and
payable on January 15, 2020.
 On October 15, 2019, the entity received a liquidating dividend of P100,000 from Mal
Company. The entity owned a 5% interest in Mal Company.

What amount of dividend income should be reported for 2019?

a. 50,000
b. 150,000
c. 500,000
d. 600,000

Solution (Question 44) Answer a

Cash dividend (10% x 500,000) 50,000

Use the following information for questions 45, 46 and 47.

Kaz Company issued rights to subscribe to new share at P150 per share in the ratio of one new
share for every five rights held. The share has market value of P190 and the right has a market
value of P10. An investor held 10,000 shares acquired at a total cost of P1,800,000. The share
rights are accounted for separately.
45. What is the journal entry to record the acquisition of the original investment?

a. Investment in Equity 1,800,000

Dividend Income 1,800,000
b. Investment in shares 1,900,000
Accounts Payable 1,900,000
c. Investment in equity securities 1,800,000
Cash 1,800,000
d. No entry

46. How many rights will the investor receive?

a. 10,000
b. 20,000
c. 30,000
d. 40,000

47. What is the initial measurement of the rights?

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a. 180,000
b. 170,000
c. 165,000
d. 100,000

Solution (Question 45) Answer c

Investment in equity securities 1,800,000

Cash 1,800,000

Solution (Question 46) Answer a

The investor received 10,000 share rights because the investor owned 10,000 shares.

Solution (Question 47) Answer d

Initial measurement of rights (10,000 x 10) 100,000

48. On July 1, 2019, Jesper Corp. exchanged a land for 25,000 ordinary shares of Matthias
Company. On this date, the land’s carrying amount was P2,500,000 and its fair value was
P3,000,000. On July 1, 2019, the carrying amount of Matthias Company’s share was P60 and its
market value was P150. On December 31, 2019, Matthias Company had 250,000 ordinary shares
and the carrying amount per share was P80.

What amount should be reported in the December 31, 2019 statement of financial position as
investment in Matthias Company?
a. 1,500,000
b. 2,500,000
c. 3,000,000
d. 3,750,000

Solution (Question 48) Answer c

Fair value of asset given (land) 3,000,000

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49. Sam Company purchased 50,000 shares on January 15, 2018 representing 5% ownership
interest. The entity received a stock dividend of 20% on March 31, 2018 when the market price
of the share is P40. The investee paid a cash dividend of P5 per share on December 15, 2018.

What amount should be reported as dividend income for 2018?

a. 700,000
b. 400,000
c. 300,000
d. 150,000

Solution (Question 49) Answer c

Original shares acquired January 15 50,000

Stock dividend on March 31 (20% x 50,000) 10,000
Total shares 60,000

Dividend income – cash dividend on December 15 (60,000 x P5) 300,000

50. On January 1, 2018, Bronn Company purchased 100,000 ordinary shares at P80 per share.
On September 30, 2018, the entity received 100,000 stock rights to purchase an additional
100,000 shares at P90 per share. The stock rights had an expiration date of February 1, 2019. On
September 30, 2018, each share had a market value of P114 and the stock right had a market
value of P6. What amount should be reported on September 30, 2018 as investment in stock
rights?

a. 100,000
b. 400,000
c. 500,000
d. 600,000

Solution (Question 50) Answer d

Cost of rights (100,000 x 6) 600,000