Enhancement Intermediate Accounting 1

P3 SW 1 – Investments Additional Topics

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

a. Date of declaration
b. Date of record
c. Date of payment
d. Date of mailing the dividend check

2. At which of the following dates has the shareholder theoretically realized income from dividend?

a. The date the dividend is declared

b. The date of record
c. The date the dividend check is mailed by the entity
d. The date the dividend check is received by the shareholder.

3. Property dividends are recorded

a. As dividend income at carrying amount of the property

b. As dividend income at fair value of the property
c. As return of investment and therefore credited to investment account
d. By means of memorandum only

4. Liquidating dividends are credited to

a. Income
b. Retained earnings
c. Investment account
d. Share capital

5. What is the effect of stock dividend of the same class?

a. Increase in investment account and increase in cost per share

b. Decrease in investment account and decrease in cost per share
c. No effect on investment account but decrease in cost per share
d. No effect on investment account but increase in cost per share

6. When stock individuals of different class are received

a. No formal entry is made but only a memorandum

b. Cash is debited and dividend income is credited
c. A new investment account is debited and dividend income is credited
d. A new investment account is debited and the original
e. Investment account is credited
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7. Shares received in lieu of cash dividend are recorded as

a. Income at fair value of the shares received

b. Income at par value of the shares received
c. Income at the cash dividend that would have been received
d. Stock dividends

8. Cash in lieu of stock dividend is accounted for as

a. Dividend income
b. Return of investment
c. Partly dividend income and partly return of investment
d. If the stock dividends are received and subsequently sold at the cash received and gain
loss is recognized

9. What is the effect of share split up?

a. Increase in number of shares and increase in cost per share

b. Decrease in number of shares and decrease in cost per share
c. Increase in number of shares and decrease in cost per share
d. Decrease in number of shares and increase in cost per share

10. An investor own 10% of the ordinary shares of an investee throughout the year. The investee has no
preference shares outstanding. What is the right of the investor?

a. To be paid 10% of the investee’s net income in cash each year

b. To receive dividend equal to 10% of the par value each year
c. To receive dividend equal to 10% if the total dividend paid by the investee for the year to
shareholder
d. To keep investee from issuing any additional shares unless the investor is willing to buy 10% of
the newly issued shares

11. Wood Company owns 20,000 shares of Arlo Company’s 200,000 shares of Ᵽ100 par, 6% cumulative,
nonparticipating preference share capital and 10,000 shares representing 2% ownership of Arlo’s
ordinary share capital.
During 2018, Arlo Company declared and paid preference dividends of Ᵽ2,400,000. No dividends had
been declared or paid during 2017.
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 Ᵽ10.

What amount should be reported as dividend income for 2018?

a. 120,000
b. 125,000
c. 240,000
d. 245,000
Enhancement Intermediate Accounting 1

Solution Answer c

Dividend income on preference share

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

12. 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
Ᵽ20. Day Company owns less than 1% of Parr’s share capital.
 A cash dividend of Ᵽ150,000 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 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.

13. Rice Company owned 30,000 ordinary shares of Wood Company acquired on July 31 at a total cost of
Ᵽ1,100,000.
On December 1, Rice received 30,000 share rights from Wood. Each right entitles the holder to acquire
one share at Ᵽ45.
The market price of Wood’s share on this date was Ᵽ50 and the market price of each right was Ᵽ10. Rice
sold the rights on December 31 for Ᵽ450,000 less a Ᵽ10,000 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 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
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For Problem 14-18.

On January 1, 2018, Myopic Company purchased bonds with face amount of Ᵽ2,000,000 for Ᵽ1,900,500
including transaction cost of Ᵽ100,500,
The business model for this investment is to collect contractual cash flows which are solely payments of
principal and interest.
The entity did not elect the fair value option.
The bonds mature on December 31, 2020 and pay 8% interest annually every December 31 with a 10%
effective yield.
On December 31, 2018, the entity changed the business model for this investment to collect contractual
cash flows and to sell the financial asset in the open market.
The bonds are quoted at 110 on January 1, 2019 and 120 on December 31, 2019.

14. What is the interest income for 2018?

a. 152,040
b. 190,050
c. 160,000
d. 200,000
15. What amount of unrealized gain in OCI should be recognized on January 1, 2019?
a. 200,000
b. 269,450
c. 290,500
d. 0
16. What cumulative amount in OCI is recognized in the statement of changes in equity for 2019?
a. 166,945
b. 269,450
c. 499,500
d. 436,395
17. What is the interest income for 2019?
a. 225,306
b. 180,244
c. 193,055
d. 220,000

18. What is the carrying amount of the investment on December 31, 2019?
a. 2,400,000
b. 1,930,500
c. 1,963,605
d. 2,200,000

Solution
Question 14 Answer b
(8%) (10%)
Interest Interest Discount Carrying
Date received income amortization amount
1/1/2018 1,900,500
12/31/2018 160,000 190,050 30,050 1,930,550
12/31/2019 160,000 193,055 33,055 1,963,605
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Question 15 Answer b

Fair value – January 1, 2019 (2,000,000 x 110) 2,200,000

Carrying amount per table – January 1, 2019 (1,930,550)
Unrealized gain – OCI 269,450

On December 31, 2018, the entity changed the business model to collect contractual cash flows and to
sell the financial asset in the open market.
Accordingly, the bond investment is reclassified from amortized cost to FVOCI.
The reclassification date is recognized on January 1, 2019 and the difference between the amortized cost
carrying amount and the fair value reclassification date is recognized in OCI.

Question 16 Answer d

Fair value – December 31, 2019 (2,000,000 x 120) 2,400,000

Carrying amount per table – December 31, 2018 (1,963,605)
Cumulative unrealized gain in OCI – 12/31/2019 436,395

Question 17 Answer c

Interest income for 2019 (see table) 193,055

Question 18 Answer a

Fair value – December 31, 2019 (2,000,000 x 120) 2,400,000

The carrying amount is always the fair value at year-end because the bond investment is measured at
FVOCI.

For Items 19-21.

On January 1, 2018, Soledad Company purchased 10% bonds in the face amount of Ᵽ3,000,000.
The bonds mature on January 1, 2028 and were purchased for Ᵽ3,405,000 to yield 8%.
The entity used the effective interest method of amortization and interest is payable annually every
December 31.
The business model for this investment is to collect contractual cash flows composed of interest and
principal.
On December 31, 2019, the entity changed the business model for this investment to realize fair value
changes.
On January 1, 2020, the fair value of the bonds was Ᵽ2,845,000 at an effective rate of 11%.

19. What is the interest income for 2019?

a. 337,740
b. 300,000
c. 272,400
d. 270,192
20. What amount in profit or loss should be recognized in 2020 as a result of the reclassification?
a. 531,600
b. 502,292
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c. 154,200
d. 0
21. What is the interest income for 2020?
a. 300,000
b. 312,950
c. 267,807
d. 284,500

Solution
Question 19 Answer d
(10%) (8%)
Interest Interest Premium Carrying
Date received income amortization amount
Jan. 1, 2018 3,405,000
Dec. 31, 2018 300,000 272,400 27,600 3,377,400
Dec. 31, 2019 300,000 270,192 29,808 3,347,592

Question 20 Answer b

Fair value – January 1, 2020 2,845,000

Carrying amount – January 1, 2020 (3,347,592)
Loss on reclassification (502,592)

On January 1, 2020, the reclassification date, the entity will reclassify the bond investment from amortized
cost to fair value through profit or loss.
The difference between the fair value and previous carrying amount on such date is recognized in profit of
loss.

Question 21 Answer a

Interest income for 2020 (3,000,000 x 10%) 300,000

If the bond investment is measured at fair value through profit or loss, there is no discount or premium
amortization.
Accordingly, the interest income is based on the nominal rate.

For Items 22-25.

On January 1, 2018, Gelyka Company purchased 12% bonds with face amount of Ᵽ5,500,000 including
transaction cost of Ᵽ100,000. The bonds provide an effective yield of 10%.
The bonds are dated January 1, 2018 and pay interest annually on December 31 of each year.
The bonds are quoted at 115 on December 31, 2018. The entity has irrevocably elected the fair value
option.

22. What amount of gain from change in fair value should be reported for 2018?
a. 750,000
b. 250,000
c. 350,000
d. 0
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23. What amount of interest income should be reported for 2018?

a. 600,000
b. 550,000
c. 660,000
d. 540,000
24. What is the carrying amount of the bond investment on December 31, 2018?
a. 5,750,000
b. 5,400,000
c. 5,500,000
d. 5,450,000
25. What total amount of income from the investment should be reported in the income statement for
2018?
a. 540,000
b. 950,000
c. 890,000
d. 900,000

Solution
Question 22 Answer c

Purchase price 5,500,000

Transaction cost (100,000)
Adjusted cost 5,400,000

The transaction cost is expensed immediately if the financial asset is measured at fair value through profit
or loss.

Market value (5,000,000 x 115) 5,750,000

Adjusted cost 5,400,000
Gain from change in fair value 350,000

Question 23 Answer a

Interest income (12% x 5,000,000) 600,000

Under the fair value option, interest income is based on nominal rate rather than effective rate.

Question 24 Answer a

Carrying amount equal to market value at year-end 5,750,000

Question 25 Answer b

Gain from change in fair value 350,000

Interest income 600,000
Total income from investment 950,000

Under the fair value option, any change in fair value is recognized in profit or loss.