question archive 1) At the start of the current year
1) At the start of the current year
Subject:AccountingPrice:9.82 Bought3
1) At the start of the current year. Violet Company held 30% of ABC Company's 150,000 outstanding shares and 2% of DEF Company's 500,000 outstanding shares. During the year, Violet received a P25,000 cash dividend from ABC and a 5% share dividend when the stock of ABC was selling at P40 per share. DEF declared a P15 per shared dividend during the year but subsequently issued 500 shares to Violet in lieu of the cash dividends. At the end of the year, Violet received P50,000 as liquidating dividends from DEF Company. How much will Violet report as dividend income for the current year?
2. Black company owned 50,000 ordinary shares which were purchased for P120 per share. During the year, the investee distributed 50,000 stock rights to the investor. The investor was entitled to buy one new share for P90 cash and two of these rights. Each share had a market value of P130 and each right had a market value of P20 on the date of issue. What amount should be debited to the investment account if the rights were not accounted for separately?
3. Answer should be presented as: DECREASE 123456 or INCREASE 123456
During 2021, the first year of operations, Dejavu Company purchased the following equity securities:
| Market Value | |||
| Cost | Dec. 31, 2021 | Dec. 31, 2022 | |
| Security One | 2,200,000 | 1,400,000 | 1,900,000 |
| Security Two | 700,000 | 1,000,000 | 1,100,000 |
| Security Three | 1,600,000 | 1,500,000 | 1,600,000 |
| Security Four | 2,000,000 | 2,000,000 | 1,200,000 |
Security One and Security Two are held for trading and Security Three and Security Four are measured at fair value through other comprehensive income by election. During 2022, the entity sold Security Two for P1,000,000 and half of Security Four for P500,000, Revenues and operating (marketing and administrative) expenses for the year 2022 are P7.500 000 and P4.000.000 respectively. How much is the change in Retained Earnings for the year 2022 due to the equity securities (indicate whether increase or decrease)?
4. White purchased 10% of an investee's 100,000 outstanding ordinary shares on January 1, 2022 for P1,000,000. On October 31, 2022, White company purchased 20,000 additional shares of the investee for P3,000,000. On the same date, the fair value of the 10% interest was P1,400,000. The fair value of the net assets of the investee is equal to carrying amount except for an equipment whose fair value exceeds carrying amount by P640,000. The equipment has a remaining life of 5 years. The investee had not issued any additional shares for the year. The investee reported net income of P8,000,000 for the current year and paid P500,000 dividends. What amount should be reported on December 31 as investment in associate?
5. On January 2. 2022, Promenade Company purchased 25% of Twilight Company's ordinary shares; no goodwill resulted from the purchase. Promenade appropriately carries this investment at equity and the balance in Twilight's investment account was P3,800,000 at December 31, 2022. Twilight reported net income of P2,400,000 for the year and paid dividends amounting to P960,000 during 2022. How much did Promenade pay for its investment in Twilight?
6. At the beginning of 2021, Gala company purchased equity securities to 5 ports held for trading for P5,000,000. The entity also paid commission, taxes and other transaction costs amounting to P200,000. The securities had a market value of P5,500.000 at year-end. No securities were sold during the year. In the year 2022, 60% of the investments were sold. Proceeds from the sale amounted to P3,450,000 which is net of transaction costs amounting to P125 000. On December 31, 2022. the fair value of the investment is 40% more than the carrying amount at the end of 2021. What total gain/loss on trading securities should be reported in the income statement for 2022? Answer should be presented as: LOSS 123456 or GAIN 123456
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1) 150,000
2) 6,000,000
3) INCREASE 3,700,000
4) 6,643,600
5) 3,440,000
6) GAIN 1,030,000
Step-by-step explanation
1)The investment in ABC is treated as an investment in associate since we have 30% holding or a refutable assumption of significant influence, hence, the dividends are accounted for as return of investment rather than investment income.
The share dividend of ABC company is not journalized but is only recorded as a memorandum entry which in return lowers the cost of each shares since the cost is still the same but the shares are higher.
500,000 shares of DEF x .02 = 10,000 shares
15 x 10,000 = 150,000
The share dividend is in lieu of cash so it is still treated as a cash dividend and recorded as such.
The liquidating dividend is a return of investment but subject for computation for gain or losses base from carrying amount, since there were no details about the carrying amount of the shares then they are accounted for as a return of investment.
2) 50,000 shs x 120 = 6,000,000 since the stock rights are not accounted for separately then the whole amount of purchasing price goes to the investment account.
3) Security 1 - accounted for as FVPL
Change in FV= 1,400,000 to 1,900,000 = 500,000 increase, recorded as income in income statement, increases RE
Security 2 - Accounted for as FVPL - sold, no info about FV at selling date so assume FV of 12/31/2021 is the FV in transaction date. since they are equal, then no gain or loss can be recorded.
Security 3 - Accounted for as FVOCI
Change in FV recorded in OCI = 1,600,000- 1,500,000= 100,000
FV adjustment upon sale= 1,500,000/2 = 750,000 - 500,000(Selling Price)= 250,000 charged to OCI
Transfer from OCI to RE= 250,000 + 100,000(1/2) = 300,000 decrease
Shortcut= Original Cost - Selling price
Original Cost= 1,600,000/2= 800,000 - 500,000 = 300,000 decrease
Net Income = 7,500,000 - 4,000,000 = 3,500,000 increase since net income
Changes in RE = 3,500,000+500,000-300,000 = Increase 3,700,000
4) FV of 10% = 1,400,000
Cost of 20% = 3,000,000
Total Carrying amount/cost of investment = 4,400,000
no FV connotation so I based my FV on FV of the past 10% so 1,400,000/.10= 14,000,000
adjust FV = 14,000,000 + 640,000= 14,640,000
attributable to 30% (10% previous +20% newly bought) = 14,640,000 x .30 = 4,392,000
There is a full Goodwill which will be imbedded in the Investment in associate account
Net Income = 8,000,000
Adjustment = Depreciation = 640,000/5 x 2/12(November and December) = 21,333.33
8,000,000-21,333=7,978,666.67 x 30% = 2,393,600( rounded off)
Dividends = 500,000 x 30% = 150,000
Carrying Amount= 4,400,000 + 2,393,600 - 150,000 = 6,643,600
5)
| Carrying Amount Beginning | 3,440,000 (squeezed) |
| Add: Net Income ( 2,400,000 x 25%) | 600,000 |
| Less: Dividends | (240,000) |
| Carrying Amount, end | 3,800,000 |
squeeze = 3,800,000 + 240,000 - 600,000 = 3,440,000
6) Investment accounted for as FVPL
Gain on sale = 3,450,000 - 3,300,000 (5,500,000 x .60) = 150,000
Gain in change in FV= 5,500,000 x .40= 2,200,000 x 40%(increase) = 880,000
Total gain = 150,000 + 880,000 = GAIN 1,030,000
