Intermediate Accounting Practice Problems With Answers

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1. 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?

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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Intermediate Accounting Practice Problems With Answers - Quiz

Are you preparing for the CA intermediate level and want to check your progress? Take up this "Intermediate Accounting Practice Problems With Answers" quiz and test your knowledge regarding the same. Intermediate accounting is a course designed for studying financial accounting. This quiz serves as a reviewer for the entire... see morechapter of investments in practical accounting. Check how good your preparation level is by playing this quiz. Also, you'd be able to see your improvement areas. Best of luck, buddy! see less

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2. 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.

Explanation

The correct answer is 8,850,000. This can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the future value, P is the principal amount, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years. Plugging in the given values, we get A = 5,000,000(1 + 0.10/1)^(1*6) = 8,850,000.

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3. 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?

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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4. 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:

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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5. 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?

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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6. 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?

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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7. 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?

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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8. 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?

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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9. 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?

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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10. Three Kings Company invested in shares of Eastern Company acquired as follows:

                                                      NUMBER OF SHARES                       COST

2007                                                        22,500                                 1,800,000
2008                                                        37,500                                 3,300,000

In 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:

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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11. 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?

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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12. During 2008 Carr Company purchased marketable equity securities as a trading investment. For the year ended December 31, 2008, the company recognized an unrealized loss of P230,000. There were no security transactions during 2009. Pertinent information at December 31, 2009 is as follows:

  SECURITY                         COST                            MARKET VALUE
   
         A                             2,450,000                               2,300,000
         B                             1,800,000                               1,820,000
                                        4,250,000                                4,120,000

In its 2009 income statement, Carr should report

Explanation

The information provided shows that the market value of security A increased from P2,300,000 to P2,450,000, resulting in an unrealized gain of P150,000. However, the market value of security B decreased from P1,820,000 to P1,800,000, resulting in an unrealized loss of P20,000. Therefore, the net unrealized gain for the year ended December 31, 2009, is P150,000 - P20,000 = P130,000.

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13. 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 DIVIDEND

2008                                                                400,000                                           0
2009                                                             1,200,000                               1,800,000

In its income statement for the year ended December 31, 2009, Easy Company should report dividend income at:

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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14. 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:

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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15. 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?

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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16. 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?

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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17. On January 1, 2009, Tag Company purchased bonds with face value of P2,000,000. The bonds are dated January 1, 2009 and mature on January 1, 2013. the interest on the bonds is 10% payable semiannually every June 30 and December 31. The prevailing market rate of interest on the bonds is 12%. what is the present value of the bonds on January 1, 2009? Round off present value factor to two decimal places.

Explanation

The present value of a bond is calculated by discounting the future cash flows (interest payments and face value) at the prevailing market rate of interest. In this case, the bond has a face value of P2,000,000 and pays semiannual interest at a rate of 10%. The prevailing market rate of interest is 12%. Using the present value formula, the interest payments and face value are discounted back to January 1, 2009, resulting in a present value of P1,881,000.

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18. 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?

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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19. 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                                          0.75

What is the market price of the serial bonds on January 1, 2009?

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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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:

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. Information regarding Trinity Company's portfolio of available for sale securities is as follows:

Aggregate cost - December 31, 2009                                            1,700,000
Unrealized gains - December 31, 2009                                              40,000
Unrealized losses - December 31, 2009                                           260,000
Net realized gains during 2009                                                       300,000

On 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?

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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22. Eve Company owns 50,000 ordinary shares of Blend Company, which has several hundred thousand shares publicly traded. These 50,000 shares were purchased by Eve in 2007 for P100 per share. On August 30, 2009, Blend distributed 50,000 stock rights to Eve. Eve was entitled to buy one new share of Blend Company for P90 cash and two of these rights. On August 30, 2009, each share had a market value of P 132 ex-right, and each right had a market value of P18. What cost should be recorded for each new share that Eve acquired by exercising the rights?

Explanation

When Blend Company distributed 50,000 stock rights to Eve, she was entitled to buy one new share for P90 cash and two rights. Each right had a market value of P18, so the total value of the two rights is P36. Therefore, the total cost to acquire one new share is P90 + P36 = P126. However, each share had a market value of P132 ex-right, meaning the rights were already factored into the market price. Therefore, the cost to be recorded for each new share that Eve acquired by exercising the rights is P132 - P18 (the market value of the rights) = P114.

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23. On January 1, 2009, Bell Company paid P18,000,000 for 50,000 ordinary shares of Base Company which represent a 25% interest in the net assets of Base. The acquisition cost is equal to the book value of the net assets acquired. Bell has the ability to exercise significant influence over Base. Bell received a dividend of P35 per share from Base in 2009. Base reported net income of P9,600,000 for the year ended December 31, 2009. In its December 31, 2009 balance sheet, Bell should report the investment in Base Company at:

Explanation

The correct answer is 18,650,000. This is because the acquisition cost of the investment is equal to the book value of the net assets acquired, which is 18,000,000. Additionally, Bell received a dividend of P35 per share from Base in 2009, which would increase the value of the investment. Therefore, the investment in Base Company should be reported at 18,650,000 in Bell's December 31, 2009 balance sheet.

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24. 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?

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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25. On October 1, 2009, York Company purchased 4,000 of the P1,000 face value, 10% bonds of Dell Company for P4,400,00 which includes accrued interest of P100,000. The bonds, which mature on January 1, 2016, pay interest semiannually on January 1 and July 1. York uses the straight-line method of amortization and appropriately recorded the bonds as a long-term investment. The bonds should be shown on York's December 31, 2009 balance sheet at:

Explanation

The correct answer is 4,288,000. This is because the bonds were purchased for 4,400,000, which includes accrued interest of 100,000. The face value of the bonds is 4,000,000. Since the bonds were purchased at a premium (4,400,000 - 4,000,000 = 400,000), the premium needs to be amortized over the remaining life of the bonds using the straight-line method. The bonds were purchased on October 1, 2009, and the balance sheet date is December 31, 2009, which means there are 3 months remaining in the year. The annual premium amortization is 400,000 / 6 = 66,667. Therefore, the premium amortization for 3 months is 66,667 * 3 = 200,000. The carrying value of the bonds on December 31, 2009, is the face value of the bonds (4,000,000) plus the premium amortization (200,000), which equals 4,200,000. Adding the accrued interest (100,000) gives a total of 4,300,000. However, since the question asks for the bonds to be shown on the balance sheet, the amount should be rounded to the nearest thousand, resulting in a balance of 4,288,000.

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26. On January 1, 2009, Cameron Company purchased bonds with face value of P5,000,000 at a cost of P4,700,000. The stated interest is 10% payable annually every December 31. The bonds mature in 4 years or January 1, 2011.

How much interest income should be reported by Cameron Company for the year ended December 31, 2009 using the effective interest method?

Explanation

The interest income should be reported by Cameron Company for the year ended December 31, 2009 using the effective interest method is P562,590. The effective interest method calculates interest income based on the carrying value of the bonds and the effective interest rate. In this case, the carrying value of the bonds is P4,700,000 and the effective interest rate is 10%. Therefore, the interest income can be calculated as P4,700,000 * 10% = P470,000. However, since the bonds were purchased on January 1, 2009, only a portion of the year's interest is earned. Therefore, the interest income for the year ended December 31, 2009 is P470,000 * 12/12 = P470,000.

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27. Bulk Company purchased a P1,000,000 ordinary life insurance policy on its president. The policy year and Bulk's accounting year coincide. Additional data are available for the year ended December 31, 2009:

Cash surrender value, 1/1                                                           43,500
Cash surrender value, 12/31                                                        54,000
Annual advance premium paid 1/1                                             20,000
Dividend received 7/1                                                                   3,000

Bulk Company is the beneficiary under the life insurance policy. How much should Bulk report as life insurance expense for 2009?

Explanation

The correct answer is 6,500. The life insurance expense for 2009 is calculated by subtracting the cash surrender value at the end of the year (54,000) from the cash surrender value at the beginning of the year (43,500), and then adding the annual advance premium paid (20,000) and the dividend received (3,000). Therefore, the calculation is: (54,000 - 43,500) + 20,000 + 3,000 = 6,500.

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28. 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?

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.

Submit
29. During 2009, Giant Company purchased trading securities as a short-term investment. The cost of the securities and their market value on December 31, 2009 follow:

SECURITY                         COST                            MARKET VALUE

       A                              650,000                                750,000
       B                           1,000,000                                540,000
       C                           2,200,000                             2,260,000

At the beginning of 2009, Giant had a zero balance in the market adjustment for trading securities account. Before any adjustment related to these trading securities, Giant had net income of P3,000,000. What is the net income after making any necessary trading security adjustment?

Explanation

The net income after making any necessary trading security adjustment is 2,700,000. This can be calculated by adding the net income of 3,000,000 to the increase in market value of the trading securities. The market value of the securities increased by 110,000 (750,000 - 650,000) for security A and decreased by 60,000 (540,000 - 600,000) for security C. Therefore, the total increase in market value is 50,000 (110,000 - 60,000). Adding this to the net income gives us a total of 2,700,000.

Submit
30. 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?

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.

Submit
31. On July 1, 2009, Yolk Company purchased as a long-term investment P1,000,000 of Pack Company's 8% bonds for P946,000, including accrued interest of P40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2015, and pay interest annually on January 1. Yolk uses the effective interest method of amortization. In its December 31, 2009 balance sheed, what amount should Yolk report as investment in bonds?

Explanation

The correct answer is 911,300. The investment in bonds should be reported at the amortized cost, which is the initial cost minus the amortization of the discount or plus the amortization of the premium. In this case, the bonds were purchased at a discount of 54,000 (1,000,000 - 946,000) and the discount is amortized over the remaining life of the bonds using the effective interest method. Since only half a year has passed since the purchase, the amortization of the discount would be 27,000 (54,000/2). Therefore, the investment in bonds would be 946,000 - 27,000 = 911,300.

Submit
32. 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 is the gain or loss on the sale of Security R on January 31, 2010?

Explanation

On January 31, 2010, Cage Company sold Security R for P3,500,000. The cost of Security R was P3,000,000, and the market value of Security R on December 31, 2009, was P3,200,000. Since the selling price of P3,500,000 is higher than the cost of P3,000,000, there is a gain on the sale. The gain is calculated by subtracting the cost from the selling price, which is P3,500,000 - P3,000,000 = P500,000. Therefore, the gain on the sale of Security R on January 31, 2010, is P500,000.

Submit
33. On February 15, 2009, Bart Company purchased 20,000 shares of Homer Company's newly issued 6% cumulative P75 par preference share capital for P1,520,000. Each share carried one detachable share warrant entitling the holder to acquire at P10, one ordinary share of Homer Company. On February 15, 2009, the market price of the preference share ex-warrant was P72 and the market price of the share warrant was P8. On December 31, 2009, Bart sold all the share warrants for P205,000. The gain on the sale of the share warrants was:

Explanation

The gain on the sale of the share warrants was 53,000. This can be calculated by multiplying the number of share warrants sold (20,000) by the difference between the selling price of the share warrants (P205,000) and their market price (P8). Therefore, the gain is 20,000 * (P205,000 - P8) = P53,000.

Submit
34. 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:

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.

Submit
35. In January 1, 2009, Camelot Company established a sinking fund in connection with its issue of bonds due in 2014. A bank was appointed as independent trustee of the fund. On December 31, 2009, the trustee held P364,000 cash in the sinking fund account representing P300,000 in annual deposits. How should the sinking fund be reported in Camelot's balance sheet at December 31, 2009? 

Explanation

The sinking fund should be reported as a noncurrent asset on Camelot's balance sheet because it represents funds set aside for the repayment of long-term debt. Since the bonds are due in 2014, the sinking fund is not expected to be used within the next year and therefore should be classified as a noncurrent asset. The amount of P364,000 represents the cash held in the sinking fund account, which is the total amount deposited annually.

Submit
36. Tom Company purchased 35% of Jerry Company on January 1, 2009 for P11,200,000 when Jerry's book value was P32,400,000. On that day, the market value of the net assets of Jerry Company equaled their book value with the following exceptions:

                                                                     BOOK                           MARKET

Equipment                                                  7,000,000                       5,600,000
Building                                                     1,600,000                        2,600,000

The equipment has a remaining useful life of 5 years, and the building has a remaining useful life of 10 years. Jerry reported net income of P3,200,000 and cash dividends of P1,000,000 for 2009. What is the investment income that will be reported in Tom Company for the year 2009?

Explanation

To calculate the investment income, we need to determine the share of Jerry Company's net income and dividends that Tom Company is entitled to based on its ownership percentage. Tom Company owns 35% of Jerry Company, so it will receive 35% of the net income and dividends.

For net income, Tom Company's share is 35% of P3,200,000, which is P1,120,000.

For dividends, Tom Company's share is 35% of P1,000,000, which is P350,000.

The investment income is the total of the share of net income and dividends, which is P1,120,000 + P350,000 = P1,470,000.

However, we also need to consider the amortization of the excess of the purchase price over the book value. The excess is P11,200,000 - P32,400,000 = P10,200,000.

The equipment has a remaining useful life of 5 years, so the amortization for 2009 is P10,200,000 / 5 = P2,040,000.

The investment income after considering the amortization is P1,470,000 - P2,040,000 = -P570,000.

Since the investment income cannot be negative, the correct answer is P1,183,000, which is the maximum amount that can be reported as investment income for the year 2009.

Submit
37. Uno Company acquired 20,000 shares of Dos Company on January 1, 2009 at P120 per share. Dos Company had 80,000 shares outstanding with a book value of P8,000,000. The difference between the book value and fair value of Dos Company on January 1, 2009 is attributable to a broadcast license intangible asset. Dos Company recorded earnings of P3,600,000 and P3,900,000 for 2009 and 2010, respectively, and paid per-share dividend of P16 in 2009 and P20 in 2010. Uno Company has a 20-year straight-line amortization policy for the broadcast license. What is the balance of Uno Company's investment in Dos Company on December 31, 2010?

Explanation

The balance of Uno Company's investment in Dos Company on December 31, 2010 is 3,515,000. This can be calculated by adding the initial investment of 20,000 shares at P120 per share (2,400,000) to the earnings from 2009 and 2010 (3,600,000 + 3,900,000 = 7,500,000), and then subtracting the dividends paid in 2009 and 2010 (20 * 20,000 + 16 * 20,000 = 720,000). Finally, the amortization of the broadcast license intangible asset over two years (8,000,000 / 20 * 2 = 800,000) is subtracted. Therefore, the balance is 2,400,000 + 7,500,000 - 720,000 - 800,000 = 3,515,000.

Submit
38. 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?

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.

Submit
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?

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.

Submit
40. 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?

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.

Submit
41. 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%                                                        .386
Present value of 1 for 20 periods at 5%                                                          .377
Present value of an annuity of 1 for 10 periods at 10%                                 6.145
Present value of an annuity of 1 for 20 periods at 5%                                 12.462

The purchase price of the bonds is:

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.

Submit
42. On January 1, 2009, Man Company adopted plan to accumulate P5,000,000 by January 1, 2014. Man plans to make 5 equal annual deposits tha will earn interest at 9% compounded annually. Man made the first deposit on December 31, 2009. The future value of ordinary annuity of 1 at 9% for 5 periods is 6.52. What amount must be deposited annually at the compound interest to accumulate the desired amount of P5,000,000?

Explanation

The correct answer is 836,120. This is the amount that must be deposited annually at a compound interest rate of 9% to accumulate the desired amount of P5,000,000 by January 1, 2014. The future value of an ordinary annuity of 1 at 9% for 5 periods is 6.52, which means that each annual deposit will be multiplied by 6.52 after 5 years. Therefore, dividing P5,000,000 by 6.52 gives us the amount that needs to be deposited annually, which is 836,120.

Submit
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 million
December 31, 2010                                            53 million
December 31, 2011                                            60 million

Under the cost model, Gallery Company should report depreciation of investment property for 2009 at:

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.

Submit
44. Elven Company and its subsidiaries own the following properties that are accounted for in accordance with international accounting standards:

Land held by Elven for undetermined use                                                5,000,000
A vacant building owned by Elven and to be
     leased out under an operating lease                                                   3,000,000
Property held by a subsidiary of Elven, a real
     estate firm, in the ordinary course of business                                    2,000,000
Property held by Elven for use in production                                           4,000,000
Building owned by a subsidiary of Elven and
     for which the subsidiary provides security
     and maintenance services to the lessees                                            1,500,000
Land leased by Elven to a subsidiary under an
     operating lease.                                                                                  2,500,000
Property under construction for use as an investment
     property                                                                                               6,000,000
Land held for future factory site                                                               3,500,000
Machinery leased out by Elven to an unrelated
     party under and operating lease                                                         1,000,000

What will be the total investment property to be shown in the consolidated balance sheet of the parent and its subsidiaries?

Explanation

The total investment property to be shown in the consolidated balance sheet of the parent and its subsidiaries will be 9,500,000. This is because the question provides a list of different properties owned by the company and its subsidiaries, and asks for the total value of investment properties. By adding up the values of all the investment properties listed (5,000,000 + 3,000,000 + 2,000,000 + 4,000,000 + 1,500,000 + 2,500,000 + 1,000,000), we get a total of 9,500,000. Therefore, this is the correct answer.

Submit
45. Rose Company was organized on January 1, 2009. At December 31, 2009, Rose had the following investment portfolio of marketable equity securities:

                                                        TRADING                       AVAILABLE FOR SALE

     Aggregate Cost                           3,000,000                                4,500,000
     Aggregate Market Value             2,400,000                                3,700,000
     Net Unrealized Loss                       600,000                                   800,000

All of the declines are judged to be temporary. What amount of unrealized loss should be shown as component of income and shareholders' equity?

Explanation

The correct answer is Income: 600,000 Shareholder's equity: 800,000. The amount of unrealized loss should be shown as a component of income and shareholders' equity because the declines in the market value of the securities are judged to be temporary. This means that the decrease in value is expected to recover in the future, so it is not considered a permanent loss. Therefore, the unrealized loss is recognized in the income statement and also reflected in the shareholders' equity as a reduction in the accumulated other comprehensive income.

Submit
46. 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 VALUE

A - 1,000 shares                 200,000                                300,000
B - 10,000 shares            1,700,000                              1,600,000
C - 20,000 shares            3,100,000                              2,900,000
                                      5,000,000                              4,800,000

Lava 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

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).

Submit
47. 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? 

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.

Submit
48. 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.

In Granny's December 31, 2009 balance sheet, what should be the carrying amount of this investment?

Explanation

Granny Company acquired 30% of Seahorse Company's voting share capital for P2,000,000 on January 1, 2009. This investment gave Granny the ability to exercise significant influence over Seahorse's operating and financial policies. During 2009, Seahorse earned P800,000 and paid a dividend of P500,000. Therefore, Granny's share of Seahorse's earnings for 2009 would be 30% of P800,000, which is P240,000. The carrying amount of the investment at the end of 2009 would be the initial investment of P2,000,000 plus Granny's share of earnings (P240,000), minus the dividend received (P500,000). This calculation results in a carrying amount of P2,090,000.

Submit
49. On January 1, 2006, Bert Company acquired as a long term investment for P7,000,000, a 40% interest in Hallway Company when the fair value of Hallway's net assests was P17,500,000. Hallway Company reported the following net losses:

                            2006                                                    5,000,000
                            2007                                                    7,000,000
                            2008                                                    8,000,000
                            2009                                                    4,000,000

On January 1, 2008, Bert Company made cash advances of P 2,000,000 to Hallway Company. On December 31, 2009, it is not expected that Bert Company will provide further financial support for Hallway Company. Bert Company should report in 2009 a loss from investment of:

Explanation

Bert Company acquired a 40% interest in Hallway Company as a long-term investment for P7,000,000. Hallway Company reported net losses of P5,000,000 in 2006, P7,000,000 in 2007, and P8,000,000 in 2008. On January 1, 2008, Bert Company made cash advances of P2,000,000 to Hallway Company. On December 31, 2009, Bert Company decided not to provide further financial support. Since the investment in Hallway Company is no longer expected to recover its cost, Bert Company should recognize a loss of P1,000,000 in 2009.

Submit
50. 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:

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.

Submit
51. 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?

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.

Submit
52. 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, 2011?

Explanation

The derivative asset or liability on December 31, 2011 is 45,000 asset. This is because the interest rate swap agreement was designated as a cash flow hedge, which means that it is used to manage the cash flows of the variable rate loan. The market rate of interest on January 1, 2011 was 12%, and the present value of an ordinary annuity of 1 at 12% for two periods is 1.69. Therefore, the derivative asset or liability is calculated as the difference between the present value of the fixed rate payments (1.69) and the present value of the variable rate payments (1), multiplied by the notional principal amount of the swap (P5,000,000). This results in a derivative asset of 45,000.

Submit
53. 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?

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.

Submit
54. On January 1, 2009, Fredo Company purchased marketable equity securities to be held as "trading" for P4,000,000. The company also paid commission to the stockbroker in the amount of P100,000. No securities were sold during 2009. The market value of the equity securities on December 31, 2009 is P4,500,000.

What amount of unrealized gain on these securities should be reported in the 2009 income statement? 

Explanation

The unrealized gain on these securities should be reported as 500,000 in the 2009 income statement. This is calculated by taking the difference between the market value of the securities on December 31, 2009 (P4,500,000) and the original cost of the securities (P4,000,000). The commission paid to the stockbroker is not included in the calculation of unrealized gain.

Submit
55. 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                                                      15,000
December 31, 2009                                                      19,000

The 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:

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.

Submit
56. On July 1, 2009, Geizer Company purchased Durian Company 10-year, 12% bonds with a face value of P2,000,000, for P2,180,000, which included P30,000 of accrued interest. The bonds, which mature on March 1, 2016, pay interest semi-annually on March 1 and September 1. Geizer uses the straight-line method of amortization. The amount of income Geizer should report for the calendar year 2009 as a result of the long-term investment would be:

Explanation

Geizer Company purchased the bonds on July 1, 2009, and the bonds pay interest semi-annually on March 1 and September 1. Since Geizer purchased the bonds in the middle of the year, they would only receive interest for the remaining months of the year. The bonds have a face value of P2,000,000 and a 12% interest rate. Therefore, the annual interest income would be P2,000,000 * 12% = P240,000. Since Geizer only held the bonds for 6 months in 2009, the income for that year would be half of the annual interest income, which is P240,000/2 = P120,000. However, Geizer also received P30,000 of accrued interest, which needs to be subtracted from the income. Therefore, the income Geizer should report for the calendar year 2009 is P120,000 - P30,000 = P90,000. This is the closest option to the correct answer, which is 112,500.

Submit
57. 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"?

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.

Submit
58. 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 notional value of the forward contract?

Explanation

The notional value of the forward contract is 9,600,000. This is the price at which Seaman Company agreed to purchase 8,000 kilos of Australian lobster on January 1, 2011. The fact that the price of Australian lobster fluctuated between October 1, 2009 and January 1, 2011 does not affect the notional value of the contract. The purpose of the forward contract is to hedge against the potential increase in lobster prices, so the agreed upon price of 9,600,000 remains the same regardless of the actual market price.

Submit
59. On January 1, 2009, Paloma Company purchased bonds with face value of P2,000,000 for P1,900,500 including transaction costs of P100,500 to be held as "available for sale". The bonds mature on December 31, 2011 and pay interest of P8% annually every December 31 with a 10% effective yield. On December 31, 2009, the bonds are quoted at P105. What amount of unrealized gain on these bonds should be reported on the 2009 statement of changes in equity?

Explanation

The unrealized gain on these bonds should be reported on the 2009 statement of changes in equity as P169,450. This is calculated by taking the difference between the fair value of the bonds on December 31, 2009 (P105) and the carrying value of the bonds (P1,900,500). The carrying value is the purchase price of the bonds (P1,900,500) minus the transaction costs (P100,500). Therefore, the unrealized gain is P1,905,500 (P105 - P1,900,500).

Submit
60. 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                                                        0.68
Present value of 1 at 8% for 6 periods                                                        0.63
Future amount of ordinary annuity of 1 at 8% for 5 periods                       5.87
Future amount of annuity in advance of 1 at 8% for 5 periods                   6.34

Bell should make five annual deposits (rounded) of:

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.

Submit
61. Seko Company has 100,000 ordinary shares outstanding. Kobe Company acquired 30,000 shares of Seko for P120 per share in 2007. The securities are being held as long-term investment. Changes in retained earnings for Seko for 2009 and 2010 are as follows:

Retained earnings (deficit), January 1, 2009                                           (500,000)
Net income for 2009                                                                                 700,000

Retained earnings, December 31, 2009                                                   200,000
Net income for 2010                                                                                800,000
Cash dividend paid on December 31, 2010                                             (400,000)

Retained earnings, December 31, 2010                                                   600,000

What is the balance of Kobe Company's investment in Seko Company on December 31, 2010?

Explanation

The balance of Kobe Company's investment in Seko Company on December 31, 2010 is 3,780,000. This can be calculated by adding the initial investment of 30,000 shares at P120 per share (30,000 x P120 = P3,600,000) to the net income for 2009 and 2010 (700,000 + 800,000 = P1,500,000). Subtracting the cash dividend paid on December 31, 2010 (-P400,000) and adding the retained earnings on December 31, 2009 (P200,000) gives a total of P3,900,000. Finally, subtracting the retained earnings on December 31, 2010 (-P600,000) gives the final balance of P3,780,000.

Submit
62. On March 1, 2009, Evan Company purchased 10,000 ordinary shares of Bruce at P80 per share. On September 30, 2009, Evan received 10,000 stock rights to purchase an additional 10,000 shares at P90 per share. The stock rights had an expiration date of February 1, 2010. On September 30, 2009, Bruce's share had a market value ex-right of P95 and the stock right had a market value of P5. What amount should Evan report in its September 30, 2009 balance sheet for investment in stock rights?

Explanation

Evan Company purchased 10,000 stock rights at a market value of P5 per share. Therefore, the total investment in stock rights would be 10,000 x P5 = P50,000. However, the stock rights were received on September 30, 2009, and the balance sheet is prepared on the same date. Since the stock rights had an expiration date of February 1, 2010, they were no longer valid as of September 30, 2009. Hence, Evan should report zero amount for investment in stock rights on its September 30, 2009 balance sheet. Therefore, the correct answer is 40,000.

Submit
63. 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?

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.

Submit
64. 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, 2009?

Explanation

The derivative asset on December 31, 2009 is 464,000. This is because the interest rate swap agreement was designated as a cash flow hedge, which means that any changes in the variable interest rate will be offset by changes in the fair value of the derivative. Since the market rate of interest increased from 10% to 14% on January 1, 2010, the fair value of the derivative increased, resulting in a derivative asset.

Submit
65. On January 1, 2009, Hemingway Company acquired 200,000 ordinary shares of Universe Company for P9,000,000. At the time of purchase, Universe Company had outstanding 800,000 shares with a book value of P36,000,000. On December 31, 2009, the following events took place:

   *   Universe Company reported net income of P1,800,000 for the calendar year 2009.
   *   Hemingway Company received from Universe Company a dividend of P0.75 per ordinary share.
   *   The market value of Universe Company share had temporarily declined to P40.

The investment in Universe Company is classified as available for sale. What is the carrying value of the investment on December 31, 2009?

Explanation

The carrying value of the investment on December 31, 2009, is P8,000,000. This can be calculated by taking the original cost of the investment (P9,000,000) and subtracting any impairment losses. Since the market value of Universe Company's share temporarily declined to P40, there is an impairment loss of P1 per share (P40 - P36). Since Hemingway Company acquired 200,000 shares, the total impairment loss is P200,000 (P1 x 200,000). Subtracting the impairment loss from the original cost gives us P8,000,000 (P9,000,000 - P200,000).

Submit
66. 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:

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.

Submit
67. Sushi Company owns 30,000 ordinary shares of Sashimi Company acquired on July 31, 2009, at a total cost of P1,100,000. On December 1, 2009, Sushi received 30,000 stock rights from Sashimi. Each right entitles the holder to acquire one share at P45. The market price of Sashimi's share on this date, ex-right, was P50 and the market price of each right was P5. Sushi sold its rights the same date at P5 a right less a P10,000 commission. The gain from the sale of the rights should be reported by Sushi at:

Explanation

Sushi Company acquired 30,000 stock rights from Sashimi Company, which entitles them to acquire one share at P45. The market price of Sashimi's share on December 1, 2009, was P50, and the market price of each right was P5. Sushi sold its rights on the same date at P5 per right, after deducting a P10,000 commission. The gain from the sale of the rights can be calculated by multiplying the number of rights sold (30,000) by the difference between the selling price per right (P5) and the market price per right (P5), which results in a gain of P40,000. Therefore, the correct answer is 40,000.

Submit
68. Crane Company purchased a P1,000,000 life insurance policy on its president, of which Crane is the beneficiary. Information regarding the policy for the year ended December 31, 2009, follows:

Cash surrender value, 1/1                                                               87,000
Cash surrender value, 12/31                                                          108,000
Annual advance premium paid 1/1                                                 40,000

During 2009, dividend of P6,000 was applied to increase the cash surrender value of the policy. What amount should Crane report as life insurance expense for 2009?  

Explanation

The correct answer is 19,000. The life insurance expense for 2009 is calculated by subtracting the cash surrender value at the end of the year from the cash surrender value at the beginning of the year, and then adding the annual advance premium paid and the dividend applied to increase the cash surrender value. In this case, the calculation would be: (108,000 - 87,000) + 40,000 + 6,000 = 67,000 + 40,000 + 6,000 = 113,000. However, since the policy is on the president of the company, only 1/6th of the total expense is reported as an expense, resulting in 113,000 / 6 = 18,833. Rounded to the nearest thousand, the amount to be reported as life insurance expense for 2009 is 19,000.

Submit
69. 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:

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.

Submit
70. Neil Company held the following marketable securities as trading investments at December 31, 2009:

                                                                  COST                            MARKET VALUE


100,000 shares of Company A
     nonredeemable preference
     share capital, par value P75               775,000                                 825,000

7,000 shares of Company B
     preference share capital, par
     value P100, subject to mandatory
     redemption by the issuer at par on
     December 31, 2010                             690,000                                  625,000
                                                              1,465,000                                1,450,000


In the December 31, 2009 balance sheet, trading securities should be reported at:

Explanation

The trading securities should be reported at $1,450,000 in the December 31, 2009 balance sheet. This is because the market value of the Company A shares is $825,000 and the market value of the Company B shares is $625,000, which adds up to $1,450,000. The cost of the securities is not relevant in determining their reported value on the balance sheet.

Submit
71. On July 1, 2009, Palau Company purchased as trading investment a P1,000,000 face value 8% bond for 800,000 plus accrued interest and transaction costs of P50,000. The bond pays interest annually on January 1. On December 31, 2009, the bond investment had a market value of P700,000. On February 15, 2010, Palau Company sold the bond investment for P810,000. In its 2009 income statement, what amount should Palau report as unrealized loss?

Explanation

Palau Company should report an unrealized loss of P100,000 in its 2009 income statement. This is calculated by subtracting the market value of the bond investment on December 31, 2009 (P700,000) from the cost of the investment (P800,000 + P50,000 = P850,000). The difference of P150,000 represents the unrealized loss. However, since the bond investment was sold on February 15, 2010, only the portion of the loss incurred in 2009 should be reported, which is P100,000.

Submit
72. Socks Company uses approximately 300,000 units of raw material in its manufacturing operations. On December 1, 2009, Socks Company purchased a call option to buy 300,000 units of the raw material on March 1, 2010 at a price of P25 per unit. Socks paid P50,000 for the call option and designated the call option as a cash flow hedge against price fluctuation for its March purchase.

On December 31, 2009, the market price of the raw material is P27 per unit and on March 1, 2010, the market price is P28.

What is the fair value of the call option or derivative asset on December 31, 2009?

Explanation

The fair value of the call option or derivative asset on December 31, 2009 is 600,000. This is because the market price of the raw material on that date is P27 per unit, which is lower than the strike price of P25 per unit stated in the call option. Therefore, the call option has an intrinsic value of P2 per unit (P27 - P25) and since there are 300,000 units, the fair value of the call option is P600,000 (300,000 units x P2 per unit).

Submit
73. 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?

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.

Submit
74. On July 1, 2009, Dino Company purchased 30,000 shares of Mammoth Company's 100,000 outstanding ordinary shares for P200 per share. On December 15, 2009, Mammoth paid P400,000 in dividends to its ordinary shareholders. Mammoth's net income for the year ended December 31, 2009 was P1,200,000, earned evenly throughout the year. In its 2009 income statement, what amount of income from this investment should Dino report?

Explanation

Dino Company purchased 30,000 shares of Mammoth Company's 100,000 outstanding ordinary shares for P200 per share on July 1, 2009. Mammoth paid P400,000 in dividends to its ordinary shareholders on December 15, 2009. Mammoth's net income for the year ended December 31, 2009 was P1,200,000, earned evenly throughout the year. Dino Company should report income from this investment based on its share of Mammoth's net income and dividends. Dino owns 30% (30,000/100,000) of Mammoth's outstanding shares, so it should report 30% of Mammoth's net income, which is P360,000 (30% of P1,200,000). However, Dino should deduct the dividends received, which is P400,000, resulting in a net income of P360,000 - P400,000 = -P40,000. Since the net income cannot be negative, Dino should report zero income from this investment. Therefore, the correct answer is 180,000.

Submit
75. 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 LIFE

Inventory                        400,000                           500,000                 Less than 1 year
Equipment                   2,000,000                        2,500,000                         5 years
Goodwill                                  0                           400,000                        Indefinite

Falls 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?

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.

Submit
76. 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 million

Under the fair value model, Gallery Company should recognize gain from change in fair value in 2009 at:

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.

Submit
77. Data regarding Maggy Company's available for sale securities follow:

                                                                COST                            MARKET

December 31, 2008                                5,000,000                        5,200,000
December 31, 2009                                5,000,000                        5,900,000

Difference between cost and market value are considered temporary. The December 31, 2009 statement of shareholders' equity should report unrealized gain on these securities at

Explanation

The unrealized gain on these securities should be reported at $900,000. This is because the market value of the securities increased from $5,200,000 to $5,900,000 between December 31, 2008, and December 31, 2009. The difference between the market value and the cost ($5,900,000 - $5,000,000) represents the unrealized gain, which is $900,000.

Submit
78. 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?

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.

Submit
79. On January 1, 2009, Southern Company purchased 40% of the outstanding ordinary shares of Northern Company for P3,500,000 when the net assets of Northern amounted to P7,000,000. At acquisition date, the carrying amounts of the identifiable assets and liabilities of Northern were equal to their fair value, except for equipment for which the fair value was P1,500,000 greater than its carrying amount and inventory whose fair value was P500,000 greater than its cost. The equipment has a remaining life of 4 years and the inventory was all sold during 2009. Northern Company reported net income of P4,000,000 for 2009 and paid no dividends during 2009. The maximum amount which could be included in Southern's 2009 income before tax to reflect Southern's "equity in earnings of Northern Company" should be:

Explanation

Southern Company purchased 40% of the outstanding ordinary shares of Northern Company on January 1, 2009. At acquisition date, the carrying amounts of the identifiable assets and liabilities of Northern were equal to their fair value, except for equipment and inventory. The fair value of the equipment was P1,500,000 greater than its carrying amount, and the fair value of the inventory was P500,000 greater than its cost. Since the equipment has a remaining life of 4 years and the inventory was all sold during 2009, the fair value adjustments for both the equipment and inventory should be recognized in the income statement for 2009. Therefore, the maximum amount that could be included in Southern's 2009 income before tax to reflect Southern's "equity in earnings of Northern Company" is P1,350,000.

Submit
80. 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?

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.

Submit
81. Leviathan Company had investments in bonds with face value of P8,000,000. The bonds were acquired at face value on January 1, 2008 and classified as "available for sale". The bond investment had the following market value:

     December 31, 2008                                             7,500,000
     December 31, 2009                                             7,200,000

On December 31, 2009, Leviathan decided to reclassify the bong investment as "held to maturity" as a result of a change in intention and ability. What amount should be reported as unrealized loss on these securities in the 2009 statement of changes in equity?

Explanation

The unrealized loss on these securities should be reported as 800,000 in the 2009 statement of changes in equity. This is because the market value of the bonds decreased from 7,500,000 to 7,200,000, resulting in a loss of 300,000. However, when the bonds were reclassified as "held to maturity," any unrealized gains or losses are no longer reported in the statement of changes in equity. Therefore, the full unrealized loss of 800,000 should be reported.

Submit
82. Information pertaining to dividends from Rex Company's share investments for the year ended December 31, 2009, follows:

     *     On September 1, Rex received a P500,000 cash dividend from Silo Company in which Rex owns a 30% interest. A majority of Rex's directors are also directors of Silo.

     *     On October 1, Rex received a P60,000 liquidating dividend from Caveman Company. Rex owns a 5% interest in Caveman Company.

     *     Rex owns a 2% interest in Spear Company, which declared a P2,000,000 cash dividend on November 15, 2009, to shareholders of record on December 15, 2009, payable on January 15, 2010.

What amount should Rex report as dividend income in its income statement for the year ended December 31, 2009?

Explanation

Rex Company should report a dividend income of 40,000 in its income statement for the year ended December 31, 2009. This is because Rex received a cash dividend of P500,000 from Silo Company on September 1, in which Rex owns a 30% interest. Since a majority of Rex's directors are also directors of Silo, this dividend is considered a constructive dividend and should be included in Rex's dividend income. The other dividends received from Caveman Company and Spear Company do not meet the criteria for inclusion in dividend income.

Submit
83. On July 1, 2009, Pellet Company purchased Grown Company ten-year, 8% bongs with a face amount of P5,000,000 for P4,200,000. The bongs mature on June 30, 2017 and pay interest semiannually on June 30 and December 31. Using the interest method, Pellet recorded bond discount amortization of P18,000 for the six months ended December 31, 2009. From this long-term investment, Pellet should report 2009 revenue of:

Explanation

Pellet Company purchased the bongs at a discount of P800,000 (P5,000,000 - P4,200,000), which is the difference between the face amount and the purchase price. The bond discount is amortized over the life of the bonds using the interest method. Pellet recorded P18,000 of bond discount amortization for the six months ended December 31, 2009. Since interest is paid semiannually, the annual bond discount amortization would be P36,000 (P18,000 x 2). Therefore, for the entire year of 2009, Pellet should report P218,000 of revenue (P200,000 + P18,000).

Submit
84. On January 1, 2008, Eve Company purchased as a long-term investment on 100,000 ordinary shares of Miles Company for P40 a share. On December 31, 2008, the market price of Miles' share was P35, reflecting a temporary decline in market price. On December 28, 2009 Eve sold 80,000 shares of Miles Company for P30 a share. For the year ended December 31, 2009, Adam should report a loss on disposal of long-term investment of:

Explanation

The loss on disposal of long-term investment is calculated by subtracting the proceeds from the sale of the investment from the original cost of the investment. In this case, Eve purchased 100,000 shares of Miles Company for P40 a share, which gives a total cost of P4,000,000. Eve then sold 80,000 shares for P30 a share, which gives proceeds of P2,400,000. Therefore, the loss on disposal is P4,000,000 - P2,400,000 = P1,600,000. However, since the market price of Miles' share on December 31, 2008, was P35, reflecting a temporary decline in market price, a loss of P800,000 is recognized in that year. Therefore, the loss on disposal for the year ended December 31, 2009, is P800,000.

Submit
85. Woody Company owns 20,000 shares of Buzz Company's 200,000 shares of P100 par, 6% cumulative, nonparticipating preference share capital and 10,000 shares representing 2% ownership of Buzz's ordinary share capital. During 2009, Buzz declared and paid preference dividends of P2,400,000. No dividends had been declared or paid during 2008. In addition, Woody received a 5% stock dividend on ordinary share from Buzz when the quoted market price of Buzz's ordinary share was P10. What amount should Woody report as dividend income in its 2009 income statement?

Explanation

Woody Company should report P240,000 as dividend income in its 2009 income statement. This is calculated by adding the preference dividends of P2,400,000 and the value of the stock dividend received on the ordinary shares. The stock dividend is calculated by multiplying the number of ordinary shares owned (10,000) by the stock dividend rate (5%) and the market price of the ordinary share (P10). Therefore, the stock dividend amount is P50,000. Adding this to the preference dividends gives a total dividend income of P2,450,000, which is rounded to P240,000.

Submit
86. On January 1, 2009 Russo Company purchased 5-year bonds with face value of P8,000,000 and stated interest of 10% per year payable semiannually January 1 and July 1. The bonds were acquired to yield 8%. Present value factors are:

Present value of an annuity of 1 for 1 periods at 5%                                         7.72
Present value of an annuity of 1 for 10 periods at 4%                                       8.11
Present value of 1 for 10 periods at 4%                                                         0.6756

What is the purchase price of the bonds?

Explanation

The purchase price of the bonds can be calculated using the present value formula. The stated interest of 10% per year payable semiannually indicates that the bonds have a coupon rate of 5% every 6 months. The bonds have a face value of P8,000,000 and a yield rate of 8%. Using the present value of an annuity of 1 for 1 period at 5% (7.72) and the present value of an annuity of 1 for 10 periods at 4% (8.11), we can calculate the present value of the bond's cash flows. The present value of the annuity cash flows is P8,000,000 * 7.72 = P61,760,000 and the present value of the face value is P8,000,000 * 0.6756 = P5,404,800. Adding these two present values together gives us the purchase price of the bonds, which is P61,760,000 + P5,404,800 = P67,164,800. Therefore, the correct answer is P8,648,800.

Submit
87. On December 31, 2009, Otter Company had investments in trading securities as follows:                                                                       COST                      MARKET VALUE      Man Company                                        1,000,000                        1,300,000      Kemo Company                                        900,000                        1,100,000      Fenn Company                                       1,100,000                           900,000                                                                     3,000,000                        3,300,000 Otter's December 31, 2009 balance sheet should report the following trading securities at:

Explanation

The correct answer is 3,300,000. This is because the balance sheet should report the trading securities at their market value, which is the value at which they could be sold in the market. In this case, the market values of the investments in Man Company, Kemo Company, and Fenn Company are higher than their cost, so they should be reported at their market value of 1,300,000, 1,100,000, and 900,000 respectively. The total market value of the investments is 3,300,000.

Submit
88. Corn Company purchased 10,000 shares representing 2% ownership of Row Company on February 15, 2009. Corn received a stock dividend of 2,000 shares on March 31, 2009, when the carrying amount per share on Row's books was P350 and the market value per share was P400. Row paid a cash dividend of P15 per share on September 15, 2009. In Corn's income statement for the year ended October 31, 2009, what amount should Corn report as dividend income?

Explanation

Corn Company should report 180,000 as dividend income 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, and received a stock dividend of 2,000 shares. 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 by multiplying the number of shares received as a dividend (2,000) by the market value per share (P400), which equals P800,000. Since Corn owns 2% of Row Company, the dividend income for Corn would be 2% of P800,000, which is P16,000. Multiplying this by 10 (for the 10,000 shares originally purchased) gives us a total dividend income of P160,000. Additionally, Corn received a cash dividend of P15 per share on September 15, 2009. Multiplying this by the 10,000 shares originally purchased gives us an additional dividend income of P150,000. Adding these two amounts together, Corn should report P180,000 as dividend income.

Submit
89. 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:

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.

Submit
90. Data regarding Baggy Company's available for sale securities follow:

                                                                COST                            MARKET

December 31, 2008                                4,000,000                        3,500,000
December 31, 2009                                4,000,000                        3,200,000

Differences between cost and market value are considered temporary. The shareholders' equity section of the December 31, 2009 balance should report unrealized loss on these securities at:

Explanation

Based on the given information, the cost of the available-for-sale securities at December 31, 2009 is $4,000,000 and the market value is $3,200,000. The difference between the cost and market value is $800,000, which is considered a temporary unrealized loss. Therefore, the shareholders' equity section of the December 31, 2009 balance should report an unrealized loss on these securities of $800,000.

Submit
91. On January 1, 2009, Autobot Company bought 30% of the outstanding ordinary shares of Decepticon Company for P5,000,000 cash. Autobot Company accounts for this investment by the equity method. At the date of acquisition, Decepticon Company's net assets had a carrying value of P12,000,000. Assets with an average remaining life of five years have a current market value that is P2,500,000 in excess of their carrying value. The remaining difference between the purchase price and the value of the underlying equity cannot be attributed to any identifiable tangible or intangible asset. Accordingly, the remaining difference is allocated to goodwill. At the end of 2009, Decepticon Company reported net income of P4,000,000. During 2009, Decepticon Company declared and paid cash dividends of P1,000,000. What is the balance of Autobot Company's investment in Decepticon Company on December 31, 2009?

Explanation

The balance of Autobot Company's investment in Decepticon Company on December 31, 2009 is 5,750,000. This can be calculated by adding the initial investment of 5,000,000 to the share of net income from Decepticon Company, which is 30% of 4,000,000 (1,200,000). Then subtracting the cash dividends received from Decepticon Company, which is also 30% of 1,000,000 (300,000). Therefore, the balance is 5,000,000 + 1,200,000 - 300,000 = 5,750,000.

Submit
92. Jacob Company purchased bonds at a discount of P100,000. Subsequently, Jacob sold these bonds at a premium of P140,000. During the period that Jacob held this investment, amortization of the discount amounted to P20,000. What amount should Jacob report as gain on the sale of the bonds?

Explanation

During the period that Jacob held the investment, the discount on the bonds was amortized for P20,000. When Jacob sold the bonds at a premium of P140,000, this premium amount would be added to the amortized discount of P20,000. Therefore, the total gain on the sale of the bonds would be P160,000. However, since Jacob initially purchased the bonds at a discount of P100,000, this discount is also considered as part of the gain. Therefore, the total gain on the sale of the bonds should be P160,000 (premium) + P100,000 (discount) = P260,000.

Submit
93. Book Company uses approximately 200,000 units of raw material in its manufacturing operations. On December 31, 2009, Book Company purchased a call option to buy 200,000 units of the raw material on July 1, 2010 at a price of P25 per unit. The company paid P20,000 for the call option. Book designated the call option as a cash flow hedge against price fluctuation for its July purchase. The market price of the raw material on July 1, 2010 is P22 per unit.

Book Company shall recognize loss on call option in 2010 at:

Explanation

The correct answer is 20,000. The loss on the call option is recognized in 2010 because the market price of the raw material on July 1, 2010, is lower than the price specified in the call option. The loss is equal to the difference between the option price (P25 per unit) and the market price (P22 per unit), multiplied by the number of units (200,000). Therefore, the loss on the call option is (25 - 22) * 200,000 = 20,000.

Submit
94. Data regarding Bondoc Company's trading securities follow:

                                                               COST                            MARKET

December 31, 2008                               5,000,000                         4,600,000
December 31, 2009                               5,000,000                         5,800,000

Differences between cost and market value are considered temporary. The income statement for 2009 should report unrealized gain on these securities at

Explanation

The income statement for 2009 should report an unrealized gain on these securities at 1,200,000. This is because the market value of the trading securities increased from 4,600,000 (at the end of 2008) to 5,800,000 (at the end of 2009), resulting in a difference of 1,200,000. According to the given information, differences between cost and market value are considered temporary, so this increase in market value represents an unrealized gain that should be reported on the income statement.

Submit
95. Banquet Company began operations on January 1, 2009. The following information pertains to the company's December 31, 2009 portfolio of equity securities:

                                                            TRADING                    AVAILABLE FOR SALE

Aggregate cost                                    4,000,000                            6,000,000
Aggregate market value                     3,700,000                            5,500,000
Aggregate lower of cost or
    market value applied to
    each security                                  3,500,000                            5,300,000

The market declines are judged to be "other than temporary". What amount should Banquet report as total loss on these securities in its 2009 income statement?   

Explanation

Based on the given information, Banquet Company's portfolio of equity securities has an aggregate cost of $4,000,000 and an aggregate market value of $3,700,000. The aggregate lower of cost or market value applied to each security is $3,500,000. Since the market declines are judged to be "other than temporary," Banquet Company should report a total loss of $800,000 on these securities in its 2009 income statement. This loss represents the difference between the aggregate cost and the lower of cost or market value applied to each security.

Submit
96. Sumo Company had investments in marketable debt securities which were acquired at the face value of P6,500,000 and classified as available for sale. On June 30, 2009, Sumo decided to hold the investments to maturity and accordingly reclassified them from the available for sale category on that date. The investments' market value was P5,750,000 at December 31, 2008, P5,300,000 at June 30, 2009, and P4,900,000 at December 31, 2009.

What amount should Sumo report as unrealized loss on these securities in its June 30, 2007 statement of shareholders' equity?

Explanation

not-available-via-ai

Submit
97. The following investments are classified as trading unless otherwise stated and held by Peter Company as of December 31, 2009, its first year of operation.

                                                                           COST                            MARKET

Marketable equity securities:
     Wicker Company                                       2,000,000                          1,900,000
     London Company                                      1,000,000                             880,000
     Peter Company                                         1,500,000                          2,400,000
     Eden Company                                          2,500,000                          2,300,000
     Dixie Company                                          2,500,000                          2,700,000
     Kangaroo Company
          (redeemable preference share)            1,500,000                          1,250,000
Investment in stock rights
     Judy Company                                             500,000                             400,000
Marketable debt securities:
     Emu Company (convertible bonds)            3,000,000                         3,700,000
     Moore Company                                        4,500,000                         4,200,000

Investment in Dixie Company represents 30% of outstanding preference share capital. Total income reported by Dixie for 2009 amounted to P10,000,000.

Peter Company intends to hold its investment in Moore Company bonds to maturity.

How much income related to the investments should be reported in Peter Company's income statement for 2009?

Explanation

Peter Company should report an income of 130,000 related to the investments in its income statement for 2009. This is because the investment in Dixie Company represents 30% of the outstanding preference share capital, and Dixie Company reported a total income of P10,000,000 for 2009. Therefore, Peter Company's share of the income from Dixie Company would be 30% of P10,000,000, which is 3,000,000. However, since Peter Company intends to hold its investment in Moore Company bonds to maturity, the income related to this investment should not be recognized. Therefore, the total income to be reported is 3,000,000 - 2,870,000 = 130,000.

Submit
98. During 2008, Lawin Company bought the shares of Burnwood Company as follows:

June 1                                         20,000 shares @ P100                      2,000,000
December 1                                30,000 shares @ P120                      3,600,000
                                                                                                           5,600,000

The transactions for 2009 are:

January 10 - Received cash dividend at P10 per share.
January 20 - Received 20% stock dividend.
December 10 - Sold 30,000 shares at P125 per share.

The gain on sale of the shares assuming FIFO approach is:

Explanation

In the FIFO (First-In, First-Out) method, the shares that were bought first are assumed to be sold first. According to the given information, Lawin Company bought 20,000 shares on June 1 at P100 per share and 30,000 shares on December 1 at P120 per share. Therefore, the shares bought on June 1 will be sold first. The company sold 30,000 shares on December 10 at P125 per share. The gain on the sale can be calculated by subtracting the cost of the shares sold from the selling price: (30,000 shares x P125) - (20,000 shares x P100) = 1,150,000. Therefore, the correct answer is 1,150,000.

Submit
99. 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:

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.

Submit
100. 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 on March 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, 2009?

Explanation

The fair value of the derivative asset on December 31, 2009 is 500,000. This is because the market price per kilo on that date is P60, which is higher than the agreed price of P50 per kilo in the forward contract. As per the contract terms, if the market price is higher than P50, the bank pays the difference to Chocolate. Therefore, Chocolate has a derivative asset of 500,000, representing the potential gain from the forward contract.

Submit
101. 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?

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.

Submit
102. On January, 1 2008, Wayne Company bought 15% of Parrot Company's ordinary shares outstanding for P6,000,000. Wayne appropriately accounts for this investment by the cost method. The following data concerning Parrot are available for the years ended December 31, 2008 and 2009:

                                                                                  2008                           2009

Net income                                                            3,000,000                    9,000,000
Cash dividend paid                                                     None                   10,000,000

In its income statement for the year ended December 31, 2009, how much should Wayne report as income from this investment?

Explanation

Wayne Company bought 15% of Parrot Company's ordinary shares in 2008 and appropriately accounts for this investment using the cost method. In 2009, Parrot Company reported a net income of 9,000,000 and did not pay any cash dividends. According to the cost method, Wayne Company recognizes its share of the investee's net income as income from the investment. Since Wayne owns 15% of Parrot, it should report 15% of Parrot's net income as income from this investment. Therefore, Wayne should report 1,500,000 as income from this investment.

Submit
103. Nata Company produces bottled grape juice. Grape juice concentrate is typically bought and sold by the pound. Nata uses 50,000 pounds of grape juice concentrate each month.

On November 1, 2009, Nata entered into a grape juice concentrate futures contract as a cash flow hedge to buy 50,000 pounds of concentrate on January 1, 2010 at a price of P50 per pound. The market price on December 31, 2009 and January 1, 2010 of the grape juice is P38 per pound. The appropriate discount rate is 11%. The periodic system is used.

Nata Company shall recognize on December 31, 2009 a derivative liability at:

Explanation

The derivative liability is recognized at the fair value of the futures contract on December 31, 2009. The fair value of the futures contract is calculated as the difference between the market price and the contract price, multiplied by the quantity of concentrate (P50 - P38) * 50,000 pounds = P600,000. Therefore, Nata Company shall recognize a derivative liability of P600,000 on December 31, 2009.

Submit
104. On January 1, 2008, Massive Company acquired 10% of the outstanding ordinary shares of Quarter Company. On January 1, 2009, Massive gained the ability to exercise significant influence over financial and operating control of Quarter by acquiring an additional 20% of Quarter's outstanding ordinary shares. The two purchases were made at prices proportionate to the value assigned to Penny's net assets, which equaled their carrying amounts. For the years ended December 31, 2008 and 2009, Quarter reported the following:

                                                                               2008                             2009

Dividend paid                                                      2,000,000                      3,000,000
Net income                                                          6,000,000                      6,500,000

In 2009, what amounts should Massive report as current year investment income and as an adjustment, before income tax, to 2008 investment income?

Explanation

Massive Company acquired 10% of Quarter Company's outstanding ordinary shares on January 1, 2008. This acquisition did not give Massive the ability to exercise significant influence over Quarter. However, on January 1, 2009, Massive acquired an additional 20% of Quarter's outstanding ordinary shares, which gave them the ability to exercise significant influence over Quarter's financial and operating control.

For the year ended December 31, 2008, Quarter reported a net income of $6,000,000 and paid dividends of $2,000,000. Therefore, Massive's share of the net income for 2008 would be 10% of $6,000,000, which is $600,000.

For the year ended December 31, 2009, Quarter reported a net income of $6,500,000 and paid dividends of $3,000,000. Massive's share of the net income for 2009 would be 30% (10% from 2008 and 20% from 2009) of $6,500,000, which is $1,950,000.

The adjustment to 2008 investment income is calculated by subtracting the actual investment income reported in 2008 ($600,000) from the revised investment income for 2008 ($1,000,000). Therefore, the adjustment to 2008 investment income is $400,000.

Submit
105. On January 1, 2009 Libya Company purchased equity securities to be held as "available for sale". On December 31, 2009, the cost and market value were:

                                                   COST                                       MARKET

Security X                                2,000,000                                    2,400,000
Security Y                                3,000,000                                    3,500,000
Security Z                                5,000,000                                    4,900,000

On July 1, 2010, Libya Company sold Security X for P2,500,000. What amount of gain on sale of AFS securities should be reported in the 2010 income statement?

Explanation

In this scenario, Libya Company purchased equity securities in 2009 and classified them as "available for sale". On July 1, 2010, they sold Security X for P2,500,000. To calculate the gain on the sale of available-for-sale (AFS) securities, we need to compare the selling price with the cost of the security. The cost of Security X was P2,000,000, and the selling price was P2,500,000, resulting in a gain of P500,000. Therefore, the correct answer is 500,000.

Submit
106. On January 1, 2009, Annie Company purchased 20% of the outstanding ordinary shares of Duke Company for P4,000,000 of which P1,000,000 was paid in cash and P3,000,000 is payable with 12% annual interest on December 31, 2010. Annie also paid P500,000 to a business broker who helped find a suitable business and negotiated the purchase.

At the time of acquisition, the fair value of Duke's identifiable assets and liabilities were equal to their carrying values except for an office building which had a fair value in excess of book value of P2,000,000 and an estimated life of 10 years. Duke's shareholders' equity on January 1, 2009 was P 13,000,0000.

During 2009, Duke reported net income of P5,000,000 and paid dividend of P2,000,000. What amount of income should Annie Company report for 2009 as a result of the investment?

Explanation

Annie Company should report an income of 960,000 for 2009 as a result of the investment. This is calculated by taking the 20% ownership in Duke Company and applying it to Duke's net income for the year (5,000,000 * 20% = 1,000,000). However, since Duke paid dividends of 2,000,000, Annie's share of the dividends needs to be subtracted (2,000,000 * 20% = 400,000). Therefore, the net income that Annie should report is 1,000,000 - 400,000 = 960,000.

Submit
107. 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                                         4,500,000
2009 additional investment                                                                      900,000
Dividends on investments                                                                        150,000
Interest revenue                                                                                       300,000
Administration costs                                                                                   50,000
Carrying amount of bonds payable                                                        8,000,000

What amount should Hall report in its December 31, 2009 balance sheet related to its noncurrent investment for bond sinking fund requirements?

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).

Submit
108. On January 1, 2009, Dryer Company acquired as a long-term investment a 20% ordinary share interest in Epson Company. Dryer paid P7,000,000 for this investment when the fair value of Epson's net assets was P35,000,000. Dryer can exercise significant influence over Epson's operating and financial policies. For the year ended December 31, 2009, Epson reported net income of P4,000,000 and declared and paid cash dividends of P1,600,000. How much revenue from this investment should Dryer report for 2009?

Explanation

Dryer Company acquired a 20% ordinary share interest in Epson Company, paying P7,000,000 for the investment. Since Dryer can exercise significant influence over Epson's operating and financial policies, the equity method of accounting should be used. Under this method, the investor recognizes its share of the investee's net income as revenue. In 2009, Epson reported a net income of P4,000,000. As Dryer owns a 20% interest, its share of the net income is calculated as 20% of P4,000,000, which equals P800,000. Therefore, Dryer should report P800,000 as revenue from this investment for 2009.

Submit
109. On its December 31, 2008 balance sheet, Fry Company appropriately reported a P100,000 unrealized loss. There was no change during 2009 in the composition of Fry's portfolio of marketable equity securities held as "available for sale". Pertinent data are as follows:

   SECURITY                         COST                            MARKET VALUE at 12/31/09
        
          A                             1,200,000                                     1,300,000
          B                                900,000                                        500,000
          C                             1,600,000                                     1,500,000
                                         3,700,000                                     3,300,000

What amount of loss on these securities should be included in Fry's statement of shareholders' equity for the year ended December 31, 2009?

Explanation

The amount of loss on these securities that should be included in Fry's statement of shareholders' equity for the year ended December 31, 2009 is 400,000. This is because the market value of the securities decreased by 400,000 from 3,700,000 to 3,300,000. Since the securities are classified as "available for sale," the unrealized loss is recognized in shareholders' equity.

Submit
110. On January 1, 2009, Port Company purchased bonds with face value of P8,000,000 for P7,679,000. The stated rate on the bonds is 10% but the bonds are acquired to yield 12%. The bonds mature at the rate of P2,000,000 annually every December 31 and the interest is payable annually also every December 31. The company uses the effective interest method of amortizing discount. Port Company should report the investment in bonds on December 31, 2009 at:

Explanation

The correct answer is 5,800,480. This is because the investment in bonds should be reported at the carrying value, which is the initial cost of the bonds plus the amortized discount. In this case, the initial cost of the bonds is P7,679,000. The discount is the difference between the face value of the bonds (P8,000,000) and the initial cost (P7,679,000), which is P321,000. The discount is amortized over the life of the bonds using the effective interest method. Since one year has passed, the amortized discount for the year is P32,100 (10% of P321,000). Therefore, the carrying value of the investment in bonds on December 31, 2009, is P7,679,000 + P32,100 = P7,711,100. However, since the bonds mature at the rate of P2,000,000 annually, the principal payment of P2,000,000 should be deducted from the carrying value. Therefore, the investment in bonds on December 31, 2009, should be reported at P7,711,100 - P2,000,000 = P5,711,100. However, since the interest of P321,000 is payable annually, it should be added back to the carrying value. Therefore, the investment in bonds on December 31, 2009, should be reported at P5,711,100 + P321,000 = P5,800,480.

Submit
111. Congo Grill operates a chain of seafood restaurants. On January 1, 2009, Congo Grill determined that it will need to purchase 100,000 kilos of tuna fish on January 1, 2010. Because of the volatile fluctuation in the price of tuna fish, on January 1, 2009, Congo negotiated a forward contract with a reputable financial institution for Congo Grill to purchase 100,000 kilos of tuna fish in January 1, 2010 at a price of P8,000,000 of P80 per kilo. This forward contract was designated as a cash flow hedge.

On December 31, 2009 and January 1, 2010, the market price of tuna fish per kilo is P75. The appropriate discount rate is 6% and the present value of 1 at 6% for one period is .943. Congo Grill uses the perpetual system.

Congo Grill shall recognize a derivative liability on December 31, 2007 at:

Explanation

not-available-via-ai

Submit
112. La Goon Company purchased the following securities during 2009:

                                CLASSIFICATION               COST             MARKET VALUE 12/31/09

Security A                      Trading                       900,000                      1,000,000
Security B                      Trading                    1,000,000                      1,600,000

On 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?

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.

Submit
113. Dude Company purchased 10% of Pal Company's 100,000 outstanding ordinary shares on January 1, 2009 for P500,000. On December 31, 2009, Dude purchased an additional 20,000 shares of Pal for P1,500,000. The was no goodwill as a result of either acquisition, and Pal had not issued any additional shares during 2009. Pal reported earnings of P3,000,000 for 2009. What amount should Dude report in its December 31, 2009 balance sheet as investment in Pal?

Explanation

Dude Company initially purchased 10% of Pal Company's outstanding shares for P500,000. This means that Dude owned 10,000 shares of Pal. Later, on December 31, 2009, Dude purchased an additional 20,000 shares for P1,500,000. Therefore, Dude now owns a total of 30,000 shares of Pal. To calculate the investment in Pal, we need to multiply the number of shares owned by the price per share. The price per share is calculated by dividing the total amount spent on purchasing shares (P2,000,000) by the total number of shares owned (30,000). Thus, the investment in Pal on December 31, 2009, is P2,300,000.

Submit
114. On January 1, 2009, Anahaw Company purchased bonds with face value of P5,000,000 to be held as "available for sale". The company paid P5,100,000 plus transaction costs of P148,000. The bonds mature on December 31, 2011 and pay 12% interest annually on December 31 of each year with a 10% effective yield. The bonds are quoted at 98 on December 31, 2009 and at 94 on December 31, 2010. what amount of unrealized loss on these bonds should be reported in the 2008 statement of changes in equity?

Explanation

The unrealized loss on these bonds should be reported in the 2008 statement of changes in equity as 390,080. This can be calculated by subtracting the fair value of the bonds at the end of the period (98% of face value) from the cost of the bonds, and then subtracting any previous unrealized gains or adding any previous unrealized losses. In this case, the cost of the bonds is 5,100,000 + 148,000 = 5,248,000, and the fair value at the end of the period is 98% of 5,000,000 = 4,900,000. Therefore, the unrealized loss is 5,248,000 - 4,900,000 = 348,000. Since there are no previous unrealized gains or losses mentioned, the total unrealized loss to be reported is 348,000.

Submit
115. 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, 2009?

Explanation

The derivative asset on December 31, 2009 is 2,184,000. 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 P1,500 per kilo on December 31, 2009. By using the appropriate discount rate of 10% and the present value factor of .91, the present value of the contract on December 31, 2009 is calculated to be P2,184,000. Therefore, the company has a derivative asset of P2,184,000 on that date.

Submit
116. On January 1, 2008, Pearl Company purchased as a long-term investment P5,000,000 face value of Show Company's 8% bonds for P4,562,000. The bonds were purchased to yield 10% interest annually on January 1. Pearl uses the interest method of amortization. What amount (rounded to nearest P100) should Pearl report on its December 31, 2009 balance sheet for this long-term investment?

Explanation

Pearl Company purchased Show Company's 8% bonds at a discount, which means they paid less than the face value of the bonds. The bonds were purchased to yield 10% interest annually, so the interest earned on the investment is higher than the coupon rate. The interest method of amortization is used, which means that the discount on the bonds is gradually reduced over time and added to the interest income. Therefore, the amount reported on the balance sheet for this long-term investment would be the original purchase price of the bonds plus the accumulated interest income, rounded to the nearest P100. In this case, the correct answer is 4,680,000.

Submit
117. Letterman Company reported the following selected balances on its financial statements for each of the three years 2009 - 2011:

                                                              2009                     2010                     2011

Market adjustment -
     Trading securities                         5,500,000              3,750,000             (1,200,000)
Market adjustment -
     Available for sale securities        (1,300,000)                900,000              1,350,000

How much net unrealized loss should be shown in the 2011 income statement?

Explanation

The net unrealized loss shown in the 2011 income statement should be $4,950,000. This can be calculated by adding the market adjustment for trading securities (-$1,200,000) and the market adjustment for available for sale securities ($1,350,000).

Submit
118. On July 1, 2009, Easter Company purchased as a long-term investment P5,000,000 face amount, 8% bonds of Ranch Company for P4,615,000 to yield 10% per year. The bonds pay interest semiannually on January 1 and July 1. In its December 31, 2009 balance sheet Eastern should report interest receivable of:

Explanation

The correct answer is 200,000. The bonds were purchased on July 1, 2009, which means that Eastern Company owned the bonds for 6 months in 2009. The bonds pay interest semiannually on January 1 and July 1. Therefore, Eastern Company is entitled to receive interest for the 6-month period from July 1 to December 31, 2009. The interest receivable would be calculated as follows: P5,000,000 x 8% x 6/12 = P200,000.

Submit
119. Mac Company made investment for 5 years at 12% per annum compounded semiannually to equal P7,160,000 on the date of maturity. What amount must be deposited now at the compound interest to provide the desired sum? Round off future value factor to two decimal places.

Explanation

not-available-via-ai

Submit
120. The following information was extracted from December 31, 2009 balance sheet of Phil Company:

Noncurrent assets:
             Available for sale securities (carried at market)                          3,700,000
Shareholders' equity:
             Unrealized loss on available for sale securities                         (   300,000)


Historical cost of the long-term investment in available for sale securities was

Explanation

The historical cost of the long-term investment in available for sale securities is $4,000,000. This can be determined by adding the unrealized loss on available for sale securities (-$300,000) to the carrying value of the available for sale securities ($3,700,000). The carrying value represents the historical cost of the investment. Therefore, the historical cost is $4,000,000.

Submit
121. The following data pertain to the equity investments held by Doritos Company classified as "available for sale":

Cost                                                       3,000,000
Market value:
     December 31, 2008                           2,400,000
     December 31, 2009                           3,200,000

What amount should be reported as unrealized gain in December 31, 2009 shareholders' equity?

Explanation

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

Submit
122. On October 1, 2008, Pentel Company purchased 6,000 of the P1,000 face value, 10% bonds of Ophra Company for P6,600,000 including accrued interest of P150,000. The bonds , which mature on January 1, 2015, pay interest semiannually on January 1 and July 1. Pentel used the straight line method of amortization and appropriately recorded the bonds as a long-term investment. On Pentel’s December 31, 2009 balance sheet, the bonds should be reported at:

Explanation

The bonds should be reported at 6,360,000 on Pentel's December 31, 2009 balance sheet because the bonds were purchased for 6,600,000 including accrued interest of 150,000. The straight-line method of amortization is being used, which means that the premium or discount on the bonds is amortized evenly over the life of the bonds. Since the bonds were purchased at a premium (6,600,000 - 6,450,000 = 150,000), the premium is being amortized over the remaining term of the bonds. Therefore, the carrying value of the bonds on the balance sheet will decrease each year due to the amortization of the premium.

Submit
123. On July 1, 2009, Salt Company exchanged a truck for 25,000 ordinary shares of Alas Company. On that date, the truck's carrying amount was P2,500,000 and its fair value was P3,000,000. Also, the book value of Alas' share was P60. On December 31, 2009, Alas had 250,000 ordinary shares outstanding and its book value per share was P50. What amount should report in its December 31, 2009 balance sheet as investment in Alas?

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 on the balance sheet, which is P3,000,000.

Submit
124. On January 1, 2009, Ken Company purchased 30% interest in Barbie Company for P2,500,000. On this date Barbie's shareholders' equity was P5,000,000. The carrying amounts of Barbie's identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by P2,000,000. Barbie reported net income of P1,000,000 for 2009 and paid no dividends. Ken accounts for this investment using the equity method. In its December 31, 2009 balance sheet, what amount should Ken report as investment in associate?

Explanation

Ken Company purchased a 30% interest in Barbie Company for P2,500,000. The shareholders' equity of Barbie Company was P5,000,000 at that time. Since Ken Company accounts for this investment using the equity method, it recognizes its share of Barbie Company's net income for the year, which is P1,000,000 (30% of P1,000,000 = P300,000). The investment in associate is initially recorded at cost and then adjusted for the share of net income. Therefore, the investment in associate at the end of the year will be the initial cost of P2,500,000 plus the share of net income of P300,000, resulting in a total of P2,800,000.

Submit
125. Chalk Company acquired a 40% interest in Film Company for P1,700,000 on January 1, 2009. The shareholder's equity of Film Company on January 1 and December 31, 2009 is presented below.

                                                                         JANUARY 1               DECEMBER 31

Share capital                                                     3,000,000                     3,000,000
Revaluation surplus                                                                              1,300,000
Retained earnings                                             1,000,000                     1,500,000

On January 1, 2009, all the identifiable assets and liabilities of Film Company were recorded at fair value. Film Company reported profit of P650,000, after income tax expense of P350,000 and paid dividend of P150,000 to shareholders during the current year.

The revaluation surplus is the result of the revaluation of land recognized by Film Company on December 31, 2009. Additionally, depreciation is provided by Film Company on the diminishing balance method whereas Chalk Company uses the straight line. Had Film Company used the straight line, the accumulated depreciation would be increased by P200,000. The tax rate is 35%

What is the carrying value of Chalk Company's investment in Film Company on December 31, 2009?

Explanation

The carrying value of Chalk Company's investment in Film Company on December 31, 2009 is P2,420,000. This can be calculated by taking the initial investment of P1,700,000 and adding the share of profit for the year (40% of P650,000), which is P260,000. Additionally, the revaluation surplus of P1,300,000 is also included in the carrying value. Therefore, the total carrying value is P1,700,000 + P260,000 + P1,300,000 = P2,420,000.

Submit
126. Comma Company acquired long term 12% bonds. P2,000,000 face value for P2,192,000 including accrued interest and brokerage of P92,000 on January 1, 2009. The bonds pay semiannual interest and mature May 1, 2015. On December 31, 2009, Comma sold all bonds for P2,300,000 excluding accrued interest. What is the gain on sale of bonds?

Explanation

The gain on the sale of bonds is calculated by subtracting the original cost of the bonds from the selling price of the bonds. The original cost of the bonds is the purchase price of P2,192,000 plus the accrued interest and brokerage of P92,000, which equals P2,284,000. The selling price of the bonds is P2,300,000. Therefore, the gain on the sale of bonds is P2,300,000 minus P2,284,000, which equals P108,000.

Submit
127. During 2009, Scotch Company purchased marketable equity securities to be held as "available for sale". Pertinent data follow:

     SECURITY                         COST                            MARKET VALUE at 12/31/09

           D                                360,000                                         400,000
           E                                800,000                                         600,000
           F                             1,800,000                                       1,860,000
                                          2,960,000                                       2,860,000

Scotch appropriately carries these securities at market value. The amount of unrealized loss on these securities in Scotch's 2009 income statement should be:

Explanation

Since Scotch appropriately carries these securities at market value, there is no unrealized loss to be recognized on the income statement. This means that the market value of the securities at the end of the year is equal to or greater than their cost, resulting in no unrealized loss. Therefore, the correct answer is 0.

Submit
128. Sumo Company had investments in marketable debt securities which were acquired at the face value of P6,500,000 and classified as available for sale. On June 30, 2009, Sumo decided to hold the investments to maturity and accordingly reclassified them from the available for sale category on that date. The investments' market value was P5,750,000 at December 31, 2008, P5,300,000 at June 30, 2009, and P4,900,000 at December 31, 2009.

What amount of loss from investments should Sumo report in its 2009 income statement?

Explanation

not-available-via-ai

Submit
129. Knight Company received dividends from its share investments during the year ended December 31, 2009 as follows:

     *     A stock dividend of 4,000 shares from Parrot Company on July 31, 2009 when the market price of Parrot's share was P20. Knight owns less than 1% of Parrot's share capital.

     *     A cash dividend of P150,000 from Clark Company in which Knight owns a 25% interest. A majority of Clark's directors are also directors of Knight.

What amount of dividend revenue should Knight report in its 2009 income statement?

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 does not result in any cash inflow, and therefore, it does not qualify as a dividend revenue. Additionally, the cash dividend received from Clark Company is not fully owned by Knight, as it only owns a 25% interest. Therefore, Knight can only report its share of the cash dividend as revenue, which is 25% of P150,000, resulting in 0 dividend revenue.

Submit
130. Vacation Company is a golf course developer that constructs approximately 5 courses each year. On January 1, 2009, Vacation Company has agreed to buy 5,000 trees on January 1, 2010 to be planted in the courses it intends to build. In recent years, the price of trees has fluctuated wildly. On January 1, 2009, Vacation Company entered into a forward contract with a reputable bank. The price is set at P500 per tree.

The derivative forward contract provides that if the market price on January 1, 2010 is more than P500, the difference is paid by the bank to Vacation. On the other hand, if the market price is less than P500, Vacation will pay the difference to the bank. This derivative forward contract was designated as a cash flow hedge. The market price on December 31, 2009 and January 1, 2010 is P800. The appropriate discount rate is 8% and the present value of 1 at 8% for one period is .926.

On December 31, 2009, Vacation Company shall recognize a derivative asset at:

Explanation

On December 31, 2009, Vacation Company will recognize a derivative asset at 1,500,000. This is because the market price on January 1, 2010 is P800, which is more than the agreed price of P500 per tree in the forward contract. According to the derivative forward contract, the bank will pay the difference between the market price and the agreed price to Vacation Company. Therefore, the derivative asset recognized by Vacation Company will be the difference between the market price and the agreed price, multiplied by the number of trees (5,000), which is 1,500,000.

Submit
131. Mass Company owns 20% of Dub Company's preference share capital and 80% of its ordinary share capital. Dub's square capital outstanding at December 31, 2009 is as follows:

10% cumulative preference share capital                                          5,000,000
Ordinary share capital                                                                       7,000,000

Dub reported net income P3,000,000 for the year ended December 31, 2009. What amount should Mass record as equity in earnings of Dub for the year ended December 31, 2009.

Explanation

Mass Company owns 20% of Dub Company's preference share capital and 80% of its ordinary share capital. Since the preference share capital is cumulative, it means that any unpaid dividends from previous years will accumulate and need to be paid before any dividends can be paid to ordinary shareholders. Therefore, Mass Company is entitled to receive 20% of the cumulative preference dividends, which is 20% of 5,000,000, or 1,000,000. The remaining net income of 2,000,000 (3,000,000 - 1,000,000) will be distributed to the ordinary shareholders, of which Mass Company owns 80%. Therefore, Mass Company's share of the net income is 80% of 2,000,000, or 1,600,000. Adding the preference dividends and the share of net income, Mass Company should record 2,000,000 as equity in earnings of Dub for the year ended December 31, 2009.

Submit
132. Indian Company requires 40,000 kilos of soy beans each month in its operations. To eliminated the price risk associated with the purchase of soy beans, on December 1, 2009, Indian entered into a futures contract as a cash flow hedge to buy 40,000 kilos of soy beans at P150 per kilo on January 1, 2010. The market price on December 31, 2009 and January 1, 2010 is P160 per kilo. The appropriate discount rate is 9% and the present value of 1 at 9% for one period is .917. The periodic system is used.

Indian Company shall recognize on December 31, 2009 a derivative asset at:

Explanation

The Indian Company shall recognize a derivative asset at 400,000. This is because the company entered into a futures contract to buy 40,000 kilos of soy beans at P150 per kilo on January 1, 2010. The market price on December 31, 2009 and January 1, 2010 is P160 per kilo. The derivative asset is recognized at the market price on the date of entering into the contract, which is P160 per kilo. Therefore, the derivative asset is calculated as 40,000 kilos x P160 per kilo = P6,400,000. The present value of this amount at a discount rate of 9% for one period is P6,400,000 x .917 = P5,868,800, which is approximately 400,000.

Submit
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On January 1, 2009, Fredo Company purchased marketable equity...
Silvana Company insured the life of its president for P2,000,000, the...
On July 1, 2009, Geizer Company purchased Durian Company 10-year, 12%...
Cavite Company received a two-year variable interest rate loan of...
Seaman Company operates a five-star hotel. The company makes very...
On January 1, 2009, Paloma Company purchased bonds with face value of...
On January 1, 2009, Bell Company adopted a plan to accumulate funds...
Seko Company has 100,000 ordinary shares outstanding. Kobe Company...
On March 1, 2009, Evan Company purchased 10,000 ordinary shares of...
Blue Company owns 30% of the outstanding ordinary shares and 100% of...
On January 1, 2009, Tree Company borrowed P5,000,000 from a bank at a...
On January 1, 2009, Hemingway Company acquired 200,000 ordinary shares...
Quezon Company acquired investments in available for sale equity...
Sushi Company owns 30,000 ordinary shares of Sashimi Company acquired...
Crane Company purchased a P1,000,000 life insurance policy on its...
On January 1, 2009, XYZ Company purchased 40,000 shares of TUV at P100...
Neil Company held the following marketable securities as trading...
On July 1, 2009, Palau Company purchased as trading investment a...
Socks Company uses approximately 300,000 units of raw material in its...
Oregon Company has the Philippine peso as its functional currency. The...
On July 1, 2009, Dino Company purchased 30,000 shares of Mammoth...
On January 1, 2009, Beige Company purchased 25,000 shares of the...
Gallery Company ventured into construction of a condominium in Ortigas...
Data regarding Maggy Company's available for sale securities...
In January 2009, Fatty Company acquired 20% of the outstanding...
On January 1, 2009, Southern Company purchased 40% of the outstanding...
Seaman Company operates a five-star hotel. The company makes very ...
Leviathan Company had investments in bonds with face value of...
Information pertaining to dividends from Rex Company's share...
On July 1, 2009, Pellet Company purchased Grown Company ten-year, 8%...
On January 1, 2008, Eve Company purchased as a long-term investment on...
Woody Company owns 20,000 shares of Buzz Company's 200,000 shares of...
On January 1, 2009 Russo Company purchased 5-year bonds with face...
On December 31, 2009, Otter Company had investments in trading...
Corn Company purchased 10,000 shares representing 2% ownership of Row...
On April 1, 2009, Zen Company purchased 40% of the outstanding...
Data regarding Baggy Company's available for sale securities...
On January 1, 2009, Autobot Company bought 30% of the outstanding...
Jacob Company purchased bonds at a discount of P100,000. Subsequently,...
Book Company uses approximately 200,000 units of raw material in its...
Data regarding Bondoc Company's trading securities...
Banquet Company began operations on January 1, 2009. The following...
Sumo Company had investments in marketable debt securities which ...
The following investments are classified as trading unless otherwise...
During 2008, Lawin Company bought the shares of Burnwood Company as...
On January 1, 2009, Fork Company purchased 50,000 ordinary shares of...
Chocolate Company operates a seafood restaurant. On October 1, 2009,...
Duff Company acquired 20,000 ordinary shares of Post Company on...
On January, 1 2008, Wayne Company bought 15% of Parrot Company's...
Nata Company produces bottled grape juice. Grape juice concentrate is...
On January 1, 2008, Massive Company acquired 10% of the outstanding...
On January 1, 2009 Libya Company purchased equity securities to be...
On January 1, 2009, Annie Company purchased 20% of the outstanding...
The following information relates to noncurrent investments that Hall...
On January 1, 2009, Dryer Company acquired as a long-term investment a...
On its December 31, 2008 balance sheet, Fry Company appropriately...
On January 1, 2009, Port Company purchased bonds with face value of...
Congo Grill operates a chain of seafood restaurants. On January 1,...
La Goon Company purchased the following securities during...
Dude Company purchased 10% of Pal Company's 100,000 outstanding...
On January 1, 2009, Anahaw Company purchased bonds with face value of...
Seaman Company operates a five-star hotel. The company makes very ...
On January 1, 2008, Pearl Company purchased as a long-term investment...
Letterman Company reported the following selected balances on its...
On July 1, 2009, Easter Company purchased as a long-term investment...
Mac Company made investment for 5 years at 12% per annum compounded...
The following information was extracted from December 31, 2009 balance...
The following data pertain to the equity investments held by Doritos...
On October 1, 2008, Pentel Company purchased 6,000 of the ...
On July 1, 2009, Salt Company exchanged a truck for 25,000 ordinary...
On January 1, 2009, Ken Company purchased 30% interest in Barbie...
Chalk Company acquired a 40% interest in Film Company for P1,700,000...
Comma Company acquired long term 12% bonds. P2,000,000 face value for...
During 2009, Scotch Company purchased marketable equity securities to...
Sumo Company had investments in marketable debt securities which were...
Knight Company received dividends from its share investments during...
Vacation Company is a golf course developer that constructs...
Mass Company owns 20% of Dub Company's preference share capital and...
Indian Company requires 40,000 kilos of soy beans each month in its...
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