Equity Investments

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MULTIPLE CHOICE – THEORIES

1. Any instrument representing ownership shares and the right to acquire ownership shares is
A. debt security
B. equity security.
C. shareholders’ equity.
D. marketable security.

2. The market value of an investee’s ordinary share increased by 20% during the year. How would this increase in the
market value of the ordinary share affect the investment account under each of the following appropriate
classification?
Equity Investments at FVPL Investment in Associate
A. increase increase
B. increase no effect
C. no effect no effect
D. no effect increase

3. A corporation declares and distributes dividend that is a result of current earnings. How will the receipt of the
dividends affect the investment balance of the investor under each of the following classification?
Equity Investments at FVOCI Investment in Associate
A. no effect decrease
B. increase decrease
C. no effect no effect
D. decrease no effect

4. An investor uses the equity method to account for investment in associate. The purchase price implies a fair value of
the investee's depreciable assets in excess of the investee's net asset carrying values. The investee's amortization of
the excess
A. decreases the investment account.
B. decreases the goodwill account.
C. increases the investment income account.
D. does not affect the carrying amount of the investment.

5. An unrealized holding gain or loss on a company’s equity investments at fair value through other comprehensive
income should be reflected in the current year financial statements as
A. direct adjustment to retained earnings.
B. income or loss on the statement of comprehensive income.
C. a disclosure in the notes to the financial statements.
D. other comprehensive income in the equity section of the statement of financial position.

6. Sarah Company’s 2021 dividend revenue included only a part of the dividends received from its investment in Jean
Company. Sarah has an investment in Jean Company, which is designated at fair value through profit or loss. The
balance of the dividend reduced Sarah’s carrying amount for its investment in Jean. This reflects the fact that Sarah
accounts for investment in Jean as an
A. equity investment at FVOCI and all of Jean's 2021 dividends represent earnings after acquisition.
B. equity investment at FVPL and only a portion of Jean's 2021 dividend represents earnings after Sarah's
acquisition.
C. investment in associate, and Jean incurred a loss in 2021.
D. investment in associate, and its carrying amount exceeded the proportionate share of Jean's market value.

7. When an investor uses the equity method to account for investment in associate, the investment account will be
increased when the investor recognizes
A. a proportionate interest in the profit of the investee.
B. a cash dividend received from the investee.
C. impairment of the goodwill related to the purchase.
D. depreciation related to the excess of market value over the carrying amount of the investee's depreciable assets at
the date of purchase by the investor.

8. Unrealized holding gains and losses which are taken to profit or loss are from securities that are classified as
A. held to maturity.
B. investment in associate.
C. equity investments at FV through profit or loss.
D. equity investments at FV through other comprehensive income.

9. Which of the following statements is correct regarding the disposal of equity investments?
A. No gain or loss is recognized on disposal of equity investments at fair value through profit or loss.
B. No gain or loss is recognized on disposal of investment in associates.
C. A gain or loss is recognized on the disposal of investment in associates for the difference between the net disposal
proceeds and the carrying amount of the investment.
D. A gain or loss is recognized on the disposal of equity investments at fair value for the difference between the net
disposal proceeds and the acquisition cost of the equity investment.

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 10. These investments are initially recorded at purchase price plus transaction costs.
A. Equity investments at fair value.
B. Investment in associates.
C. Equity investments at FVPL and investment in associates.
D. Equity investments at FVOCI and investment in associates.

11. Transactions costs directly attributable to financial instruments include

A. fees and commissions paid to agent, levies by regulatory authorities, transfer taxes and duties.
B. debt premiums or discounts.
C. financing costs.
D. internal administrative costs.

12. Changes in market value of equity investments at FVPL shall be

A. shown as deduction from or addition to shareholders' equity.
B. included in the determination of profit of the period in which they occur.
C. ignored.
D. shown as a prior period adjustment.

13. Which statement is correct concerning equity investments at fair value?

A. Cash dividends received are treated as reduction of investment balance.
B. Property dividends received are treated as income.
C. Unrealized gain on investments at FVPL is reported in equity.
D. Gain or loss on sale of equity investments at fair value through profit or loss is the difference between the net
selling price and the original cost of the investment.

14. Which of the following is not correct in regard to trading securities?

A. They are held with the intention of selling them in a short period of time.
B. Unrealized holding gains and losses are reported as part of net income.
C. Any discount or premium is not amortized.
D. All these statements are correct.

15. When a company has acquired a "passive interest" in another corporation, the acquiring company should account for
the investment
A. by using the equity method.
B. by using the fair value method.
C. by using the effective interest method.
D. by consolidation.

16. At which of the following dates has the. shareholder theoretically realized income from dividend?
A. Date of record
B. Date the dividend is paid
C. Date the dividend is credited to the investor's bank account
D. Date the dividend is declared.

17. How does a share dividend of the same class affect the following:
Investment Account Cost per Share
A. increase increase
B. decrease decrease
C. no effect decrease
D. no effect increase

18. Shares received in lieu of cash dividend are recorded as

A. income at the cash dividend that would have been received.
B. income at fair value of the shares received.
C. share dividends.
D. income at par value of the shares received.

19. Cash received in lieu of share dividends is recorded as

A. return of investment.
B. partly income and partly return of investment.
C. if the share dividends are received and subsequently sold at the cash received and gain or loss is recognized.
D. dividend income.

20. What is the effect of a share split up?

Number of Shares Cost per Share
A. increase increase
B. decrease decrease
C. increase decrease
D. decrease increase

MULTIPLE CHOICE – PROBLEMS

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A. Jam Company bought the ordinary shares of Mad Company designated as equity securities at fair value through other
comprehensive income, as follows:

June 20, 2020 1,000 shares for P101,600

November 5, 2020 3,000 shares at P104 per share

On January 25, 2021, Jam Company received cash dividend of P4.50 per share. On June 14, 2021, it received a 10%
bonus issue and on July 18, 2021, Jam Company sold 1,500 shares at P95 per share. Market values of Mad Company
ordinary shares are as follows:

December 31, 2020 P106.70 per share

December 31, 2021 P96.00 per share

(1) At how much would the equity investment be reported at December 31, 2020?
A. P431,600
B. P426,800
C. P413,600
D. P384,000

(2) How much is the dividend revenue reported in Jam Company's statement of comprehensive income for the year
ended December 31, 2021?
A. P19,800
B. P18,000
C. P13,500
D. P4,500

(3) What is the revised carrying amount per share of Mad Company ordinary share after the receipt of bonus issue on
June 14, 2021?
A. P97.00
B. P94.00
C. P96.00
D. P95.00

(4) How much is the gain (loss) on the sale of Mad Company ordinary shares on July 18,
2021?
A. P4,500
B. P3,000
C. P1,500
D. P0

(5) What is the amount transferred to retained earnings if Jam Company opted to transfer the unrealized gain or loss
relating to the shares sold?
A. P11,100
B. P5,500
C. P5,100
D. P1,500

(6) At how much would the remaining equity investment be reported at December 31, 2021?
A. P299,100
B. P278,400
C. P240,000
D. P214,000

B. On July 16, 2021, Habagat Company acquire 1,000 ordinary shares of Ondoy Company at P42 per share plus broker’s
fees of P900. Ondoy ordinary shares are traded and were primarily held by Habagat for profit taking opportunities.
Ondoy declared and issued a stock dividend of one Ondoy preference share for every 10 ordinary shares held. Market
values per share of the ordinary and preference are P 40 and P 100, respectively.

(7) How much is the dividend revenue recognized by Habagat?

A. P0
B. P4,000
C. P10,000
D. P42,000

C. Alexis Company bought the shares of Gabriel Company classified as equity investments at fair value through other
comprehensive income, as follows:

April 17, 2020 1,000 shares at 84

July 16, 2020 2,000 shares at P90

Market value per share of Gabriel Company shares at December 31, 2020 was P92.00. The following were the
transactions for 2021:

January 10 Received cash dividend of P4.00 per share

June 20 Received 5% bonus issue
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 December 10 Sold 1,200 shares at P105 per share

(8) How much is the total dividend revenue for the year 2021?
A. P0
B. P12,000
C. P13,800
D. P25,800

(9) How much is the gain on the sale of shares on December 10?
A. P15,600
B. P18,000
C. P20,857
D. P0

D. During 2019, Mark Company acquired 11,000 ordinary shares of Raian Company’s 200,000 shares that are widely
distributed. The shares are not intended to be traded in the near term and Mark Company does not have the ability to
exercise significant influence over the operating and financial policies of Raian Company. The market value of these
shares had been changing for the last three years as follows:

December 31, 2019 - P235,000

December 31, 2020 - P241,000
December 31, 2021 - P222,000

These shares were acquired in 2019 for P231,000 plus broker’s commission of P2,310.

(10) How much is the unrealized loss on the equity investment recognized in profit or loss of 2021?
A. P19,000
B. P11,310
C. P9,000
D. P0

(11) At how much will the equity investments be reported in Mark Company’s December 31, 2021 statement of
financial position?
A. P233,310
B. P222,000
C. P241,000
D. 235,000

E. Regine, Inc. owns 500 ordinary shares of Velasquez Company which has several hundred thousand shares publicly
traded. These 500 shares were purchased by Regine in early part of 2021 for P200 per share. On August 20, 2021,
Velasquez distributed 500 rights to Regine. Regine was entitled to buy one new share of Velasquez ordinary shares at
P180 and two share rights. On September 1, 2021, when the market value of Velasquez ordinary share was P203,
Regine exercised all the rights and received 250 ordinary shares.

(12) How much is the investment income recognized by Regine Inc. upon exercise of the rights?
A. P11,500
B. P5,750
C. P750
D. P0

F. Pomeranz Company holds ordinary shares of David, Inc. The shares are designated as equity investments at fair value
through other comprehensive income and were acquired as follows:

Lot A (August 16, 2019) 750 shares for P67,500

Lot B (July 1, 2020) 1,250 shares for P118,750

The market values of the David Inc. ordinary shares are P92 per share on December 31, 2019 and P105 per share on
December 31, 2020. In 2021, Pomeranz Company received 2,000 rights to purchase David, Inc. ordinary shares at
P110 per share. Four rights are required to purchase one share. Pomeranz exercised 1,000 rights at which time, each
ordinary share is selling at P124. Subsequently, all the other rights are sold at P4.00 each.

(13) What is the total cost of the investment acquired through the exercise of rights?
A. P124,000
B. P110,000
C. P31,000
D. P27,500

(14) How much is the total investment income arising from the stock rights?
A. P7,500
B. P4,000
C. P3,500
D. P0

G. During 2021, Carpenters Corporation purchased equity securities and carried them at fair value through other
comprehensive income. Pertinent data follow:

Earth Ordinary Wind Ordinary Fire Ordinary

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 Cost P 36,000 P 80,000 P 180,000
Market values, 12/31/21 40,000 60,000 186,000

(15) The unrealized loss reported in Carpenters 2021 profit or loss is

A. P0
B. P6,000
C. P10,000
D. P20,000

H. Paul Company presented the following information pertaining to its investments in equity securities.

Security FVPL FVOCI

Cost P 1,000,000 P 1,000,000
Market value
December 31, 2021 1,050,000 980,000
December 31, 2020 950,000 920,000

(16) What amount should Paul Company report as unrealized gain in its 2021 profit or loss?
A. P160,000
B. P110,000
C. P100,000
D. P50,000

(17) What amount should Paul Company report as unrealized gains/losses in the shareholders’ equity of its
December 31, 2021 statement of financial position?
A. P60,000 credit
B. P20,000 debit
C. P80,0000 debit
D. P20,000 credit

I. A company had various equity investments at fair value through profit or loss transactions during 2020 and 2021. The
acquisition cost of all the securities in its portfolio during 2020 was P532,000. At December 31, 2020 and December
31, 2021, the market values of these equity investments were P541,000 and P512,000, respectively. In 2022, all of
these securities were sold for P550,000.

(18) Assuming no other transactions are noted regarding these financial assets at fair value through profit or loss,
what is the amount of unrealized gain/loss reported in the 2021 income statement relating to these securities?
A. P29,000 loss
B. P20,000 loss
C. P29,000 gain
D. P20,000 gain

(19) What is the gain on sale reported in A Company’s 2022 income statement?
A. P38,000
B. P18,000
C. P9,000
D. P0

(20) Assuming that the securities held by A Company are classified as at fair value through other comprehensive
income, what is the gain on sale reported in A Company’s 2021 income statement?
A. P38,000
B. P18,000
C. P9,000
D. P0

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