EXAMINATION about INVESTMENT 5

General Rule: Read the following carefully and answer it wisely. All solutions are needed, so put it in the last
page. (10 Points)

1. Grand Company has 60,000 ordinary shares of Brand Corporation as an investment in available for securities.
These shares were acquired at fair market value which was P80 per share on May 2, 2011. On December 20,
2011, Grand Company sold 42,000 shares of its investment in Brand Corporation for P85 per share. Market value
of Brand’s shares has yet to change; it remained at P90 per share.
Question 1: What amount of realized gain or loss should Grand Company recognize in selling those shares?
a. None c. P210,000
b. P300,000 d. P420,000
Solution: C
Market Ratio Carrying
Value Value
Share sold (42,000 x P90) P3,780,000 70% P3,360,000
Shares retained (18,000 x P90) 1,620,000 30% P1,440,000
Total P5,400,000 P4,800,000

Selling Price (42,000 x P85) P3,570,000

Question 2: What amount of unrealized gain or loss should Grand Company derecognize in selling those shares?
a. None c. P210,000
b. P180,000 d. P420,000
Solution: D
Market Value – partly sold P3,780,000
Less: Carrying value – partly sold P3,360,000
Unrealized Gain - to be derecognizedP 420,000

Question 3: What amount of unrealized gain or loss should Grand Company carry over to the next measurement date?
a. None c. P210,000
b. P180,000 d. P420,000
Solution: B
Market Value – partly retained P1,620,000
Less: Carrying value – partly retained P1,440,000
Unrealized Gain - to be carried over P 180,000

Note: PAS 39, paragraph 27, when a single instrument is partly disposed of, the carrying amount of the instrument should
be allocated between the partly disposed of and partly retained, based on the relative values. A cumulative gain or loss
that has been recognized in equity is allocated between the parts that continues to be recognized (part retained) and part
that is derecognized (sold/exchanged) based on their relative fair market values of those parts. The amount of unrealized
gain/loss related to the part disposed of is derecognized, while the amount of unrealized gain/loss on the part retained is
carried over until the next measurement.

2. Wand Company has 40,000 shares of unquoted equity instrument of Sand Corporation. These shares were
acquired at P40 per share on January 2, 2010. On December 31, 2010, Wand Company sold 30,000 shares of its
 investment in Sand Corporation for P50 per share. The remaining securities were sold on December 15, 2011 for
P60 per share. Market value of Sand’s share is not determinable or cannot be measured reliable. What amount
of realized gain or loss should Wand Company recognize in 2011 from selling those shares?
a. P100,000 c. P400,000
b. P500,000 d. P600,000
Solution: B
SP – 2011 Sales (10,000 shares x P60) P600,000
Less: CV of Security (unrecovered cost)
Total cost (40,000 x P40) P1,600,000
Less: Proceeds from sales
(30,000 x P50) P1,500,000 P100,000
Realized Gain on Sale P500,000

Note: When the FMV of financial instrument cannot be measured reliably, the cost recovery method should be used in
measuring the realized gain or loss on the disposal of the instrument.

3. During 2010, Ostrich Company purchased marketable securities as available for sale. The cost and market value
at December 31, 2010 were:

Securities Shares Cost Market

Ostrich sold 10,000 shares of Company Cum stock on January 31, 2011, for a net proceeds of P2,100,000. On the sale,
how much should Ostrich report as realized gain?
a. None c. P120,000
b. P150,000 d. P170,000
Solution: B
Net Selling Price P2,100,000
Cost of Security – Cum P1,950,000
Realized Gain P 150,000

Note: When a single equity security is sold in “part”, from an equity portfolio of available for sale securities, changes in
market value of the securities in the portfolio should not affect the realized gain or loss on the sale of the single security
from the portfolio, meaning, the realized gain or loss is the difference of the SP and the historical cost of the single
security disposed of.

4. On November 1, 2009, Gain Company invested P600,000 in equity securities representing 20,000 ordinary shares
of Brain Company. The investment was classified as available for sale security since the company does not intend
to sell the security for a short-term profit. On December 31, 2009, this investment has a market value of
P580,000. On December 31, 2010, the market value of the investment was P640,000 On January 15, 2011, Gain
Company sold the investment for P650,000. What amount realized gain should Grain Company recognize on the
disposal of the available for sale security?
a. None c. P20,000
b. P30,000 d. P50,000
Answer: D
Selling price P650,000
Less: Historical cost P600,000
Realized gain in sale P 50,000

Investment in Equity
5. Turbo Company bought 2,000 shares of Miguel Company on January 2, 2010 at P150 per share and paid P2,250
as brokerage fee and P1,500 nonrefundable tax. At the time acquisition, Turbo Company had a positive intent to
hold this instrument for an indefinite period of time. Prior to the data of acquisition, information revealed that on
December 9, 2009, Miguel Company declared a P10 cash dividend to shareholders on record as of January 31,
2010 payable on April 30, 2010. There were no record as of in 2010 affecting the investment in Miguel Company.
What is the historical cost of the investment account?
a. P283,750 c. P300,000
b. P302,250 d. P303,750
Solution: A
Amt paid for the shares (2,000 x P150) P300,000
Add: Transaction costs:
Brokerage P2,250
Non-refundable tax P1,500 3,750
Tax cash outlay P303,750
Less: Amt of dividend included
(2,000 x P10) 20,000
Historical cost of investment P283,750

Note: The equity instruments were selling dividends on; hence, the amount paid includes payment for
dividend.