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Investment in Equity Securities - Problem 16-2, 16-3, 16-10. and 16-11

1) The document describes several transactions involving investments in companies and dividends. It begins with an investment in Aye Company shares and later transactions involving share splits, dividends, and sales of those shares. 2) It then discusses further transactions with investments in Aye, Bee, and other companies, including property dividends and gains or losses on sales of shares. 3) The last part provides examples of cash and liquidating dividends and their accounting treatment.

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Jessie Dela Cruz
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321 views6 pages

Investment in Equity Securities - Problem 16-2, 16-3, 16-10. and 16-11

1) The document describes several transactions involving investments in companies and dividends. It begins with an investment in Aye Company shares and later transactions involving share splits, dividends, and sales of those shares. 2) It then discusses further transactions with investments in Aye, Bee, and other companies, including property dividends and gains or losses on sales of shares. 3) The last part provides examples of cash and liquidating dividends and their accounting treatment.

Uploaded by

Jessie Dela Cruz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Problem 16-2

Transaction 1 - Purchase / Investment


Investment in Aye Company 2,000,000.00 (40,000 shares at P50 / share)
Cash 2,000,000.00
*In the absence of data, the share is ORDINARY.
Transaction 2 - Share Split
Share Dividend = existing no. of shares + additional shares
Share Split = existing no. of shares divided - THE ACCOUNTING TREATMENT IS MEMORANDUM

Share Dividend and Share Split have the same accounting effect.
NO. OF SHARES VALUE/ SHARE TOTAL INVESTMENT
40,000 50.00 2,000,000.00
200,000 10.00 2,000,000.00 Incremental Percentage = 4 / 1 = 400%

When the problem is silent, Share Split / Split UP - INCREASE IN NUMBER OF SHARES / DECREASE THE VALUE PER SHARE - MULTIPLICATION
Reverse Share Split / Split DOWN - DECREASE IN NUMBER OF SHARES / INCREASE THE VALUE PER SHARE - DIVISION

Transaction 3 - Share Dividend


DIFFERENT KIND AND SAME CORPORATION - RECOGNITION
1 preference = 10 ordinary ; 20,000 preference = 200,000 ordinary

Relative Fair Value Method FAIR VALUE PRO-RATA ALLOCATION


ordinary shares 3,000,000.00 0.9375 1,875,000.00
preference shares 200,000.00 0.0625 125,000.00
3,200,000.00 2,000,000.00
*In the absence of any data, the selling price is EXCLUSIVE OF DIVIDEND CONSIDERATION; reason: to simplify the problem solving.

Investment in Aye Company - Preference 125,000.00


Investment in Aye Company 125,000.00

In Summary: NO. OF SHARES VALUE / SHARE TOTAL INVESTMENT


Investment in Aye Company - Ordinary 200,000.00 9.375 1,875,000.00
Investment in Aye Company - Preference 20,000.00 6.250 125,000.00

Transaction 4 - Property Dividend - Property from the Issuing Corporation going into the possession of the Investor
Properties received by the investor will be measured at FAIR VALUE.
In terms of share distribution:
Share Dividend - SAME CORPORATION Property Dividend - DIFFERENT CORPORATION
1. SAME KIND OF SAME CORPORATION 1. SAME KIND OF DIFFERENT CORPORATION
2. DIFFERENT OF SAME CORPORATION 2. DIFFERENT KIND OF DIFFERENT CORPORATION

1 share of BEE = 4 shares of AYE


50,000 shares of BEE = 200,000 shares of AYE

Investment in BEE Company (50,000 shares x P6) 300,000.00


Dividend Income 300,000.00

In Summary: NO. OF SHARES VALUE / SHARE TOTAL INVESTMENT


Investment in Aye Company - Ordinary 200,000.00 9.375 1,875,000.00
Investment in Aye Company - Preference 20,000.00 6.250 125,000.00
Investment in Bee Company - Ordinary 50,000.00 6.00 300,000.00

Transaction 5 - Sale of Aye Company - Ordinary shares


Selling Price 1,200,000.00
Less: Carrying Amount (80,000 * 9.375) 750,000.00 750,000.00
Gain on Sale 450,000.00

Cash 1,200,000.00
Investment in Aye Company 750,000.00
Gain on Sale 1,200,000.00

In Summary: NO. OF SHARES VALUE / SHARE TOTAL INVESTMENT


Investment in Aye Company - Ordinary 120,000.00 9.375 1,125,000.00
Investment in Aye Company - Preference 20,000.00 6.250 125,000.00
Investment in Bee Company - Ordinary 50,000.00 6.00 300,000.00

Problem 16-10
October 1
Investment in Equity Securities 6,600,000.00
Cash 6,600,000.00
NO. OF SHARES VALUE / SHARE TOTAL INVESTMENT
Investment in Equity Securities - Ordinary 40,000.00 165.00 6,600,000.00

November 30
NO. OF SHARES VALUE / SHARE TOTAL INVESTMENT
Investment in Equity Securities - Ordinary 40,000.00 165.00 6,600,000.00
Investment in Equity Securities - Ordinary 44,000.00 150.00 6,600,000.00 10% - Share Dividend

December 31
Selling Price 1,000,000.00
Less: Carrying Amount (4,000 * 150) 600,000.00 600,000.00
Gain on Sale 400,000.00 LETTER B

Cash 1,000,000.00
Investment in Aye Company 600,000.00
Gain on Sale 400,000.00

Problem 16-11
Activity 1 - Cash Dividend - RETURN ON INVESTMENT
November 30, 2019 - Date of Declaration Dividend On - the buyer is the investor entitled to the dividend.
December 31, 2019 - Date of Record Ex Dividend - the seller is the investor entitled to the dividend.
January 15, 2020 - Date of Payment

November 30, 2019


Dividend Receivable (10% of P500,000) 50,000.00
Dividend Income 50,000.00 LETTER D
December 31, 2019
No Journal entry

January 15, 2020


Cash 50,000.00
Dividend Receivable 50,000.00

Activity 2 - Liquidating Dividend - RETURN OF INVESTMENT


October 15, 2019
Cash 100,000.00
Investment in Equity Securities 100,000.00

Problem 16-3
Beginning Balances
NO. OF SHARES VALUE / SHARE TOTAL INVESTMENT
Investment in SMC - Preference 5,000.00 240.00 1,200,000.00
Investment in Benguet - Ordinary 10,000.00 100.00 1,000,000.00

*Preference Dividend = Dividend Rate x Total Par Value


*Total Par Value = Par Value per share x No. of Shares

Transaction 1
Investment in ANA Company 300,000.00
Cash 300,000.00

NO. OF SHARES VALUE / SHARE TOTAL INVESTMENT


Investment in SMC - Preference 5,000.00 240.00 1,200,000.00
Investment in Benguet - Ordinary 10,000.00 100.00 1,000,000.00
Investment in ANA - Ordinary 4,000.00 75.00 300,000.00

Transaction 2 - Shares in lieu of Cash


Date of Declaration - Intention - Cash Dividend - 10,000 shares x P10 = P100,000
Date of Payment - Decision - Share Dividend

Cash Investment in Benguet 120,000.00


Dividend Income 120,000.00

Shares in lieu of Cash


1. The value to be received is equal to the FAIR VALUE OF SHARES
2. In the absence of no.1, the value will be equal to the original cash dividend amount.

NO. OF SHARES VALUE / SHARE TOTAL INVESTMENT


Investment in SMC - Preference 5,000.00 240.00 1,200,000.00
Investment in Benguet - Ordinary 12,000.00 93.33 1,120,000.00
Investment in ANA - Ordinary 4,000.00 75.00 300,000.00

Transaction 3
Investment in ANA Company 420,000.00
Cash 420,000.00

NO. OF SHARES VALUE / SHARE TOTAL INVESTMENT


Investment in SMC - Preference 5,000.00 240.00 1,200,000.00
Investment in Benguet - Ordinary 12,000.00 93.33 1,120,000.00
Investment in ANA - Ordinary 10,000.00 72.00 720,000.00

Transaction 4 - Preference Dividend


Cash (P200 x 5,000 shares x 12%) 120,000.00
Dividend Income 120,000.00

Transaction 5 - Share Split


NO. OF SHARES VALUE / SHARE TOTAL INVESTMENT
Investment in SMC - Preference 5,000.00 240.00 1,200,000.00
Investment in Benguet - Ordinary 12,000.00 93.33 1,120,000.00
Investment in ANA - Ordinary 20,000.00 36.00 720,000.00

Transaction 6 - Sale of Shares of ANA Company


Selling Price (P85 x 95% x 8,000 shares) 646,000.00
Less: Carrying Amount (8,000 * 36) 288,000.00 288,000.00
Gain on Sale 358,000.00

Cash 646,000.00
Investment in ANA Company 288,000.00
Gain on Sale 358,000.00

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