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REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

COST AND EQUITY METHOD

1. On January 1, 2004, Laoag Company purchased 15% of Vintar Company’s common

stock for P20,000,000. The following data concerning Vintar Company are available:

2004 _
2005_
Net income 6,000,000 7,000,000
Cash dividend paid None 15,000,000

In its income statement for the year ended December 31, 2005, how much should
Laoag report as income from this investment?
a. 2,250,000
b. 1,950,000
c. 700,000
d. 600,000

2. In January 2005 Paoay Company acquired 25% of the outstanding common stock of
Bangui Company for P25,000,000. The book value of the acquired shares was
P21,000,000. The excess of cost over book value was attributable to an identifiable
intangible asset which was undervalued on Bangui’s balance sheet and which had an
indefinite life. For the year ended December 31, 2005, Bangui reported net income of
P20,000,000 and paid cash dividends of P6,000,000 on its common stock and
thereafter issued 10% stock dividend. What is the proper carrying value of investment
in associate at December 31, 2005?
a. 28,300,000
b. 28,500,000
c. 20,400,000
d. 28,700,000

3. On January 2, 2005, Currimao Company purchased 10% of Bacarra Company’s

outstanding common shares for P20,000,000. Currimao is the largest single
shareholder in Bacarra and Currimao’s officers are majority of Bacarra’s board of
directors. Bacarra reported net income of P10,000,000 and paid dividend of
P4,000,000. In its December 31, 2005 balance sheet, what amount should Currimao
report as investment in Bacarra Company?
a. 20,000,000
b. 21,000,000
c. 20,600,000
d. 21,400,000

4. On July 1, 2005, Batac Company purchased 40% of the outstanding common stock of
Dumalneg Company for P50,000,000. On this date, Dumalneg’s net assets were
P100,000,000 which approximated their fair values, except for land whose fair value
exceeded its carrying amount by P15,000,000. Any implied goodwill has a useful life of
5 years. Dumalneg’s 2005 net income was P25,000,000. The maximum amount which
could be included in Batac’s 2005 income before tax to reflect its “equity in earnings of
Dumalneg” is
a. 9,200,000
b. 4,600,000
c. 3,000,000
d. 4,200,000
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5. Culasi Company bought 20% of Bugasong Corporation’s common stock on January 1,

2005 for P20,000,000. Carrying amount of Bugasong’s net assets at purchase date
totaled P60,000,000. Fair value and carrying amounts were the same for all items
except for plant and inventory, for which fair values exceed their carrying amounts by
P15,000,000 and P5,000,000 respectively. The plant has a 5-year life. All inventory
was sold during 2005. Goodwill, if any, has an indefinite life. During 2005, Bugasong
reported net income of P40,000,000 and paid a P15,000,000 cash dividend. What
amount should Culasi report as investment income for 2005?
a. 6,200,000
b. 6,400,000
c. 3,000,000
d. 7,600,000

6. Carasi Company purchased 15% of Badoc Company’s 500,000 outstanding shares of

common stock on January 2, 2005, for P15,000,000. On December 31, 2005, Carasi
purchased additional 125,000 shares of Badoc for P35,000,000. There was no
goodwill as a result during 2005. Badoc reported earnings of P20,000,000 for 2005.
What amount should Carasi report in its December 31, 2005 balance sheet as
investment in Badoc Company?
a. 50,000,000
b. 58,000,000
c. 55,000,000
d. 53,000,000

7. On January 1, 2004 Dingras Company acquired 10% of the outstanding voting stock of
Piddig Company. On January 1, 2005, Dingras gained the ability to exercise significant
influence over financial and operating control of Piddig by acquiring 30% of Piddig’s
outstanding stock. The two purchases were made at prices proportionate to the value
assigned to Piddig’s net assets, which equaled their carrying amounts. For the years
ended December 31, 2004 and 2005, Piddig reported the following:

2004 2005 __
Dividend paid 5,000,000
10,000,000
Net income 8,000,000 15,000,000

In 2005, what amounts should Dingras report as current year investment income
and as an adjustment to 2004 income, respectively?
a. 6,000,000 and 800,000
b. 6,000,000 and 300,000
c. 4,500,000 and 300,000
d. 4,500,000 and 800,000

8. Pagudpud Company owns 50% of Sarrat Company’s preferred stock and 30% of its
common stock. Sarrat’s stock outstanding at December 31, 2005 includes P20,000,000
of 10% cumulative preferred stock and P50,000,000 of common stock. Sarrat reported
net income of P10,000,000 for the year 2005. What amount should Pagudpud report
as investment income for the year 2005?
a. 3,000,000
b. 2,400,000
c. 3,400,000
d. 4,400,000
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