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Pre-Test 7
Pre-Test 7
1. On January 2, 2010, paragon Company acquired 16,000 ordinary shares of Hexagon Company at
P50 per share. On July 1, 2010, the Hexagon ordinary share was split 5 to 1. On October 1, 2010,
Paragon received from Hexagon a preference share dividend of one share for every 10 ordinary
shares held. On this date, the market price of Hexagon ordinary is P15 per share and preference,
P10 per share.
On December 31, 2010, Paragon received from Hexagon a dividend in Kind of one share of Octagon
Company ordinary share for every 4 Hexagon ordinary shares held. The market price of Octagon ordinary
is P5 per share. In its 2010 statement of comprehensive income, how much should Paragon report as
dividend revenue?
a. None c. P40,000
b. P100,000 d. P150,000
Solution: B
Share held (16,000 x 5) 80,000
Divided by: ÷4
Dividend 20,000
x market price per share 5
Property dividend P100,000
Note: Share dividend other than those held is not considered as an income, the accounting process is to
allocate the original investment between the ordinary and preference shares using their relative fair
market value ratios. An Accounting entry is then necessary to reflect this allocation by a debit to
Investment in Preference and a credit to Investment in Ordinary. Property dividend is considered as
income and should be measured at MV of the property at the time of declaration .
2. Dancer Company purchased 40,000 share of Lancer Corporation’s newly issued 6%, cumulative
preference shares, P50 par for P3,040,00 on May 9, 2010. Each share carried on detachable share
warrant entitling the holder to acquire at P60 one share of Lancer ordinary shares. On May 9,
2010, the market price of the preference share ex-warrant was P69 per share and the market price
of the share warrant was P6 warrant. On December 31, 2010, Dancer sold stock warrants for
P295,000. What is the gain on sale of warrants?
a. None c. P30,652
b. P51,800 d. P55,000
Solution: B
Selling Price P295,000
Less: Cost of warrants (sch. 1) P243,200
Gain on Sale P 51,800
3. On December 20, 2009 Ball Corporation purchased 30,000 shares of Pencil Company’s share at
P100 each. On December 31, 2009, Pencil Company’s shares are selling at P125 per share. On
February 1, 2010, Ball received 30,000 rights entitling it to purchase at P130 per share one
additional share of Pencil for each 10 share then held. On date, Pencil’s shares were selling ex-
right at 145 and the rights were selling at P5.00.
Question 1: if the securities were classified by Ball Corporation as trading securities at the time of
acquisition and assuming the entire share rights were sold at their prevailing market price of P5, what
amount of gain on sale of share rights should Ball Corporation recognize?
a. P 25,000 c. P 50,000
b. P100,000 d. P150,000
Answer: A
Selling Price (30,000 x P5) P150,000
Less: Cost of rights {5/150 (30,000 x P125)} 125,000
Gain on Sale of rights P 25,000
Question 2: if the securities were classified by ball Corporation as available for sale securities at the time
of acquisition and assuming the entire share rights were sold at their prevailing market price of P5, what
amount of gain on sale of share rights should Ball Corporation recognize?
a. P25,000 c. P 50,000
b. P100,000 d. P150,000
Answer: C
Selling Price (30,000 x P5) P150,000
Less: Cost of rights {5/150 x 3,000,000 } 100,000
Gain on Sale of rights P 50,000
4. World Company owns 2,000 ordinary shares of Company, which has hundred thousand share
publicly trade. World Company purchased these 2,000 shares in 2011 for P120 per share. On
November 1, 2011, hope distributed 2,000 share rights to World. World Company was entitled to
buy one new share of hope Company ordinary share for P125 for every two of these rights. On
November 1, 2011, hope Company’s share have a market value of P132 ex-right and the share
rights had a market value of P18. On December 31, 2011, hope Company’s market value has yet
to change.
Question 1: If the investment was classified as Available for Sale Securities how much should be
recorded as cost of new investment in trading securities assuming all the share rights were exercised?
a. P153,800 c. P155,000
b. P156,000 d. P161,000
Answer: C
Cash paid for the New shares (2,000 ÷2 x P125) P125,000
Add: Cost of rights (P18/P150(2,000 x P125) 30,000
Cost of new Investment P155,000
Question 2: If the investment was classified as Available for sale Securities how much should be recorded
as cost of new investment in Available for Sale securities assuming all the share rights were exercised?
a. P153,800 c. P155,000
b. P156,000 d. P161,000
Cash paid for the New shares (2,000 ÷2 x P125) P125,000
Add: Cost of rights (P18/P150(2,000 x P120) 28,800
Cost of new Investment P153,800
5. On January 2, 2010, Stereo Company purchased 50,000 shares of Mono Company ordinary share
for P3,600,000. Stereo Company classified the investment as available for sale securities. On
December 4, 2010, Stereo received 50,000 share rights from Mono. Each right entitles the holders
to acquire one share for P85, market value of share was P100, immediately before the rights
issued, and P90 a share, immediately after the rights were issued, Stereo sold its rights on
December 31, 2010 for P10 a right. How much would be gain from the sale of the right?
a. None c. P100,000
b. P140,000 d. P500,000
Answer: B
Selling Price (50,000 x P10) P500,000
Less: Cost of rights (10/100 x P3,600,000) P360,000
Gain on sales of rights P140,000