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    Paragon Company acquired shares of Hexagon Company in January 2010. Throughout 2010, Hexagon issued stock dividends and dividends in-kind to Paragon. To calculate dividend revenue for its 2010 statement, Paragon would report P100,000. Dancer Company purchased preference shares of Lancer Corporation in May 2010. The shares included detachable warrants. In December 2010, Dancer sold the warrants for P295,000, realizing a gain of P51,800. Ball Corporation purchased shares of Pencil Company in December 2009. In February 2010, Ball received rights to purchase additional Pencil shares. If the Pencil shares were trading securities, Ball would recognize a P25,000 gain on sale of

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    Paragon Company acquired shares of Hexagon Company in January 2010. Throughout 2010, Hexagon issued stock dividends and dividends in-kind to Paragon. To calculate dividend revenue for its 2010 statement, Paragon would report P100,000. Dancer Company purchased preference shares of Lancer Corporation in May 2010. The shares included detachable warrants. In December 2010, Dancer sold the warrants for P295,000, realizing a gain of P51,800. Ball Corporation purchased shares of Pencil Company in December 2009. In February 2010, Ball received rights to purchase additional Pencil shares. If the Pencil shares were trading securities, Ball would recognize a P25,000 gain on sale of

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    256 views3 pages

    Pre-Test 7

    Uploaded by

    BLACKPINKLisaRoseJisooJennie
    Paragon Company acquired shares of Hexagon Company in January 2010. Throughout 2010, Hexagon issued stock dividends and dividends in-kind to Paragon. To calculate dividend revenue for its 2010 statement, Paragon would report P100,000. Dancer Company purchased preference shares of Lancer Corporation in May 2010. The shares included detachable warrants. In December 2010, Dancer sold the warrants for P295,000, realizing a gain of P51,800. Ball Corporation purchased shares of Pencil Company in December 2009. In February 2010, Ball received rights to purchase additional Pencil shares. If the Pencil shares were trading securities, Ball would recognize a P25,000 gain on sale of

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    of 3

    Pre-Test 7

    Answer this test wisely. 5 Points

    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

    MV Cost Allocated cost


    Preference share 69/75 3,040,000 P2,796,800
    Warrant 6/75 3.040,000 243,200

    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

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