Accounting for Equity Investment Rights
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Pomeranz Company holds ordinary shares of David, Inc. The shares are designated as equity investments at fair value through other comprehensive income and were acquired as follows:
Lot A (August 16, 2023) - 750 shares for ₱67,500
Lot B (July 1, 2024) - 1,250 shares for ₱118,750
The market values of the David, Inc. ordinary shares are ₱92 per share on December 31, 2023 and ₱105 per share on December 31, 2024.
In 2025, Pomeranz Company received 2,000 rights to purchase David, Inc. ordinary shares at ₱110 per share. Four rights are required to purchase one share. Pomeranz exercised 1,000 rights at which time, each ordinary share is selling at ₱124. Subsequently, all the other rights are sold at ₱4.00 each.
(20) What is the total cost of the investment acquired through the exercise of rights?
a. ₱124,000
b. ₱110,000
c. ₱31,000
d. ₱27,500
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Step by Step Written Solution
Hi Vanessa, let's solve this investment accounting problem together. We need to find the total cost of the investment acquired through the exercise of rights.
Investment Problem Analysis
First, let's note that the company held 2,000 shares which resulted in 2,000 rights. The problem states that 1,000 of these rights were exercised.
Given Data for Exercise:
- Rights Exercised: 1,000
- Exercise Price: P110 per share
- Rights Required per Share: 4
To find the total cost, we first need to determine how many new shares were actually purchased. Since it takes four rights to buy one share, we divide 1,000 by 4.
Now, let's calculate the cash paid for these 250 shares. We multiply the number of shares by the exercise price of 110 pesos.
Total Cost Calculation
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