UNIT 4

Accounting for Investments

Topic 1 – Financial Assets and Investment in Equity Securities
Pretest:

Problem 1: TRUE or FALSE (page 501)

FALSE 1. The term financial instruments encompasses only assets that are considered “investments.”

TRUE 2. Investment in equity securities and accounts payable are both examples of financial instruments.

FALSE 3. According to PFRS 9, financial assets are classified based on management's intention for holding each financial
asset.

FALSE 4. Investment in equity securities can be measured at amortized cost.

FALSE 5. Entity A acquires debt securities to be held under a “hold to collect and sell” business model. Entity A shall
classify the securities either as FVOCI or as FVPL.

TRUE 6. According to PFRS 9, all financial assets are initially measured at fair value plus transaction cost.

TRUE 7. A debit balance in the “Fair Adjustment – FVOCI” account implies a corresponding equity account with a credit
balance of the same amount.

FALSE 8. Unrealized gains and losses on investments in equity securities measured at FVOCI are recognized in the
income statement.

FALSE 9. An entity's investment in equity securities classified as FVOCI and originally acquired for P100 has fair values of
P80 and P110 at the end of Years 1 and 2, respectively. In Year 2, the amount presented in equity in relation to the
investment is P30 credit.

TRUE 10. During the year, an entity acquires equity securities at fair value of P10 and classifies them as held for trading
securities. The entity pays broker's commission of P2 on the acquisition. By the end of the year, the fair value of the
investment is P15. The entity recognizes a fair value gain of P7 in profit or loss for the year.

Problem 1: TRUE or FALSE (page 610)

1. Triniville Co. commits to purchase asset on Day 1. The transaction will be settled on Day 4. If Triniville Co.
uses the trade date accounting, the financial asset is will be initially recognized on Day 4.

2. On Day 1, Tomay Co. commits to sell a financial asset. The sales transaction will be settled on Day 4. If Tomay
Co. appropriately derecognizes the asset on Day 4, Tomay Co. must have adopted the settlement date accounting.

3. Reclassification entries are made on the date an entity changes its business model for managing financial
assets.

4. A change in management’s intention for holding a particular financial assets would trigger the reclassification
of financial assets between the measurement categories of PFRS 9.

5. Only debt-type financial assets can be reclassified when an entity changes its business model for financial
assets.

6. The impairment accounting under PFRS 9 applies to all the measurement categories of financial assets.

7. The reclassification of financial assets between the amortized cost and FVOCI classifications would result in a
change in the measurement of expected credit losses.
 8. A reclassification adjustment to profit or loss would result if a financial asset is reclassified from FVOCI to
FVPL.

9. After the date of declaration but before the date of record, shares are said to be selling ex-dividend.

10. An investee’s shares were selling at P10 before the issuance of stock rights. Immediately after the issuance,
the market price of the shares declined to P8. The value per stock right must be approximately P2.

Assessment:

Activity 1

B 1. According to PFRS 9, a financial instrument is recognized

a. when the instrument has probable economic benefits that can be measured reliably.
b. only when the entity becomes a party to the contractual provisions of the instrument.
c. when the entity enters into a binding contract to deliver a variable number of its own equity instrument.
d. only when the instrument requires receipt of another financial instrument under conditions that are potentially
favorable.

D 2. Which of the following is a financial liability?

a. Income tax payable
b. Unearned revenue
c. Warranty obligation
d. Lease liability

A 3. During the period, an entity acquires an investment. The entity has a “hold to collect and sell” business model.
The investment should be classified as
a. investment measured at fair value through other comprehensive income.
b. investment measured at amortized cost.
c. investment measured at fair value through profit or loss.
d. any of these

B 4. Which of the following is measured at fair value with fair value changes recognized in profit or loss?
a. Held to maturity investments
b. Financial assets designated at FVPL
c. FVOCI
d. All of these

B 5. If an entity’s business model’s objective is to hold investments in order to collect contractual cash flows that
are solely payments for principal and interests, then investments should be classified as
a. subsequently measured at fair value through other comprehensive income.
b. subsequently measured at amortized cost.
c. subsequently measured at fair value through profit or loss.
d. any of these

D 6. Under PFRS 9, financial assets are classified

a. on the basis of the entity’s business model only.
b. based on the nature of the financial assets, i.e., debt or equity instrument.
c. as financial assets subsequently measured at FVPL, FVOCI (election), FVOCI (mandatory) or Amortized cost.
d. all of these
 B 7. According to PFRS 9, if an asset or a liability measured at fair value has a bid price and an ask price, the price
within the bid-ask spread that is most representative of fair value in the circumstances is used to measure fair value. Bid
price is
a. the maximum price at which market participants are willing to sell an asset.
b. the maximum price at which market participants are willing to buy an asset.
c. the minimum price at which market participants are willing to sell an asset.
d. the price that an entity will incur to bid farewell to an asset.

C 8. The following are taken from the records of Lunch Co. as of year-end.
Cash 10,400 Investment in subsidiary 44,000
Accounts receivable 12,000 Treasury shares 44,800
Allowance for bad debts (1,600) Investment in bonds 9,600
Note receivable 4,000 Land 112,000
Interest receivable 1,600 Building 208,000
Claim for tax refund 9,600 Accum. Depreciation (52,000)
Advances to suppliers 4,800 Investment property 40,000
Inventory 60,000 Biological assets 24,000
Prepaid expenses 4,000 Intangible assets 56,000
Petty cash fund 800 Deferred tax assets 48,000
Investment in equity securities 10,400 Cash surrender value 9,600
Investment in associate 16,000 Sinking fund 16,000

How much are the total financial assets disclosed in the notes?
a. 142,400 b. 132,000 c. 132,800 d. 92,800
Solution:

Use the following information for the next three questions:

On January 1, 20x1, ABC Co. purchased 1,000 shares of XYZ, Inc. for ₱250,000. Commission paid to broker amounted to
₱10,000. The equity securities were designated by management to be measured at fair value through profit or loss. On
December 31, 20x1, the shares are quoted at ₱200 per share. It was estimated that transaction cost of ₱20 per share will
be incurred if the shares were sold on that date.

B 9. How much is the unrealized gain (loss) on change in fair value recognized in the 20x1 profit or loss?
a. (70,000) b. (50,000) c. (40,000) d. 60,000

C 10. On January 3, 20x2, all the shares were sold at ₱300 per share. Commission paid for the sale amounted to
₱60,000. How much is the realized gain (loss) from the sale?
a. 60,000 b. (10,000) c. 40,000 d. (40,000)

D 11. If ABC Co. uses an allowance account to account for changes in fair values, how much is the balance of this
account on December 31, 20x1?
a. 70,000 debit c. 40,000 credit
b. 50,000 debit d. 50,000 credit

Use the following information for the next three questions:

On Jan. 1, 20x1, Three Co. purchased 10,000 shares of AM, Inc. for ₱1,000,000. Three Co. paid broker’s commission of
₱15,000 on the acquisition. Three Co. made an irrevocable choice to subsequently measure the shares at fair value
through other comprehensive income. The quoted prices per share on Dec. 31, 20x1 and Dec. 31, 20x2 were ₱90 and
₱108, respectively. On Jan. 3, 20x3, Three Co. sold all the shares at ₱105 per share. Three Co. paid broker’s commission
of ₱16,000 on the sale.

B 12. How much is the unrealized gain (loss) recognized in Three Co.’s 20x1 profit or loss?
a. 115,000 b. (115,000) c. (85,000) d. 0

13. How much is the unrealized gain (loss) recognized in Three Co.’s 20x2 other comprehensive income?
a. 180,000 b. 65,000 c. (115,000) d. 0

14. How much is the cumulative gain (loss) transferred to retained earnings on Jan. 3, 20x3?
a. 19,000 b. 34,000 c. (19,000) d. (34,000)

15. On January 1, 20x1, ABC Co. purchased ₱1,000,000 bonds at a price that reflects a yield rate of 14%. The bonds
mature on January 1, 20x4 and pay 12% annual interest. The bonds are classified as held for trading securities. On
December 31, 20x1, the bonds are selling at a yield rate of 10%. How much is the unrealized gain (loss) on the change in
fair value recognized in ABC’s 20x1 profit or loss?
a. 78,336 b. 83,561 c. 81,144 d. 0

B 16. It refers to purchase or sale of a financial asset under a contract whose terms require delivery of the asset
within the time frame established generally by regulation or convention in the marketplace concerned.
a. normal way c. special way
b. regular way d. no way

17. According to PFRS 9, which of the following represents a commencement of a financial asset’s impairment
accounting?
a. Reclassification of the financial asset from Amortized cost to FVPL
b. Reclassification of the financial asset from FVPL to Amortized cost
c. Reclassification of the financial asset from Amortized cost to FVOCI
d. Reclassification of the financial asset from FVOCI to Amortized cost

Use the following information for the next two questions:

On December 29, 20x1, an entity commits itself to purchase a financial asset for ₱10,000. The transaction will be settled
on January 4, 20x2. On December 31, 20x1 and on January 4, 20x2, the fair value of the asset is ₱12,000 and ₱15,000,
respectively.

18. If the financial asset is measured at fair value through profit or loss and that the entity uses the settlement date
accounting, on what date and at what amount is the financial asset initially recognized?
a. December 29, 20x1, ₱10,000
b. January 4, 20x2, ₱10,000
c. January 4, 20x2, ₱12,000
d. January 4, 20x2, ₱15,000

19. If the financial asset is measured at fair value through other comprehensive income and that the entity uses the
trade date accounting, what amount of gain (loss) on fair value change is recognized on December 31, 20x1 and how is
that gain (loss) recognized?
a. ₱2,000 gain in other comprehensive income
b. ₱3,000 gain in other comprehensive income
c. ₱2,000 gain in profit or loss
d. zero gain or loss

Use the following information for the next two questions:

On Jan. 1, 20x1, Cloudy Day Co. acquires ₱2,000,000 face amount, 10% bonds for ₱1,903,927. The bonds are due on Jan.
1, 20x4 but pay annual interest every Dec. 31. The yield rate is 12%. Cloudy changes its business model for managing
financial assets on Sept. 1, 20x2. Cloudy only reports annually every Dec. 31. The bonds are quoted at 101 on Sept. 1,
20x2, 103 on Dec. 31, 20x2 and 104 on Jan. 1, 20x3.

20. The bonds are reclassified from amortized cost to fair value through profit or loss. How much is the gain (loss) on
reclassification and where is that amount presented?
a. 128,471 in P/L c. 115,714 in P/L
b. (143,292) in OCI d. 115,714 in OCI

21. The bonds are reclassified from fair value through profit or loss to amortized cost. What is the amount of premium
or discount to be amortized over the remaining life of the bonds subsequent to the reclassification date?
a. 80,000 discount c. 115,714 discount
b. 80,000 premium d. 115,714 premium

C 22. On March 31, 20x1, Likkig, Inc. declares cash dividends of ₱40 per share to shareholders of record on April
15, 20x1, to be distributed on April 30, 20x1. On April 9, 20x1, Ceecee Co. purchases 10,000 Likkig shares for ₱400 per
share. The investment is classified as investment in equity securities measured at FVOCI. How much is the initial carrying
amount of the investment?
a. 4,000,000 b. 4,400,000 c. 3,600,000 d. 3,890,664

23. Devin Co holds 10,000 shares of Eureka, Inc. as investment in equity securities. On April 1, 20x1, Devin receives
shares with fair value of ₱520,000 and aggregate par value of ₱400,000 as share dividend. How much is the dividend
income?
a. 520,000 b. 400,000 c. 120,000 d. 0

B 24. On April 1, 20x1, Jean Co. received ₱480,000 cash dividends, one-third of which represents liquidating
dividends. How much is the dividend revenue?
a. 160,000 b. 320,000 c. 80,000 d. 0
Solution:
480,000 x 1/3 =

C 25. On March 31, 20x1, Bogart Co. received from its investment in equity securities 10,000 stock rights to
subscribe to new shares at ₱60 per share for every 4 rights held. Immediately after issuance of stock rights, the shares
were selling at ₱80 per share. How much is the initial carrying amount of the stock rights?
a. 20,000 c. 50,000
b. 40,000 d. cannot be determined
Activity 2
Show your Solution and answer as required.
1. In your books, answer problem 5 and problem 6 found in pages 510 to 515.
Problem 5
Act. 1: (INVESTMENTS MEASURED AT FVPL)
You are the accountant of ABC Co. The balance of ABC’s investment in PLDT shares (measured at fair value through
profit or loss) on December 31,20x1 is P189, 120, before year-end adjustments. You have obtained the documents
below for the purpose of adjusting this account.

Requirement: Prepare the adjusting entry on December 31,20x1

Dec. 31,20x1 P 189,120

Closing rate (based on document) P 2,364
Shares 100

Adjusted Fair value – Dec. 31,20x1 (2,364 x 100 sh.) P 236,400

Unadjusted fair value (189,120)
Fair value gain P 47,280

Adjusting entry:
Investment in PLDT shares 47,280
Fair value gain – P/L 47,280

Act. 2: (INVESTMENT PORTFOLIO)

You are the accountant of ABC Co. ABC Co. started investing during 20x1 (current period). ABC’s business model’s
objective is neither to “hold and collect” nor “hold to collect and sell.” A print screen of your company’s investment

Requirements:
a. What measurement category is most appropriate for the investment portfolio? Why?
b. What is the balance of ABC’s investment account before year-end adjustment?
c. At what amount will the investment be reported in ABC’s December 31,20x1 statement of financial position?
d. Provide year-end adjusting entry.
e. Identify the investments in the portfolio that are considered equity securities and debt securities. You may use
symbols.

Problem 6
FINANCIAL ASSETS
1. Twilight Co. has the following assets on Dec. 31,20x1:
Petty cash fund 10,000 Prepaid income tax 10,000
Cash in bank 40,000 Prepaid assets 4,000
Notes receivable (N/R) 130,000 Inventory 380,000
Discount on N/R (7,000) Held for trading securities 60,000
Loan receivable (L/R) 80,000 Investment in associate 40,000
Loss allowance on L/R (4,000) Deferred tax assets 12,000
Advances to suppliers 12,000 Plant expansion fund 75,000

Req.: Compute for the total amt. of financial assets.

Solution:
Petty cash fund P 10,000
Cash in bank 40,000
Notes receivable (N/R) 130,000
Discount on N/R (7,000)
 Loan receivable (L/R) 80,000
Loss allowance on L/R (4,000)
Held for trading securities 60,000
Investment in associate 40,000
Total financial assets P 349,000

FAIR VALUE MEASUREMENT

2. Burnham Co. has an asset that is sold in two different active markets. Price information from the two markets is
as follows:
Market #1 Market #2
Market price 270 265
Transaction costs 6 5
Transport costs 10 15
Requirements:
a. If market #2 is the principal market for the asset, how much is the fair value?
If neither market is the principal market for the asset, how much is the fair value?

FVPL
3. At the start of 20x1, Aglolos Co.’s held for trading securities consist of 10,000 shares of Trucking Co. with fair
value per share of P80. Aglolo’s trading activities relating to Trucking Co.’s shares during the year are
summarized below:
 Acquired 5,000 shares at P78 per share. Total transaction cost (tax) was P18,500.
 Sold 3,000 shares (from those held at the start of the year) at P82 per share. Total transaction cost was
P12,300.
Trucking Co.’s shares have a fair value of P81 per share on Dec. 31, 20x1.

Requirements: Provide journal entries. Determine the total net gain (loss) from the sale and fair value change
during the period.

2. In your books, answer problem 5 found in pages 618 to 622.