01 Investment in Equity Securities - V2 With Answers

Financial Accounting and Reporting: FINANCIAL INSTRUMENTS AND INVESTMENT IN EQUITY SECURITIES
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INTRODUCTION TO FINANCIAL INSTRUMENTS
AND
ACCOUNTING FOR INVESTMENT IN EQUITY SECURITIES
INVESTMENTS
Are assets held by an entity for the accretion of wealth through distribution such as interest, royalties, dividends and
rentals, for capital appreciation or for other benefits to the investing entity such as those obtained through trading
relationships.
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or
equity instrument of another entity.
FINANCIAL ASSETS
A financial asset is any asset that is:
a. cash;
b. an equity instrument of another entity;
c. a contractual right:
i. to receive cash or another financial asset from another entity; or
ii. to exchange financial assets or financial liabilities with another entity under conditions that are potentially
favourable to the entity; or
d. a contract that will or may be settled in the entity’s own equity instruments and is:
i. a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own
equity instruments; or
ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own
equity instruments do not include instruments that are themselves contracts for the future receipt or
delivery of the entity’s own equity instruments.
EXAMPLE OF FINANCIAL ASSETS EXAMPLE OF NONFINANCIAL ASSETS

Cash and cash equivalent Merchandise inventory
Accounts receivable, net Biological assets
Notes receivable Building, net
Interest receivable Intangible assets
Prepaid interest (not a valuation account to financial liability Prepaid rent
Investment in equity instruments (associates or subsidiary) Claims for tax refund
Investment in debt instruments Deferred tax assets
Cash surrender value Gold bullion deposited in banks
Sinking fund
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all
of its liabilities.
FINANCIAL LIABILITIES
A financial liability is any liability that is:
a. a contractual obligation:
i. to deliver cash or another financial asset to another entity; or
ii. to exchange financial assets or financial liabilities with another entity under conditions that are potentially
unfavourable to the entity; or
b. a contract that will or may be settled in the entity’s own equity instruments and is:
i. a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own
equity instruments; or
ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own
equity instruments do not include instruments that are themselves contracts for the future receipt or
delivery of the entity’s own equity instruments.
EXAMPLE OF FINANCIAL LIABILITIES EXAMPLE OF NONFINANCIAL LIABILITIES

Accounts payable Unearned revenues
Notes payable Advances from customers
Loans payable Unearned rent
Bonds payable SSS Contributions payable
Mortgage payable PAG-Ibig Contributions payable
Salaries payable PhilHealth Contributions payable
Accrued interest expense Withholding taxes payable
Utilities payable Income taxes payable
Cash dividends payable Warranties payable
Lease liability Premiums payable
Property dividends payable
Constructive obligations
FAR by Raymund Francis A. Escala, MBA, CPA Page 1 of 17

PROBLEM SOLVING
PROBLEM 1 Classification of financial instruments
On December 31, 20Y1, data for DETERMINED Co. includes the following:
1 Cash and cash equivalents 70,000
2 Accounts receivable 100,000
3 Allowance for bad debts 10,000
4 Notes receivable 150,000
5 Interest receivable 21,000
6 Prepaid interest (unrelated to a financial liability) 20,000
7 Investment in equity instruments 125,000
8 Investment in associate 45,000
9 Investment in subsidiary 70,000
10 Investment in bonds 170,000
11 Cash surrender value 60,000
12 Sinking fund 40,000
13 Merchandise inventories 133,000
14 Biological assets 120,000
15 Building 500,000
16 Accumulated depreciation 50,000
17 Intangible assets 30,000
18 Prepaid rent 20,000
19 Treasury shares 23,000
20 Claims for tax refund 45,000
21 Deferred tax assets 60,000
22 Accounts payable 150,000
23 Utilities payable 250,000
24 Accrued interest expense 18,000
25 Cash dividends payable 27,000
26 Finance lease liability 45,000
27 Bonds payable 120,000
28 Discount on bonds payable 15,000
29 Security deposit 30,000
30 Advances from customers 16,000
31 Unearned rent 8,000
32 Warranty obligations 13,000
33 Unearned interest on receivables 5,000
34 Income taxes payable 9,000
35 SSS contributions payable 5,000
36 PHILHEALTH contributions payable 6,000
37 Share Premium 35,000
38 Accumulated Profits – appropriated 500,000
39 Accumulated Profits – unappropriated 3,200,000
40 Issued redeemable preference shares (with mandatory redemption) 100,000
41 Issued Preference shares capital 350,000
Determine the following:
1. Financial assets
A. P310,000 B. P476,000 C. P861,000 D. P1,616,000
2. Nonfinancial assets
A. P100,000 B. P703,000 C. P858,000 D. P958,000
3. Financial liabilities
A. P270,000 B. P610,000 C. P655,000 D. P725,000
4. Nonfinancial liabilities
A. P42,000 B. P51,000 C. P56,000 D. P62,000

SOLUTION:
Financial Non-financial Financial Non-financial
Asset Asset Liabilities Liabilities SHE
Cash and cash equivalents P 70,000
Accounts receivable 100,000
Allowance for bad debts ( 10,000)
Notes receivable 150,000
Interest receivable 21,000
Prepaid interest (unrelated to
financial liability) 20,000
Investment in equity instruments 125,000
Investment in associate 45,000
Investment in subsidiary 70,000
Investment in bonds 170,000
Cash surrender value 60,000
Sinking fund 40,000
Merchandise inventories P 133,000
Biological assets 120,000
Building 500,000
Accumulated depreciation ( 50,000)
Intangible assets 30,000
Prepaid rent 20,000
Treasury shares (P 23,000)
Claims for tax refund 45,000
Deferred tax assets 60,000
Accounts payable P 150,000
Utilities payable 250,000
Accrued interest expense 18,000
Cash dividends payable 27,000
Finance lease liability 45,000
Bonds payable 120,000
Discount on bonds payable ( 15,000)
Security deposit 30,000
Advances from customers P 16,000
Unearned rent 8,000
Warranty obligations 13,000
Unearned interest on receivables 5,000
Income taxes payable 9,000
SSS contributions payable 5,000
PhilHealth contributions payable 6,000
Share premium 35,000
Accumulated profits – appropriated 500,000
Accumulated profits – appropriated 3,200,000
Issued redeemable preference shares
(with mandatory redemption) 100,000
Issued preference share capital 350,000
TOTALS P 861,000 P 858,000 P 725,000 P 62,000 P 4,062,000
ACCOUNTING FOR EQUITY SECURITIES
Problem 2 (Basic Journal Entries – Comprehensive illustration)
The following are the transactions related to the investment in equity securities of ELIJAH Company.
2016
 September 1 – acquired 25,000 equity shares for P250,000 and paid P15,000 as commission to broker.
 December 31 – fair value and related costs to sell of the securities are P270,000 and P15,000.
2017
 April 1 – Sold half of the investment for P150,000 and incurred P6,000 for broker’s commission.
 December 31 – fair value and related costs to sell of the securities are P127,500 and P7,500.
2018
 June 30 – Sold the remaining investment for P110,000 and incurred P3,000 for broker’s commission.
Required: Prepare all the necessary entries assuming the investment is
A. Trading securities
B. Fair value through other comprehensive income securities
SOLUTION:
Trading securities
2016
09/01/16 Trading securities 250,000
Cash 250,000
Commission expense 15,000

Cash 15,000
12/31/16 Trading securities 20,000

Unrealized gain on trading securities 20,000

2017
04/01/17 Cash 144,000
Trading securities 135,000
Gain on sale of trading securities 9,000
12/31/17 Unrealized loss on trading securities 7,500

2018
06/30/18 Cash 107,000
Loss on sale of trading securities 20,500
Fair value through other comprehensive income securities

2016
09/01/16 Financial asset – FVOCI 265,000
Cash 265,000
12/31/16 Financial asset 5,000

Unrealized gain on Financial asset – FVOCI 5,000
2017
04/01/17 Cash 144,000
Expense 6,000
Financial asset – FVOCI 135,000
Retained earnings 17,500
12/31/17 Unrealized loss on Financial asset – FVOCI 7,500

2018
06/30/18 Cash 107,000
Expense 3,000
Unrealized loss on Financial asset – FVOCI 5,000
PROBLEM 3 (Basic Journal Entries – Acquisitions in between dates of declaration and record)
ELISHA Company has the following transactions relating to its investments during 2016:
 On January 5, ELISHA acquired 16,000 shares of CHARIOT Co for P1,600,000 paying additional P10,000 for
brokerage and another P5,000 for commission.
 On February 14, ELISHA received dividends from CHARIOT Co declared January 2, 2016 to the stockholder of
record January 10, 2016, P16,000.
 On December 31, 2016 the market values per share of the CHARIOT stock is P95.
 On December 31, 2017 the market values per share of the CHARIOT stock is P120.
Required: Prepare all the necessary entries assuming the investment is
A. Financial asset designated at fair value through profit or loss
B. Fair value through other comprehensive income securities
Solution:
Financial asset designated at fair value through profit or loss
2016
01/05/16 Financial asset – FVPL 1,584,00
0
Dividend receivable/Dividend income 16,000
Brokerage fee 10,000
Commission expense 5,000
Cash 1,615,000
02/14/16 Cash 16,000

12/31/16 Unrealized loss on Financial asset – FVPL 64,000

Financial asset – FVPL 64,000
2017
12/31/17 Financial asset – FVPL 400,000
Unrealized gain on Financial asset – FVPL 400,000

Fair value through other comprehensive income securities
2016
01/05/16 Financial asset – FVOCI 1,599,00
0
Cash 1,615,000
02/14/16 Cash 16,000

12/31/16 Unrealized loss on Financial asset – FVOCI 79,000

2017
12/31/17 Financial asset – FVOCI 400,000
PROBLEM 4 Derecognition of Financial Assets-Sale of Investment
On January 1, 2017, DANIEL Corp owns 15,000 ordinary shares representing 15% of the shares outstanding of
SHADRACH Corporation. The ordinary shares were acquired on November 12, 2016 at a cost of P750,000 and have a
fair value of P800,000 on December 31, 2016. On January 2, 2017, DANIEL sold half of its investment for P50 per
share incurring a brokerage and commission expense of P10,000.
Required: Assume the following independent cases:
Case 1 Assume that the above securities are classified as fair value through profit or loss
1. Unrealized gain (or loss) on December 31, 2016 to be presented in the statement of financial position.
A. P0 B. P50,000 C. P(50,000) D. P10,000
2. Gain (or loss) on sale on January 2, 2017.
A. P0 B. P10,000 C. P(25,000) D. P(35,000)
Case 2 Assume that the above securities are classified as fair value through other comprehensive income
3. Unrealized gain (or loss) on December 31, 2016 to be presented in the statement of financial position.
A. P0 B. P50,000 C. P(50,000) D. P10,000
4. Gain or loss on sale on January 2, 2017.
A. P0 B. P10,000 C. P(25,000) D. P(35,000)
5. Prepare all the necessary entries for the years 2016 and 2017.
SOLUTION
CASE 1 Financial Asset – FVPL
Question 1
Nil, since the above securities are FVTPL unrealized gain or loss is recognized in the profit or loss.
Question 2
Nil, since no recycling to P/L should be made when accounting for equity securities.
CASE 2 Financial Asset – FVOCI
Question 3
Fair value, 12/31/2016 P 800,000
Less: Carrying amount (P800,000 x 50%) 750,000
Unrealized gain on Financial Asset – FVPL P 50,000
Question 4
Net proceeds from sale (7,500 x P50) – P10,000 P 365,000
Less: Carrying amount (P800,000 x 50%) 400,000
Loss on sale of Financial Asset – FVOCI P( 35,000)
PROBLEM 5 Trade Date and Settlement Accounting for Purchase
On December 29, 2016, MESHACH Company commits itself to purchase a financial asset to be classified as held for
trading for P900,000, its fair value on commitment (trade) date. This security has a fair value of P901,000 and
P902,000 on December 31, 2016 (MESHACH's financial year-end), and January 5, 2017 (settlement date),
respectively.
1. If MESHACH applies the trade date accounting method to account for regular-way purchases of its securities, how
much should be recognized as trading securities on December 31, 2016?
A. P902,000 B. P901,000 C. P900,000 D. P0
2. If MESHACH applies the settlement date accounting method to account for regular-way purchases of its securities,
how much should be recognized as trading securities on December 31, 2016?
A. P902,000 B. P901,000 C. P900,000 D. P0
Trade date accounting Settlement date accounting
12/29/2016
Financial asset – FVPL 900,000
No entry
Accounts payable 900,000
12/31/2016
Financial asset – FVPL 1,000 Accounts receivable 1,000
Unrealized gain - FVPL 1,000 Unrealized gain - FVPL 1,000
01/05/2017
Accounts payable 900,000 Financial asset - FVPL 902,000
Financial asset – FVPL 1,000 Cash 900,000
Cash 900,000 Accounts receivable 1,000
Unrealized gain - FVPL 1,000 Unrealized gain - FVPL 1,000
PROBLEM 6 Trade Date and Settlement Accounting for Sale

On December 29, 2016 (trade date), ABEDNEGO Corp. enters into a contract to sell an equity security classified as
Fair value through other comprehensive income for its current fair value of P606,000. The asset was acquired on
March 1, 2016 its cost was P600,000. On December 31, 2016 (financial year-end), the fair value of the asset is
P610,000. On January 5, 2017 (settlement date), the asset's fair value is P611,000.
1. If ABEDNEGO uses the trade date method to account for regular-way sales of its securities, how much is the
carrying amount of AFS at December 31, 2016?
A. P611,000 B. P610,000 C. P606,000 D. P0
2. If ABEDNEGO uses the settlement date method to account for regular-way sales of its securities, how much is the
carrying amount of equity classified as FVOCI at December 31, 2016?
A. P610,000 B. P606,000 C. P5,000 D. P0
Trade date accounting Settlement date accounting
12/29/2016
Accounts receivable 606,000 Financial asset – FVOCI 6,000
Financial asset – FVOCI 600,000 Unrealized gain - FVOCI 6,000
Gain on sale 6,000
12/31/2016
No entry No entry
01/05/2017
Cash 606,000 Cash 606,000
Accounts receivable 606,000 Financial asset – FVOCI 606,000
Unrealized gain - FVOCI 1,000
Unrealized gain – FVOCI 6,000
Realized gain 6,000
ACCOUNTING FOR DIVIDENDS AND STOCK RIGHTS

PROBLEM SOLVING
PROBLEM 7 Cash dividends
On December 1, 2017, ESAU Corp owns 15,000 ordinary shares representing 15% of the shares outstanding of Luke
Corporation. During the same date Luke declared P4 per share dividends on ordinary shares to the shareholders of
record on December 15 payable on December 31.
Required: Prepare all the necessary entries on the date of declaration, record and payment and determine
1. The dividend income to be recognized in 2017
A. P0 B. P15,000 C. P30,000 D. P60,000
SOLUTION:
a. Dividend Receivable (15,000 x P4) 60,000
Dividend income 60,000
b. No formal accounting entry
c. Cash 60,000
Dividend Receivable 60,000
PROBLEM 8 Property dividends
JACOB Company owns 15% of the outstanding ordinary shares of REBEKAH Corp. On November 1, 2016, REBEKAH
declared its inventory as property dividends. Data relating to the fair values of the inventory follow:
Date Total fair values of property dividends
November 1, 2016 P500,000
December 31, P900,000
2016
February 15, 2017 P820,000
Required: Prepare all the necessary entries on the date of declaration, record and payment and determine
A. P0 B. P75,000 C. P123,000 D. P135,000
SOLUTION:
11/01/201 Dividend Receivable (500,000 x 15%)
6 75,000
12/31/201 No journal entry

6
02/15/201 Noncash Asset

7 75,000

Dividend Receivable 75,000

PROBLEM 9 Share Dividends
On October 1, 2017, RACHEL Corp. owns 15,000 fair value through other comprehensive income shares at a cost of
P750,000. The shares represent 15% of the shares outstanding of LEAH Corporation. The fair value of the ordinary
shares amounted to P54 per share.
Assume the following independent cases, record the receipt of the share dividends on the RACHEL’s assuming:
Case 1 RACHEL received 10% ordinary shares as Share Dividends.
Case 2 RACHEL received 900 preference shares as Share Dividends. Each preference share has a fair value of P100.
SOLUTION:
1. Memo entry: Received 1,000 ordinary shares from Josiah Company.
2. Investment in Preference shares-FVTOCI 125,000

Investment in Ordinary shares-FVTOCI 125,000
Total Fair value Fraction Allocated cost
Pref. shares (900 x P100) 90,000 9/90 75,000
Ordinary shares (15,000 x P54) 810,000 81/90 675,000
Total 900,000 750,000
PROBLEM 10 Cash Received in lieu of Share dividends
On October 1, 2017, JOSEPH Corp owns 15,000 fair value through other comprehensive income shares acquired at a
cost of P172,500. The shares represent 15% of the shares outstanding of MOSES Corporation. On the same date,
MOSES Corp. declared 15% share dividends payable to stockholders on October 31. On October 31, the stock is
selling at P20 per share. However, on October 31, MOSES Corp. gave P18 per share cash in lieu of the supposed
share dividends previously declared.
Required: Prepare all the necessary entries on October 1 and 31, 2017 and determine
A. P0 B. P22,500 C. P25,875 D. P45,000
2. The gain on loss on sale of investment to be recognized in 2017
A. P0 B. P22,500 C. P25,875 D. P45,000
SOLUTION:
Net proceeds from sale (2,250 x P18) P 40,500
Less: Carrying amount [P172,500/(15,000x1.15) x 2,250] 22,500
Gain on sale on financial asset P 18,000
10/01/201 Memo entry
7
10/31/201 Cash
7 40,500
Financial asset - FVOCI 22,500
PROBLEM 11 Shares received in lieu of cash dividends
On October 1, 2017, JOSHUA Corp owns 15,000 fair value through other comprehensive income shares acquired at a
cost of P172,500. The shares represent 15% of the shares outstanding of GIDEON Corporation. On the same date,
GIDEON Corp. declared P4 cash dividends on its outstanding shares payable to stockholders on October 31. However,
on October 31, GIDEON Corp. issued 1 share for every 5 shares held by the shareholders in lieu of the supposed cash
dividends previously declared. The stocks were selling at that time at P22 per share.
Required: Prepare all the necessary entries on October 1 and 31, 2017 and determine
A. P0 B. P54,000 C. P60,000 D. P66,000
SOLUTION:
P66,000 (15,000/5 X P22)
Journal entries are:
Oct 1 Dividend Receivable (15,000 x P4) 60,000
Oct. 31 Fair value through other comprehensive income securities (15,000/5 x P22) 66,000
Dividend receivable 60,000
PROBLEM 12 Dividends out of capital
On January 2, of the current year, SAMSON Company has 10,000 shares of P100 par value ordinary shares. The
shares were acquired a year ago at a cost of P220,000. On February 14, of the current year, SAMSON Company
received 15% cash, liquidating dividends from the Investee Corporation.
1. Assuming that the Investee Corporation is a wasting asset corporation, how much is the amount loss on
liquidation to recognized in 2017?
A. P0 B. P70,000 C. P150,000 D. P220,000
2. Assuming that the Investee Corporation is a wasting asset corporation, the necessary entries will include a
A. Debit to Cash, P220,000 C. Credit to Investment, P220,000
B. Debit to Loss on liquidation, P150,000 D. Credit to Investment, P150,000
3. Assuming that the Investee Corporation is other than a wasting asset corporation, how much is the amount loss
on liquidation to recognized in 2017?
A. P0 A. P70,000 C. P150,000 D. P220,000
4. Assuming that the Investee Corporation is other than a wasting asset corporation, the necessary entries will
include a
A. Debit to Cash, P220,000 C. Credit to Investment, P220,000
B. Debit to Loss on liquidation, P150,000 D. Credit to Investment, P150,000
SOLUTION:
Wasting Asset Corporation Other than Wasting Asset
Cash (P100 x 15% x 10,000) 150,000 Cash 150,000
Investment 150,000 Loss on liquidation 70,000
Investment 220,000
PROBLEM 13 Stock splits and Special Assessment
On January 1 of the current year, DELILAH Company acquired 10,000 shares of Fair value through other
comprehensive income securities of SAMUEL Company at P200,000 plus brokerage expense of P10,000. On March 1,
of the current year, SAMUEL Company ordinary share was split on a 5-for-2 basis. On October 1, SAMUEL Company
made a special assessment of P1.60 per share on all ordinary shareholders. DELILAH Company accordingly paid the
assessment. The fair value amounted to P15 per share.
1. The total number of shares at the end of the year
A. 5,000 B. 10,000 C. 15,000 D. 25,000
2. The unrealized gain to be presented in the other comprehensive income for the current year
A. P0 B. P70,000 C. P125,000 D. P375,000
3. The necessary entries on January 1, will include a
A. Debit to Financial Asset at FVOCI, P200,000 C. Credit to Cash, P200,000
B. Debit to Financial Asset at FVOCI, P210,000 D. No journal entry
4. The necessary entries on October 1, will include a
A. Debit to Financial Asset at FVOCI, P210,000 C. Credit to Cash, P150,000
B. Debit to Financial Asset at FVOCI, P40,000 D. Credit to Unrealized gain, P25,000
SOLUTION:
Requirement 1
Date Transaction No. of shares Cost per share Total Cost
01/01 Acquisition 10,000 P21.00 P210,000
03/01 Stock split (5:2) 15,000
10/01 Special assessment 40,000
Total 25,000 P250,000
12/31 Year-end balance 25,000 P15.00 P375,000

Requirement 2
Fair value at the end of the year (15 x 25,000) P 375,000
Less: Carrying amount [210,000+(25,000 x P1.60)] 250,000
Requirement 3
Journal entries are:
01/01 Financial Asset at FVOCI 210,000
Cash 210,000
03/01 Received 5,000 shares as a result of 5 for 2 share

split
10/01 Financial Asset – FVOCI 40,000

Cash 40,000
12/31 Financial Asset – FVOCI 125,000

PROBLEM 14 Stock right

On June 15 of the current year, SAUL Company owns 10,000 shares with a cost of P700,000 of DAVID Company’s
stocks. During the same period, DAVID Company issued stock rights to existing shareholders. SAUL received 10,000
stock rights entitling him to purchase 5,000 new shares at P80. The ordinary share was trading ex-rights at P80 a
share and the rights had a market value P20 per right.
On July 15 of the current year, SAUL exercised all the stock rights. The share is quoted right-on at P90.
1. Assuming that the above securities are FVPL, the stock rights should be initially recognized at
A. P0 B. P100,000 C. P150,000 D. P200,000
2. Assuming that the above securities are FVOCI, the stock rights should be initially recognized at
A. P0 B. P100,000 C. P150,000 D. P200,000
3. Assuming that the above securities are FVPL, the cost of investment acquired through exercised of stock rights
should be
A. P100,000 B. P200,000 C. P400,000 D. P600,000
4. Assuming that the above securities are FVOCI, the cost of investment acquired through exercised of stock rights
should be
A. P100,000 B. P200,000 C. P400,000 D. P600,000

Fair value through profit and loss securities
06/15 Memo entry (Received 10,000 stock rights)
07/15 Financial asset – FVPL (P80 x 10,000/2) 400,000

Cash 400,000
Fair value through other comprehensive income

06/15 Investment in stock rights (P20 x 10,000) 200,000
Financial asset - FVOCI 200,000
07/15 Financial asset – FVOCI (P80 x

10,000/2)+200,000 600,000
Cash 400,000
Investment in stock rights 200,000
PROBLEM 15 Theoretical value of rights
On January 2, of the current year, SOLOMON Company purchased 10,000 shares of P100 par value ordinary shares at
P120 per share of NEHEMIAH Company. On March 2 of the current year, NEHEMIAH Company issued stock rights to
its shareholders. The holder needs five rights to purchase one share of common stock at par. The market value of
the stock on that date was P160 per share. There was no quoted price for the rights.
1. Compute for the theoretical value of the rights assuming, the stock is selling right-on
A. P0 B. P10 C. P12 D. 15
2. Compute for the theoretical value of the rights assuming, the stock is selling ex-right
A. P0 B. P10 C. P12 D. 15
EXCHANGE TRANSACTIONS
PROBLEM 16 Exchange of one financial asset into another Financial asset
JONAH Company owns 8,000, convertible preference shares of which was acquired in 2017 at a cost of P800,000. The
investment was classified as trading securities. On December 31, 2017, the fair value of the preference shares was
P850,000. On March 31, 2018, JONAH Company converted the 4,000 preference shares into 6,000 shares of ordinary
shares, when the market price was P100 per share for the preference shares and P80 per share for the ordinary
shares.
1. The amount of gain on exchange to be recognized in 2018
A. P0 B. P80,000 C. P120,000 D. P200,000
2. The necessary journal entry on March 31, will include a
A. Debit to Investment in Trading-Ordinary shares, P400,000
B. Credit to Investment in Trading-Pref. shares, P400,000
C. Credit Gain on exchange, P80,000
D. Debit to Investment in Trading-Ordinary shares, P480,000
SOLUTION:
Investment in Trading- Ordinary Shares (6,000 x P80) 480,000
Investment in Trading- Pref. Shares (P800,000/8,000 x
4,000) 400,000
Gain on exchange 80,000
Fair value- Ordinary Shares (6,000 x P80) 480,000

Less Carrying value- Pref. Shares (P800,000/8,000 x 4,000) 400,000
Gain on exchange 80,000
PROBLEM 17 Exchange of a property, plant and equipment for Financial asset
On January 1, 2017, ESTHER Company has a piece land acquired a year ago at a cost of P600,000. The land has a fair
value of P700,000. On March 31, 2017, ESTHER Company exchanged the land for a financial asset to be initially
recognized at fair value through other comprehensive income. At the time of exchange, the shares, which was publicly
listed, has a fair value of P820,000.
A. P0 B. P100,000 C. P120,000 D. P220,000
2. The necessary journal entry on March 31, will not include a
A. Debit to Financial Asset at FVOCI, P820,000 C. Credit Gain on exchange, P220,000
B. Credit Land, P700,000 D. Credit Land, P600,000
SOLUTION:
Fair value of the asset P 820,000
Less: Carrying amount of the land 600,000
The entry to record the transaction on the date of exchange would be
March 31 Financial asset at FVOCI 820,000
Land 600,000
Gain on exchange (820,000-
600,000) 220,000
PROBLEM 18 Exchange of a financial asset for property, plant and equipment
On January 1, 2016, GABRIEL Company has fair value through other comprehensive income securities with a fair
value of P600,000. These securities were acquired a year ago at a cost of P625,000. On March 31, 2016, GABRIEL
Company exchanged these securities for a piece of land. The carrying amount of the land was P480,000 and a zonal
value of P800,000. At the time of exchange, the shares, which was publicly listed, has a fair value of P650,000.

a. P0 b. P25,000 c. P50,000 d. P170,000

2. The necessary journal entry on March 31, will not include a
a. Debit to Financial Asset at FVOCI, P600,000 c. Credit Gain on exchange, P50,000
b. Credit Land, P650,000 d. Debit to loss on exchange, P25,000
SOLUTION:
Fair value of the financial asset P 650,000
Less: Cost of equity investments 625,000
Retained earnings P 50,000
The entry to record the transaction on the date of exchange would be
March 31 Land (at fair value of the asset given up) 650,000
Fair value through other comprehensive income 600,000
Unrealized loss (625,000-600,000) 25,000
PROBLEM 19 Reclassifications of Investments in Equity Securities
JOSEPH Company owns 8,000, convertible preference shares of which was acquired in 2016 at a cost of P800,000. On
December 31, 2016, the fair value of the preference shares was P860,000.
Case 1 Assume that the investment is to be held as trading securities also assume that on August 31, 2017, JOSEPH
Company recorded a transfer of all shares to FVTOCI when the fair value was P110. How much is the gain or loss on
reclassification to be recognized during the period?
Case 2 Assume that the investment is to be held as FVTOCI Securities also assume that on August 31, 2017, JOSEPH
Company recorded a transfer of all shares to trading securities when the fair value was P110. How much is the gain or
loss on reclassification to be recognized during the period?
Case No. 1
Not allowed. Therefore the securities remain as FVPL
Case No. 2
Not allowed. Therefore the securities remain as FVOCI
Since reclassification is not allowed, there is no reclassification gain or loss.
INVESTMENT IN ASSOCIATE
PROBLEM 1 Equity method
On January 2, 2019, Tuao Company purchased 10% of Abulug Company’s outstanding ordinary shares for
P20,000,000. Tuao is the largest single shareholder in Abulug and Tuao’s officers are majority of Abulug’s board of
directors. Abulug reported net income of P10,000,000 and paid dividend of P4,000,000. In its December 31, 2019
statement of financial position, what amount should Tuao report as investment in Abulug Company?
A. P20,000,000
B. P20,600,000
C. P21,000,000
D. P21,400,000
Allapacan Company bought 20% of Amulung Corporation’s ordinary shares on January 1, 2019 for P20,000,000.
Carrying amount of Amulung’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 2019. Goodwill,
if any, has an indefinite life.
During 2019, Amulung reported net income of P40,000,000 and paid a P15,000,000 cash dividend. What amount
should Allapacan report as investment income for 2019?
A. P7,600,000
B. P6,400,000
C. P6,200,000
D. P3,000,000
On January 1, 2018, an entity purchased 40% of the outstanding ordinary shares of another entity for P5,000,000
when the net assets of the investee amounted to P10,000,000. On this date, the carrying amounts of the identifiable
assets and liabilities of the investee were equal to fair value, except for land whose fair value was P2,000,000 greater
than carrying amount and inventory whose fair value was P1,500,000 greater than cost.
During 2018, the investee reported net income of P8,000,000 and paid cash dividend of P2,500,000. Also, the land
and one-half of the inventory were sold during 2018.
What is the carrying amount of the investment on December 31, 2018?

A. 6,100,000
B. 6,500,000
C. 7,200,000
D. 7,300,000
PROBLEM 4 Investee with preference shares
Alcala Company owns 50% of Aparri Company’s preference shares and 30% of its ordinary shares. Aparri’s shares
outstanding at December 31, 2019 includes P20,000,000 of 10% cumulative preference shares and P50,000,000 of
ordinary shares. Aparri reported net income of P10,000,000 for the year 2019. What amount should Alcala report as
investment income for the year 2019?
A. P2,400,000
B. P3,000,000
C. P3,400,000
D. P4,400,000
PROBLEM 5 Downstream and Upstream Transactions
Intor Company acquired 20% of the ordinary shares of Intee Company on January 1, 2018. At this date, all the
identifiable assets and liabilities of Intee were recorded at fair value. An analysis of the acquisition showed that
P200,000 of goodwill was acquired. Intee Company recorded a profit of P1,000,000 for 2019 and paid dividend of
P700,000 during the same year. The following transactions have occurred between the two entities.
 In December 2019, Intee sold inventory to Intor for P1,500,000. This inventory had previously cost Intee
P1,000,000 and remains unsold by Intor in December 31, 2019.
 In November 2019, Intor sold inventory to Intee at a before tax profit of P300,000. Half of this was sold by
Intee before December 31, 2019.
 In December 2018, Intee sold inventory to Intor for P1,800,000. This inventory had cost Intee P1,200,000.
At December 31, 2018, this inventory remained unsold by Intor. However, it was all sold by Intor in 2019.
Ignoring income tax, Intor company shall report a "share of profit of associate" in 2019 at
A. P200,000
B. P190,000
C. P160,000
D. P140,000
PROBLEM 6 Investee with heavy losses
On July 1, 2015, Cleopatra Corporation acquired 25% of the shares of Marcus, Inc. for P1,000,000. At that date, the
equity of Marcus was P4,000,000, with all the identifiable assets and liabilities being measured at amounts equal to
fair value. The table below shows the profits and losses made by Marcus during 2015 to 2019 :
Year Profit (Loss)
2015 P 200,000
2016 (2,000,000)
2017 (2,500,000)
2018 160,000
2019 300,000
What is the carrying amount of the investment in Marcus, Inc. as of December 31, 2019?
A. P75,000
B. P40,000
C. P15,000
D. P0
PROBLEM 7 Gain of significant influence
On January 1, 2018, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted
for under the cost method. During 2018, the investee reported net income of P4,000,000 and paid dividends of
P1,000,000.
On January 1, 2019, the entity acquired a further 15% interest in the investee for P8,500,000. On such date, the
carrying amount of the net assets of the investee was P36,000,000 and the fair value of the 10% existing interest was
P3,500,000. The fair value of the net assets of the investee is equal to carrying amount except for an equipment
whose fair value was P4,000,000 greater than carrying amount. The equipment had a remaining life of 5 years.
The investee reported net income of P8,000,000 for 2019 and paid dividend of P6,000,000 on December 31, 2019.
1. What total amount of income should be recognized in 2018?
A. 500,000
B. 400,000
C. 300,000
D. 100,000
2. What total amount of income should be recognized in 2019?
A. 2,500,000
B. 2,300,000
C. 2,000,000
D. 1,800,000
3. What is the carrying amount of the investment in associate on December 31, 2019?
A. 12,300,000
B. 12,500,000
C. 12,900,000
D. 13,800,000
PROBLEM 8 Loss of significant influence
On January 1, 2018, an entity acquired 30% of the voting share capital of another entity for P2,000,000 which was
equal to the carrying amount of interest acquired. The investee reported net income of P1,500,000 for 2018 and paid
dividend of P500,000 on December 31, 2018.
On July 1, 2019, the investor sold half of the investment for P2,000,000. The fair value of the retained investment
was P2,200,000 and P2,400,000 on July 1, 2019 and December 31, 2019, respectively.
The investee reported net income of P1,000,000 for the six months ended June 30, 2019 and P2,500,000 for the year
ended December 31, 2019 but paid dividend of P1,000,000 on October 1, 2019.
What total amount of income should be reported in 2019?
A. 2,250,000
B. 2,100,000
C. 2,050,000
D. 1,950,000
SHORT PROBLEMS
1. On December 28, 2013, Bakeks Company commits itself to purchase a financial asset to be classified as financial
assets at fair value through profit or loss for P1,000,000, its fair value on commitment (trade) date. This security
has a fair value of P1,002,000 and P1,005,000 on December 31, 2013 (Bakeks' financial year-end), and January
5, 2014 (settlement date), respectively. If Bakeks applies the settlement date accounting method to account for
regular-way purchases of its securities, how much should be recognized as unrealized gain on financial asset at
fair value through profit or loss in its 2013 income statement?
a. P0 b. P2,000 c. P3,000 d. P4,000
2. On December 28, 2013 (trade date), Charm Corp. enters into a contract to sell an equity security classified as
financial asset at fair value through other comprehensive income for its current fair value of P505,000. The asset
was acquired a year ago and its cost was P500,000. On December 31, 2013 (financial year-end), the fair value of
the asset is P506,000. On January 5, 2014 (settlement date), the asset's fair value is P507,500. If Charm uses
the trade date method to account for regular-way sales of its securities, how much should be recognized in 2013
profit or loss as gain on sale of the securities?
a. P7,500 b. P6,000 c. P5,000 d. P0
3. On December 31, 2013, Charlton acquired an investment for P500,000 plus a purchase commission of P10,000.
The investment is designated as financial asset at fair value through other comprehensive income. On December
31, 2013, quoted market price of the investment is P500,000. If the investment were sold, a commission of
P15,000 would be paid. On December 31, 2013, the investment should be carried at
a. P510,000 b. P500,000 c. P495,000 d. P485,000
4. Information about Echague Company’s portfolio securities measure at fair value through other comprehensive
income is as follows:
Aggregate cost – December 31, 2013 P9,000,000
Unrealized gains– December 31, 2013 500,000
Unrealized losses – Dec. 31, 2013 2,000,000
Net realized gains during 2013 300,000
On January 1, 2013 Echague reported an unrealized loss of P400,000 as a component of shareholders’ equity. In
its December 31, 2013 shareholders’ equity, Echague should report what amount of unrealized loss?
a. P2,000,000 b. P1,500,000 c. P1,200,000 d. P1,100,000
5. Marcus Company made the following transactions in the ordinary shares of Cato Company designated as a
financial asset at fair value through profit or loss:
 July 16, 2011 - Purchased 10,000 shares at P45 per share.
 June 28, 2012 - Sold 2,000 shares for P51 per share.
 May 18, 2013 - Sold 2,500 shares for P33 per share.
 The end-of-year market prices for the shares were as follows:
December 31, 2011 - P47 per share
How much should be recognized in 2013 profit or loss as a result of the fair value changes?
a. P77,000 b. P44,000 c. P11,000 d. P0
6. On Feb. 2, 2012, I AM DETERMINED CO. purchased 10,000 shares of CPA CO. at P56 plus broker’s commission of
P4 per share. The investment is classified as financial asset at fair value through other comprehensive income.
During 2012 and 2013, the following events occurred regarding the investment:
12/15/12 CPA CO. declares and pays a P2.20 per share dividend
12/31/12 The market price of CPA CO. stock is P52 per share at year-
end
12/01/13 CPA CO. declares and pays a dividend of P2 per share
12/31/13 The market price of CPA CO. stock is P55 per share at year-
end
The Unrealized Loss on Investment in Marketable Securities on 12/31/13 is
a. P40,000 b. P50,000 c. P60,000 d. P80,000
7. On December 31, 2011, Zenobia Co. purchased equity securities as to be classified as financial asset at fair value
through OCI. Pertinent data are as follows:
Market
Cost 12/31/12 12/31/13
C Company P 900,000 P 880,000 P780,000
P Company 1,100,000 1,120,000 1,240,000
A Company 2,000,000 1,920,000 1,720,000
On December 31, 2013, Zenobia transferred its investment in security P from financial asset at fair value through
OCI to financial asset at fair value through profit or loss. How much should be recognized as component of equity
as of December 31, 2013 related to these securities?
a. P180,000 b. P260,000 c. P300,000 d. P400,000
8. On January 2, 2012, Reynolds Corporation bought 15 percent of Scorpio Corporation's capital stock for P60,000
and classified it as financial asset at fair value through other comprehensive income. Scorpio's net incomes for
the years ended December 31, 2012 and 2013, were P20,000 and P100,000, respectively. During 2013, Scorpio
declared a dividend of P140,000. No dividends were declared in 2012. On December 31, 2013, the fair value of
the Scorpio stock owned by Reynolds had increased to P90,000. How much should Reynolds show on its 2013
income statement as income from this investment?
a. P51,000 b. P21,000 c. P15,000 d. P3,150
THEORETICAL CONCEPTS
1. Under PFRS, which of the following is not a category of financial assets?
A. Financial assets at fair value through profit or loss
B. Financial asset at fair value through other comprehensive income
C. Financial assets at amortized cost
D. Financial assets held for sale
2. All of the following financial assets shall be measured at fair value through profit or loss except
A. Financial assets held for trading
B. Financial assets designated on initial recognition as fair value through profit or loss
C. Investments in quoted equity instruments
D. Financial assets at amortized cost
3. A financial asset is held for trading(choose the incorrect one)
A. It is acquired principally for the purpose of selling or repurchasing it in the near term
B. On initial recognition, it is part of portfolio of financial assets that are managed together and for which there is
evidence of a recent actual pattern of short-term profit taking.
C. It is derivative that is not designated as an effective hedging instrument.
D. It is derivative that is designated as an effective hedging instrument.
4. Transaction costs include
A. Fees and commission paid to agent, levies by regulatory authorities, transfer taxes and duties
B. Debt premiums or discounts
C. Financing costs
D. Internal administrative costs
5. Transaction costs that are directly attributable to the acquisition of financial asset shall be
A. Capitalized as cost of the financial asset
B. Expensed when incurred
C. Charged to retained earnings
D. Included as a component of other comprehensive income.
6. If the financial asset is held for trading or the financial asset is measured at fair value through profit or loss,
transaction costs directly attributable to the acquisition shall be
A. Capitalized as cost of the financial asset
B. Expensed immediately when incurred
C. Deferred and amortized over a reasonable period
D. Included as component of other comprehensive income
7. Depending on the business model for managing financial assets, an entity shall classify financial assets
subsequent to initial recognition at
A. Fair value C. Either fair value or amortized cost
B. Amortized cost D. Neither fair value nor amortized cost
8. Under PFRS 9,A financial asset shall be measured subsequently at amortized cost when
I. The business model of the entity is to hold the financial asset in order to collect the contractual cash flows on
specified dates
II. The contractual cash flows are solely payments of principal and interest on the principal amount outstanding.
A. I only B. II only C. Neither I nor II D. Both I and II
9. Which statement is correct concerning the subsequent measurement of financial asset at fair value?
I. The financial asset shall be measured at fair value if the business model is not to collect contractual cash flows
on specified dates and the contractual cash flows are not solely payments of interest and principal.
II. An entity may designate a financial asset as measured at fair value through profit or loss even if the financial
asset satisfies the amortized cost measurement.
A. I only B. II only C. Both I and II D. Neither I nor II
10. Which statement is correct concerning recognition of unrealized gains and losses on financial assets?
I. Unrealized gains and losses on financial assets held for trading shall be included in profit or loss
II. Unrealized gains and losses on financial assets measured at amortized cost shall be included as component of
other comprehensive income
A. I only B. II only C. Both I and II D. Neither I nor II
11. Subsequent changes in fair values of a financial asset classified as fair value through profit or loss are
A. recognized in profit or loss
B. recognized in other comprehensive income
C. recognized in other comprehensive income and accumulated in equity
D. ignored
12. Subsequent changes in fair values of a financial asset classified as fair value through other comprehensive income
are recognized in
A. recognized in profit or loss
B. recognized in other comprehensive income
C. recognized in other comprehensive income and accumulated in equity
D. ignored
13. When a financial asset at fair value through other comprehensive income is derecognized, any cumulative
unrealized gains or losses is
A. recognized in profit or loss as a reclassification adjustment
B. recognized in profit or loss as an adjustment to the realized gain or loss on the derecognition
C. transferred directly in equity
D. any of these as an accounting policy choice
14. It is the date on which the stock and transfer book of the corporation is closed for registration. Only those
stockholders registered as of this date are entitled to receive dividends.
A. date of declaration B. date of payment C. date of record D. date of mailing the dividend check
15. Cash dividends are recognized as income on the
A. date of balance sheet B. date of declaration C. date of record D. date of issuing statements
16. Property dividends are recorded as
A. Dividend income at market value of the property
B. Dividend income at cost of the property
C. Return of investment and therefore credited to investment account
D. Memorandum only
17. Liquidating dividends are credited to
A. investment account B. retained earnings C. common stock D. additional paid in capital
18. What is the effect of stock dividend of the same class?
A. increase in investment account and increase in cost per share
B. Decrease in investment account and decrease in cost per share
C. No effect on investment account but decrease in cost per share
D. No effect on investment account but increase in cost per share
19. When stock dividends of different class are received
A. No formal entry is made but only a memorandum.
B. Cash is debited and dividend income is credited.
C. A new investment account is debited and dividend income is credited.
D. A new investment account is debited and the original investment account is credited.
20. Shares received in lieu of cash dividend are recorded as
A. Income at book value of the shares received.
B. Income at market value of the shares received.
C. Income at the cash dividend that would have been received.
D. Stock dividends.
21. Cash received in lieu of stock dividends is accounted for as
A. dividend income
B. return of investment
C. partly dividend income and partly return of investment.
D. If the stock dividends are received and subsequently sold and gain or loss is recognized.
22. What is the effect of split up?
A. increase in number of shares and decrease in cost per share.
B. Decrease in number of shares and decrease in cost per share.
C. Increase in number of shares and increase in cost per share.
D. Decrease in number of shares and increase in cost per share.
23. When stock rights are exercised, the cost of the new fair value through other comprehensive securities includes
A. subscription price
B. subscription price plus the cost of rights exercised.
C. Par value of the new shares acquired plus the cost of rights exercised.
D. Par value of new shares acquired.
24. When stock rights are not exercised but expired, the allocated cost of the stock rights is
A. treated as loss C. reverted to the original investment account
B. deferred and amortized D. charged to retained earnings
END OF HANDOUTS

01 Investment in Equity Securities - V2 With Answers

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Financial Accounting and Reporting: FINANCIAL INSTRUMENTS AND INVESTMENT IN EQUITY SECURITIES

EXAMPLE OF FINANCIAL ASSETS EXAMPLE OF NONFINANCIAL ASSETS

EXAMPLE OF FINANCIAL LIABILITIES EXAMPLE OF NONFINANCIAL LIABILITIES

FAR by Raymund Francis A. Escala, MBA, CPA Page 1 of 17

FAR by Raymund Francis A. Escala, MBA, CPA Page 2 of 17

Commission expense 15,000

12/31/16 Trading securities 20,000

FAR by Raymund Francis A. Escala, MBA, CPA Page 3 of 17

12/31/17 Unrealized loss on trading securities 7,500

Fair value through other comprehensive income securities

12/31/16 Financial asset 5,000

12/31/17 Unrealized loss on Financial asset – FVOCI 7,500

02/14/16 Cash 16,000

12/31/16 Unrealized loss on Financial asset – FVPL 64,000

FAR by Raymund Francis A. Escala, MBA, CPA Page 4 of 17

02/14/16 Cash 16,000

12/31/16 Unrealized loss on Financial asset – FVOCI 79,000

PROBLEM 6 Trade Date and Settlement Accounting for Sale

ACCOUNTING FOR DIVIDENDS AND STOCK RIGHTS

12/31/201 No journal entry

02/15/201 Noncash Asset

FAR by Raymund Francis A. Escala, MBA, CPA Page 6 of 17

FAR by Raymund Francis A. Escala, MBA, CPA Page 7 of 17

2. Investment in Preference shares-FVTOCI 125,000

12/31 Year-end balance 25,000 P15.00 P375,000

03/01 Received 5,000 shares as a result of 5 for 2 share

10/01 Financial Asset – FVOCI 40,000

12/31 Financial Asset – FVOCI 125,000

PROBLEM 14 Stock right

FAR by Raymund Francis A. Escala, MBA, CPA Page 10 of 17

07/15 Financial asset – FVPL (P80 x 10,000/2) 400,000

Fair value through other comprehensive income

07/15 Financial asset – FVOCI (P80 x

Fair value- Ordinary Shares (6,000 x P80) 480,000

FAR by Raymund Francis A. Escala, MBA, CPA Page 11 of 17

FAR by Raymund Francis A. Escala, MBA, CPA Page 12 of 17

What is the carrying amount of the investment on December 31, 2018?

FAR by Raymund Francis A. Escala, MBA, CPA Page 17 of 17

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