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Chapter 7 – Investments in Equity Securities and Debt Securities CHAPTER 7 INVESTMENTS IN EQUITY SECURITIES AND DEBT SECURITIES PROBLEMS 7-1.
(Victoria Corporation) Year 1 (a) Equity Investments –FVPL Other Expenses Cash (b)
Equity Investments – FVPL Unrealized Gains on Equity Investments – Profit or Loss
150,000 3,750
153,750
30,000 30,000
Year 2 (a)
(b)
7-2.
Gain on Sale of Equity Investments – FVPL Equity Investments – FVPL
Equity Investments – FVPL Unrealized Gains on Equity Investments – Profit or Loss
(Victory Company) Year 1 (a) Equity Investments at FV through OCI Cash (b)
Year 2
(a)
(b)
7-3.
Cash
94,000 4,000 90,000 6,000 6,000
153,750 153,750
Equity Investments at FV through OCI Unrealized Gains and Losses on Equity Investments - OCI
26,250
Equity Investments at FV through OCI Unrealized Gains and Losses on Equity Investments - OCI
10,000
Cash Loss on Sale of Equity Investments Equity Investments at FV through OCI
94,000 1,000
Equity Investments at FV through OCI Unrealized Gains and Losses on Equity Investments - OCI
(A Company) a. Cash
26,250
10,000
95,000 1,000 1,000
18,000 Dividend Revenue 2,400 shares x 7.50
57
18,000
Chapter 7 – Investments in Equity Securities and Debt Securities
7-4.
b.
Memo entry. Received additional 600 shares of B Corp. ordinary shares as bonus issue on 2,400 shares previously held.
c.
Equity Investments - A Preference Dividend Revenue 600 x 250 =
150,000
150,000
150,000
d.
Memo entry. Received additional shares of B Corp. ordinary shares on a 4-for-1 stock split of the 2,400 shares previously held. Total shares now held: 9,600.
e.
Equity Investments - C Ordinary Dividend Revenue 2,400/6 = 400 shares x 50
20,000
(Inn Corporation) (a) December 31, Year 2 ledger balance (30,000 shares x 65)
20,000
P1,950,000
Year 3 Memo: Received 6,000 shares of NPA Co. ordinary as 20% bonus issue on the 30,000 shares previously held. Cash (15,000 x 70) 1,050,000 Equity Investments – FVPL Gain on Sale of Equity Investments 1,950,000 x 15,000/36,000 = 812,500 Equity Investments – FVPL 374,500 Unrealized Gain on Equity Investments at FVPL 21,000 x 72 1,512,000 1,950,000 – 812,500 1,137,500 Unrealized gain 374,500
7-5.
(b)
Gain on sale Unrealized gain on equity investments at FVPL Total amount reported in profit or loss
(c)
Equity Investments at Fair Value
812,500 237,500
374,500
P237,500 374,500 P612,000 P1,512,000
(Inna Corporation) (a) December 31, Year 2 ledger balance (30,000 x P65) Cost Unrealized Gain or Loss on Equity Investments - OCI
P1,950,000 1,800,000 P 150,000
Year 3 Memo: Received 6,000 shares of NPA Co. ordinary as 20% bonus issue on the 30,000 shares previously held. Equity Investments at Fair Value through OCI Unrealized Gain or Loss on Equity Investments – OCI
58
570,000 570,000
Chapter 7 – Investments in Equity Securities and Debt Securities 36,000 sh x 70 12/31/Y2 FV Unrealized gain
2,520,000 1,950,000 470,000
Cash (15,000 x 70) Equity Investments at FV through OCI
1,050,000 1,050,000
Unrealized Gain or Loss on Equity Investments – OCI 300,000 Retained Earnings (150,000 + 570,000) x 15,000/36,000
7-6.
(b)
Equity Investments at FV through OCI Unrealized Gain on Equity Investments at FV through OCI 21,000 x (72 - 70) None
(c)
Equity Investments at Fair Value through OCI
P1,512,000
(d)
Unrealized Gain or Loss in Equity , 12/31 Year 3 (150,000 + 570,000 – 300,000 + 42,000)
P 462,000
Fair value, December 31, Year 3 Cost (1,800,000 x 21,000/36,000) Unrealized Gain (Loss) in Equity
P1,512,000 1,050,000 P 462,000
42,000 42,000
(Gypsy Corporation) (a)
Sales price (5,000 x 54) CV at date of sale Gain on sale of Dizon shares
P270,000 250,000 P 20,000
(b)
Cumulative balance of Unrealized Gains and Losses (in equity) - see below
P 35,000
Monterey Preference Garcia Ordinary Barney Corporation
7-7.
300,000
# of shares 3,500 1,000 3,000
Cost P133,000 180,000 177,000 P490,000
FV, 12/31/ Year 3 P135,000 190,000 200,000 P525,000
(Melody Corporation) (a) Unrealized Gains or Losses on Equity Investments through OCI Fair value (1,250 x 85) Cost Unrealized Loss, end of Year 1 Total FV, Dec. 31, Year 2 (2,000 x 90) Total cost (110,000 + 60,000) Cumulative balance, end of Year 2
59
Unrealized Gain (Loss) P 2,000 10,000 23,000 P35,000
P106,250 110,000 P 3,750 P180,000 170,000 P 10,000
Chapter 7 – Investments in Equity Securities and Debt Securities (b)
Amount taken to OCI Fair value (1,250 x 85) Cost Unrealized Loss for Year 1
P106,250 110,000 P 3,750
Fair value (2,000 x 90) Carrying value/Cost (106,250+60,000) Unrealized gain for Year 2 (c)
P180,000 166,250 P 13,750
Memo: Received 2,000 stock rights from Music, Inc. for the purchase of one share for every five rights submitted at P80 per share. Equity Investments at FV through OCI Cash Investment Income 300 x 100 = 30,000 300 x 80 = 24,000 Cash
30,000
2,250
Investment Income 500 x 4.50
Equity Investments at FV through OCI 15,400 Unrealized Gains and Losses on Equity Investments – OCI 2,300 x 98 = 225,400 225,400 – (180,000 + 30,000)=15,400 7-8.
(Anti Corporation) (a) Cash Investment Income 10,000 x 5 (b)
50,000
Equity Investments at FVPL (2,000 x 75) Cash (2,000 x 50) Investment Income Equity Investments at FVPL Unrealized Gain on Equity Investments – Profit or Loss Market value (12,000 shares x 78) Carrying value before this adjustment (660,000 + 150,000) Unrealized gain
7-9.
150,000
2,250
15,400
50,000
100,000 50,000
90,000 90,000 936,000 810,000 126,000
(Tolits Corporation) (a) Year 2 a. Equity Investments at FV through OCI–Diana Ordinary
60
24,000 6,000
54,000
Chapter 7 – Investments in Equity Securities and Debt Securities Cash
54,000
b.
Memorandum entry. Received 500 additional shares of Diana ordinary shares as a result of 2for-1 split.
c.
Equity Investments at FV through OCI – Smith Preference Cash (1,000 x 120) + 1,200
d.
Equity Investments at FV through OCI - Diana Ordinary Unrealized Gains and Losses on Equity Investments at FV - OCI 15,000/250 = 60; 54,000/1,000 = 54 (60 – 54) x 1,000 shares = 6,000 Cash Equity Investments at FV through OCI – Diana Ordinary (60,000 / 1,000) x 250 shares
e.
Memorandum entry. Received 750 stock rights from Diana for the purchase of one share for every two rights submitted at P55 per share.
f.
Equity Investments at FV through OCI – Diana Ordinary Cash Investment Income 60% x 750 = 450; 450/2 = 225 shares 225 x 61 = 13,725; 225 x 55 = 12,375 225 x (61 – 55) = 1,350 Cash Investment Income 750 – 450 = 300; 300 x 3 = 900
g.
Equity Investments at FV through OCI – Diana Ordinary Unrealized Gains and Losses on Equity Investments at FV - OCI 225 x (64 – 61) = 675 Cash (100 x 64) Equity Investments at FV through OCI – Diana Ordinary
61
121,200 121,200
6,000 6,000
15,000 15,000
13,725
12,375 1,350
900 900
675 675
6,400 6,400
Chapter 7 – Investments in Equity Securities and Debt Securities h.
Cash (1,000 x 100 x 8%) Dividend Revenue
8,000
i.
Unrealized Gains and Losses on Equity Investments - OCI Equity Investments at FV through OCI – Diana ordinary Equity Investments at FV through OCI - Smith
Diana 1 (875 sh) Smith (1,000 x 115) Total
Market CV 54,250 53,000* 115,000 121,200 169,250 174,200
*Original Diana shares 500 shares at P108 2-for-1 split 500 shares 1,000 shares at P54 Adjust prior to sale Balance 1,000 shares at P60 Sale (250 shares Balance 750 shares at P60 Exercise of rights 225 shares at P61 Adjust prior to sale Sale (100 shares at P64 Balance 875 shares (b)
7-10.
Investment income (1,350 + 900) Dividends revenue Total income
8,000
4,950 1,250
6,200
Unreal 1,250 (6,200) (4,950 P54,000 -____ P54,000 6,000 P60,000 15,000) P45,000 13,725 675 6,400) P53,000 P 2,250 8,000 P10,250
(Carlo Company) Year 2
Apr. 1
May 15
July 10
Cash (5,000 x 25) Loss on Sale of Equity Investments Equity Investments at FVPL – Avi Ordinary Equity Investments at FV through OCI – Ghio Preference Cash (600 x 50) + 550 Memorandum entry. Received 4,000 additional shares of Darrel ordinary representing a 20% bonus issue. Shares now held are 24,000.
Nov. 30
Cash (1 x 24,000) Dividend Revenue
Dec. 31
Unrealized Loss on Equity Investments – Profit or Loss Equity Investments at FVPL – Avi Ordinary 5,000 x 26 = 130,000; 130,000 – 139,000
31
125,000 14,000 139,000
30,550
24,000
Equity Investments at FV through OCI - Darrel Equity Investments at FV through OCI - Ghio
62
30,550
24,000
9,000 9,000
110,000 650
Chapter 7 – Investments in Equity Securities and Debt Securities Unrealized Gains and Losses on Equity Investments - OCI FV Darrel 480,000 Ghio 31,200 Total 511,200 7-11.
(b)
2,000,000
Investment in Associates Share in Profit of Associates 20% x 1,500,000
300,000
Memo. Received 2,000 additional shares of Atlanta ordinary as 10% bonus issue. Shares now held are 22,000.
4.
Investment in Associates Share in Profit of Associates 20% x 3,000,000
600,000
Cash Investment in Associates 20% x 1,000,000
200,000
600,000
200,000
Investment cost Share in profit – 2012 Share in profit – 2013 Share in dividends Carrying amount, December 31, 2013
(Byron, Inc.) 2013 Jan. 1 Investment in Associates – Pirates Ordinary Cash Dec. 31
Investment in Associates – Pirates Ordinary Share in Profit of Associates 30% x 3,600,000
Dec. 31
Cash (30% x 400,000) Investment in Associates – Pirates Ordinary
2,000,000
300,000
3.
5.
7-13.
Change in FV 110,000 650 110,650
(Hostel Company) (a) 1. Investment in Associates Cash 2.
7-12.
CV 370,000 30,550 400,550
110,650
P2,000,000 300,000 600,000 (200,000) P2,700,000
5,160,000 5,160,000 1,080,000
1,080,000
120,000 120,000
(Barbie, Inc.) (a) 2012
Mar. 1
Investment in Associates – Kitchie Cash
63
1,365,000 1,365,000
Chapter 7 – Investments in Equity Securities and Debt Securities Dec. 31
31
31
(b)
7-14.
Cash (30% x 800,000) Investment in Associates – Kitchie
240,000
Investment in Associates – Kitchie Share in Profit of Associates (1.2M x 10/12) x 30%
300,000
Share in Profit of Associates – Kitchie Investment in Associates – Kitchie Amortization of undervaluation of assets (30% x 750,000) / 5 yrs. = 45,000 45,000 x 10/12 = 37,500 50,000 x 30% = 15,000 37,500 + 15,000 = 52,500
240,000
300,000
52,500 52,500
Acquisition cost, March 1, 2013 Cash dividends received Share in reported profit of associate Adjustment in reported profit Investment carrying value, December 31, 2013
P1,365,000 ( 240,000) 300,000 ( 52,500) P1,372,500
Income reported by Barbie from its investment in associates: (300,000 – 52,500)
P 247,500
(Richmonde Corporation) (a) Year 1
Jan. 1
Equity Investments at FV through OCI – Pen Cash
900,000
Dec. 31
Cash Dividend Revenue 10% x 2,000,000
200,000
Equity Investments at FV through OCI – Pen Unrealized Gains and Losses on Equity Investments - OCI
480,000
31
900,000
200,000
480,000
Year 2
Jan. 1
Investment in Associates – Pen, Inc. (at FV) Equity Investments at FV through OCI – Pen Unrealized Gains and Losses on Equity Investments at FV - OCI Retained Earnings
1
Dec. 31
31
1,380,000 1,380,000
480,000 480,000
Investment in Associates – Pen, Inc. Cash
2,600,000
Investment in Associates – Pen, Inc. Share in Profit of Associates (30% x 6,500,000)
1,950,000
Cash
1,950,000 900,000
64
2,600,000
Chapter 7 – Investments in Equity Securities and Debt Securities Investment in Associates (30% x 3,000,000) (b)
7-15.
900,000
Cost transferred from Equity Investments at FV Additional investment Share in profit Cash dividends received Carrying amount, December 31, Year 2
1,380,000 2,600,000 1,950,000 (900,000) 5,030,000
(E Corporation) (a) Year 1
Jan.
1
Aug. 1
Dec. 31
Year 2
Dec. 31
31
Year 3
Jan. 2
2
Dec. 31
31
Investment in Associates – F Company Cash (50,000 x 165)
8,250,000
Cash Investment in Associates – F Company
210,000
Investment in Associates – F Company Share in Profit of Associates 25% x 680,000
170,000
Cash Investment in Associates – F Company
240,000
Investment in Associates – F Company Share in Profit of Associates – F Company 25% x 1,000,000
250,000
210,000
170,000
240,000
Cash (20,000 x 175) Investment in Associates – F Company Gain on Sale of Investment in Associates Acquisition cost 8,250,000 Share in profit (Year1) 170,000 Cash dividends received (Year1) (210,000) Cash dividends received (Year2) (240,000) Share in profit (Year 2) 250,000 Investment carrying amount 8,220,000 Portion sold 20/50 CV of investment sold 3,288,000
3,500,000
Equity Investments at FV through OCI Investment in Associates – F Company Investment Income 30,000 x 175 = 5,250,000 8,220,000 – 3,288,000 = 4,932,000 5,250,000 – 4,932,000 = 318,000
5,250,000
250,000
3,288,000 212,000
4,932,000 318,000
Cash Dividend Revenue
120,000
Equity Investments at FV through OCI Unrealized Gains and Losses on Equity Investments - OCI
450,000
65
8,250,000
120,000
450,000
Chapter 7 – Investments in Equity Securities and Debt Securities 30,000 x (190 - 175) = (b).
Cost/Carrying Value, beg of year Income from associates Cash dividends received Sale of shares Carrying value, end of year Market value 30,000 x 190
Year 1 Year 2 P8,250,000 P8,210,000 170,000 250,000 (210,000 (240,000) P8,210,000
Year 3
P8,220,000 P5,700,000
7-16. 1. 2. 3. 4. 5. 6. 7-17.
A and B A B and C A and B C C
(Abu Company) (a) Date 01/01/Year 1 12/31/Year 1 12/31/Year 2 12/31/Year 3 12/31/Year 4 12/31/Year 5 *rounded off. (b) Year 1 Jan. 1
Dec. 31
Year 2 Dec. 31
7-18.
7. 8. 9. 10. 11.
B A, B, and C C B A
Interest Received
Interest Revenue
Amortization
1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
1,158,450 1,152,633 1,146,002 1,138,442 1,129,827*
41,550 47,367 53,998 61,558 70,173*
Debt Investments at Amortized Cost Cash
8,274,646
Cash Debt Investments at Amortized Cost Interest Revenue
1,200,000
Cash Debt Investments at Amortized Cost Interest Revenue
1,200,000
Carrying Value 8,274,646 8,233,096 8,185,729 8,131,731 8,070,173 8,000,000
8,274,646
41,550 1,158,450
47,367 1,152,633
(South Company) (a) (1) Securities are classified as at fair value through profit and loss. Year 1
June 1
Dec. 1
Debt Investments at FVPL Cash
3,691,500 3,691,500
Cash
160,000
66
Chapter 7 – Investments in Equity Securities and Debt Securities Interest Revenue (4M x 8% x ½) Dec.31
31
Interest Receivable Interest Revenue (4M x 8% x 1/12) Debt Investments at FVPL Unrealized Gain on Debt Investments at FVPL 4M x 0.97 = 3,880,000 3,880,000 – 3,691,500 = 188,500
160,000 26,667
26,667
188,500 188,500
Year 2
Jan. 1
Interest Receivable Interest Revenue
26,667
June 1
Cash Interest Revenue
160,000
Dec. 1
Cash Interest Revenue
160,000
31
Interest Receivable Interest Revenue
26,667
Debt Investments at FVPL Unrealized Gain on Debt Investments at FVPL 4M x 0.99 = 3,960,000 3,960,000 – 3,880,000 = 80,000
80,000
Dec. 31
26,667
160,000
160,000
26,667
80,000
(2) Securities are classified as at amortized cost To facilitate computation, a partial amortization table is presented below. Interest Interest Revenue Amortization Date Received of Discount Amortized Cost June 1, Year 1 3,691,500 Dec 1, Year 1 160,000 184,575 24,575 3,716,075 June 1, Year 2 160,000 185,804 25,804 3,741,879 Dec. 1, Year 2 160,000 187,094 27,094 3,768,973 June 1, Year 3 160,000 188,449 28,449 3,797,422 Dec. 1, Year 3 160,000 189,871 29,871 3,827,293 June 1, Year 4 160,000 191,365 31,365 3,858,658 Dec. 1, Year 4 160,000 192,933 32,933 3,891,591 Year 1
June 1
Debt Investments at Amortized Cost Cash
Dec. 1
Cash Debt Investments at Amortized Cost Interest Revenue (see above table)
31
Interest Receivable Debt Investments at Amortized Cost Interest Revenue 160,000 x 1/6 = 26,667
67
3,691,500
3,691,500
160,000 24,575 184,575 26,667 4,301
30,968
Chapter 7 – Investments in Equity Securities and Debt Securities 25,804 x 1/6 = 4,301
Year 2
Jan. 1
June 1
Dec. 1
31
Interest Revenue Interest Receivable Debt Investments at Amortized Cost
30,968 26,667 4,301
Cash Debt Investments at Amortized Cost Interest Revenue (see above table)
160,000 25,804
Cash Debt Investments at Amortized Cost Interest Revenue (see above table)
160,000 27,094
Interest Receivable Debt Investments at Amortized Cost Interest Revenue 160,000 x 1/6 = 26,667 28,449 x 1/6= 4,742
185,804
187,094
26,667 4,742 31,409
(b) Journal entry/entries to record sale of investment on November 1, Year 4. (1) Securities are classified as at fair value through profit and loss. Year 4
Nov. 1
Cash Loss on Sale of Debt Investments at FVPL Interest Revenue Debt Investments at FVPL Acc. Int. = 4M x 8% x 5/12 = 133,333 Sales price (3,925,000–133,333) 3,791,667 Carrying value (4 M x 0.98) 3,920,000 Loss on sale 128,333 (2) Securities are classified as at amortized cost
3,925,000 128,333 133,333 3,920,000
Year 4
Nov. 1
1
7-19.
Debt Investments at Amortized Cost Interest Receivable Interest Revenue 192,933 x 5/6 32,933 x 5/6 = 27,444 Cash Loss on Sale of Debt Investments at Amortized Cost Interest Receivable Debt Investments at Amortized Cost CV of Debt Investments sold: As of June 1, Year 4 3,858,658 Amortization June 1 to Nov. 1, Year 4 27,444 As of Nov. 1, Year 4 3,886,102 Sales price 3,791,667 Loss on sale 94,435
(Grow Company)
68
27,444 133,333
160,777
3,925,000 94,435
133,333 3,886,102
Chapter 7 – Investments in Equity Securities and Debt Securities (1)
Classified as Debt Investments at FV through Profit or Loss (a) Interest income (1,000,000 x 12%) P 120,000 (b) Sales price (600,000 x 1.01) P 606,000 Carrying value, 12/31/Year 2 (600,000 x 1.06) 636,000 Loss on sale P 30,000 (c) Carrying value, 12/31/Year 2 (FV) (1,000,000 x 1.06) P1,060,000 Carrying value, 12/31/Year 3 (400,000 x 1.04) P 416,000
(2)
Classified as at Amortized Cost
Date 1/1/Year 1 12/31/Year 1 12/31/Year 2 12/31/Year 3 (a) (b)
(c)
(d)
7-20.
Nom Int
Amortization Table Effect Int Prem Amort
120,000 120,000 120,000
106,339 104,973 103,471
13,661 15,027 16,529
Amortized cost, end 1,063,394 1,049,733 1,034,706 1,018,177
Carrying value, 12/31/Year 2 (see table) P1,034,706 Sales price P 606,000 Carrying value, 1/1/Year 3 (1,034,706 x 6/10 P620,824 Amortization 1/1/Year 3 – 4/1/Year 3 16,529 x 3/12 x 600/1000 (2,479) 618,345 Loss on sale P 12,345 Interest income for Year 3: Jan 1 to Mar 31 103,471 x 3/12 P 25,868 Apr 1 to Dec 31 103,471 x 400/1000 x 9/12 31,041 Total interest income for Year 3 P 56,909 Carrying value, 12/31/Year 3 1,018,177 x 400/1000 P 407,271
(Powerpuff Company) Feb. 1
Equity Investments - FVPL – Blossom Ordinary Cash
April 1
Debt Investments – FVPL – Peach Co. Bonds Cash
July 1
Debt Investments – FVPL – Buttercup Bonds Interest Receivable (150,000 x 12% x 4/12) Cash
Oct. 1
Dec. 31
374,000 374,000 1,010,000
150,000 6,000
Cash Interest Income (1,000,000 x 10% x 6/12)
50,000
Interest Receivable Interest Income 1M x 10% x 3/12 = 25,000 150,000 x 12% x 6/12 = 9,000 25,000 + 9,000 = 34,000
34,000
69
1,010,000
156,000
50,000
34,000
Chapter 7 – Investments in Equity Securities and Debt Securities 31
Unrealized Loss on Investments at FVPL Equity Investments – FVPL - Blossom Ordinary Debt Investments – FVPL - Buttercup Bonds Debt Investments – FVPL - Peach Bonds Cost 374,000 1,010,000 150,000 1,534,000
Blossom Ordinary Peach 10% Bonds Buttercup 12% Bonds
7-21.
11,000 6,000 3,000
Fair value 380,000 990,000 153,000 1,523,000
20,000 UGL 6,000 (20,000) 3,000 (11,000)
(Narito Company)
Jan. Dec. Dec. Dec. Dec. Dec.
Date 1, Year 1 31, Year 1 31, Year 2 31, Year 3 31, Year 4 31, Year 5
Nominal Interest 7,000 7,000 7,000 7,000 7,000
Amortization Table Effective Interest 5,433 5,355 5,272 5,186 5,094
Amortization 1,567 1,645 1,728 1,814 1,906
Amortized Cost, End 108,660 107,093 105,448 103,720 101,906 100,000
Year 1
Jan. 1
Debt Investments at Amortized Cost – Wolf Bonds Cash
108,660
Dec. 31
Cash Debt Investments at Amortized Cost – Wolf Bonds Interest Income
7,000
Cash Debt Investments at Amortized Cost – Wolf Bonds Interest Income
7,000
Cash Debt Investments at Amortized Cost – Wolf Bonds Interest Income
7,000
Impairment Loss on Debt Investments Debt Investments at Amortized Cost – Wolf Bonds Carrying value, Dec. 31, Year 3 P103,720 Present value of future cash inflows 100,000 x 0.9070 90,700 4,500 x 1.8594 8,367 99,067 Impairment Loss P 4,653
4,653
Cash Debt Investments at Amortized Cost – Wolf Bonds Interest Income
4,500 453
108,660
1,567 5,433
Year 2
Dec. 31
1,645 5,355
Year 3
Dec. 31
1,728 5,272
4,653
Year 4
Dec. 31
70
4,953
Chapter 7 – Investments in Equity Securities and Debt Securities Year 5
Dec. 31
Cash Debt Investments at Amortized Cost – Wolf Bonds Interest Income
B and C A B and C A B and C
4,980
Revised Amortization Table Nominal Effective Discount Interest Interest Amortization
Date Dec. 31, Year 3 Dec. 31, Year 4 Dec. 31, Year 5 7-22. 1. 2. 3. 4. 5.
4,500 480
4,500 4,500
6. 7. 8. 9. 10.
4,953 4,980*
A A A C B and C
453 480*
11. 12. 13. 14. 15.
Amortized Cost, End 99,067 99,520 100,000
B B and C A A C
7-23. Raffy Company) To facilitate computation, a partial amortization table is presented below. Interest Interest Revenue Amortization HTM Date Received of Discount Carrying Value June 1, 2010 5,353,150 Dec. 31, 2010 350,000 312,267 37,733 5,315,417 Dec. 31, 2011 600,000 531,542 68,458 5,246,959 Dec. 31, 2012 600,000 524,696 75,304 5,171,655 Dec. 31, 2013 600,000 517,166 82,834 5,088,821 2010
June 1
Dec. 31
2011 Dec. 31
2012 Dec. 31
2013 Sept. 1
1
Held to Maturity Securities – Blessie Corp. Bonds Interest Revenue (5M x 12% x 5/12) Cash
5,353,150 250,000
Cash Interest Revenue Held to Maturity Securities – Blessie
600,000
Cash Interest Revenue Held to Maturity Securities – Blessie
600,000
Cash Interest Revenue Held to Maturity Securities – Blessie
600,000
Interest Receivable (3M x 12% x 8/12) Held to Maturity Securities – Blessie Interest Revenue (517,166 x 3/5 x 8/12)
240,000
Cash (3,090,000 + 240,000) Gain on sale of HTM Securities
71
5,603,150
562,267 37,733
531,542 68,458
524,696 75,304
33,134 206,866 3,330,000 20,141
Chapter 7 – Investments in Equity Securities and Debt Securities Interest Receivable Held to Maturity Securities – Blessie
240,000 3,069,859
CV of HTM securities sold: As of 12/31/11 (5,171,655 x 3/5) Amort from 1/1/12-9/1/12 CV as of 9/1/12 Sales price Gain on sale Sept. 1
Available for Sale Securities – Blessie Held to Maturity Securities 5,171,655 – 3,102,993 = 2,068,662
2,068,662
Dec. 31
Cash Interest Revenue Available for Sale Securities – Blessie 2M x 12% = 240,000 5,171,655 – 3,102,993 = 2,068,662 2,068,662 x 10% = 206,866 240,000 – 206,866 = 33,134
240,000
Dec 31
7-24.
2,068,662
206,866 33,134
Market Adjustment – AFS Unrealized Gain or Loss on AFS Amortized cost 2,068,662 – 33,134 = P2,035,528* Market value 2M x 103.5% 2,070,000 Market Adjustment P 34,472 *or 5,088,821 x 2/5 = P2,035,528
34,472
34,472
(Grow Company) Date 1/1/Year 1 12/31/Year 12/31/Year 12/31/Year (a)
(b) (c)
7-25.
3,102,993 33,134 3,069,859 3,090,000 20,141
Nom Int
1 120,000 106,339 13,661 2 120,000 104,973 15,027 3 120,000 103,471 16,529 Market value, 12/31/ Year 2 (1.06 x 1M) Amortized cost, 12/31/Year 2 Unrealized Gain or Loss (In Equity) Interest income for Year 2 Market value, 12/31/Year 3 (1.04 x 400,000) Amortized cost (1,018,177 x 4/10) Unrealized Gain on 12/31/Year 3
(Naruto Company)
Jan. Dec. Dec. Dec.
Date 1, 2010 31, 2010 31, 2011 31, 2012
Amortization Table Effect Int Prem Amort
Nominal Interest 7,000 7,000 7,000
Amortization Table Effective Interest
5,433 5,355 5,272
72
Amortization 1,567 1,645 1,728
Amortized cost, end 1,063,394 1,049,733 1,034,706 1,018,177 P1,060,000 1,034,706 P 25,394 P 104,973 P 416,000 407,271 P 8,729
Amortized Cost, End 108,660 107,093 105,448 103,720
Chapter 7 – Investments in Equity Securities and Debt Securities
Dec. 31, 2013 Dec. 31, 2014 (a) (b) (c)
(d) Theory MC1 MC2 MC3 MC4 MC5
B B C A C
Problems MC18 MC19 MC20 MC21
B B C D
MC22 MC23 MC24 MC25 MC26 MC27 MC28 MC29 MC30 MC31
A C D C B B B A B A
MC32 MC33
A B
MC34 MC35 MC36
A C B
MC37 MC38 MC39 MC40
C B B A
MC41 MC42
C C
7,000 7,000
5,186 5,094
1,814 1,906
101,906 100,000
Interest income for 2010 P 5,433 Carrying amount at December 31, 2011 (amortized cost) P105,448 After the sale, the investment shall be reclassified as AFS, applying tainting rule in IAS 39. Fair value of remaining 105,650 x 40/100 P42,260 Amortized cost of remaining 103,720 x 40/100 41,488 Unrealized gain in equity, December 31, 2011 P 772 Interest income for 2013 5,186 x 40/100 P 2,074 MULTIPLE CHOICE QUESTIONS MC6 MC7 MC8 MC9 MC10
D B A A B
MC11 MC12 MC13 MC14 MC15
B C A C C
MC16 MC17
B D
535,000 – 525,000 = 10,000 2,000,000 – 1,750,000 = 250,000 loss 2,100,000 – (2,000,000 + 50,000) = 50,000 FV 12/31/ Year 2 (600 x 440) + (2,000 x 138) = 540,000 FV 12/31/Year 1 = 270,000 + 280,600 = 550,600 Change in FV = 540,000 – 550,600 = 10,600 decrease or debit 1,000 x 150) + 2,250 = 152,250; 152,250 – (1,000 x 10) = 142,250 10,000 x 150 = 1,500,000; 1,500,000 + (20% x 3M) – (10,000 x 50) = 1,600,000 960-500 = 460; 460 + 600 = 1,060; 1,060/10 = 106 shares (500 x 20) – 500 = 9,500; 106 x (620 – 450) = 18,020; 9,500 + 18,020 = 27,520 88 ÷ 1.10 = 80 1,200,000 – (3 x 40,000) + (25% x 640,000) = 1,240,000 1,000 x (140 - 130) + 900 x (170 – 180) + 800 x (200- 220) = 15,000 additional loss 1,000 x (20) + 15,000 = 35,000 40% x 450,000 = 180,000; 150,000 ÷ 12 = 12,500; 180,000 – 12,500 = 167,500 25,000 x 180 = 4,500,000; 25% x (2,400,000 – 480,000) = 480,000 4,500,000 + 480,000 – 60,000 – 60,000 = 4,860,000 CV at date of reclassification is equal to FV = 15,000 x 200 = 3,000,000 10,000 x 200 = 2,000,000; 4,860,000 x 10/25 = 1,944,000 2,000,000 – 1,944,000 = 56,000 P0; No income is recognized upon receipt of bonus issue. 750,000 + 1,500,000 = 2,250,000 40% x 1,200,000 = 480,000; (40% x 900,000) ÷ 18 = 20,000 40% x 100,000 = 40,000; 480,000 – 20,000 – 40,000 = 420,000 4,000,000 + 420,000 – (40% x 200,000) = 4,340,000 20% x 5.5M = 1,100,000; 1,100,000 – (20% x 1,000,000) = 900,000 3,700,000 + 900,000 – (20% x 1,500,000) = 4,300,000 (1.04 x 1,000,000) = 1,040,000; interest receivable = 1,000,000 x 12% x 4/12 = 40,000 8,750,000 x 5% = 437,500 3,692,000 x 5% = 184,600; 4M x 4% = 160,000
73
Chapter 7 – Investments in Equity Securities and Debt Securities
MC43 MC44
C B
MC45
D
MC46 MC47 MC48 MC49
D B D C
MC50
D
184,600 – 160,000 = 24,600; 3,692,000 + 24,600 = 3,716,600 3,692,000 x 5% = 184,600 912,400 x 10% = 91,240; 1,000,000 x8% = 80,000 91,240-80,000 = 11,240; 912,400 + 11,240 = 923,640 7,850,000 – (8M x .08 x 6/12) = 7,530,000 selling price; 7,383,000 x 5% = 369,150 8M x 4% = 320,000; 369,150 – 320,000 = 49,150 7,383,000 + 49,150 = 7,432,150 CV Dec. 1, Year 1; 7,432,150 x 5% = 371,608 371,608 – 320,000 = 51,608; 7,342,150 + 51,608 = 7,483,758 CV June 1, Yr 2. 7,530,000 – 7,483,758 = 46,242 Carrying amount is equal to FV (472,500) 500,000 x 4% = 20,000 460,000 – 472,500 = 12,500 loss Selling price = 3,000 x 120 = 360,000; cost of shares sold = 560,000 x 3,000/6,000 = 280,000; Gain = 360,000 – 280,000 = 80,000 Cost of shares sold (for 2,400 shares, P200,000) + 600 /3,600 x 360,000 = 200,000 + 60,000 = 260,000; Gain = 360,000 – 260,000 = 100,000
74
(Victoria Corporation) Year 1 (a) Equity Investments –FVPL Other Expenses Cash (b)
Equity Investments – FVPL Unrealized Gains on Equity Investments – Profit or Loss
150,000 3,750
153,750
30,000 30,000
Year 2 (a)
(b)
7-2.
Gain on Sale of Equity Investments – FVPL Equity Investments – FVPL
Equity Investments – FVPL Unrealized Gains on Equity Investments – Profit or Loss
(Victory Company) Year 1 (a) Equity Investments at FV through OCI Cash (b)
Year 2
(a)
(b)
7-3.
Cash
94,000 4,000 90,000 6,000 6,000
153,750 153,750
Equity Investments at FV through OCI Unrealized Gains and Losses on Equity Investments - OCI
26,250
Equity Investments at FV through OCI Unrealized Gains and Losses on Equity Investments - OCI
10,000
Cash Loss on Sale of Equity Investments Equity Investments at FV through OCI
94,000 1,000
Equity Investments at FV through OCI Unrealized Gains and Losses on Equity Investments - OCI
(A Company) a. Cash
26,250
10,000
95,000 1,000 1,000
18,000 Dividend Revenue 2,400 shares x 7.50
57
18,000
Chapter 7 – Investments in Equity Securities and Debt Securities
7-4.
b.
Memo entry. Received additional 600 shares of B Corp. ordinary shares as bonus issue on 2,400 shares previously held.
c.
Equity Investments - A Preference Dividend Revenue 600 x 250 =
150,000
150,000
150,000
d.
Memo entry. Received additional shares of B Corp. ordinary shares on a 4-for-1 stock split of the 2,400 shares previously held. Total shares now held: 9,600.
e.
Equity Investments - C Ordinary Dividend Revenue 2,400/6 = 400 shares x 50
20,000
(Inn Corporation) (a) December 31, Year 2 ledger balance (30,000 shares x 65)
20,000
P1,950,000
Year 3 Memo: Received 6,000 shares of NPA Co. ordinary as 20% bonus issue on the 30,000 shares previously held. Cash (15,000 x 70) 1,050,000 Equity Investments – FVPL Gain on Sale of Equity Investments 1,950,000 x 15,000/36,000 = 812,500 Equity Investments – FVPL 374,500 Unrealized Gain on Equity Investments at FVPL 21,000 x 72 1,512,000 1,950,000 – 812,500 1,137,500 Unrealized gain 374,500
7-5.
(b)
Gain on sale Unrealized gain on equity investments at FVPL Total amount reported in profit or loss
(c)
Equity Investments at Fair Value
812,500 237,500
374,500
P237,500 374,500 P612,000 P1,512,000
(Inna Corporation) (a) December 31, Year 2 ledger balance (30,000 x P65) Cost Unrealized Gain or Loss on Equity Investments - OCI
P1,950,000 1,800,000 P 150,000
Year 3 Memo: Received 6,000 shares of NPA Co. ordinary as 20% bonus issue on the 30,000 shares previously held. Equity Investments at Fair Value through OCI Unrealized Gain or Loss on Equity Investments – OCI
58
570,000 570,000
Chapter 7 – Investments in Equity Securities and Debt Securities 36,000 sh x 70 12/31/Y2 FV Unrealized gain
2,520,000 1,950,000 470,000
Cash (15,000 x 70) Equity Investments at FV through OCI
1,050,000 1,050,000
Unrealized Gain or Loss on Equity Investments – OCI 300,000 Retained Earnings (150,000 + 570,000) x 15,000/36,000
7-6.
(b)
Equity Investments at FV through OCI Unrealized Gain on Equity Investments at FV through OCI 21,000 x (72 - 70) None
(c)
Equity Investments at Fair Value through OCI
P1,512,000
(d)
Unrealized Gain or Loss in Equity , 12/31 Year 3 (150,000 + 570,000 – 300,000 + 42,000)
P 462,000
Fair value, December 31, Year 3 Cost (1,800,000 x 21,000/36,000) Unrealized Gain (Loss) in Equity
P1,512,000 1,050,000 P 462,000
42,000 42,000
(Gypsy Corporation) (a)
Sales price (5,000 x 54) CV at date of sale Gain on sale of Dizon shares
P270,000 250,000 P 20,000
(b)
Cumulative balance of Unrealized Gains and Losses (in equity) - see below
P 35,000
Monterey Preference Garcia Ordinary Barney Corporation
7-7.
300,000
# of shares 3,500 1,000 3,000
Cost P133,000 180,000 177,000 P490,000
FV, 12/31/ Year 3 P135,000 190,000 200,000 P525,000
(Melody Corporation) (a) Unrealized Gains or Losses on Equity Investments through OCI Fair value (1,250 x 85) Cost Unrealized Loss, end of Year 1 Total FV, Dec. 31, Year 2 (2,000 x 90) Total cost (110,000 + 60,000) Cumulative balance, end of Year 2
59
Unrealized Gain (Loss) P 2,000 10,000 23,000 P35,000
P106,250 110,000 P 3,750 P180,000 170,000 P 10,000
Chapter 7 – Investments in Equity Securities and Debt Securities (b)
Amount taken to OCI Fair value (1,250 x 85) Cost Unrealized Loss for Year 1
P106,250 110,000 P 3,750
Fair value (2,000 x 90) Carrying value/Cost (106,250+60,000) Unrealized gain for Year 2 (c)
P180,000 166,250 P 13,750
Memo: Received 2,000 stock rights from Music, Inc. for the purchase of one share for every five rights submitted at P80 per share. Equity Investments at FV through OCI Cash Investment Income 300 x 100 = 30,000 300 x 80 = 24,000 Cash
30,000
2,250
Investment Income 500 x 4.50
Equity Investments at FV through OCI 15,400 Unrealized Gains and Losses on Equity Investments – OCI 2,300 x 98 = 225,400 225,400 – (180,000 + 30,000)=15,400 7-8.
(Anti Corporation) (a) Cash Investment Income 10,000 x 5 (b)
50,000
Equity Investments at FVPL (2,000 x 75) Cash (2,000 x 50) Investment Income Equity Investments at FVPL Unrealized Gain on Equity Investments – Profit or Loss Market value (12,000 shares x 78) Carrying value before this adjustment (660,000 + 150,000) Unrealized gain
7-9.
150,000
2,250
15,400
50,000
100,000 50,000
90,000 90,000 936,000 810,000 126,000
(Tolits Corporation) (a) Year 2 a. Equity Investments at FV through OCI–Diana Ordinary
60
24,000 6,000
54,000
Chapter 7 – Investments in Equity Securities and Debt Securities Cash
54,000
b.
Memorandum entry. Received 500 additional shares of Diana ordinary shares as a result of 2for-1 split.
c.
Equity Investments at FV through OCI – Smith Preference Cash (1,000 x 120) + 1,200
d.
Equity Investments at FV through OCI - Diana Ordinary Unrealized Gains and Losses on Equity Investments at FV - OCI 15,000/250 = 60; 54,000/1,000 = 54 (60 – 54) x 1,000 shares = 6,000 Cash Equity Investments at FV through OCI – Diana Ordinary (60,000 / 1,000) x 250 shares
e.
Memorandum entry. Received 750 stock rights from Diana for the purchase of one share for every two rights submitted at P55 per share.
f.
Equity Investments at FV through OCI – Diana Ordinary Cash Investment Income 60% x 750 = 450; 450/2 = 225 shares 225 x 61 = 13,725; 225 x 55 = 12,375 225 x (61 – 55) = 1,350 Cash Investment Income 750 – 450 = 300; 300 x 3 = 900
g.
Equity Investments at FV through OCI – Diana Ordinary Unrealized Gains and Losses on Equity Investments at FV - OCI 225 x (64 – 61) = 675 Cash (100 x 64) Equity Investments at FV through OCI – Diana Ordinary
61
121,200 121,200
6,000 6,000
15,000 15,000
13,725
12,375 1,350
900 900
675 675
6,400 6,400
Chapter 7 – Investments in Equity Securities and Debt Securities h.
Cash (1,000 x 100 x 8%) Dividend Revenue
8,000
i.
Unrealized Gains and Losses on Equity Investments - OCI Equity Investments at FV through OCI – Diana ordinary Equity Investments at FV through OCI - Smith
Diana 1 (875 sh) Smith (1,000 x 115) Total
Market CV 54,250 53,000* 115,000 121,200 169,250 174,200
*Original Diana shares 500 shares at P108 2-for-1 split 500 shares 1,000 shares at P54 Adjust prior to sale Balance 1,000 shares at P60 Sale (250 shares Balance 750 shares at P60 Exercise of rights 225 shares at P61 Adjust prior to sale Sale (100 shares at P64 Balance 875 shares (b)
7-10.
Investment income (1,350 + 900) Dividends revenue Total income
8,000
4,950 1,250
6,200
Unreal 1,250 (6,200) (4,950 P54,000 -____ P54,000 6,000 P60,000 15,000) P45,000 13,725 675 6,400) P53,000 P 2,250 8,000 P10,250
(Carlo Company) Year 2
Apr. 1
May 15
July 10
Cash (5,000 x 25) Loss on Sale of Equity Investments Equity Investments at FVPL – Avi Ordinary Equity Investments at FV through OCI – Ghio Preference Cash (600 x 50) + 550 Memorandum entry. Received 4,000 additional shares of Darrel ordinary representing a 20% bonus issue. Shares now held are 24,000.
Nov. 30
Cash (1 x 24,000) Dividend Revenue
Dec. 31
Unrealized Loss on Equity Investments – Profit or Loss Equity Investments at FVPL – Avi Ordinary 5,000 x 26 = 130,000; 130,000 – 139,000
31
125,000 14,000 139,000
30,550
24,000
Equity Investments at FV through OCI - Darrel Equity Investments at FV through OCI - Ghio
62
30,550
24,000
9,000 9,000
110,000 650
Chapter 7 – Investments in Equity Securities and Debt Securities Unrealized Gains and Losses on Equity Investments - OCI FV Darrel 480,000 Ghio 31,200 Total 511,200 7-11.
(b)
2,000,000
Investment in Associates Share in Profit of Associates 20% x 1,500,000
300,000
Memo. Received 2,000 additional shares of Atlanta ordinary as 10% bonus issue. Shares now held are 22,000.
4.
Investment in Associates Share in Profit of Associates 20% x 3,000,000
600,000
Cash Investment in Associates 20% x 1,000,000
200,000
600,000
200,000
Investment cost Share in profit – 2012 Share in profit – 2013 Share in dividends Carrying amount, December 31, 2013
(Byron, Inc.) 2013 Jan. 1 Investment in Associates – Pirates Ordinary Cash Dec. 31
Investment in Associates – Pirates Ordinary Share in Profit of Associates 30% x 3,600,000
Dec. 31
Cash (30% x 400,000) Investment in Associates – Pirates Ordinary
2,000,000
300,000
3.
5.
7-13.
Change in FV 110,000 650 110,650
(Hostel Company) (a) 1. Investment in Associates Cash 2.
7-12.
CV 370,000 30,550 400,550
110,650
P2,000,000 300,000 600,000 (200,000) P2,700,000
5,160,000 5,160,000 1,080,000
1,080,000
120,000 120,000
(Barbie, Inc.) (a) 2012
Mar. 1
Investment in Associates – Kitchie Cash
63
1,365,000 1,365,000
Chapter 7 – Investments in Equity Securities and Debt Securities Dec. 31
31
31
(b)
7-14.
Cash (30% x 800,000) Investment in Associates – Kitchie
240,000
Investment in Associates – Kitchie Share in Profit of Associates (1.2M x 10/12) x 30%
300,000
Share in Profit of Associates – Kitchie Investment in Associates – Kitchie Amortization of undervaluation of assets (30% x 750,000) / 5 yrs. = 45,000 45,000 x 10/12 = 37,500 50,000 x 30% = 15,000 37,500 + 15,000 = 52,500
240,000
300,000
52,500 52,500
Acquisition cost, March 1, 2013 Cash dividends received Share in reported profit of associate Adjustment in reported profit Investment carrying value, December 31, 2013
P1,365,000 ( 240,000) 300,000 ( 52,500) P1,372,500
Income reported by Barbie from its investment in associates: (300,000 – 52,500)
P 247,500
(Richmonde Corporation) (a) Year 1
Jan. 1
Equity Investments at FV through OCI – Pen Cash
900,000
Dec. 31
Cash Dividend Revenue 10% x 2,000,000
200,000
Equity Investments at FV through OCI – Pen Unrealized Gains and Losses on Equity Investments - OCI
480,000
31
900,000
200,000
480,000
Year 2
Jan. 1
Investment in Associates – Pen, Inc. (at FV) Equity Investments at FV through OCI – Pen Unrealized Gains and Losses on Equity Investments at FV - OCI Retained Earnings
1
Dec. 31
31
1,380,000 1,380,000
480,000 480,000
Investment in Associates – Pen, Inc. Cash
2,600,000
Investment in Associates – Pen, Inc. Share in Profit of Associates (30% x 6,500,000)
1,950,000
Cash
1,950,000 900,000
64
2,600,000
Chapter 7 – Investments in Equity Securities and Debt Securities Investment in Associates (30% x 3,000,000) (b)
7-15.
900,000
Cost transferred from Equity Investments at FV Additional investment Share in profit Cash dividends received Carrying amount, December 31, Year 2
1,380,000 2,600,000 1,950,000 (900,000) 5,030,000
(E Corporation) (a) Year 1
Jan.
1
Aug. 1
Dec. 31
Year 2
Dec. 31
31
Year 3
Jan. 2
2
Dec. 31
31
Investment in Associates – F Company Cash (50,000 x 165)
8,250,000
Cash Investment in Associates – F Company
210,000
Investment in Associates – F Company Share in Profit of Associates 25% x 680,000
170,000
Cash Investment in Associates – F Company
240,000
Investment in Associates – F Company Share in Profit of Associates – F Company 25% x 1,000,000
250,000
210,000
170,000
240,000
Cash (20,000 x 175) Investment in Associates – F Company Gain on Sale of Investment in Associates Acquisition cost 8,250,000 Share in profit (Year1) 170,000 Cash dividends received (Year1) (210,000) Cash dividends received (Year2) (240,000) Share in profit (Year 2) 250,000 Investment carrying amount 8,220,000 Portion sold 20/50 CV of investment sold 3,288,000
3,500,000
Equity Investments at FV through OCI Investment in Associates – F Company Investment Income 30,000 x 175 = 5,250,000 8,220,000 – 3,288,000 = 4,932,000 5,250,000 – 4,932,000 = 318,000
5,250,000
250,000
3,288,000 212,000
4,932,000 318,000
Cash Dividend Revenue
120,000
Equity Investments at FV through OCI Unrealized Gains and Losses on Equity Investments - OCI
450,000
65
8,250,000
120,000
450,000
Chapter 7 – Investments in Equity Securities and Debt Securities 30,000 x (190 - 175) = (b).
Cost/Carrying Value, beg of year Income from associates Cash dividends received Sale of shares Carrying value, end of year Market value 30,000 x 190
Year 1 Year 2 P8,250,000 P8,210,000 170,000 250,000 (210,000 (240,000) P8,210,000
Year 3
P8,220,000 P5,700,000
7-16. 1. 2. 3. 4. 5. 6. 7-17.
A and B A B and C A and B C C
(Abu Company) (a) Date 01/01/Year 1 12/31/Year 1 12/31/Year 2 12/31/Year 3 12/31/Year 4 12/31/Year 5 *rounded off. (b) Year 1 Jan. 1
Dec. 31
Year 2 Dec. 31
7-18.
7. 8. 9. 10. 11.
B A, B, and C C B A
Interest Received
Interest Revenue
Amortization
1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
1,158,450 1,152,633 1,146,002 1,138,442 1,129,827*
41,550 47,367 53,998 61,558 70,173*
Debt Investments at Amortized Cost Cash
8,274,646
Cash Debt Investments at Amortized Cost Interest Revenue
1,200,000
Cash Debt Investments at Amortized Cost Interest Revenue
1,200,000
Carrying Value 8,274,646 8,233,096 8,185,729 8,131,731 8,070,173 8,000,000
8,274,646
41,550 1,158,450
47,367 1,152,633
(South Company) (a) (1) Securities are classified as at fair value through profit and loss. Year 1
June 1
Dec. 1
Debt Investments at FVPL Cash
3,691,500 3,691,500
Cash
160,000
66
Chapter 7 – Investments in Equity Securities and Debt Securities Interest Revenue (4M x 8% x ½) Dec.31
31
Interest Receivable Interest Revenue (4M x 8% x 1/12) Debt Investments at FVPL Unrealized Gain on Debt Investments at FVPL 4M x 0.97 = 3,880,000 3,880,000 – 3,691,500 = 188,500
160,000 26,667
26,667
188,500 188,500
Year 2
Jan. 1
Interest Receivable Interest Revenue
26,667
June 1
Cash Interest Revenue
160,000
Dec. 1
Cash Interest Revenue
160,000
31
Interest Receivable Interest Revenue
26,667
Debt Investments at FVPL Unrealized Gain on Debt Investments at FVPL 4M x 0.99 = 3,960,000 3,960,000 – 3,880,000 = 80,000
80,000
Dec. 31
26,667
160,000
160,000
26,667
80,000
(2) Securities are classified as at amortized cost To facilitate computation, a partial amortization table is presented below. Interest Interest Revenue Amortization Date Received of Discount Amortized Cost June 1, Year 1 3,691,500 Dec 1, Year 1 160,000 184,575 24,575 3,716,075 June 1, Year 2 160,000 185,804 25,804 3,741,879 Dec. 1, Year 2 160,000 187,094 27,094 3,768,973 June 1, Year 3 160,000 188,449 28,449 3,797,422 Dec. 1, Year 3 160,000 189,871 29,871 3,827,293 June 1, Year 4 160,000 191,365 31,365 3,858,658 Dec. 1, Year 4 160,000 192,933 32,933 3,891,591 Year 1
June 1
Debt Investments at Amortized Cost Cash
Dec. 1
Cash Debt Investments at Amortized Cost Interest Revenue (see above table)
31
Interest Receivable Debt Investments at Amortized Cost Interest Revenue 160,000 x 1/6 = 26,667
67
3,691,500
3,691,500
160,000 24,575 184,575 26,667 4,301
30,968
Chapter 7 – Investments in Equity Securities and Debt Securities 25,804 x 1/6 = 4,301
Year 2
Jan. 1
June 1
Dec. 1
31
Interest Revenue Interest Receivable Debt Investments at Amortized Cost
30,968 26,667 4,301
Cash Debt Investments at Amortized Cost Interest Revenue (see above table)
160,000 25,804
Cash Debt Investments at Amortized Cost Interest Revenue (see above table)
160,000 27,094
Interest Receivable Debt Investments at Amortized Cost Interest Revenue 160,000 x 1/6 = 26,667 28,449 x 1/6= 4,742
185,804
187,094
26,667 4,742 31,409
(b) Journal entry/entries to record sale of investment on November 1, Year 4. (1) Securities are classified as at fair value through profit and loss. Year 4
Nov. 1
Cash Loss on Sale of Debt Investments at FVPL Interest Revenue Debt Investments at FVPL Acc. Int. = 4M x 8% x 5/12 = 133,333 Sales price (3,925,000–133,333) 3,791,667 Carrying value (4 M x 0.98) 3,920,000 Loss on sale 128,333 (2) Securities are classified as at amortized cost
3,925,000 128,333 133,333 3,920,000
Year 4
Nov. 1
1
7-19.
Debt Investments at Amortized Cost Interest Receivable Interest Revenue 192,933 x 5/6 32,933 x 5/6 = 27,444 Cash Loss on Sale of Debt Investments at Amortized Cost Interest Receivable Debt Investments at Amortized Cost CV of Debt Investments sold: As of June 1, Year 4 3,858,658 Amortization June 1 to Nov. 1, Year 4 27,444 As of Nov. 1, Year 4 3,886,102 Sales price 3,791,667 Loss on sale 94,435
(Grow Company)
68
27,444 133,333
160,777
3,925,000 94,435
133,333 3,886,102
Chapter 7 – Investments in Equity Securities and Debt Securities (1)
Classified as Debt Investments at FV through Profit or Loss (a) Interest income (1,000,000 x 12%) P 120,000 (b) Sales price (600,000 x 1.01) P 606,000 Carrying value, 12/31/Year 2 (600,000 x 1.06) 636,000 Loss on sale P 30,000 (c) Carrying value, 12/31/Year 2 (FV) (1,000,000 x 1.06) P1,060,000 Carrying value, 12/31/Year 3 (400,000 x 1.04) P 416,000
(2)
Classified as at Amortized Cost
Date 1/1/Year 1 12/31/Year 1 12/31/Year 2 12/31/Year 3 (a) (b)
(c)
(d)
7-20.
Nom Int
Amortization Table Effect Int Prem Amort
120,000 120,000 120,000
106,339 104,973 103,471
13,661 15,027 16,529
Amortized cost, end 1,063,394 1,049,733 1,034,706 1,018,177
Carrying value, 12/31/Year 2 (see table) P1,034,706 Sales price P 606,000 Carrying value, 1/1/Year 3 (1,034,706 x 6/10 P620,824 Amortization 1/1/Year 3 – 4/1/Year 3 16,529 x 3/12 x 600/1000 (2,479) 618,345 Loss on sale P 12,345 Interest income for Year 3: Jan 1 to Mar 31 103,471 x 3/12 P 25,868 Apr 1 to Dec 31 103,471 x 400/1000 x 9/12 31,041 Total interest income for Year 3 P 56,909 Carrying value, 12/31/Year 3 1,018,177 x 400/1000 P 407,271
(Powerpuff Company) Feb. 1
Equity Investments - FVPL – Blossom Ordinary Cash
April 1
Debt Investments – FVPL – Peach Co. Bonds Cash
July 1
Debt Investments – FVPL – Buttercup Bonds Interest Receivable (150,000 x 12% x 4/12) Cash
Oct. 1
Dec. 31
374,000 374,000 1,010,000
150,000 6,000
Cash Interest Income (1,000,000 x 10% x 6/12)
50,000
Interest Receivable Interest Income 1M x 10% x 3/12 = 25,000 150,000 x 12% x 6/12 = 9,000 25,000 + 9,000 = 34,000
34,000
69
1,010,000
156,000
50,000
34,000
Chapter 7 – Investments in Equity Securities and Debt Securities 31
Unrealized Loss on Investments at FVPL Equity Investments – FVPL - Blossom Ordinary Debt Investments – FVPL - Buttercup Bonds Debt Investments – FVPL - Peach Bonds Cost 374,000 1,010,000 150,000 1,534,000
Blossom Ordinary Peach 10% Bonds Buttercup 12% Bonds
7-21.
11,000 6,000 3,000
Fair value 380,000 990,000 153,000 1,523,000
20,000 UGL 6,000 (20,000) 3,000 (11,000)
(Narito Company)
Jan. Dec. Dec. Dec. Dec. Dec.
Date 1, Year 1 31, Year 1 31, Year 2 31, Year 3 31, Year 4 31, Year 5
Nominal Interest 7,000 7,000 7,000 7,000 7,000
Amortization Table Effective Interest 5,433 5,355 5,272 5,186 5,094
Amortization 1,567 1,645 1,728 1,814 1,906
Amortized Cost, End 108,660 107,093 105,448 103,720 101,906 100,000
Year 1
Jan. 1
Debt Investments at Amortized Cost – Wolf Bonds Cash
108,660
Dec. 31
Cash Debt Investments at Amortized Cost – Wolf Bonds Interest Income
7,000
Cash Debt Investments at Amortized Cost – Wolf Bonds Interest Income
7,000
Cash Debt Investments at Amortized Cost – Wolf Bonds Interest Income
7,000
Impairment Loss on Debt Investments Debt Investments at Amortized Cost – Wolf Bonds Carrying value, Dec. 31, Year 3 P103,720 Present value of future cash inflows 100,000 x 0.9070 90,700 4,500 x 1.8594 8,367 99,067 Impairment Loss P 4,653
4,653
Cash Debt Investments at Amortized Cost – Wolf Bonds Interest Income
4,500 453
108,660
1,567 5,433
Year 2
Dec. 31
1,645 5,355
Year 3
Dec. 31
1,728 5,272
4,653
Year 4
Dec. 31
70
4,953
Chapter 7 – Investments in Equity Securities and Debt Securities Year 5
Dec. 31
Cash Debt Investments at Amortized Cost – Wolf Bonds Interest Income
B and C A B and C A B and C
4,980
Revised Amortization Table Nominal Effective Discount Interest Interest Amortization
Date Dec. 31, Year 3 Dec. 31, Year 4 Dec. 31, Year 5 7-22. 1. 2. 3. 4. 5.
4,500 480
4,500 4,500
6. 7. 8. 9. 10.
4,953 4,980*
A A A C B and C
453 480*
11. 12. 13. 14. 15.
Amortized Cost, End 99,067 99,520 100,000
B B and C A A C
7-23. Raffy Company) To facilitate computation, a partial amortization table is presented below. Interest Interest Revenue Amortization HTM Date Received of Discount Carrying Value June 1, 2010 5,353,150 Dec. 31, 2010 350,000 312,267 37,733 5,315,417 Dec. 31, 2011 600,000 531,542 68,458 5,246,959 Dec. 31, 2012 600,000 524,696 75,304 5,171,655 Dec. 31, 2013 600,000 517,166 82,834 5,088,821 2010
June 1
Dec. 31
2011 Dec. 31
2012 Dec. 31
2013 Sept. 1
1
Held to Maturity Securities – Blessie Corp. Bonds Interest Revenue (5M x 12% x 5/12) Cash
5,353,150 250,000
Cash Interest Revenue Held to Maturity Securities – Blessie
600,000
Cash Interest Revenue Held to Maturity Securities – Blessie
600,000
Cash Interest Revenue Held to Maturity Securities – Blessie
600,000
Interest Receivable (3M x 12% x 8/12) Held to Maturity Securities – Blessie Interest Revenue (517,166 x 3/5 x 8/12)
240,000
Cash (3,090,000 + 240,000) Gain on sale of HTM Securities
71
5,603,150
562,267 37,733
531,542 68,458
524,696 75,304
33,134 206,866 3,330,000 20,141
Chapter 7 – Investments in Equity Securities and Debt Securities Interest Receivable Held to Maturity Securities – Blessie
240,000 3,069,859
CV of HTM securities sold: As of 12/31/11 (5,171,655 x 3/5) Amort from 1/1/12-9/1/12 CV as of 9/1/12 Sales price Gain on sale Sept. 1
Available for Sale Securities – Blessie Held to Maturity Securities 5,171,655 – 3,102,993 = 2,068,662
2,068,662
Dec. 31
Cash Interest Revenue Available for Sale Securities – Blessie 2M x 12% = 240,000 5,171,655 – 3,102,993 = 2,068,662 2,068,662 x 10% = 206,866 240,000 – 206,866 = 33,134
240,000
Dec 31
7-24.
2,068,662
206,866 33,134
Market Adjustment – AFS Unrealized Gain or Loss on AFS Amortized cost 2,068,662 – 33,134 = P2,035,528* Market value 2M x 103.5% 2,070,000 Market Adjustment P 34,472 *or 5,088,821 x 2/5 = P2,035,528
34,472
34,472
(Grow Company) Date 1/1/Year 1 12/31/Year 12/31/Year 12/31/Year (a)
(b) (c)
7-25.
3,102,993 33,134 3,069,859 3,090,000 20,141
Nom Int
1 120,000 106,339 13,661 2 120,000 104,973 15,027 3 120,000 103,471 16,529 Market value, 12/31/ Year 2 (1.06 x 1M) Amortized cost, 12/31/Year 2 Unrealized Gain or Loss (In Equity) Interest income for Year 2 Market value, 12/31/Year 3 (1.04 x 400,000) Amortized cost (1,018,177 x 4/10) Unrealized Gain on 12/31/Year 3
(Naruto Company)
Jan. Dec. Dec. Dec.
Date 1, 2010 31, 2010 31, 2011 31, 2012
Amortization Table Effect Int Prem Amort
Nominal Interest 7,000 7,000 7,000
Amortization Table Effective Interest
5,433 5,355 5,272
72
Amortization 1,567 1,645 1,728
Amortized cost, end 1,063,394 1,049,733 1,034,706 1,018,177 P1,060,000 1,034,706 P 25,394 P 104,973 P 416,000 407,271 P 8,729
Amortized Cost, End 108,660 107,093 105,448 103,720
Chapter 7 – Investments in Equity Securities and Debt Securities
Dec. 31, 2013 Dec. 31, 2014 (a) (b) (c)
(d) Theory MC1 MC2 MC3 MC4 MC5
B B C A C
Problems MC18 MC19 MC20 MC21
B B C D
MC22 MC23 MC24 MC25 MC26 MC27 MC28 MC29 MC30 MC31
A C D C B B B A B A
MC32 MC33
A B
MC34 MC35 MC36
A C B
MC37 MC38 MC39 MC40
C B B A
MC41 MC42
C C
7,000 7,000
5,186 5,094
1,814 1,906
101,906 100,000
Interest income for 2010 P 5,433 Carrying amount at December 31, 2011 (amortized cost) P105,448 After the sale, the investment shall be reclassified as AFS, applying tainting rule in IAS 39. Fair value of remaining 105,650 x 40/100 P42,260 Amortized cost of remaining 103,720 x 40/100 41,488 Unrealized gain in equity, December 31, 2011 P 772 Interest income for 2013 5,186 x 40/100 P 2,074 MULTIPLE CHOICE QUESTIONS MC6 MC7 MC8 MC9 MC10
D B A A B
MC11 MC12 MC13 MC14 MC15
B C A C C
MC16 MC17
B D
535,000 – 525,000 = 10,000 2,000,000 – 1,750,000 = 250,000 loss 2,100,000 – (2,000,000 + 50,000) = 50,000 FV 12/31/ Year 2 (600 x 440) + (2,000 x 138) = 540,000 FV 12/31/Year 1 = 270,000 + 280,600 = 550,600 Change in FV = 540,000 – 550,600 = 10,600 decrease or debit 1,000 x 150) + 2,250 = 152,250; 152,250 – (1,000 x 10) = 142,250 10,000 x 150 = 1,500,000; 1,500,000 + (20% x 3M) – (10,000 x 50) = 1,600,000 960-500 = 460; 460 + 600 = 1,060; 1,060/10 = 106 shares (500 x 20) – 500 = 9,500; 106 x (620 – 450) = 18,020; 9,500 + 18,020 = 27,520 88 ÷ 1.10 = 80 1,200,000 – (3 x 40,000) + (25% x 640,000) = 1,240,000 1,000 x (140 - 130) + 900 x (170 – 180) + 800 x (200- 220) = 15,000 additional loss 1,000 x (20) + 15,000 = 35,000 40% x 450,000 = 180,000; 150,000 ÷ 12 = 12,500; 180,000 – 12,500 = 167,500 25,000 x 180 = 4,500,000; 25% x (2,400,000 – 480,000) = 480,000 4,500,000 + 480,000 – 60,000 – 60,000 = 4,860,000 CV at date of reclassification is equal to FV = 15,000 x 200 = 3,000,000 10,000 x 200 = 2,000,000; 4,860,000 x 10/25 = 1,944,000 2,000,000 – 1,944,000 = 56,000 P0; No income is recognized upon receipt of bonus issue. 750,000 + 1,500,000 = 2,250,000 40% x 1,200,000 = 480,000; (40% x 900,000) ÷ 18 = 20,000 40% x 100,000 = 40,000; 480,000 – 20,000 – 40,000 = 420,000 4,000,000 + 420,000 – (40% x 200,000) = 4,340,000 20% x 5.5M = 1,100,000; 1,100,000 – (20% x 1,000,000) = 900,000 3,700,000 + 900,000 – (20% x 1,500,000) = 4,300,000 (1.04 x 1,000,000) = 1,040,000; interest receivable = 1,000,000 x 12% x 4/12 = 40,000 8,750,000 x 5% = 437,500 3,692,000 x 5% = 184,600; 4M x 4% = 160,000
73
Chapter 7 – Investments in Equity Securities and Debt Securities
MC43 MC44
C B
MC45
D
MC46 MC47 MC48 MC49
D B D C
MC50
D
184,600 – 160,000 = 24,600; 3,692,000 + 24,600 = 3,716,600 3,692,000 x 5% = 184,600 912,400 x 10% = 91,240; 1,000,000 x8% = 80,000 91,240-80,000 = 11,240; 912,400 + 11,240 = 923,640 7,850,000 – (8M x .08 x 6/12) = 7,530,000 selling price; 7,383,000 x 5% = 369,150 8M x 4% = 320,000; 369,150 – 320,000 = 49,150 7,383,000 + 49,150 = 7,432,150 CV Dec. 1, Year 1; 7,432,150 x 5% = 371,608 371,608 – 320,000 = 51,608; 7,342,150 + 51,608 = 7,483,758 CV June 1, Yr 2. 7,530,000 – 7,483,758 = 46,242 Carrying amount is equal to FV (472,500) 500,000 x 4% = 20,000 460,000 – 472,500 = 12,500 loss Selling price = 3,000 x 120 = 360,000; cost of shares sold = 560,000 x 3,000/6,000 = 280,000; Gain = 360,000 – 280,000 = 80,000 Cost of shares sold (for 2,400 shares, P200,000) + 600 /3,600 x 360,000 = 200,000 + 60,000 = 260,000; Gain = 360,000 – 260,000 = 100,000
74
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