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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 OCIDiana
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

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.

Aug. 1

Dec. 31

Year 2

Dec. 31

31

Year 3

Jan. 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

Premium
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 )
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 (3,925,000133,333) 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

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

Premium
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

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

Premium
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

MC46
MC47
MC48
MC49

D
B
D
C

MC50

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