SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department

ACCT 1056- Intermediate Accounting 2

Lesson 2: Investment in Equity Securities

Topic: Investment in Equity Securities

a. Acquisition of equity securities
b. Acquisition by Exchange
c. Investment in unquoted equity securities
d. Cash dividend, property dividend, liquidating dividend, share
dividend
e. Shares received in lieu of cash
f. Cash received in lieu of share dividends
g. Other issues regarding equity investments

Learning Outcomes: At the end of this module, you are expected to:
a. Account for the different forms of acquiring equity
instruments.
b. Explain and illustrate the issues related to equity
investments, such as share split, special assessment,
redemption of shares and share right.

LEARNING CONTENT

Accounting for equity securities

An equity security is an investment in stock issued by another company. The accounting for an
investment in an equity security is determined by the amount of control of and influence over
operating decisions the company purchasing the stock has over the company issuing the stock.
If less than 20% of the stock is acquired and no significant influence or control exists, the
investment is accounted for using the cost method.

A. Acquisition of equity instruments

PFRS 9 states that when financial assets are initially recognized an entity shall measure it at fair
value plus transaction cost that are directly attributable to the acquisition. However, transaction
cost that are directly attributable to the acquisition of financial assets held for trading or financial
assets at fair value through profit or loss shall be expensed immediately.

Usually the fair value is the transaction price, meaning the fair value of the consideration given.
Illustration 1: Accounting for Investments in equity securities at FVOCI
On January 1, 2020, Buknoy company purchased 6,000 shares of Marlou Inc. for P100,000.
Commission paid to broker amounted to P2,000. The shares do not meet the definition of held for
trading. Management made an irrevocable decision to subsequently measure the shares at fair
value through other comprehensive income.

At initial measurement the investment’s carrying is computed as follows:

Transaction Price P100,000
Add: Transaction Cost 2,000
Initial carrying amount 102.000

On January 1, 2020 the entry to record the purchase is:

Investment in equity securities- FVOCI 102,000

Cash 102,000

The transaction costs are capitalized as investments and not expensed immediately. This differs
from the treatment of transaction cost on FVPL.

On December 31,2020, the shares are quoted at P20 per share

Fair value- Dec. 31, 2020 (6,000x 20) 120,000

Carrying amount-Jan 1,2020 (102,000)
Increase in Fair value- Unrealized Gain 18,000

On Dec.31, 2020 the entry to record the fair value changes is as follows:

Investment in equity securities-FVOCI 18,000

Unrealized gain- OCI 18,000

The unrealized gain is presented in the other comprehensive income portion of the statement
of profit or loss and other comprehensive income. In the statement of financial position, the
cumulative balance of the Unrealized gain- OCI account is presented in equity under the Other
components of equity.

On January 6, 2021, the shares were sold for P 150,000.

First, we should adjust the investment in to its fair value. The entry to adjust the investment is as
follows:

Investment in equity securities- FVOCI 30,000

Unrealized gain- OCI 30,000

The entry to record the sale on January 6, 2021 is:

Cash 150,000
Investment in equity securities-FVOCI 150,000
Since the investment was irrevocably elected to be measured at FVOCI, the cumulative balance
of gains and losses previously presented in equity is transferred directly to Retained earnings.
The entry to record the transfer of gains and losses to retained earnings is as follows:

Unrealized Gain-OCI (18k+30K) 48,000

Retained Earnings 48,000

B. Acquisition by exchange
If the equity securities are acquired in exchange, the acquisition cost is determined by reference
to the following in the order of priority:
a. Fair value of the asset given
b. Fair value of the shares received
c. Carrying amount of the asset given

Illustration: Acquisition by exchange

On January 1, 2020 Chewy Company acquired 10,000 shares of Momo Inc. in exchange of a land
with a carrying amount and a fair value of P800,000 and P1,000,000 respectively. At the time of
exchange the fair value of the shares received is P110 per share.

The entry to record the acquisition is as follows:

Investment in equity securities 1,000,000
Land 800,000
Gain on exchange 200,000

Assuming that the fair value of the land is not available the entry to record the acquisition is:
Investment in equity securities (10,000x110) 1,100,000
Land 800,000
Gain on exchange 300,000

Assuming that both fair value of the land and shares received is not available the entry to record
the acquisition is as follows:
Investment in equity securities 800,000
Land 800,000

C. Investment in unquoted equity instruments

PFRS provides that all investment in equity securities shall be measured at fair value. However,
investments in unquoted equity instruments are measured at cost if the fair value cannot be
measured reliably.

D. Cash dividend, Property dividend, Liquidating dividend and Share dividend

If the equity securities are measured at fair value through profit or loss, or at fair value through
other comprehensive income or at cost, dividends are considered as income except share
dividends and liquidating dividends.
Dividends may include the following:
1. Cash dividends- dividends that are receivable in cash
2. Property dividends- dividends that are receivable in non- cash assets
3. Share dividends- dividends that are receivable in the form of the investee’s own equity
securities. Shares of other entities received from the investee as dividends are bot share
dividends but property dividends.
4. Liquidating dividends- these dividends represent return of the invested capital and therefore,
are not income. The payment may be in the form of cash or non-cash assets.

When are dividends considered earned?

In accounting for dividends there are 3 relevant dates we need to take note.
a. Date of declaration- This is the date on which the payment of dividends is approved by the
Board of directors.
b. Date of record- This is the date on which the stock and transfer book of the corporation is closed
for registration. Only those shareholders registered as of this date are entitled for dividends.
c. Date of payment/distribution- This is the date on which the dividends declared are paid.

Between the date of declaration and date of record, the shares are selling “Dividend on”. This
means that when shares are sold after the date of declaration but prior the date of record, they
carry with them the right to received dividends. Therefore, the purchase price includes the
dividends.

Between the date of record and date of payment, the shares are selling “ex-dividend” which
means that the shares can be sold, and still the original shareholder has the right to receive the
dividends on payment date. Therefore, the purchase price excludes the dividends

Illustration: Dividend-on and Ex-dividends

On May 31, 2020, Irene Inc. declares cash dividends of P15 per share to shareholder of record
in June 15, 2020. The dividends will be distributed at on July 1, 2020.

Assuming that Wendy Company purchases 5,000 Irene Inc. shares for P90 per share on June
12, 2020. The investment is measured at FVOCI.

The entry to record the acquisition of shares on June 12, 2020 is as follows:
Investment in equity securities-FVOCI 375,000
Dividend Income 75,000
Cash 450,00
In this situation the shares of Irene Inc. are selling “dividend-on” therefore, the purchase price of
P90 includes the dividends per share of P15. The computation for the initial measurement of the
investment is as follows:
Total Purchase Price: (5,000 x 90) 450,000
Less: Purchased Dividends (5,000 x 15) (75,000)
Initial measurement of investment 375,000
The entry to record the receipt of dividends on July 1, 2020 is as follows:
Cash 75,000
Dividend Income 75,000

Assuming that Wendy Company purchases 5,000 Irene Inc. shares for P90 per share on June
23, 2020. The investment is measured at FVOCI.

The entry to record the acquisition of shares on June 23, 2020 is as follows:
Investment in equity securities-FVOCI 450,000
Cash 300,000
In this situation the shares of Irene Inc. are selling “ex-dividend” therefore, the purchase price of
P90 is solely for the acquisition of investment.

There is no entry for the dividends on July 1, 2020 because Wendy Company is not entitled to
receive dividends.

Accounting for Property dividends

Property dividend are recognized as dividend revenue at the fair value of the non-cash assets
received or receivable as determined as of the date of declaration.

For example, Seulgi company distributes its holding of 10,000 shares in Yeri company as property
dividend. The shares of Yeri company have a fair market value of P100 per share.

Joy company receives 500 shares of Yeri company as property dividend from Seulgi company.

The property dividend is recorded by Joy company as follows:

Investment in shares (500 x 100) 50,000
Dividend income 50,000

Accounting for Liquidating dividends

Normally, liquidating dividends are paid when the corporation is dissolved or liquidated. As a result
of liquidating dividends, the invested capital is reduced equal to the amount of liquidating
dividends received. The proforma entry to record liquidating dividends is as follows:
Cash or other non-cash asset received xxx
Investment in shares xxx
However, in the case of wasting asset corporation liquidating dividends may be paid even
before dissolution and liquidation. Accordingly, when dividends received from wasting asset
corporation, the dividends are designated partly income and partly return of capital. The portion
representing liquidating dividends should be credited to the investment account.

For example, a shareholder receives a P100,000 dividend designated as income P60,000 and
liquidating P40,000
The journal entry to record the dividend is
Cash 100,000
Dividend Income 60,000
Investment in shares 40,000
When the liquidating dividends exceeds the cost of investment, the difference is credited to gain
on investment. On the other hand, when the liquidation is completed and the carrying amount of
the investment is not full recovered, the balance is written off as a loss.

Accounting for Share dividends

Share dividends whether of the same class or different are not income. The reason is that
there is no distribution of the assets of the entity. The assets of the entity are the same before
and after the issuance of the share dividends.
In the case of the shareholder, he will receive additional share but still has the same proportion
equity interest in the entity. The shareholder may have more share but at reduced market value.

Share dividends of same class are recorded only by means of memorandum entry on the part
of the shareholder. Share dividends do not affect the total cost of the investment but reduces
the cost of investment per share.

For example, a shareholder owns 10,000 outstanding shares costing 120 each or a total cost of
P1,200,000. Subsequently the shareholder receives 20% share dividend or 2,000 shares. The
effect of this share dividend may be shown as follows:
Shares Cost per share Total cost
Original shares 10,000 120 1,200,000
Share dividends 2,000 - -
12,000 100 1,200,000

The P1,200,000 applies now to 12,000 shares with an adjusted cost per share of P100. The cost
per share is reduced from P120 to P100

Share dividends different from those held

A share holder may receive a share dividend which is different from original shares. Again, share
dividends are not income. However, the original cost of the investment is apportioned between
the original shares and the share dividends on the basis of market value at the date of receipt.

Illustration:
A shareholder owns 10,000 ordinary share costing P800,00. Subsequently the shareholder
receives 10% share dividend in the form of preference shares. The market value of ordinary
shares is P150 and the market value of preference share is P100. The original cost of P800,000
is allocated as follows:
 Market Fraction Allocated cost
value
Ordinary shares (10,000 x 150) 1,500,000 15/16 750,000
Preference shares (1,,000 x 100,000 1/16 50,000
100)
1,600,000 800,000
The fractions are developed from the market value of the shares and multiplied by the original
cost of P800,000 to arrive at the allocated cost.

The entry to record the receipt of preference shares dividend is as follows:

Investment in Preference shares 50,000
Investment in Ordinary shares 50,000

*** END of LESSON 2***

EXERCISES

Cash Dividends
1. On December 1, 2018, Synthetic Corp. owns 15,000 ordinary shares representing 15%
of the shares outstanding of Prowess Corporation. During the same date, Prowess
declared P2 per share dividends on ordinary shares to the shareholders of record on
December 15 payable on December 31.
a. Prepare all the necessary entries at the
- Date of declaration
- Date of record
- Date of payment
b. How much is the dividend income to be recognized on 2018?

Property Dividends
2. Doused Company owns 15% of the outstanding ordinary shares of Albeit Corp. On
November 1, 2018, Albeit 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, 2018 P250,000
December 31, 2018 P450,000
February 15, 2019 P410,000
a. Prepare all the necessary entries at the
- Date of declaration
- Date of record
- Date of payment
b. How much is the dividend income to be recognized on 2018?

Share Dividends
3. On October 1, 2018, Contentious Corp owns 15,000 fair value through other
comprehensive income ordinary shares at a cost of P1,500,000. The shares represent
15% of the ordinary shares outstanding of Pulsate Corporation.
 Record the receipt of the share dividends on the Contentious’ books under each of the
assumption listed below:

Case No. 1: Assuming the shares are investment in unquoted securities measured at
cost:
1. Contentious received 15% ordinary shares as Share Dividends.
2. Contentious received 1,500 preference shares as Share Dividends. The par
value of the preference share is P200 per share while the ordinary shares has a
par value of P100.
Case N0. 2: Assuming the shares are financial assets at fair value through profit or loss
3. Contentious received 15% ordinary shares as Share Dividends. The fair value of
the ordinary shares amounted to P100.
4. Contentious received 1,500 preference shares as Share Dividends. The fair
value of each preference share is P150.
Case No. 3: Assuming the shares are investment in equity securities designated as at
fair value though other comprehensive income
5. Contentious received 15% ordinary shares as Share Dividends. The fair value of
the ordinary shares amounted to P100.
6. Contentious received 1,500 preference shares as Share Dividends. The fair
value of each preference share is P150.

Cash Received in Lieu of Share Dividends

4. On October 1, 2018, Qualms Corp. owns 15,000 fair value through other comprehensive
income shares acquired at a cost of P345,000. The shares represent 15% of the shares
outstanding of Sarcasm Corporation. On the same date, Sarcasm declared 15% share
dividends payable to stockholders on October 31. On October 31, the stock is selling at
P40 per share. However, on October 31, Sarcasm gave P36 per share cash in lieu of the
supposed share dividends previously declared.
Case no. 1: Assuming the shares are investment in unquoted securities measured as
cost.
Case no. 2: Assuming the shares are financial assets at fair value though profit or loss.
Case no. 3: Assuming the shares are investment in equity securities designated as at
fair value through other comprehensive income.
a. Prepare all the necessary entries.
b. What is the dividend income to be recognized in 2018?
c. What is the gain or loss on sale of investment to be recognized in 2018?

Shares Received in Lieu of Cash Dividends

5. On October 1, 2018, Venus Corp owns 15,000 fair value through other comprehensive
income shares acquired at a cost of P345,000. The shares represent 15% of the
outstanding shares of Mercury Corporation. On the same date, Mercury Corp. declared
P8 cash dividends on its outstanding shares payable to stockholders on October 31.
However, on October 31, Mercury Corp. issued 1 share for every 5 shares held by the
shareholders in lieu of the supposed cash dividends previously declared.
Case no. 1: Assuming the shares are investment in unquoted securities measured as
cost.
Case no. 2: Assuming the shares are financial assets at fair value though profit or loss.
On October 1, 2018, the stocks were selling at that time at P44 per share.
a. Prepare all the necessary entries.
b. What is the dividend income to be recognized in 2018?
Liquidating Dividends
6. On January 2, 2018, Earth Company has 20,000 shares of P100 par value ordinary
shares. The shares were acquired a year ago at a cost of P440,000. On February 14, of
the current year, Earth Company received 15% cash, liquidating dividends from the
Investee Corporation.
a. Assuming that the Investee Corporation is a wasting asset corporation and partial
liquidation, how much is the amount of loss on liquidation to be recognized in 2018?
b. Assuming that the Investee Corporation is a wasting asset corporation and partial
liquidation, provide the relevant entries.
c. Assuming that the Investee Corporation is other than a wasting asset corporation,
how much is the amount of loss on liquidation to be recognized in 2018?
d. Assuming that the Investee Corporation is other than a wasting asset corporation
and partial liquidation, provide the relevant entries.

Stock Split and Special Assessment

7. On January 1 of the current year, Phobos Company acquired 10,000 shares of
Investment in equity designate as at Fair Value through Other Comprehensive Income of
Deimos Company at P400,000 plus brokerage expense of P20,000. On March 1 of the
current year, Deimos Company ordinary shares was split on a 5-for-2 basis. On October
1, Deimos Company made a special assessment of P3.20 per share on all ordinary
shareholders. Phobos Company accordingly paid the assessment. The fair value on
December 31 amounted to P30 per share.
a. The total number of shares at the end of the year.
b. The unrealized gain to be presented in the other comprehensive income for the
current year.
c. Journal entry on January 1.
d. Journal entry on December 31.

Stock Right
8. On June 15, 2018, Mars Company owns 10,000 shares with a cost of P700,000 of Moon
Company’s stocks. During the same period, Moon Company issued stock rights to
existing shareholders. Mars 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 of P20 per right.
a. Assuming that the above information are FVTPL, the stock rights should be initially
recognized at____.
b. Assuming the above securities are FVTOCI, the stocks rights should be initially
recognized at___.
c. Assuming that the above securities are FVTPL, the cost of investment acquired
through exercised of stocks should be_____.
d. Assuming that the above securities are FVTOCI, the cost of the investment acquired
through the exercise of stock rights should be___.

Theoretical Value of Stock Rights

9. On January 2, 2018, Jupiter Company purchased 10,000 shares of P200 par value
ordinary shares at P240 per share of Saturn Company. On March 2, 2018, Saturn
Company issued stock rights to its shareholders. The holder needs five rights to
purchase one share of ordinary stock at par. The market value of the stock on that date
was P320 per share. There was no quoted price for the rights.
a. Compute for the theoretical value of the rights assuming the stock is selling right-on.
 b. Compute fir the theoretical value of the rights assuming the stock is selling ex-right.

Exchange of One Financial Asset into Another Financial Asset

10. Uranus Company owns 8,000 convertible preference shares of which was acquired in
2017 at a cost of P400,000. The investment was classified as trading securities. On
December 31, 2017, the fair value of the preference shares was P425,000. On March
31, 2018, Uranus Company converted the 4,000 preference shares into 6,000 shares of
ordinary shares, when the market price was P50 per share for the preference shares
and P40 per share for the ordinary shares.
a. Compute for the gain on exchange to be recognized in 2018.
b. Give the journal entry on March 31, 2018.

Exchange of a PPE for a Financial Asset

11. On January 1, 2018, Neptune 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, 2018, Neptune
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. Compute for the gain on exchange to be recognized in 2018.
b. Provide the journal entry on March 31.

REFERENCES

Textbooks

1. Millan, Z. V. (2020) Intermediate Accounting Volume 1A, Baguio City: Bandolin Enterprise.
2. Valix, C. and Peralta, J. (2019) Intermediate Accounting Volume 1, GIC Enterprises & Co.,
Inc., Manila