TFA 1

Chapter 35 – Financial Asset At Fair Value Measurement-FVPL and

FVOCI
Romie Q. Diño

PROBLEM 35-6 (AICPA Adapted)

On December 31, 2019, Fay Company appropriately reported a P100, 000 unrealized loss.

There was no change during 2020 in the composition of the portfolio of non-trading equity
securities held at fair value through other comprehensive income.

Security Market value

A Cost December 31, 2020
B 1,200,000 1,300,000
C 900,000 500,000
1,600,000 1,500,000
3,700,000 3,300,000

1. What is the market value of the investment on December 31, 2019?

a. 3,600,000
b. 3,700,000
c. 3,500,000
d. 3,800,000

2. What amount of loss on these securities should be included in the statement of

comprehensive income for the year ended December 31, 2020 as component of the other
comprehensive income?

a. 400,000
b. 300,000
c. 100,000
d. 0

3. What cumulative amount of loss on these securities should be reported in the statement
of changes in equity for the year ended December 31, 2020 as component of other
comprehensive income?

a. 100,000
 b. 200,000
c. 400,000
d. 0

Solution 35-6

Question 1 Answer a

Total cost
Unrealized loss in 2019 3,700,000
Market value – December 31, 2019 (100,000)
3,600,000
Question 2 Answer b

Market value – December 31, 2019 3,300,000

Market value – December 31, 2019 3,600,000

Unrealized loss in 2020 (300,000)

Unrealized loss- December 31, 2019 (100,000)

Cumulative unrealized loss- December 31, (400,000)

2020

Only the unrealized loss of P300, 000 is shown in the statement of comprehensive income for
2020 as component of other comprehensive income.

Question 3 Answer c

The cumulative unrealized loss of P400, 000 would appear in the statement of changes in
equity.

Actually, if the investment is held as financial asset at fair value the through other
comprehensive income, total or cumulative unrealized gain or loss is always the difference
between the market value and the original historical cost.

Market value – December 31, 2020

Original historical cost 3,300,000
Cumulative unrealized loss- December 31, 3,700,000
2020 (400,000)
Unrealized loss in 2019
Unrealized loss in 2020 (100,000)
(300,000)
PROBLEM 35-7 (IAA)

On January 1, 2019 Lebanon Company purchased equity securities to be held at fair value
through other comprehensive income. On December 31, 2019 the cost and market value were:

Cost Market
Security X 2,000,000 2,400,000
Security Y 3,000,000 3,500,000
Security Z 5,000,000 4,900,000

On July 1, 2020, the entity sold Security X for P2, 500,000.

What amount should be recognized directly in retained earnings as a result of the sale of
financial asset in 2020?

a. 500, 000
b. 100, 000
c. 400, 000
d. 0

Solution 35 -7 Answer a

Upon disposal of an equity investment measured at FVOCI, the difference between net
proceeds and carrying amount is directly recognized in retained earnings.

Cash 2,500,000
Financial Asset-FVOCI 2,400,000
Retained Earnings 100,000

Moreover, the amount previously recognized in other comprehensive income is also transferred
to retained earnings.

Unrealized gain-OCI
Retained Earnings 400, 000
400,000
Market value Security X- December 31,
2019 2,400, 000
Historical cost Security X
2,400, 000

Unrealized gain-OCI in 2019

 400, 000
As a simple approach, the cumulative amount recognized directly in retained earnings is
determined as the difference between sale price and original historical cost.

Sale price - Security X 2,500,000

Historical cost - Security X 2,500,000
Cumulative credit to retained earnings 500,000

PROBLEM 35-8 (AICPA Adapted)

Trinidad Company provided the following portfolio of equity investments measured at fair value
through other comprehensive income:

Aggregate cost – December 31, 2019 1,700,000

Unrealized gain – December 31, 2019 40,000
Unrealized loss – December 31, 2019 260,000
Net realized gain during 2019 300,000

On January 1, 2019, the entity reported an unrealized loss of P15, 000 as a component of other
comprehensive income.

In the 2019 statement of changes in equity, what cumulative account should be reported as
unrealized loss on these securities?

a. 260,000
b. 220,000
c. 205,000
d. 0

Solution 35-8 Answer b

Unrealized loss
Unrealized gain
Cumulative net unrealized loss – 260,000
December 31, 2019 40,000
Unrealized loss – January 1, 2019 220,000
Increase in unrealized loss 15,000
205,000

The increased in unrealized loss of P205, 000 is reported in the statement of comprehensive
income as component of other comprehensive income.
However, the statement of changes in equity for 2019 would report the cumulative net
unrealized loss of P220, 000.

Incidentally, the net realized gain represents gain from the investment that is actually sold and
should be directly credited to retained earnings.

PROBLEM 35-9 (IAA)

At the beginning of current year, Remington Company acquired 200, 000 ordinary shares of
Universal Company for P9, 000,000.

At the time of purchase, Universal Company had outstanding 800, 000 shares with a carrying
amount of P36, 000,000.

The following events took place during the current year:

 Universal Company reported net income of P1, 800, 000 for the current year.

 Remington Company received from Universal Company a dividend of P3.00 per ordinary
share of P600, 000.

 The market value of Universal Company share had temporarily declined to P40.

Remington Company has selected irrevocably to measure the investment at fair value through
other comprehensive income.

What is the carrying amount of the investment at year-end?

a. 9,000,000
b. 8,000,000
c. 9,300,000
d. 9,450,000

Solution 35-9 Answer b

Market value at year-end (200,000 x 40) 8,000,000

Acquisition cost 9,000,000
Unrealized loss on financial asset – OCI (1,000,000)
Although the interest is 25%, 200, 000 shares divided by 800, 000 shares, the equity method is
not applied because the entity has elected to measure the equity investment at fair value
through other comprehensive income or FVOCI.

The unrealized loss on the financial asset of P1, 000,000 is shown in the statement of
comprehensive income as component of other comprehensive income.

The dividend received of P600, 000 as recognized as dividend income.

PROBLEM 35-10 (AICPA Adapted)

Neal Company held the following financial assets as trading investments on December 31, 2019:

Cost Market
Value

100, 000 shares of Company A

nonredeemable preference share capital, 775,000
par value P75 825,000

7,000 shares of Company B

Preference share capital, par value P100,
subject to mandatory redemption by the 690,00
issuer at par on December 31, 2020 1, 0465,000 625,000
1, 450,000

On December 31, 2019, what is the total carrying amount of the investments?

a. 1,400,000
b. 1,450,000
c. 1,465,000
d. 1,475,000

Solutions 35-10 Answer b

The nonredeemable preference share is an equity security.

The redeemable preference share is a debt security.

Whether equity or debt security, financial assets held for trading are measured at fair value
through profit or loss.