MODULE 3 INVESTMENT

LEARNING OBJECTIVE:
1. Describe the accounting framework for financial assets.
2. Understand the accounting for debt investments at amortized cost.
3. Understand the accounting for debt investments at fair value.
4. Describe the accounting for the fair value option.
5. Understand the accounting for equity investments at fair value.
6. Explain the equity method of accounting and compare it to the fair value method for
equity investments.
7. Discuss the accounting for impairments of debt investments.
8. Describe the accounting for transfer of investments between categories.

OVERVIEW
PFRS 9 Financial Instruments issued on 24 July 2014 is the replacement of PAS 39 Financial
Instruments: Recognition and Measurement. The Standard includes requirements for recogni-
tion and measurement, impairment, derecognition and general hedge accounting. The IASB
completed its project to replace IAS 39 in phases, adding to the standard as it completed each
phase.

IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest
rate risk (often referred to as the ‘macro hedge accounting’ requirements) since this phase of
the project was separated from the IFRS 9 project due to the longer term nature of the macro
hedging project which is currently at the discussion paper phase of the due process.

Acquiring new knowledge

Asynchronous - links to more information: www.farhatlectures.com
A synchronous discussion for this lesson will be scheduled on AUGUST 18, 2020 (Tuesday
7:30 – 8:30 AM)

Financial Asset
 Cash.
 Equity investment of another company (e.g., ordinary or preference shares).
 Contractual right to receive cash from another party (e.g., loans, receivables, and
bonds).

IASB requires that companies classify financial assets into two measurement categories—
amortized cost and fair value—depending on the business model.

Measurement Basis
PFRS requires that companies measure their financial assets based on two criteria:
 Company’s business model for managing its financial assets; and
 Contractual cash flow characteristics of the financial asset.

Only debt investments such as receivables, loans, and bond investments that meet the two
criteria above are recorded at amortized cost. All other debt investments are recorded and
reported at fair value.
Debt investments are characterized by contractual payments on specified dates of
 principal and
 interest on the principal amount outstanding.

Companies measure debt investments at

 amortized cost or
 fair value.

Reporting Bond Investment at Amortized Cost

Equity investment represents ownership of ordinary, preference, or other capital shares.

 Cost includes price of the security and transaction cost incidental to acquisition.
 Broker’s commissions and fees are recorded as expense for trading security.

The degree to which one corporation (investor) acquires an interest in the common stock of
another corporation (investee) generally determines the accounting treatment for the
investment subsequent to acquisition.

Levels of Influence
Determine Accounting Methods
Accounting and Reporting for Equity Investments by Category

PFRS allows companies to classify some equity investments as non-trading.

General accounting and reporting rule:
 Investments valued at fair value.
 Record unrealized gains and losses in other comprehensive income.

Example: Equity Investments (OCI)

The accounting entries to record non-trading equity investments are the same as for trading
equity investments, except for recording the unrealized holding gain or loss.
Report the unrealized holding gain or loss as other comprehensive income.

Financial Statement Presentation

EQUITY METHOD
An investment (direct or indirect) of 20 percent or more of the voting shares of an investee
should lead to a presumption that in the absence of evidence to the contrary, an investor has
the ability to exercise significant influence over an investee.

In instances of “significant influence,” the investor must account for the investment using the
equity method.

Controlling Interest - When one corporation acquires a voting interest of more than 50 percent
in another corporation
 Investor is referred to as the parent.
 Investee is referred to as the subsidiary.
 Investment in the subsidiary is reported on the parent’s books as a long-term
investment.
 Parent generally prepares consolidated financial statements.

SUMMARY
 MODULE 3 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
INVESTMENT

PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before AUGUST 21, 2020 (Friday)

1. JMB Company marketable equity securities to be held as trading for P4,000,000.The entity also paid commission,
taxes and other transaction cost amounting to P300,000. The security had market value of P4,500,000 000 on the
end of the current year and the transaction cost that would be incurred on sale is estimated at P200,000. What
amount of unrealized gain or loss on these securities should be reported in the 2020 income statement?
a. 0 b. 200,000 c. 500,000 d. 300,000

2. During 2019, Kachow Company purchased marketable securities as a trading investment.

For the year ended December 31, 2019, the entity recognized an unrealized loss of P350,000.
There were no security transactions during 2020. The entity provided the following information on December 31,
2020:
Security Cost Market Value
A 3,530,000 3,400,000
B 2,650,000 2,700,000
6,180,000 6,100,000

In the 2020 income statement, what amount should be reported as unrealized gain or loss?
a. Unrealized loss 80,000 b. Unrealized loss 270,000
c. Unrealized gain 80,000 d. Unrealized gain 270,000

3. Georel Company acquired 40,000 ordinary shares on October 1 for P 6,600,000 to be held for trading.

On November 30, the investee distributed a 10% ordinary share dividend when the market price of the share was
P250.

On December 31, the entity sold 4,000 shares for P1,000,000.

What amount should be reported as gain on sale of investment in the current year?
a. 340,000 b. 400,000 c. 500,000 d. 600,000

4. At the beginning of current year, Illusion Company acquired an entity instrument for P 4,000,000 to be measured at
fair value through other comprehensive income. The entity incurred direct acquisition cost of 700,000.
At year-end, fair value of the instrument was 5,500,000 and the transaction cost that would be incurred on the sale of
the investment were estimated at 600,000.

What amount of unrealized gain should be recognized in other comprehensive income for the current year?
a. 200,000 b. 900,000 c. 800,000 d. 0

5. During 2020, Knickknack Company purchased marketable equity securities to be measured at fair value through
other comprehensive income. On December 31, 2020, the balance in the unrealizable loss on these securities was
200,000.
 There were no security transaction during 2021. Pertinent data on December 31, 2021 are as follows:
Security Cost Market Value
X 2,100,000 1,600,000
Y 1,850,000 2,000,000
Z 1,050,000 900,000

In the statement of changes in equity for 2021, what amount should be included as cumulative unrealized loss as
component of other comprehensive income?
a. 500,000 b. 300,000 c. 200,000 d. 0

6. At the beginning of the current year, Lavish Company purchased 10,000 ordinary shares at P90 per share to be held
for trading. At the year-end, the entity received 2,000 shares of the investee in lieu of cash dividend of P10 per share.
On this date, the investee’s share has a quoted market price of P60 per share.

What amount should be reported as dividend income for the current year?
a. 120,000 b. 100,000 c. 20,000 d. 0

7. Inspiration Company had trading and non-trading investment held throughout 2020 and 2021. The non-trading
investments are measured at fair value through other comprehensive income. The investments had a cost of
3,000,000 for trading and 3,000,000 for non-trading. The investment had the following fair value at year-end
December 31 2020 December 31 2021
Trading 4,000,000 3,800,000
Non Trading 3,200,000 3,700,000

What amount of unrealized gain or loss should be reported in the income statement for 2021?
a. 200,000 gain b. 200,000 loss c. 300,000 gain d. 300,000 loss

8. On January 1, 2020, Jerome Company purchased non-trading equity investments which are irrevocably designated
at FVOCI:

Purchase Price Transaction Cost Market Value

December 31, 2020
Security A 1,000,000 100,000 1,500,000
Security B 2,000,000 200,000 2.400,000
Security C 4,000,000 400,000 4,700,000

On July 1, 2021, the entity sold Security C for 5,200,000.

What amount of gain on sale should be recognized in the income statement for 2021?
a. 800,000 b. 500,000 c. 300, 000 d. 0

9. During the current year, Veto Company held 30,000 shares of Rock Company's 100,000 outstanding shares and
6,000 shares of Sand Company's 300,000 outstanding shares.
During the current year, Veto received P300,000 cash dividend from Rock, P15,000 cash dividend and 3% stock
dividend from Sand. The closing price of Sand share is P150.

What amount should be reported as dividend revenue for the current year?
a. 342,000 b. 315,000 c. 442,000 d. 15,000
10. Temporal Company owned 50,000 ordinary shares held for trading. These 50,000 were purchased 120 per share.
During the year, the investee distributed 50,000 stock rights to the investor. The investor was entitled to buy one new
share for P90 cash and two of these rights. Each share had a market value of P130 and each right had a market
value of P20 on the date of issue.
What total cost should be recorded for the new shares that are acquired by exercising the rights?
a. 2,250,000 b. 3,250,000 c. 3,050,000 d. 5,500,000

11. On January 1, 2021, Chummer Company paid 20,000,000 for 60,000 ordinary shares of Case Company which
represent a 25% interest in the net asset of case. The acquisition cost is equal to the carrying amount of the net
assets acquired. Chummer has the ability to exercise significant influence over Case. Chummer received a dividend
of P40 per share from case in 2021. The investee reported net income of 10,000,000 for the year ended December
31, 2021.

On December 31, 2021, what amount should be reported as investment in associate?

a. 24,900,000 b. 20,100,000 c. 22,500,000 d. 17, 700,000

12. On September 1, 2021, Karl Company purchased 30% of the outstanding ordinary shares of Mai’s Corporation for
3,000,000 when the book value of net assets of Mai Corporation was 9,000,000. The fair value of the assets are
equal to their carrying values except for a land which was undervalued by 1,000,000. Mai reported net earnings
throughout the year in the amount of 2,400,000 and paid total dividends of 1,000,000.

What is the maximum amount of income Tender Company could include in its 2021 profit or loss as “income from
investment”?
a. 235,000 b. 207,500 c. 237,500 d. 240,000

13. An entity purchased 5,000,000 of 8%, 5-year bonds on January 1, 2020 with interest payable on June 30 and
December 31. The bonds were purchased for 5,100,000 plus transaction cost of 108,000 at an effective interest rate
of 7%. The business model for this investment is to collect contractual cash flows and sell the bonds in the open
market. On December 31, 2020, the bonds were quoted at 106.

1. What amount of interest income should be reported for 2020?

a. 400,000 b. 200,000 c. 364,560 d. 363,940

2. What is the adjusted carrying amount of the investment on December 31, 2020?
a. 5,300,000 b. 5,171,940 c. 5,174,560 d. 5,000,000

3. What amount should be recognized in OCI in the statement of comprehensive income for 2020?
a. 300,000 b. 125,440 c. 128,060 d. 92,000

14. At the beginning of the current year, Bong Company purchased 40,000 shares of Cora Company’s 200,000
outstanding shares for 6,200,000. On that date, the carrying amount of the acquired shares on Cora’s books was
4,200,000.

Bong allocated the excess of the cost over carrying amount to patent. The patent has reaming life of 12 years.

During the period, Bong’s officers obtain a majority on Cora’s board of directors.
Cora Company reported earnings of 5,100,000 for the current year and declared and paid dividend of 2,800,000 at
year end.
 What is the carrying amount of the investment in associate at year end?
a. 6,000,000 b. 6,460,000 c. 6,640,000 d. 4,450,000

15. Fantagio Company purchased 10% bonds with face amount of 7,000,000 for 8,000,000 including transaction cost of
200,000. The bonds provide an effective yield of 8%.

The bonds are quoted at 105 at the end of the year. The company has the policy of using the fair value option.

1. What amount of gain from change in fair value should be reported?

a. 7,350,000 b. 7,150,000 c. 250,000 d. 200,000

2. What total amount of investment should be reported in the statement of financial performance at the end of the
year?
a. 200,000 b. 700,000 c. 900,000 d. 560,000

16. Temporal Company owned 50,000 ordinary shares held for trading. These 50,000 were purchased 120 per share.
During the year, the investee distributed 50,000 stock rights to the investor. The investor was entitled to buy one new
share for P90 cash and two of these rights. Each share had a market value of P130 and each right had a market
value of P20 on the date of issue.
What total cost should be recorded for the new shares that are acquired by exercising the rights?
a. 2,250,000 b. 3,250,000 c. 3,050,000 d. 5,500,000

17. On January 1, 2020, Mega Company acquired 10% of the outstanding ordinary shares of Penny Company for
4,000,000. The investment was appropriately accounted for under the cost method.
On January 1, 2021, Mega gained the ability to exercise significant influence over financial and operating control of
Penny by acquiring an additional 20% of Penny’s outstanding ordinary shares for 10,000,000.
The fair value of Penny’s net assets equalled carrying amount. The fair value of the 10% interest on January 1, 2021
was 6,000,000.
For the years ended December 31, 2020 and 2021, the investee reported the following:
2020 2021
Dividend paid 2,000,000 3,000,000
Dividend income 6,000,000 6,500,000
1. What is the investment income for 2020?
a. 200,000 b. 400,000 c. 600,000 d. 300,000

2. What is the investment income for 2021?

a. 1,300,000 b. 1,950,000 c. 1,000,000 d. 1,900,000

3. What is the carrying amount of the investment in associate on December 31, 2021?
a. 16,000,000 b. 17,050,000 c. 15,050,000 d. 16,700,000

18. On January 1, 2020, Tricia Company purchased equity securities to be held as financial assets measured at fair
value through other comprehensive income.
Cost Market-12/31/2020 Market-12/31/2021
Security R 3,000,000 3,200,000 -
Security S 4,000,000 3,500,000 3,700,000
Security T 5,000,000 4,600,000 4,700,000
On January 31, 2021, the entity sold Security R for P3,500,000.
 1. What amount should be recognized directly in retained earnings as a result of the sale of investment in 2021?
a. 500,000 b. 300,000 c. 200,000 d. 0

2. What cumulative unrealized gain or loss on the remaining financial assets should be reported in the statement of
changes in equity for 2021?
a. 600,000 gain b. 600,000 loss c. 300,000 gain d. 300,000 loss

19. At year-end, Ozz Company held several investments with the intent of selling them in the near term. The investments
consisted of 1,500,000 10% three-year bonds purchased for 1,350,000 and equity securities purchased for 500,000.
At year-end, the bonds were selling om the open market for 1,600,000 and the equity securities had a market value
of 700,000.

What amount should be reported as trading securities?

a. 1,850,000 b. 2,000,000 c. 2,300,000 d. 1,200,000

20. Jill Company acquired a financial instrument for 1,000,000 on April 30, 2021. The financial instrument is classified as
financial asset at fair value through other comprehensive income. The direct acquisition cost incurred amounted to
200,000. On December 31, 2021, the fair value of instrument was 2,000,000. What gain should be recognized in
other comprehensive income for the year-ended?
a. 1,000,000 b. 500,000 c. 1,200,000 d. 800,000

21. LOVER COMPANY buys and sells securities expecting to earn profits on short-term differences in price. During
2020, Lover Company purchased the following trading securities:
Security Cost Fair Value
December 31, 2020
A 195,000 225,000
B 300,000 162,000
C 660,000 678,000

Before any adjustments related to these trading securities, Lover Company had net income of 900,000.

1. What is Lover’s net income after making any necessary trading security adjustments?
a. 900,000 b. 810,000 c. 762,000 d. 948,000

2. What would Lover’s net income be if the fair value of security B were 285,000?
a. 867,000 b. 900,000 c. 885,000 d. 933,000

22. Leopard Company purchased P 5, 000, 000 of Bonds at par. The entity has chosen the fair value model for this
investment. At year-end, the entity receives annual interest of P 350, 000 and the fair value of the bonds was 4,705,
000.

What amount should be reported for the bond investment as total income or loss in the income statement?
a. 65, 000 b. 55, 000 c. 295, 000 d. 50, 000

23. On January 1, 2020, Tricia Company purchased bonds with face amount of 4,000,000. The business model of the
entity in managing the financial asset is not only to collect contractual cash flows that are solely payment of principal
and interest but also to sell the bonds in the open market. The entity has not collected the fair value option of
measuring financial asset. The entity paid 4,206,000 for the bond investment. The bonds mature on December 31,
2022 and pay 10% interest annually on December 31 of each year with 8% effective yield. The bonds are quoted at
95 on December 31, 2020 and 90 on December 31, 2021.
 What amount of cumulative unrealized loss should be reported in the statement of changes in equity on December
31, 2021?
a. 406,000 b. 606,000 c. 473,878 d. 0

24. Maxim Company acquired 40,000 ordinary shares on October 1 for 6,600,000 to be held for trading. On November
30, the investee distributed a 10% ordinary stock dividend when the market price of the share was P250. On
December 31, the entity sold 4,000 shares for 1,000, 000.

What amount should be reported as gain on sale of investment in the current year?
a. 340,000 b. 400,000 c. 500,000 d. 600,000

25. Puff Co. acquired 40% of Straw, Inc.’s voting common stock on January 2, year 1, for 400,000. The carrying amount
of Straw’s net assets at the purchase date totaled 900,000. Fair values equaled carrying amounts for all items except
equipment, for which fair values exceeded carrying amounts by 100.000. The equipment has a five-year life. During
year 1, Straw reported net income of 150,000. What amount of income from this investment should Puff report in its
year 1 income statement if Puff uses the equity method to account for the investment?
a. 40,000 b. 52,000 c. 56,000 d. 60,000

26. Moss Corp. owns 20% of Dubro Corp.’s preferred stock and 80% of its common stock. Dubro’s stock outstanding at
December 31, year 1, is as follows:
10% cumulative preferred stock 100,000 Common stock 700,000 Dubro reported net income of 60,000 for the year
ended December 31, year 1. Assume that Moss does not elect the fair value option to report the investment in Dubro.
What amount should Moss record as equity in earnings of Dubro for the year ended December 31, year 1?
a. 42,000 b. 48,000 c. 48,400 d. 50,000

27. Sage, Inc. bought 40% of Adams Corp.’s outstanding common stock on January 2, year 1, for 400,000. The carrying
amount of Adams’ net assets at the purchase date totaled 900,000. Fair values and carrying amounts were the same
for all items except for plant and inventory, for which fair values exceeded their carrying amounts by 90,000 and
10,000, respectively. The plant has an eighteen-year life. All inventory was sold during year 1. During year 1, Adams
reported net income of 120,000 and paid a 20,000 cash dividend. Assume that Sage uses the equity method to
account for this investment. What amount should Sage report in its income statement from its investment in Adams
for the year ended December 31, year 1?
a. 48,000 b. 42,000 c. 36,000 d. 32,000

28. On January 1, 2020, Royalty Company purchased 9% bonds in the face amount of P6,000,000. The bonds mature
on January 1, 2025 and were purchased for P5,555,000 to yield 11%. The entity classified the bonds as held for
trading and interest is payable annually every December 31. The entity provided the following information about fair
value of the bonds and effective rate:
Fair value Effective rate
December 31, 2020 5,450,000 12%
December 31, 2021 6,155,000 8%

On January 1, 2022, the entity changed the business model for this investment to collect contractual cash flows
composed of principal and interest.
On January 1, 2022, the fair value of the bonds did not change.
1. What is the interest income for 2020?
a. 540,000 b. 610,922 c. 660,000 d. 661,918

2. What amount of unrealized loss should be recognized in profit or loss for 2020?
 a. 500,000 b. 450,000 c. 105,000 d. 0

3. What amount of unrealized gain should be recognized in profit or loss for 2021?
a. 155,000 b. 600,000 c. 705,000 d. 0

4. What is the interest income for 2022?

a. 492,400 b. 540,000 c. 480,000 d. 677,050

29. Sun Corp. had investments in marketable debt securities costing 650,000 that were classified as available-for-sale.
On June 30, year 2, Sun decided to hold the investments to maturity and accordingly reclassified them to the held-to-
maturity category on that date. The investments’ fair value was 575,000 at December 31, year 1, 530,000 at June 30,
year 2, and 490,000 at December 31, year 2. Sun does not elect the fair value option to account for these
investments.

1. What amount of loss from investments should Sun report in its year 2 income statement?
a. 45,000 b. 85,000 c. 120,000 d. 0

2. What amount should Sun report as net unrealized loss on marketable debt securities in its year 2 statement of
stockholders’ equity?
a. 40,000 b. 45,000 c. 160,000 d. 120,000

30. Jill Corp. had investments in marketable debt securities purchased on January 1, year 1, for 650,000 that were
classified as trading securities and accounted for using the cost adjusted to fair value method. On June 30, year 2,
Jill decided to hold the investments to maturity and accordingly reclassified them to the held-to-maturity category on
that date. The investments’ fair value was 575,000 at December 31, year 1, 530,000 at June 30, year 2, and 490,000
at December 31, year 2. Jill elects the fair value option for reporting these held-to-maturity securities.
1. What amount of loss from investments should Jill report in its year 2 income statement?
a. 40,000 b. 85,000 c. 160,000 d. 0

2. What amount should Jill report as net unrealized loss on marketable debt securities in other comprehensive
income in its year 2 statement of stockholders’ equity?
a. 0 b. 40,000 c. 45,000 d. 120,000