Activity no.

3 Accounting for Investments

Problem A
Victoria Corporation completed the following transactions relating to investment in
Whirlpool Corporation ordinary shares, which Victoria Court acquired for trading purposes.
Year 1
(a) Purchased 1,000 shares (5% interest in voting shares) at P150 per share, plus
transaction costs of P3,750.
(b) At year end, the Whirlpool Corporation ordinary shares had fair value of P180 per
share.

A DEBIT CREDIT
Equity Investment 160,000
Transaction cost 3,570
Cash 163,750

B DEBIT CREDIT
Equity Investment 30,000
Unrealized gain on equity investment 30,000

Year 2
(a) Sold 500 of Whirlpool Corporation ordinary shares at P190 per share, incurring P1,000
transaction costs on the sale.
(b) At year end, the fair value of each share was P192.

A DEBIT CREDIT
Cash 95,000
Equity Investment 90,000
Gain on sale of equity investment 5,000
Transaction cost 1,000
Cash 1,000

B DEBIT CREDIT
Equity Investment 6,000
Unrealized gain on equity investment 6,000

Required: Prepare entries for year 1 and 2 in the books of Victoria Corporation.
COMPUTATIONS

Year 1

A
1,000 x 150 = 150,000 - value of the equity investment

B
1,000 x 180 = 180,000 - 150,000 = 30,000 - unrealized gain on equity investment

Year 2

A
500 x 190 = 95,000 - cash received
500 x 180 = 90,000 - value of the shares sold
95,000 - 90,000 = gain on sale

B
500 x 180 = 90,000 - value of the remaining shares
500 x 192 = 96,000
90,000 - 96,000 = 6,000 - unrealized gain on equity investment
Problem B
Victory Company completed the following transactions relating to investment in Whirlpool
Corporation ordinary shares. Victory did not intend to hold the securities for immediate trading
and exercised its option to designate them at fair value through other comprehensive income.
Year 1
(a) Purchased 1,000 shares (5% interest in voting shares) at P150 per share, plus transaction
costs of P3,750.
(b) At year end, the Whirlpool Corporation ordinary shares had fair value of P180 per share.
Year 2
(a) Sold 500 of Whirlpool Corporation ordinary shares at P190 per share, incurring P1,000
transaction costs on the sale.
(b) At year end, the fair value of each share was P192.
Required: Prepare entries for year 1 and 2 in the books of Victory Company.
ANSWER:
YEAR 1
A. DEBIT CREDIT
Equity Investment at FVOCI 153,750
Cash 153,750
(1,000 x 150) + 3,750

B. DEBIT CREDIT
Equity Investment at FVOCI 26,250
Unrealized Gains and Losses on Equity Investment - OCI 26,250
190,000 – 153,750

YEAR 2
A. DEBIT CREDIT
Equity Investment at FVOCI 10,000
Unrealized Gains and Losses on Equity Investment - OCI 10,000
190,000 – 180,000
Cash 94,000
Loss on Sale of Equity Investments 1,000
Equity Investment at FVOCI 95,000
B. DEBIT CREDIT
Equity Investment at FVOCI 1,000
Unrealized Gains and Losses on Equity Investment - OCI 1,000
96,000 – 95,000
Problem C
On June 1, Year 1, South Company purchased 4,000 of the P1,000 face value, 8% bonds of
State Corporation for P3,691,500. The bonds were purchased to yield 10% interest. Interest is
payable semi-annually on December 1 and June 1. The bonds mature on June 1, Year 5. South
uses the effective interest method of amortization. On November 1, Year 4, South sold the
bonds for P3,925,000. This amount includes the appropriate accrued interest. Market value of
the bonds at the end of each reporting period follows:
December 31, Year 1 – 97
December 31, Year 2 – 99
December 31, Year 3 – 98
Required:
(a) Prepare the entries in the books of South Year 1 and Year 2, including the adjustments
at December 31, as a result of all the foregoing assuming that the securities are
classified as:

1. Debt investment at fair value through profit or loss

Debt Investment at Fair Value through Profit/Loss

June 1, Year 1 DEBIT CREDIT

Debt Investment at FVPL 3,691,500
Cash 3,691,500

December 1, Year 1 DEBIT CREDIT

Cash 160,000
Interest Revenue 160,000
4,000,000 x 8% x 6/12 = 160,000

December 31, Year 1 DEBIT CREDIT

Interest Receivable 26,667
Interest Rate 26,667
4,000,000 x 8% x 1/12 + 26,667

Debt Investment at FVPL

Unrealized Gain/Loss on 188,500
Debt Investment at FVPL 188,500

Fair Value 4,000,000 x 97% 3,880,000

Carrying Amount 3,691,500
 Increase in Market Value 188,500

Debt Investment at Fair Value through Profit/Loss

June 1, Year 2 DEBIT CREDIT

Cash 160,000
Interest Receivable 26,667
Interest Revenue 133,333

December 1, Year 2 DEBIT CREDIT

Cash 160,000
Interest Revenue 160,000
4,000,000 x 8% x 6/12 = 160,000

December 31, Year 2 DEBIT CREDIT

Interest Receivable 26,667
Interest Rate 26,667
4,000,000 x 8% x 1/12 + 26,667

Debt Investment at FVPL

Unrealized Gain/Loss on 80,000
Debt Investment at FVPL 80,000

Fair Value 4,000,000 x 97% 3,960,000

Carrying Amount 3,880.000
Increase in Market Value 80,000

2. Debt investment at fair value through other comprehensive income

Debt Investment at Fair Value Through Other Comprehensive Income

June 1, Year 1 DEBIT CREDIT

Debt Investment of FVOCI 3,691,500
Cash 3,691,500

Dec 1, Year 1 DEBIT CREDIT

Cash 160,000
Debt Investment of FVOCI 24,575.00
Interest Revenue 184,575.00
Dec 31, Year 1 DEBIT CREDIT
Interest Receivable 26,667
Debt Investment at FVOCI 4,301
Interest Revenue 30,967

160,000 x 1/6 = 26,667

25,803.75 x 1/6 = 4,300.63
185,803.75 x 1/6 = 30,9967.29

Debt Investment at FVOCI 163,925,00

Unrealized Gain/Loss at FVOCI 1,63,925.00

Fair Value 97% x 4,000,000 3,880,000

Amortized Cost in the Table 3,716,075.00
Unrealized Gain 163,925.00

Debt Investment at Fair Value Through Other Comprehensive Income

June 1, Year 2 DEBIT CREDIT

Cash 160,000
Debt Investment of FVOCI 21,503
Interest Receivable 26,667
Interest Revenue 154, 837

Dec 1, Year 2 DEBIT CREDIT

Cash 160,000
Debt Investment of FVOCI 27,093.94
Interest Revenue 187,093.94

Dec 31, Year 2 DEBIT CREDIT

Interest Receivable 26,667
Debt Investment at FVOCI 4,742
Interest Revenue 31,408

160,000 x 1/6 = 26,667

28,448.63 x 1/6 = 4,742
188,448.63 x 1/6 = 31,308
 Debt Investment at FVOCI 27,102.31
Unrealized Gain/Loss at FVOCI 27,102.31

Fair Value 99% x 4,000,000 3,960,000

Amortized Cost in the Table 3,768,972.69
Cum. Unrealized Gain 191,027.31
Less: Bal of Equity 163,925.00
27,102.31

3. Debt investment at amortized cost

Nominal Effective Discount

Date Interest Interest Amortization Carrying Value
0.04 0.05
June 1, Year 1 3,691,500
184,575.0
Dec 1, Year1 160,000 0 24,575.00 3,716,075.00
185,803.7
June 1, Year 2 160,000 5 25,803.75 3,741,878.75
187,093.9
Dec 1, Year 2 160,000 4 27,093.94 3,768,972.69

(b) Prepare the entry to record the sales of the securities on Year 4, assuming that the
securities are classified as:

1. Debt investment at fair value through profit or loss

Debt Investment at Fair Value through Profit/Loss

June 1, Year 4 DEBIT CREDIT

Cash 160,000
Interest Receivable 26,667
Interest Revenue 133,333
November 1, Year 4 DEBIT CREDIT
Cash 3,925,000
Loss in Sale of Debt Investment 168,333
Debt Investment 3,960,000
Interest Revenue 133,333

Selling Price 3,791,667

 Accrued Interest 4,000,000 x 5/12 x 8% 133,333
Total Cash Received 3,925,000

Selling Price 3,791,667

Carrying Value 3,960,000
Loss on Sale 168,333
2. Debt investment at fair value through other comprehensive income

June 1, Year 4 DEBIT CREDIT

Cash 160,000
Debt Investment at FVOCI 26,138
Interest Receivable 26,667
Interest Revenue 159,471

Fair Value 8% x 4,000,000 3,920,000

Amortized Cost in the Table 3,827,292.39
Cum. Unrealized Gain 92,707.61
Less: Bal of Equity 27,102.31
65,605,30

Nov 1, Year 4 DEBIT CREDIT

Cash 3,925,000
Loss on Sale of Debt Investment 66,990
Debt Investment at FVPL 3,858,657
Interest Revenue 133,333

Selling Price 3,791,667

Accrued Interest 4,000,000 x 5/12 x 8% 133,333
Total Cash Received 3,925,000

Selling Price 3,791,667

Carrying Value 3,858,657
Loss of Sale 66,990

3. Debt investment at amortized cost

Nominal Effective Discount Carrying
Date Interest Interest Amortization Value
0.04 0.05
June 1, Year 4 160,000 191,364.62 31,364.62 3,858,657.01
Dec 1, Year 4 160,000 192,932.85 32,932.85 3,891,589.86