CHAPTER 6 – INVESTMENTS IN FINANCIAL INSTRUMENTS

CHAPTER 6
INVESTMENTS IN FINANCIAL INSTRUMENTS

Multiple Choice – Theories

1. B 2. A 3. B 4. D 5. C
6. A 7. B 8. C 9. B 10. D

Problem 1
1. A 2. C 3. B, E 4. C, D 5. C, D
6. A, C, D 7. D 8. D, E 9. D 10. A, B, C, D

Problem 3 HONEY COMPANY

1. Selling price on July 3 P130,000

Dividends included in the selling price 1,000 x 5 (5,000)
Carrying value of shares sold 600,000 x 1000/5,500 shares (109,091)
Gain on Shares sold P15,909

2. Proceeds from sale P140,000

Carrying value of shares sold = 490,909 x 1,000/4,500 (109,091)
Gain on December 4 sale P 30,909

3. Dividend revenue for the year 2018:

November dividends 500 shares x P 5 P22,500
On July 10 sale 1,000 x 5 5,000
Dividends accrued on December 31 ( 3,500 x P5) 35,000
Total dividend income P62,500

4. Adjusted balance of the investment account

shares Peso balance
Market value, January 1 5,000 P600,000
May 31 bonus issue 500
July 10 sale (1,000) (109,091)
Dec 4 sale (1,000) (109,091)
Balances before adjustment to fair value 3,500 381,818
Adjustment to market (84,318)
Balance, December 31, at fair value 3,500 P297,500

Adjusting Entries
Dividend Income 12,000
Trading Securities 12,000

Trading Securities 20,909

SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS

Gain on Sale of Trading Securities 20,909

Trading Securities 30,909

Gain on Sale of Trading Securities 30,909

Dividends Receivable 35,000

Dividend Income 35,000

Unrealized Loss on Trading Securities 84,318

Unrealized Gain on Trading Securities 84,318

Problem 4 MYRA COMPANY

Shares At cost Unrealized

gains
(losses)
Jan. 1 balances adjusted to Fair value
3,000 @ 80 3,000 P240,000 60,000
8,000 @ 100 8,000 800,000 ---
May 31 4,000 x (120-5) 4,000 460,000
Oct. 31 Sold 5,000 shares (3,000) (240,000)
(2,000) (200,000) 50,000
31 Realized gain transferred to RE (110,000)
Dec. 22 Sold 2,000 shares (2,000) (200,000) 80,000
22 Realized gain transferred to RE (80,000)
31 Adjustment to FV 276,000
Dec. 31 Per Audit 8,000 P 860,000 P 276,000

Investment in Ivan Company 60,000

Unrealized Gain /Loss on Equity Investments–
Other Comprehensive Income 60,000
11,000 x (105 – 5)* = 1,100,000
1,100,000 – 1,040,000 = 60,000
*105 is FV dividends-on

Dividend Income 55,000

Retained Earnings 55,000
Dividends accrued last year.

Dividend Income 20,000

Investment in Ivan 20,000
Dividends included in the purchase price
of March 5 acquisition, acquired
dividends-on. 4,000 x 5 = 20,000

Investment in Adams 9,000

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SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS

Dividend Income 9,000

Property dividends should be recorded
at fair value

Investments in Ivan 50,000

Unrealized Gain/Loss on Equity Investments
- OCI 50,000

Selling price P550,000

Previous carrying value =
fair value on January 1
5,000 x 100 500,000
Unrealized gain – OCI P 50,000

*Unrealized Gain/Loss on Equity Investments – OCI 110,000

Retained Earnings 110,000
3,000 (110 – 80) + 2,000 (110-100) =110,000

Investment in Ivan 80,000

Unrealized Gain/Loss on Equity Investments 80,000
- OCI
Selling price = FV 2,000 x 140 = 280,000
Previous CV = FV, Jan. 1 = 200,000
Unrealized Gain 80,000

Miscellaneous Receivables 280,000

Investment in Ivan (2,000 x 140) 280,000

*Unrealized Gain/Loss on Equity Investments - OCI 80,000

Retained Earnings 80,000
2,000 ( 140 – 100) = 30,000

Investments in Ivan 276,000

Unrealized Gain/Loss on Equity Investments 276,000
- OCI
FV, 12/31/15 = 8,000 x 142 = 1,136,000
Previous CV :
Old = FV, Jan. 1
= 4,000 x 100 = 400,000
New=4,000 x 115 = 460,000 860,000
Unrealized Gain – OCI 276,000

Investments in Adams 1,500

Unrealized Gain/Loss on Equity 1,500
Investments – OCI (17 – 16) x 1,500

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SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS

Problem 7

Total amount paid P547,778

Accrued interest 500,000 x 10% x 2/12 8,333
Initial measurement P539,445

Amortization Table

Date Nominal Interest(5%) Effective Interest (4%) Premium Carrying Value, end
Amortization
08/1/17 P539,445
11/30/17 P16,667 P14,385 P2,282 537,163
05/31/18 25,000 21,487 3,513 533,650
11/30/18 25,000 21,346 3,654 529,996
05/31/19 25,000 21,200 3,800 526,196

(a) Interest Revenue:

2017: P14,385 + 1/6(P21,487) = P17,966
2018: 5/6(21,487) + 21,346 + 1/6(21,200) = P42,785

(b) Interest Receivable, December 31, 2018

P500,000 x 10% x 1/12 = P4,167

(c) Carrying value

Dec. 31, 2017: P537,163 – 1/6(3,513) = P536,577
Dec. 31, 2018: P529,996 – 1/6(3,800) = P529,363

Problem 9

Amortization Table

Date Nominal Interest(3%) Effective Interest (4%) Discount Carrying Value, end
Amortization
January 2, 2018 P1,815,000
June 30, 2018 P60,000 P72,600 P12,600 1,827,600
December 31, 2018 60,000 73,104 13,104 1,840,704

(a) Entries that should have been made:

Jan. 2 Debt Investments – Fulfilled Dreams 6% Bonds 1,815,000

Cash 1,815,000

June 30 Debt Investments – Fulfilled Dreams 6% Bonds 12,600

Cash 60,000

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SOLUTIONS TO INVESTMENTS IN FINANCIAL INSTRUMENTS

Interest Revenue 72,600

Dec. 31 Debt Investments – Fulfilled Dreams 6% Bonds 13,104

Cash 60,000
Interest Revenue 73,104

31 Debt Investments – Fulfilled Dreams 9% Bonds 109,296

Unrealized Gains/Losses on Debt Investments 109,296
*97.5% x 2,000,000 = 1,950,000
Amortized Cost 1,840,704
Unrealized gain P 109,296

*FV = 195,000/200,000 = 97.5%

Dec. 31 Cash 195,000

Unrealized Gains/Losses on Debt Investments 10,930
Debt Investments – Fulfilled Dreams 6% Bonds 195,000
Gain on Sale of Debt Investments 10,930

(b) Audit Adjustments

Debt Investments- Fulfilled Dreams 6% Bonds 145,704

Interest Revenue 145,704

Debt Investments- Fulfilled Dreams 6% Bonds 109,296

Unrealized Gains/Losses on Debt Investments 109,296

Unrealized Gains/Losses on Debt Investments 10,930

Gain on Sale of Debt Investments 10,930

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