Professional Documents
Culture Documents
Equity: Distance Education Course Guide Using Obtl Design V1
Equity: Distance Education Course Guide Using Obtl Design V1
2021-2022
DISTANCE EDUCATION COURSE GUIDE USING OBTL DESIGN v1
DISCUSSION
Let’s have a short review of the important concepts on the measurement of financial assets, but
this time, I want you to focus your attention on equity securities.
In this Module, it is assumed that you are already familiar with the concepts underlying the
measurement of equity securities. What we are about to discuss in this Module are the different
forms of equity investments and how it affects the other elements of financial statements.
SAMPLE PROBLEM:
Accessible Company purchased for a lump sum of P3,075,000 the following long-term
investments:
A Corporation share capital 8,000 shares
B Corporation share capital 16,000 shares
C Corporation bond P1,000,000 face value
At the time of purchase, the securities were quoted at the following prices: A share, 100; B
share, 150; and C bond, 90.
Required: Prepare journal entry to record the lump sum acquisition with proper allocation of the
single cost.
SOLUTION:
Fair value Total Ratio Allocated cost
A 8,000 100 800,000 800/4,100 600,000
B 16,000 150 2,400,000 2,400/4,100 1,800,000
C 1,000,000 90% 900,000 900/4,100 675,000
4,100,000 3,075,000
When equity securities are sold, the difference between the consideration received and
the carrying amount of the financial asset shall be recognized in profit or loss. But what if, the
equity shares of the same class were acquired on different dates at different costs, and only a
portion is subsequently sold? In such a case, the entity shall determine the cost of the shares
sold using either FIFO (if the problem is silent) or average cost approach.
SAMPLE PROBLEM:
Inane Company purchased shares to be measured at cost because the shares are unquoted.
Purchases were in the following order:
a. Purchased 1,000 ordinary shares of Star Company at P300 per share plus transaction
costs of P9,000.
b. Purchased 4,000 ordinary shares of Star Company at P250 per share plus transaction
costs of P30,000.
c. Sold 1,500 ordinary shares of Star Company at P280 per share minus transaction costs
of P15,000.
Required: 1.) Prepare journal entries to record transaction a and b. 2.) Prepare journal entry to
record transaction c under each of the following assumptions: 2a.) The shares sold are
accounted on FIFO basis. 2b.) The shares sold are accounted on an average basis.
SOLUTION:
Since this is an investment in another company’s equity shares, the shareholder can
receive dividends out of his/her investment. This is thoroughly discussed in the book of Valix,
Chapter 16. Here is a summary of the journal entries under the different types of dividends. You
might be asking why I am showing you the journal entries? Because, the journal entries will
clearly show us as to what account or element of financial statements will be affected by the
transaction. It will be easier for you to analyze the effects.
EFFECT ON
TYPE OF DIVIDEND PRO-FORMA JOURNAL ENTRY
INVESTMENT ACCT.
Cash XX
Cash dividend No effect
Dividend income XX
Property dividend (except Noncash assets XX
shares of another entity Dividend income XX No effect
declared as dividends)
Property dividend (in the form of Investment in shares XX
shares of another entity Dividend income XX Increase
declared as dividends)
Liquidating dividend (except in Cash or other appropriate acct. XX
Decrease
the case of wasting asset corp.) Investment in shares XX
Cash or other appropriate acct. XX
Liquidating dividend (wasting Decrease (to the extent
Investment in shares XX
asset corp.) of liquidating dividends)
Dividend income XX
Share/Stock dividend (issuing
entity’s own shares as No entry No effect
dividends)
Shares received in lieu of cash
Investment in shares XX
dividends (in effect: Property Increase
Dividend income XX
dividend)
Cash XX
Cash received in lieu of share Loss on investment* XX
dividends (“as if” approach – Investment in shares XX Decrease
applied if the problem is silent) Gain on investment* XX
*depends on whether it is a gain/loss
Cash received in lieu of share Cash XX
No effect
dividends (BIR approach) Dividend income XX
Let’s now proceed to share split. I just like to reiterate that share split does not affect the
total cost of investment, only a decrease or increase in the cost per share and the number of
shares. Also, the ratio is always new for old. Meaning, for example, 4:1 share split. This means
4 new shares for every share, hence, a split up.
As to special assessments, its effect is an increase in the investment account. The pro-
forma journal entry is a debit to Investment in shares, and a credit to Cash. Lastly, for the
redemption of shares, the debit to Cash is computed by multiplying the selling price to the
number of shares, then, credit the cost of the Investment account; any difference goes to gain or
loss on investment. That is, if the balancing factor is on the debit side, it is a loss on investment,
if it is on the credit side, it is a gain on investment.
SAMPLE PROBLEM: Refer to Problem 16-3 on p.420 of Valix’s book – Effective Company
SOLUTION:
1) Investment in ANA ordinary shares 300,000
Cash 300,000
2) Investment in Benguet ordinary shares 120,000
Dividend income (2,000x60) 120,000
3) Investment in ANA ordinary shares 420,000
Cash 420,000
4) Cash 60,000
Dividend income (12%x200x5,000x(6/12)) 60,000
5) memorandum entry - ANA
"Received 20,000 new shares as a result of a 2-for-1 split of 10,000 original shares."
6) Cash [(8,000x85)*95%] 646,000
Gain on sale of ANA ordinary shares 358,000
Investment in ANA ordinary shares (8,000x36)* 288,000
Share rights can be accounted for separately or not accounted for separately. If the
problem is silent, our assumption is that, share rights are NOT accounted for separately. Refer
to Chapter 16 of Valix for intensive discussion of this section.
SAMPLE PROBLEM: Refer to Problem 16-4 on p.421 of Valix’s book – Viable Company
SOLUTION:
SAMPLE PROBLEM: Refer to Problem 16-5 on p.421 of Valix’s book – Vivacious Company
SOLUTION:
ACCOUNTED FOR SEPARATELY
1) Receipt of rights Stock rights 125,000
Investment in equity securities 125,000
[(125-100)/(4+1)]x25,000
Exercise of rights Investment in equity securities (squeeze) 750,000
Cash [(25,000/4)x100] 625,000
Stock rights (at cost) 125,000
2) Receipt of rights Stock rights 156,250
Investment in equity securities 156,250
[(125-100)/4]x25,000
Exercise of rights Investment in equity securities (squeeze) 781,250
Cash [(25,000/4)x100] 625,000
Stock rights (at cost) 156,250
Investment in Associate
The discussion and illustrations can be found in Chapters 17 and 18 of Valix’s book. Use
it as your reference for this topic. Below is the summary of concepts that you need to take note.
Methods
20% OR MORE LESS THAN 20%
• EQUITY • FAIR VALUE
– Initial recognition: at cost – Affected by changes in FV
– Increased by the investor’s – Cash dividends: dividend
share in profit
income
– Decreased by the investor’s
share in loss – Stock dividends: add to the
total stocks held
– Cash dividends: reduce the
carrying amount of the • COST
investment – Not affected by changes in FV
– Stock dividends: add to the
– Cash dividends: dividend
total stocks held
income
– Investment must be in
ordinary shares (preference: – Stock dividends: add to the
FVTPL/FVTOCI total stocks held
Upstream/Downstream Transactions
• Investors share:
Net income – Unrealized profit on sale of
asset + Realized profit on sale of asset
• Unrealized profit : when the asset is not sold to
an unrelated party
• Realized profit:
– depreciation of the asset over its remaining
life
– When the asset is sold to an unrelated party
Measurement After
Loss of Significant Influence
Fair value
SAMPLE PROBLEMS:
Problem #1
Civility Company provided the following chronological transactions:
1. Purchased 20,000 ordinary shares of an investee for P2,400,000 representing 20%
interest on January 1, 2014. The net assets of the investee are fairly stated at
P8,000,000.
2. The investee reported a net income of P1,500,000 for 2014.
3. Received a 10% stock dividend from the investee.
4. The investee reported a net loss of P300,000 for 2015.
5. The investee paid a cash dividend of P500,000 to ordinary shareholders on December
31, 2015.
6. Sold 5,500 ordinary shares at P200 per share on December 31, 2015 resulting to loss of
significant influence.
7. The quoted market price of the investee’s share is P180 on December 31, 2015.
Required: Prepare journal entries to record the transactions under equity method and cost
method.
COST METHOD
1.) Investment in equity securities 2,400,000
Cash 2,400,000
2.) NO ENTRY
3.) memo entry (total # of shares: 20,000+(20,000*10%) = 22,000)
4.) NO ENTRY
Problem #2
On January 1, 2015, Forensic Company acquired a 10% interest in an investee for P3,000,000.
The investment was accounted for at fair value through other comprehensive income. The fair
value of the investment was P3,500,000 on December 31, 2015 and P4,500,000 on December
31, 2016.
On January 1, 2017, the entity acquired a further 15% interest in the investee for P6,750,000.
On such date, the carrying amount of the net assets of the investee was P36,000,000. The fair
value of the net assets of the investee is equal to carrying amount, except for an equipment
whose fair value exceeds carrying amount by P4,000,000. The equipment has a remaining life
of 5 years. The investee reported net income of P8,000,000 for 2017 and paid dividend of
P5,000,000 on December 31, 2017. No dividends were paid in 2015 and 2016 by the investee.
Required: 1.) Compute the goodwill on January 1, 2017. 2.) Prepare journal entries for 2015,
2016, and 2017.
Problem #3
On January 1, 2015, Grand Company acquired 30% of East Company’s voting shares for
P8,000,000. During 2015, East earned P5,000,000 and paid dividends of P2,000,000. East
reported earnings of P6,000,000 for the 6 months ended June 30, 2016 and P8,000,000 for the
year ended December 31, 2016.
On July 1, 2016, Grand sold half of the investment in East for P6,000,000 cash resulting to loss
of significant influence. East paid dividends of P2,500,000 on October 1, 2016. Moreover, on
July 1, 2016, the investment is measured at fair value through other comprehensive income.
The fair value of the retained investment is P6,500,000 on July 1, 2016, and P5,900,000 on
December 31, 2016.
Problem #4
At the beginning of the current year, Bridge Company purchased 25,000 shares of the 100,000
outstanding shares of an investee for P1,000,000. At the time of the purchase, the carrying
amount of the investee’s equity was P3,000,000. Assets having a market value greater than
carrying amount at the time of the acquisition were as follows:
The investee’s net income for the year was P700,000. Dividend per share paid by the investee
amounted to P3 at year-end.
Required: 1.) Prepare journal entries to record transactions. 2.) Compute the investment income
for the current year. 3.) Compute the carrying amount of the investment.
Problem #5 – Refer to Problem 17-5 on Valix’s book, found on p. 446. – Alpha Company
Problem #6 – Refer to Problem 17-7 on Valix’s book, found on p. 447. – Bypass Company
Problem #7 – Refer to Problem 18-2 on Valix’s book, found on p. 469. – Glorious Company