Chapter 11

Investments – Additional Concepts

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. TRUE
4. TRUE
5. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. B

2. D

3. Solutions:
Requirement (a) Held for trading securities
Date Trade date accounting Settlement accounting
Dec. Held for trading securities 1,000
29, Accounts payable 1,000
20x1
No entry
to record the purchase of investment
Dec. Held for trading securities 750 Accounts receivable 750
31, Unrealized gain – P/L 750 Unrealized gain – P/L 750
20x1
to record the fair value change to record the fair value change
Jan. Unrealized loss – P/L 250 Held for trading securities 1,500
3, Accounts payable 1,000 Unrealized loss – P/L 250
20x2 Held for trading securities 250 Accounts receivable 750
Cash 1,000 Cash 1,000
to record the settlement of the to record the purchase of investment
purchase transaction

Requirement (b) FVOCI securities

Date Trade date accounting Settlement accounting
Dec. FVOCI securities 1,000
29, Accounts payable 1,000
20x1
No entry
to record the purchase of investment
Dec. FVOCI securities 750 Accounts receivable 750
31, Unrealized gain – OCI 750 Unrealized gain – OCI 750
20x1
to record the fair value change to record the fair value change

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Jan. Unrealized loss – OCI 250 FVOCI securities 1,500
3, Accounts payable 1,000 Unrealized loss – OCI 250
20x2 FVOCI securities 250 Accounts receivable 750
Cash 1,000 Cash 1,000
to record the settlement of the to record the purchase of investment
purchase transaction

Requirement (c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. Investment in bonds 1,000
29, Accounts payable 1,000
20x1 No entry
to record the purchase of investment
Dec.
31, No entry No entry
20x1
Jan. Accounts payable 1,000 Investment in bonds 1,000
3, Cash 1,000 Cash 1,000
20x2
to record the settlement of the to record the purchase of investment
purchase transaction

4. Solutions:
Requirement (a) Held for trading securities
Date Trade date accounting Settlement accounting
Dec. Accounts receivable 1,000 Unrealized loss – P/L 200
29, Realized loss on sale 200 Held for trading securities 200
20x1 Held for trading securities 1,200 to adjust the carrying amount of the
to derecognize the investment sold investment sold to fair value as of
and to recognize the gain on disposal trade date
Dec.
31, No entry No entry
20x1
Jan. Cash 1,000 Cash 1,000
3, Accounts receivable 1,000 Held for trading securities 1,000
20x2
to record the settlement of the sale to derecognize the investment sold
transaction and to record the settlement of the
sale transaction

Requirement (b) FVOCI securities

Date Trade date accounting Settlement accounting
Dec. Accounts receivable 1,000 Unrealized loss – OCI 200
29, Realized loss on sale 200 FVOCI securities 200
20x1 FVOCI securities 1,200 to adjust the carrying amount of the
to derecognize the investment sold investment sold to fair value as of
and to recognize the gain on disposal trade date
Dec.
31, No entry No entry
20x1

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Jan. Cash 1,000 Cash 1,000
3, Accounts receivable 1,000 FVOCI securities 1,000
20x2
to record the settlement of the sale to derecognize the investment sold
transaction and to record the settlement of the
sale transaction

Retained earnings 200

Realized loss on sale 200

to transfer the accumulated unrealized

gain to profit or loss as a
reclassification adjustment

Requirement (c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. Accounts receivable 1,000
29, Realized loss on sale 200
20x1 Investment in bonds 1,200
No entry
to derecognize the investment sold
and to recognize the gain on
disposal
Dec.
31, No entry No entry
20x1
Jan. Cash 1,000 Cash 1,000
3, Accounts receivable 1,000 Realized loss on sale 200
20x2 Investment in bonds 1,200
to record the settlement of the sale
transaction to derecognize the investment sold, to
record the settlement of the sale
transaction and to recognize the gain
on disposal

5. B

6. D

7. Solutions:

Scenario (a): Amortized cost to FVPL

Jan. FVPL asset 120,000
1, Amortized cost asset 100,000
20x3
Gain on reclassification (squeeze) 20,000

Scenario (b): FVPL to Amortized cost

Jan. FVPL asset 20,000
1, Unrealized gain – P/L 20,000
20x3
Jan. Amortized cost asset 120,000

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 1, FVPL asset 120,000
20x3

Scenario (c): Amortized cost to FVOCI (mandatory)

Jan. FVOCI asset 120,000
1, Amortized cost asset 100,000
20x3
Gain on reclassification – OCI 20,000

Scenario (d): FVOCI (mandatory) to Amortized cost

Jan. FVOCI asset 20,000
1, Unrealized gain – OCI 20,000
20x3
Jan. Amortized cost asset (squeeze) 95,000
1,
Unrealized gain – OCI (5K + 20K) 25,000
20x3
FVOCI asset (FV on reclassification date) 120,000

Scenario (e): FVPL to FVOCI (mandatory)

Jan. FVPL asset 20,000
1, Unrealized gain – P/L 20,000
20x3
Jan. FVOCI asset 120,000
1,
FVPL asset 120,000
20x3

Scenario (f): FVOCI (mandatory) to FVPL

Jan. FVOCI asset 20,000
1, Unrealized gain – OCI 20,000
20x3
Jan. FVPL asset 120,000
1,
FVOCI asset 120,000
20x3
Jan. Unrealized gain – OCI 25,000
1,
Gain on reclassification – P/L 25,000
20x3

8. D

9. Solutions:

Dec. Impairment loss – P/L 3,000

31, Unrealized loss – OCI (squeeze) 7,000
20x1
Investment in bonds – FVOCI 10,000
Dec. Interest receivable 10,000

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 31, Interest income 10,000
20x1

10. Solution: (200/1,000) x 30,000 = 6,000

11. Solution: (200 stock rights x ₱5.50) = 1,100

12. C

13. A

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PROBLEM 3: EXERCISES

1. Solutions:

Requirement (a): Reclassification date

The reclassification date is January 1, 20x3.

Requirement (b): Journal entry on reclassification date

Interest Interest
Date Amortization Present value
received income
Jan. 1, 20x1 1,903,927
Dec. 31, 20x1 200,000 228,471 28,471 1,932,398
Dec. 31, 20x2 200,000 231,888 31,888 1,964,286
Dec. 31, 20x3 200,000 235,714 35,714 2,000,000

Jan. 1, Held for trading securities 2,080,000

20x3 (2M x 104%)
Investment in bonds at
amortized cost 1,964,286
Gain on reclassification 115,714

2. Solutions:

Requirement (a):
Jan. Held for trading securities 20,000
1, [2M x (104% - 103%)]
20x3 Unrealized gain – P/L 20,000
Jan. Investment in bonds at amortized
1, cost (2M x 104%) 2,080,000
20x3 Held for trading securities 2,080,000

Requirement (b):
Carrying amount (fair value) at date of reclassification 2,080,000
Face amount (2,000,000)
Difference – Premium 80,000

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3. Solution:

1/1/x2
FVPL asset 6,000
Unrealized gain – P/L 6,000

Amortized cost asset 226,000

FVPL asset 226,000

4. Solutions:

Scenario (a): Amortized cost to FVPL

Jan. FVPL asset 240,000
1, Amortized cost asset 200,000
20x3
Gain on reclassification (squeeze) 40,000

Scenario (b): FVPL to Amortized cost

Jan. FVPL asset 40,000
1, Unrealized gain – P/L 40,000
20x3
Jan. Amortized cost asset 240,000
1,
FVPL asset 240,000
20x3

Scenario (c): Amortized cost to FVOCI (mandatory)

Jan. FVOCI asset 240,000
1, Amortized cost asset 200,000
20x3
Gain on reclassification – OCI 40,000

Scenario (d): FVOCI (mandatory) to Amortized cost

Jan. FVOCI asset 40,000
1, Unrealized gain – OCI 40,000
20x3
Jan. Amortized cost asset (squeeze) 190,000
1,
Unrealized gain – OCI (10K + 40K) 50,000
20x3
FVOCI asset (FV on reclassification date) 240,000

Scenario (e): FVPL to FVOCI (mandatory)

Jan. FVPL asset 40,000
1, Unrealized gain – P/L 40,000
20x3
Jan. FVOCI asset 240,000
1,
FVPL asset 240,000
20x3

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Scenario (f): FVOCI (mandatory) to FVPL
Jan. FVOCI asset 40,000
1, Unrealized gain – OCI 40,000
20x3
Jan. FVPL asset 240,000
1,
FVOCI asset 240,000
20x3
Jan. Unrealized gain – OCI 50,000
1,
Gain on reclassification – P/L 50,000
20x3

5. Solutions:

Dec. Impairment loss – P/L 9,000

31, Unrealized loss – OCI 21,000
20x1
Investment in bonds – FVOCI 30,000
Dec. Interest receivable 30,000
31, Interest income 30,000
20x1

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PROBLEM 4: MULTIPLE CHOICE - THEORY
1. A 6. D 11. B
2. C 7. D
3. C 8. D
4. B 9. D
5. D 10. C

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PROBLEM 5: COMPUTATIONAL: MULTIPLE CHOICE
1. B (1,000 stock rights x 5 fair value per stock right) = 5,000

2. C (140,000 x 15%) = 21,000 dividend revenue

3. A 6,000 dividend revenue

4. A - Reclassification from FVOCI (election) to held for trading is not

permitted.

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