Chapter 6 Equity Investments __ Other Transactions Subsequent to Initial Recognition of Equity Investment s at Fair Value > After initial recognition, at fair value are affected by (1) equity Investments share/stock rights, stock splits; and (3 receipt of dividends; (2) share/s i + eh Investments at fair value inless they are considered as rn of ) or if they represent distribution of investments (liquidating dividend, fncquisition of shares, Such dividends are credited tg earings earned prior to mple for A Corporation, and B Company, Using the preceding exa ‘and paid P5.00 per share cash dividend on assume that B Company declared its ordinary shares, The receipt of the cash dividend is re orded as Cash 5,000 Dividend Revenue 5,000 If 20%6-of the P5.00 cash dividends declared and paid by B Company are from Its earnings before the acquisition of shares by A Corporation the receipt of the cash dividend is recorded as Cash Dividend Revenue Equity Investments at Fair Value 1,000 + lends are distribution ‘They are usually in the form of shi investor records the prope! ns in the form of the investee’s non-cash ares held by the investee In other assets. rty dividends received as di companies. ‘The t the asset's fair mé odevenues aria valateh ation holds 1,000 ordinary shares of B Property dividend illustrated. A Corpor Company acquired at a total cost of P126,000. The shares ane designated as equity. investment at fair value through other comprehensive income. Subsequently, B Company declared and issued one share of ¢ Company ordinary shares for every ten shares held in B Company. © Company shares are currently selling at P50 per share, ‘The receipt of the property dividends is recorded as Equity Investments at Fair Value 5, Dividend Revenue 5,000 1/000/10 = 100 shares; 100 x 50 . Share dividends (also called bonus issue) and share splits are accounted by the investor by adjusting the amount of the previous shares held. No formal urea entry is required in the accounts, A memorandum entry 1s made Mi eating the effect of the bonus Issue. However, when the bonus issue Is in 1e form of another class of share capital (different from shares held), the 142(iii care Chapter 6 Equity Investments transaction is treated similar to a property dividend, ‘The shares received are recorded at its fair value with a credit to dividend revenue. Bonus issue illustrated. A Corporation holds 1,000 ordinary shares of B Company at a total cost of P126,000. The shares are designated as equity investment at fair value through other comprehensive income. Subsequently, B Company declared a 20% bonus issue. The memorandum entry for this transaction is Memo. Received 200 ordinary shares of B Company as 20% bonus issue on 1,000 shares held. The adjusted cost for the 1,200 shares now held is P105.00 per share (P126,00 00 shares). Special bonus issue illustrated. A Corporation holds 1,000 ordinary shares of B Company acquired at a total cost of P126,000. The shares are designated as equity investment at fair value. Subsequently, B Company declared a preference share dividend of one share for every five ordinary shares held. On the date of declaration, B Company preference shares are selling at P100 per share. The receipt of preference share dividend is recorded as Equity Investments at Fair Value 20,000 : Dividend Revenue 20,000 1,000 + 5 = 200 shares; 200 x 100 Share split illustrated. A Corporation holds 1,000 ordinary shares of B Company acquired at a total cost of P126,000. The shares are held as investments at fair value through other comprehensive income. Subsequently, B Company split its shares on a 2-for-1 basis. The memorandum entry for the share split is Memo. Received additional 1,000 ordinary shares of B Company as a result of 2-for-1 split on 1,000 shares held. The adjusted cost for the 2,000 shares now held is P63.00 per share (P126,000 = 2,000 shares). > ar + Share rights are granted to existing shareholders to subscribe for new shares before such shares are offered for sale to the public. There is usually no fair value for the rights upon their receipt; thus, only a memorandum entry is made. An investor that receives the stock rights has three possible options: (1) Exercise the rights; (2) Sell the rights; or (3) Allows the rights to lapse. : ‘The exercise of rights gives rise to a new equity investment holdi cost ofthe new equity investment isaeeaededat its fair value and since the payment or subscription price would be usual lower that its fair value, the excess is presumably the fair value of the "stock rights. Such excess than is taken to profit or loss. 143P Chapter 6 Equity Investments _ ‘i, The expiry or lapse of stock rights is ee bya memorandum entry, — ights Illustrated. Investor Company owns 2,500 ordinary shares eee crann that has several hundred thousand shares Publicly traded. These shares were acquired at PSO per share and are appropriately designated as equity investments at fair value. On September 19, Investee Corporation distributed share rights entitling shareholders to buy one new ordinary share for P45 cash and two of these rights. —_-——————————. Subsequently, Investor Company sold 500 rights at P4 and exercised ining rights, at which time the fair value per ordinary share i§ PS: The entries to record the receipt, sale and exercise of the share rights follow: Memo: — Received from Investee Corporation 2,500 rights to purchase one ordinary share for every two shares held at P45 per share. Cash 2,000 Investment Income 3 2,000 500 rights x 4 Equity Investments 54,000 Investment Income 9,000 Cash 45,000 2,000 rights + 2 = 1,000 shares; 1,000 x 54=54 1,000 x45 = 45,000 nie * Statement Presentation and M ‘€asurement after [, i Investments at Fair Value through Profit or Nose ee wea - Equity ii vestments at fair assets in the statement of lue through Profit or loss are presented as current Mnancial position at fair values, with unrealized n profit or loss,