RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

LESSON 4

MODULE NO. 4: INVESTMENTS IN EQUITY

SECURITIES

1. Nature, Characteristics and Accounting Procedures for Investment

in Equity Securities
2. Other Transactions Affecting Investment Securities:
a. Dividends
b. Stock Splits
c. Special Assessments
d. Stock Rights
3. Nature, Characteristics and Accounting Procedures for
Investments in Associates and Joint Ventures

Overview

This module is prepared for the students to understand the nature of

investments in equity securities and investment in associates and joint
ventures.
This module introduces the nature of investments in equity securities,
types and classification, initial recognition and measurement, subsequent
measurement and reclassification, derecognition and presentation in the
financial statements.
This module will also include the investments in associate and joint
ventures, the concept of significant influence, and accounting recognitions for
this kind of investments.
This module will cover a brief discussion of the theory and standard
behind the topic, exercises and practice problem the cover the said topic.

Study Guide

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

This module is designed for the students to understand provisions,

contingencies and other liabilities. This module includes:
1. Topic Discussions - to be read by the students to fully understand the
topic.
2. Assessment – to be accomplished by the students after the
discussion to test their skills and understanding to the subject matter.
3. Assignment – activity to be done by students to be submitted to the
instructor. This is to reinforce or advance the student’s learning. It is
relevant to the past, current, and future lessons.
To complete the requirements of this module, the students are required to:
1. Read and understand the topic discussion and the guided exercises
2. Accomplish the assessment.
3. Accomplish the assignment due on next meeting.

Learning Outcomes

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

1. Identify and describe the nature of equity instruments, its classification

as a financial asset, its initial recognition and measurement,
subsequent measurement and reclassification, derecognition and
presentation in the financial statements.
2. Describe investment in associate and significant influence, and the
situations that will give rise to this kind of investment.

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Cities of Mandaluyong and Pasig

Topic Presentation

INVESTMENT IN EQUITY SECURITIES

Investment in equity securities are investments held by the entity in the form of
equity instruments. Equity instrument is any contract that evidences a residual
interest in the assets of an entity after deducting all its liabilities.
Examples of equity instruments are ordinary shares, certain preference shares and
warrants or written call options.
CLASSIFICATION OF INVESTMENT IN EQUITY SECURITIES

Percent of Ordinary Shares Preference Shares

Ownership*
< 20% FVPL or FVOCI FVPL or FVOCI
20% to 50% Investment in Associate FVPL or FVOCI
> 50% to 100% Investment in Subsidiary FVPL or FVOCI

* Note: The rates and the related classification are only presumptions and if there is
no contradictory information. The nature of the relationship between the investor and
investee will still be the primary consideration on classifying the investments.

STANDARDS APPLICABLE FOR INVESTMENTS IN PREFERENCE SHARES

Type of Purpose Method Applicable

Investment Standards
Financial Dividend/Speculation Fair Value PAS 32
Asset PFRS 7
PFRS 9

STANDARDS APPLICABLE FOR INVESTMENTS IN ORDINARY SHARES

Type of Purpose Method Applicable

Investment Standards
Financial Dividend/Speculation Fair Value PAS 32
Asset PFRS 7
PFRS 9
Investment in Significant Influence Equity Method PAS 28
Associate PFRS 7
Investment in Joint Control Equity Method PAS 28
Joint Venture PFRS 11
PFRS 7
Investment in Control a. Separate FS - PAS 27
Subsidiary Cost or Equity Method PAS 28
b. Consolidated FS PFRS 10
PFRS 7

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

A. INITIAL RECOGNITION AND MEASUREMENT OF INVESTMENTS IN EQUITY

SECURITIES AT FAIR VALUE
Initial Recognition
Under PFRS 9, financial assets are recognized when, and only when the entity
becomes party to the contractual provisions of the instrument.
Measurement
Under PFRS 9, investment in equity securities are initially measured:
1. FVPL – at fair value excluding transaction costs
a. Financial assets held for trading
b. All other investments in quoted equity instruments
c. Financial assets that are irrevocably designated on initial recognition at
FVPL

2. FVOCI – fair value including transaction costs

a. Financial assets not held for trading by irrevocable election on initial
recognition at FVOCI
3. Unquoted equity securities recorded at cost
Acquisitions in between dates of declaration and record of dividends
(dividends-on)
If the investment is acquired in in between dates of declaration and record of
dividends, the dividends that have accrued on such investment shall be deducted
from the total consideration given to arrive at the adjusted cost of the investment. To
record such acquisition would be:
1. To record the acquisition
Investment in equity securities xxx
Dividend receivable xxx
Cash xxx

2. To record receipt of dividends

Cash xxx
Dividend receivable xxx

Presentation in the Financial Statements

1. Financial assets at FVPL – current assets
2. Financial assets at FVOCI– generally as noncurrent assets, except when they
are due within 12 months from the reporting date.

B. SUBSEQUENT RECOGNITION AND MEASUREMENT OF INVESTMENTS IN

EQUITY SECURITIES AT FAIR VALUE
Investment in equity securities with fair value may subsequently be classified to
either financial assets at FVPL or FVOCI

SUBSEQUENT MEASUREMENT: FVPL FVOCI

Measurement at reporting date Fair value Fair value

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Cities of Mandaluyong and Pasig

Change in fair values (Unrealized gain or loss) P/L OCI

Computation of Unrealized Gain or Loss:

FVPL FVOCI
Fair value (measurement date) xxx Fair value (measurement date) xxx
Less: Carrying value (FV previous Less: Carrying value (FV previous
reporting date) xxx reporting date) xxx
Unrealized gain (loss) – P/L xxx Unrealized gain (loss) – P/L xxx

OR

Fair value (measurement date) xxx

Less: Cost xxx
Unrealized gain (loss) – SFP xxx

The journal entry to record the unrealized gain or loss is:

Unrealized gain Investments in equity securities – FVPL/FVOCI xxx
Unrealized gain – FVPL/FVOCI xxx
Unrealized loss Unrealized loss – FVPL/FVOCI xxx
Investments in debt securities – FVPL/FVOCI xxx

C. OTHER TRANSACTIONS SUBSEQUENT TO ACQUSITION

1. DIVIDENDS
Distribution of corporate income to its shareholders on a prorate basis. It is
distributed out of accumulated earnings of corporation except for liquidating
dividend which represents return to the shareholders of their investments.

Three Different Dates Related to Dividends:

I. Date of Declaration – date when the Board of Directors announces the
distribution of dividends. On the point of view of the investor, dividend
income may or may not be recorded.
II. Date of Record – is the cut-off date that determines who among the
shareholders is entitled to dividend per listing as to record date. No journal
entry is required on this date.
III. Date of Payment – is the date when the dividend is received.
Dividends Out of Earnings
I. Cash Dividends
Cash dividends are payment of cash to shareholders in proportion to
number of shares owned. Cash dividend maybe a certain amount of pesos
per share or a certain percent of par or stated value.

Journal Entries:

Date of Dividend receivable xxx

declaration Dividend Income xxx
Date of NO ENTRY
record
Date of Cash xxx
payment Dividend receivable xxx

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II. Property Dividends

Dividends paid in the form of some asset other than cash. Property
dividends, regardless of type of asset, should always be recorded at fair
value at the date of declaration irrespective of the date of payment.
Journal Entries:

Date of Dividend receivable xxx

declaration Dividend Income xxx
Date of NO ENTRY
record
Date of Noncash asset xxx
payment Dividend receivable xxx

III. Scrip Dividends

Dividend in the form of issuance of scrip or promissory notes that is payable
in a future date.
Journal Entries:

Date of Scrip dividend receivable xxx

declaration Dividend Income xxx
Date of NO ENTRY
record
Date of Cash xxx
payment Interest income xxx
Dividend receivable xxx

IV. Share Dividends/Bonus Issue

Dividend paid in the form of the issuing entity’s own share. Distribution of
share dividends in the same class of share capital increases the number
of shares held by each stockholder, without any change in total
shareholders’ equity balance. The equity of each stockholder after the
receipt of bonus is also unchanged. Thus, on the point of view of the
investor who receives the share dividends only prepare a memorandum
entry. The receipt of share dividends merely adjusts the carrying value
per share held by the investor.

However, if a share dividend in the form of another class of share

capital (special bonus issue), there are several interpretations to account
for the share dividends different from those held:
1. The receipt of share dividends will be treated as follows:
a. Unquoted securities – allocate the original cost using the aggregate
par value method. Journal entry, assuming investments in
preference shares are received:
Investment in equity securities – preference shares xxx
Investment in equity securities – ordinary shares xxx
b. For FVPL and FVOCI – recognize share dividends as an increase in
the amount of investment and an unrealized gain. Journal entry is:
Investment in equity securities xxx

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Cities of Mandaluyong and Pasig

Unrealized gain – FVPL/FVOCI xxx

2. The receipt of share dividends will be treated as property dividends.

The share dividends received is recognized at fair value with a credit
to dividend income. Journal entry is:
Investment in equity securities xxx
Dividend income xxx
V. Cash Received In Lieu of Share Dividends
When share dividends are declared and received, they are not considered
as dividend, although a previously recognized share dividends may be
settled by cash in lieu of share dividends.
Cash received in lieu of share dividends “as if” the stocks were received
and subsequently sold at the amount of cash received. This is not a
dividend income, however, gain or loss shall be recognized.
Journal Entries:

Date of MEMORANDUM ENTRY

declaration
Date of NO ENTRY
record
Date of Cash xxx
payment Investment in equity securities xxx
Gain on sale (if any) xxx
VI. Shares Received In Lieu of Cash Dividends
When cash dividends are declared and received, they are initially
considered as dividend income, although a previously recognized cash
dividends may be settled by shares in lieu of cash dividends.

Shares received in lieu of cash dividends are recognized as income at the

fair value of the stock received, except for unquoted securities (at cost).

Date of Dividend receivable xxx

declaration Dividend Income xxx
Date of NO ENTRY
record
Date of Investment in equity securities xxx
payment Dividend receivable xxx
Dividend income (if any) xxx

VII. Liquidating Dividends

Liquidating dividends, also dividends out of capital or return of investment
are not considered as dividend income but as a credit to the investment
account. Partial liquidation can be done only if the entity is a wasting asset
corporation, otherwise the entity can only perform one-time liquidation.

Partial Cash xxx

liquidation Investment in equity securities xxx
To record Cash xxx
full Loss on liquidation (if any) xxx
liquidation Investment in equity securities xxx

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Gain on liquidation (if any) xxx

2. STOCK SPLIT
Stock split or share split is a decision by the company’s board of directors to
change the number of shares that are outstanding with a corresponding change
in the par value or stated value of shares. Stock split may either be split up or
split down.
I. Split up – this is a transaction whereby the original shares are called in
for cancellation and replaced by a larger number of shares
accompanied by a reduction in the par value or stated value of shares.
II. Split down or reverse share split – this is a transaction whereby the
original shares are called in for cancellation and replaced by a smaller
number of shares accompanied by an increase in the par value or
stated value of shares.
Accounting for share split, on the point of view of the investor will initially be
recorded as a memorandum entry because only the number of shares will be
affected by the share split. However, for FVPL and FVOCI, since they are
measured at fair value, the shares must be also measured at fair value, thus any
changes in connection to change in shares must be reflected at fair value.
3. SPECIAL ASSESSMENTS
Special assessments are additional contributions required by an entity to its
shareholders especially during financial difficulties. This is treated as additional
cost of investment and recorded as:
Investment in equity securities xxx
Cash xxx

4. STOCK RIGHTS
A stock right/rights issue or preemptive right is a privilege giving current
shareholders the first right to buy shares in a new offering, thus maintaining their
proportionate ownership interest. This is normally evidenced by a certificate of
ownership of stock right or called as share warrants.

Stock rights are valuable to a shareholder because the exercise price or price to
purchase a share is generally below the prevailing market price of stock.

PFRS 9 does not address the accounting issue for stock rights but stock rights
are also form of financial assets. In accounting for stock rights, they are
designated as:
1. Stock rights are not accounted for separately
Share rights as an embedded derivative (a component of a hybrid or
combined contract with the effect that some of the cash flows of the combined
contract vary in a way similar to a stand-alone derivative) is not accounted for
separately because the host contract – investment in equity securities is a
financial asset.

2. Stock rights are accounted for separately

Share rights as accounted for separately and a form of equity instrument is
therefore measured initially at fair value. Share rights are normally classified
as current assets if the rights are accounted for separately.

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Not accounted for separately Accounted for separately

Upon receipt of MEMORANDUM ENTRY ONLY Stock rights xxx
stock rights Investment in equity securities/
Unrealized gain xxx
Upon exercise of Investment in equity Investment in equity securities xxx
rights securities xxx Cash xxx
Cash xxx Stock rights xxx

When expired MEMORANDUM ENTRY ONLY Loss on stock rights xxx

Stock rights xxx
When sold Cash xxx Cash xxx
Investment in equity securities xxx Loss on sale (if any) xxx
Stock rights xxx
(at net amount received – no gain Gain on sale (if any) xxx
or loss recognized)
NOTE: The accounting for stock rights as an investment is yet to be settled. Several academicians
have different point of view on accounting for stock rights. For now, we use one interpretation about
accounting for stock rights.

Theoretical Value of Rights

If the fair value of the stock rights is not given, the entity can compute its value using the
theoretical value of rights.

a. When the stock is selling right-on

When stock rights are recognized after the date of declaration and before the
date of record, the shares are known to be selling rights-on

Value of a ¿=Market value of stock ¿−on minus subscription price ¿ purchase one
Number of rights ¿
b. When the stock is selling ex-right

When stock rights are recognized after the date of record and before the date of
expiration, the shares are known to be selling ex-right

Market value of stock ex−¿ minus subscription price

Value of a ¿= purchase one share ¿
Number of rights ¿

D. RECLASSIFICATION OF INVESTMENT IN EQUITY SECURITIES

PFRS 9 only allows reclassification of debt instruments. Therefore,

reclassifications to and from financial assets that are equity securities is
prohibited.

E. IMPAIRMENT OF INVESTMENT IN EQUITY SECURITIES

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Under PFRS 9, equity securities measured at fair value are no longer tested for
impairment. The measurement to fair value is sufficient to include such
impairment, if any.

F. DERECOGNITION OF INVESTMENTS IN EQUITY SECURITIES AT FAIR

VALUE
When derecognized, gain or loss on investment in equity securities classified as
FVPL or FVOCI is computed as follows:
Consideration received xxx
Less: Dividend acquired (dividend-on)* (xxx)
Transaction cost (xxx)
Net selling price xxx
Add: New asset obtained xxx
Less: New liability assumed (xxx)
Less carrying amount at the date of derecognition (xxx)
Gain or loss on derecognition* xxx

* Note:
1. If the investment in equity securities is at FVPL, the gain or loss on derecognition
is recognized in the profit or loss.
2. If the investment in equity securities is at FVOCI, the gain or loss on
derecognition is recognized in the OCI or directly at retained earnings.

The journal entry to record the sale is:

FVPL FVOCI
To record the sale: To record the sale:
Cash xxx Cash xxx
Loss on sale (if any) xxx Retained earnings (if any) xxx
Investment in equity securities-FVPL xxx Investment in equity securities-FVOCI xxx
Gain on sale (if any) xxx Retained earnings (if any) xxx

To record transfer of unrealized gain to

RE:
Unrealized gain - OCI xxx
Retained earnings xxx

To record transfer of unrealized loss to

RE:
Retained earnings xxx
Unrealized loss - OCI xxx

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Cities of Mandaluyong and Pasig

INVESTMENT IN ASSOCIATES AND JOINT VENTURES

Under PAS 28, the following are defined in relation to investments in associates and
joint ventures:
1. Associate - An entity over which the investor has significant influence
2. Significant influence - The power to participate in the financial and operating
policy decisions of the investee but is not control or joint control of those
policies
3. Joint arrangement - An arrangement of which two or more parties have joint
control
4. Joint control - The contractually agreed sharing of control of an
arrangement, which exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control
5. Joint venture - A joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement
6. Joint venture - A party to a joint venture that has joint control of that joint
venture
7. Equity method - A method of accounting whereby the investment is initially
recognized at cost and adjusted thereafter for the post-acquisition change in
the investor's share of the investee's net assets. The investor's profit or loss
includes its share of the investee's profit or loss and the investor's other
comprehensive income includes its share of the investee's other
comprehensive income
A. IDENTIFICATION OF ASSOCIATES

If an entity holds, directly or indirectly (e.g. through subsidiaries), 20% or more of

the voting power of the investee, it is presumed that the entity has significant
influence, unless it can be clearly demonstrated that this is not the case.

Conversely, if the entity holds, directly or indirectly (e.g. through subsidiaries), less
than 20% of the voting power of the investee, it is presumed that the entity does not
have significant influence, unless such influence can be clearly demonstrated. A
substantial or majority ownership by another investor does not necessarily preclude
an entity from having significant influence.

The existence of significant influence by an entity is usually evidenced in one

or more of the following ways:
(a) representation on the board of directors or equivalent governing body
of the investee;
(b) participation in policy-making processes, including participation in
decisions about dividends or other distributions;
(c) material transactions between the entity and its investee;

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(d) interchange of managerial personnel; or

(e) provision of essential technical information.

B. EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN ASSOCIATES

Under the equity method, the investment in an associate or joint venture is:
1. Initially recognized at cost
2. Increased or decreased to recognize the investor’s share in profits or losses
3. Decreased for the distributions received (e.g. cash or property dividends)
4. Increased or decreased to recognize the investor’s share for changes in the
investor’s proportionate interest in the investee’s equity that have not been
recognized in the investee’s profit or loss (i.e. OCI)
5. Decreased for impairment loss
EXCESS OF COST OVER NET FAIR VALUE OF INVESTMENT
If the investor pays more than the carrying amount of the net assets acquired, the
excess of cost over carrying amount maybe attributed to the following:
1. Undervaluation of identifiable assets of the investee
a. If excess is attributable to undervaluation of depreciable assets, it is
amortized over the remaining life of the depreciable asset
b. If excess is attributable to undervaluation of land, the excess will be
expensed when the land is sold or disposed
c. If excess is attributable to undervaluation of inventories, the excess will be
expensed when the inventory is sold or disposed
2. Goodwill
Goodwill is the net of the acquisition-date amounts of the identifiable assets
acquired and the liabilities assumed. Goodwill is included in the carrying
amount of the investment and is not amortized. Excess attributed to goodwill
is tested for impairment every reporting period.
EXCESS OF NET FAIR VALUE OF INVESTMENT OVER COST
Under PAS 28, any excess of investor’s share of the net fair value of the associate’s
identifiable net assets over the cost of the investment is included as income in the
determination of the investor’s share of associate’s profit or loss in the period
the investment is acquired (gain on bargain purchase).
Formula:
Acquisition cost or purchase price xxx
Less: Book value of the net asset acquired (xxx)
Excess of cost over book value xxx
Less: Undervaluation of assets (xxx)
Add: Overvaluation of assets xxx
Goodwill (gain on bargain purchase) xxx(xxx)

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ASSOCIATE HAS PREFERENCE SHARES

When the associate or joint venture has outstanding preference shares, the
measurement of investor’s share of profit from associate shall be based on the
investee’s profit after making adjustments for the dividends on preference
shares.

INVESTEE WITH HEAVY LOSSES

Under PAS 28, if an investor’s share of losses of an associate equal or exceeds its
interest in the associate, the investor discontinues recognizing the share in
further losses. The investment in associate is reported at nil or zero value.
The interest in an associate is the carrying amount of the investment in the associate
under the equity method together with any long-term interests, investment in
preference shares, unsecured long-term receivables or loans, that in substance, form
part of the investor’s net investment in the associate.
However, trade receivables and any long-term receivables for which an adequate
collateral exists, such as secured loans, are excluded from the carrying amount of
an investment in associate.
After the investor’s interest is reduced to zero, additional losses are provided for, and
a liability is recognized, only to the extent that investor has incurred legal or
constructive obligations or made payments on behalf of the associate.
If the associate subsequently reports profits, the investors resumes recognizing its
share of those profits only to the extent of the profits equals the share of losses
recognized.
To summarize, illustrated below is the T-Account for the transactions that may affect
the investment in associate account and investment income account:

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C. COST METHOD OF ACCOUNTING FOR INVESTMENTS IN ASSOCIATES

Under the cost method, the investment in an associate or joint venture is:
1. Initially recognized at cost
2. No effect when investee recognize profit or loss
3. Recognizes dividend income to recognize investor’s share in investee’s
declared dividends
4. Decreased for impairment loss
D. POSSIBLE SCENARIOS OF CHANGES IN OWNERSHIP INTEREST
1. From Cost to Equity Method
In accounting for change in ownership of an investment at cost or fair value to
equity method, the investor shall remeasure the previously held equity
interest at its fair value and recognize the resulting gain or loss from
remeasurement in the profit or loss or OCI, as appropriate.

2. Discontinuance of Equity Method

When an investor that accounts for investment in associate using the equity
method loses its significant influence over the investee company, the investor
shall discontinue the use of equity method and shall reclassify the investment
at fair value (irrevocable choice of measuring at FVPL or FVOCI). The equity
securities shall be transferred at fair value at the date of reclassification.

The difference between the fair value of the retained investment and its
previous carrying value is recognized as gain or loss to be reported in profit or
loss.

REMEASUREMENT GAINS (LOSSES) TO CHANGES IN OWNERSHIP:

From To Remeasurement G/L

Financial asset at Significant Profit or loss
FVPL Influence/Control
Financial asset at Significant Other Comprehensive
FVOCI Influence/Control Income
Significant Financial asset at FVPL Profit or loss
Influence/Control
Significant Financial asset at Profit or loss
Influence/Control FVOCI

E. IMPAIRMENT ON INVESTMENT IN ASSOCIATES

After application of equity method, including recognizing the associate’s losses,
the entity needs to determine whether there is any objective evidence that its net
investment in the associate is impaired.
The entire carrying amount of the investment in associate is being tested
because the goodwill is already included in the carrying amount of the investment
and it is not separately recognized. Under PAS 36 Impairment of Assets, the
impairment is tested by comparing the recoverable amount with its carrying
amount.

Formula:
Carrying amount before impairment loss xxx

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Less: Recoverable amount (Fair value less costs of disposal

Or Value in Use whichever is higher) (xxx)
Impairment loss xxx

F. FINANCIAL STATEMENT PRESENTATION

An investment in an associate or a joint venture is generally classified as non-
current asset, unless it is classified as held for sale in accordance with PFRS 5
Noncurrent Assets Held for Sale and Discontinued Operations.

G. DERECOGNITION OF INVESTMENT IN ASSOCIATES

When an investor that accounts for the investment in associate using the equity
method disposes some or all of the shares held, the difference between the net
disposal proceeds and the carrying value of the investment using the equity
method shall be recognized as gain or loss in the profit or loss section.

SUMMARY AND COMPARISON OF JOURNAL ENTRIES UNDER EQUITY METHOD AND

COST METHOD
Transactions Equity Method Cost Method
Acquisition Investment in associate xxx Investment in associate xxx
Cash (or other account) xxx Cash (or other account) xxx
Amortization of Investment income xxx NO ENTRY
undervaluation of Investment in associate xxx
assets (other than
goodwill)
Share in net Investment in associate xxx NO ENTRY
income of Investment income xxx
associate
Dividends received Cash xxx Cash xxx
(e.g. cash dividend) Investment in associate xxx Dividend income xxx
Share dividends MEMORANDUM ENTRY MEMORANDUM ENTRY
received
Share in increase Investment in associate xxx NO ENTRY
in OCI component OCI (e.g. Revaluation
of associate Surplus) xxx
Impairment of Impairment loss xxx Impairment loss xxx
investment in Investment in associate xxx Investment in associate xxx
associate

H. ADDITIONAL NOTES FOR PFRS FOR SMEs

Investment in associate and joint ventures of an SME is accounted using cost
model, fair value model or equity model.

SUMMARY AND COMPARISON OF COST, FAIR VALUE AND EQUITY MODEL

Transactions Cost Equity Fair Value
Transaction cost Yes Yes No
Dividends Income Deduction Income
Share in net N/A P/L N/A
income/loss
Share in changes N/A OCI N/A
in OCI component
Change in fair N/A N/A P/L

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value of investment
Subject to Yes Yes No
impairment loss

Guided Exercises / Learning Activities

PRACTICE PROBLEMS:

I. INVESTMENT IN EQUITY SECURITIES – FVPL AND FVOCI

PROBLEM 1

On January 1, 2020, STARK INDUSTRIES acquired 16,000 shares of JARVIS

Corp. for ₱ 1,500,000. Commissions paid on the purchase of shares amounted to
₱ 15,000.
On December 31, 2020, the market value per share of JARVIS’s stock is ₱90.
On March 18, 2021, STARK sold 50% of JARVIS’s shares. The market value at
that time is ₱120. STARK paid ₱ 5,000 for brokerage and commissions in relation
to disposal.

Required: Prepare all the necessary journal entries assuming the following
cases:
CASE 1: FVPL
CASE 2: FVOCI

ANSWER:

FVPL FVOCI
2020 2020
Jan 1 Investment in equity Jan 1 Investment in equity
securities – FVPL 1,500,000 securities – FVOCI 1,515,000
Commission expense 15,000 Cash 1,515,000
Cash 1,515,000

Dec 31 Unrealized loss – P/L 60,000 Dec 31 Unrealized loss – OCI 75,000
Investment in equity Investment in equity
securities – FVPL 60,000 securities – OCI 75,000
[(₱90*16,000) – 1,500,000] [(₱90*16,000) – 1,515,000]

2021 2021
Mar 18 Cash 955,000 Mar 18 Cash 955,000
Investment in equity Investment in equity
securities – FVPL 720,000 securities – FVOCI 780,000
Gain on sale – P/L 235,000 Retained earnings 235,000

Consideration received (₱120 * 16,000 * 50%) 960,000 Consideration received (₱120 * 16,000 * 50%) 960,000
Less: Brokerage and commissions (5,000) Less: Brokerage and commissions (5,000)
Net selling price 955,000 Net selling price 955,000
Less: CV of shares sold (1,440,000 * 50%) 720,000 Less: CV of shares sold (1,440,000 * 50%) 720,000

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Realized gain on sale 235,000 Realized gain on sale 235,000

Mar 18 Retained earnings 37,500

Unrealized loss – FVOCI 37,500
(75,000 * 50%)

PROBLEM 2

During 2020, ROGERS, INC. entered into the following transactions:

Jan 10 Acquired the following investments:

 32,000 shares of BUCKY Corp. trading securities for ₱ 1,500,000

cash and paying additional ₱ 15,000 for brokerage and
commissions.

 10,000 shares of FALCON Corp. classified as FVOCI for ₱

1,000,000 cash and paying additional ₱ 20,000 for brokerage fees.

Feb 15 Received the following dividends:

 ₱ 32,000 from BUCKY Corp. declared January 5, 2020 to

stockholders of record January 31, 2020

 ₱ 10,000 from FALCON Corp. declared January 15, 2020 to

stockholders of record January 31, 2020

REQUIRED: Compute for the following.

1. Investment in equity securities - FVPL on January 10
2. Investment in equity securities - FVOCI on January 10
3. Total dividend income for the year.

ANSWER:

1. Purchase price of securities 1,500,000

Less: Dividend income of investment acquired (32,000)
Investment in equity securities – FVPL, 1,468,000

2. Purchase price of securities 1,000,000

Add: Transaction costs capitalizable 20,000
Investment in equity securities – FVOCI 1,020,000

3. Dividend income for the year

Dividend from FALCON Corp. 10,000

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 RIZAL TECHNOLOGICAL UNIVERSITY
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II. DIVIDENDS, STOCK SPLIT, SPECIAL ASSESSMENTS AND STOCK RIGHTS

PROBLEM 3
Based on the following transactions below, prepare the entries and the amount of
dividend income to be recorded in the answer sheet below.
STAR-LORD Inc. has several investments in shares to different companies.
During 2020, STAR-LORD enumerated the transactions on these investments:

Transaction Journal Entry Dividend

Income
for 2020
a. STAR-LORD Inc. owns an 18% interest in 11/15/2020 Dividend receivable 162,000
GAMORA Inc. which declared a ₱900,000 Dividend income 162,000
cash dividend on Nov. 15, 2020 to holders (900,000 * 18%)
on record on December 15, 2020 payable on 162,000
January 15, 2021. 12/15/2020 NO ENTRY

1/15/2021 Cash 162,000

Dividend receivable 162,000
b. STAR-LORD Inc. received on December 1, 11/1/2020 MEMO ENTRY: Received 12%
2020 from ROCKET Inc. ₱50,600 in lieu of share dividend from ROCKET Inc.
a 12% share dividend which was declared
November 1, 2020 on holders on record on 11/15/2020 NO ENTRY
November 15, 2020.
12/1/2020 Cash 50,600 NIL
STAR-LORD owns 15,000 of the total Investment in equity 48,300*
100,000 outstanding shares of ROCKET Gain on sale 2,300
which it has acquired for ₱450,800.
* [₱450,800/(15,000 * 1.12)] * (15,000 * 12%)] = 48,300

c. GROOT Inc. declared a 10% stock 7/15/2020 MEMO ENTRY: Received from
dividend on July 15, 2020 at which time GROOT Inc. 10% stock dividend NIL
GROOT’s shares was quoted at ₱4.50 per quoted at ₱4.50 per share.
share. STAR-LORD owns 6,000 GROOT
shares.
d. Received 14,000 common shares of DRAX 11/1/2020 Dividend receivable 129,500
Inc. in lieu of cash dividend on December Dividend income 129,500
1, 2020. The market price of DRAX’s shares (14,000 * 9.25)
was ₱9.25 at November 1, 2020, the date of 129,500
declaration to holders on record on 11/30/2020 NO ENTRY
November 30, 2020.
12/1/2020 Investment in equity 129,500
Dividend receivable 129,500

e. Received ₱65,000 from YONDU Inc. on 12/15/2020 Cash 65,000

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December 15, 2020 which was considered Investment in equity 65,000 NIL
as liquidating dividend.
f. STAR-LORD Inc. received from MANTIS 11/15/2020 Dividend receivable 143,640
Inc. a dividend in kind of one share of Dividend income 143,640
MOONDRAGON common stock for every 4 (75,600/4 * ₱7.6)
of MANTIS shares common shares held. 143,640
STAR-LORD holds 75,600 MANTIS shares.
MOONDRAGON shares were currently 12/15/2020 NO ENTRY
selling at ₱7.60 per share.
1/15/2021 Cash 143,640
Dividend receivable 143,640

PROBLEM 4

During 2020, ROMANOFF Inc. holds 2,000 of ₱100 par ordinary shares of
TASKMASTER Inc. with a carrying amount of ₱252,500. On February 1, 2020,
TASKMASTER effected a 2-for-1 share split and issued additional shares to its
shareholders.

On March 18, 2020, TASKMASTER made a special assessment of ₱10 per

share on all shareholders. ROMANOFF accordingly paid on the investment.

Required: Prepare journal entries on the above transactions.

ANSWERS:

2/1/2020 MEMORANDUM ENTRY: TASKMASTER Inc. effected a 2-for-1 share

split on its ordinary shares. As a result, the entity now holds a total of
4,000 ordinary shares of TASKMASTER Inc.

Before Multiply by After

OS issued 2,000 2/1 4,000

Par value per share ₱ 100 1/2 ₱ 50

3/18/2020 Investment in equity securities 20,000

Cash (₱10 * 2,000) 20,000

PROBLEM 5

WANDA Inc. owned 80,000 common shares of VISION Inc. at a cost of ₱

560,000.

On June 1, 2020, VISION Inc. made a declaration of one stock right for each
share of common stock owned by investors. The rights provided that for each 3
rights held, a share of common stock (₱1.00 par value) could be purchased for
₱8.50 cash.

In October 1, 2020, WANDA Inc. exercised 60% of the rights and sold the
remaining rights for ₱1.90. WANDA accounts for the stock rights separately from
the investment.

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CASE 1: Assuming the fair value of the shares prior to the issuance of the rights
was ₱13.10

CASE 2: Assuming the fair value of the shares after to the issuance of the rights
was ₱13.10

Required: Determine the following:

a. Initial measurement of the rights
b. Cost of the new shares
c. Gain/loss from sale of remaining rights

ANSWERS:

CASE 1
₱ 13.10−8.50
a. Theoretical Value of a ¿= = ₱ 1.15
3+1

Initial measurement of stock rights

(₱ 1.15 * 80,000 shares x 1 right/share) 92,000

b. Cost of new shares acquired [(80,000 * 60%)/3 rights * ₱8.50] 136,000

Cost of rights used (92,000 * 60%) 55,200
Total cost of new shares 191,200

c. Proceeds on sale of rights [(80,000 rights * 40%) * ₱1.90] 60,800

Carrying amount of rights (92,000 *40%) (36,800)
Gain on sale of rights 24,000

CASE 2
₱ 13.10−8.50
a. Theoretical Value of a ¿= = ₱ 1.53 (rounded off)
3

Initial measurement of stock rights

(₱ 1.53 * 80,000 shares x 1 right/share) 122,400

b. Cost of new shares acquired [(80,000 * 60%)/3 rights * ₱8.50] 136,000

Cost of rights used (122,400 * 60%) 73,440
Total cost of new shares 209,440

c. Proceeds on sale of rights [(80,000 rights * 40%) * ₱1.90] 60,800

Carrying amount of rights (122,400 *40%) (48,960)
Gain on sale of rights 11,840

III. INVESTMENT IN ASSOCIATE

PROBLEM 1 – INITIAL AND SUBSEQUENT RECOGNITION
On January 1, 2020, T’CHALLA INC. paid ₱ 68,000,000 for 4 million shares of
T’CHAKA INC. ordinary shares. The investment represents a 25% interest in the
assets of T’CHAKA and gave T’CHALLA the ability to exercise significant
influence over T’CHAKA INC.

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On the date of acquisition, the following data are available:

 The book value of T’CHAKA’s net assets was ₱ 192,000,000.
 The fair value of T’CHAKA’s depreciable assets exceeded the book value by
₱ 32,000,000. These assets have an average remaining life of eight years.
 The remainder of excess of the cost of the investment over the book value of
assets was attributed to goodwill.
T’CHAKA paid ₱1.50 per share dividends on August 23, 2020. Luke reported net
income of ₱ 40,000,000 for the year ended December 31, 2020. The market
value of T’CHAKA’s ordinary shares at December 31, 2020 was ₱18.50 per
share.

REQUIRED:

1. Compute for the following.

a. Implied goodwill from the acquisition of investment
b. Investment income for 2020
c. Carrying amount of the investment as of December 31, 2020.

2. Prepare all appropriate journal entries relevant to the investment in 2020.

ANSWERS:
Requirement 1.
a. Acquisition cost 68,000,000
Less: Book value of net assets acquired (192M * 25%) (48,000,000)
Excess of cost over book value 20,000,000
Less: Undervaluation of depreciable asset (32M * 25%) (8,000,000)
Implied goodwill 12,000,000

b. Share in net income (40M * 25%) 10,000,000

Less: Amortization of excess on depreciable assets (8M/8 years)
(1,000,000)
Investment income for 2020 9,000,000

c. Investment in associate, 1/1/2020 68,000,000

Add: Investment income for the year 9,000,000
Less: Dividends received (4M shares * ₱1.50) (6,000,000)
Carrying amount of investment in associate, 12/31/2020 71,000,000

Requirement 2. Journal Entries

1/1/2020 Investment in associate 68,000,000

Cash 68,000,000

8/23/2020 Cash 6,000,000

Investment in associate 6,000,000

12/31/2020 Investment in associate 10,000,000

Investment income 10,000,000

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Investment income 1,000,000

Investment in associate 1,000,000

PROBLEM 2 – INVESTEE WITH HEAVY LOSSES

On January 1, 2020, THOR Corp. acquired a long-term investment for ₱
1,400,000, a 40% interest to LOKI Corp. when the fair value of LOKI’s net assets
was ₱ 3,500,000. LOKI reported the following net income (losses):

2020 (5,000,000)
2021 (7,000,000)
2022 (8,000,000)
2023 (4,000,000)

On January 1, 2022, THOR made cash advances of ₱ 2,000,000 to LOKI. On

December 31, 2023, it is not expected that THOR Corp. Will provide further
financial aid to LOKI.
REQUIRED:
1. Prepare all appropriate journal entries relevant to the investment in 2020 and
2021.

ANSWERS:
Journal Entries

1/1/2020 Investment in associate 7,000,000

Cash 7,000,000

12/31/2020 Investment loss 2,000,000

Investment in associate (40% * 5M) 2,000,000

12/31/2021 Investment loss 2,800,000

Investment in associate (40% * 7M) 2,800,000

1/1/2022 Advances to associate 2,000,000

Cash 2,000,000

12/31/2022 Investment loss 3,200,000

Investment in associate 2,200,000
Advances to associate 1,000,000

12/31/2023 Investment loss 1,000,000

Advances to associate 1,000,000

Acquisition cost 7,000,000

Advances to associate 2,000,000
Total investment in associate 9,000,000
Net losses from 2020 to 2022 (40M * 40%) (8,000,000)
Carrying amount of investment, 12/31/2022 1,000,000

Share in net loss on 2023 (4M * 40%) 1,600,000

Loss to be reported shall be only the carrying amount of the

investment. Subsequently, if the investee earns profit, the
share in net income must be applied first to the loss not

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 RIZAL TECHNOLOGICAL UNIVERSITY
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recognized which is 600,000 and the excess will be

recognized as investment income.

PROBLEM 3 – GAIN OF SIGNIFICANT INFLUENCE

On January 1, 2020, ANTMAN Corp. acquired a 10% interest in WASP Corp. for
₱ 3,000,000. The investment was accounted under cost method. On December
31, 2020, WASP reported net income of ₱ 4,000,000 and paid dividends of ₱
1,000,000.

On January 1, 2021, ANTMAN acquired a further 15% interest in WASP Corp. for
₱ 8,500,000. On such date, the carrying amount of net assets of WASP was ₱
36,000,000 and the fair value of 10% existing interest was ₱ 3,500,000.

The fair value of the net assets of WASP is equal to carrying amount except for
an equipment whose fair value was ₱ 4,000,000 greater than carrying amount.
The equipment had a remaining life of 5 years.

WASP reported net income of ₱ 8,000,000 for 2021 and paid ₱ 6,000,000 on
December 31, 2021.

REQUIRED:
2. Compute for the following.
a. Investment income for 2020
b. Implied goodwill from the acquisition of investment on January 1, 2021
c. Total amount of income to be recognized by ANTMAN in 2021
d. Carrying amount of investment in associate in 2021
3. Prepare all appropriate journal entries relevant to the investment in 2020 and
2021.

ANSWERS:
Requirement 1.
a. Investment income = dividend income for 2020
Share in dividends paid by WASP (1M * 10%) 100,000

b. Fair value of 10% interest on date of reclassification 3,500,000

Carrying amount of 10% interest (3,000,000)
Gain on reclassification 500,000

Acquisition cost (8.5M + 3.5M) 12,000,000

Less: Book value of net assets acquired (36M * 25%) (9,000,000)
Excess of cost over book value 3,000,000
Less: Undervaluation of depreciable asset (4M * 25%) (1,000,000)
Implied goodwill 2,000,000

Share in net income (8M * 25%) 2,000,000

Less: Amortization of excess on depreciable assets (1M/5 years) (200,000)
Investment income for 2020 1,800,000
Add: Gain on reclassification 500,000
Total income recognized for 2020 2,300,000

c. Investment in associate, 1/1/2021 12,000,000

Add: Investment income for the year 1,800,000

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Less: Dividends received (6M shares * 25%) (1,500,000)

Carrying amount of investment in associate, 12/31/2021 12,300,000

Requirement 2. Journal Entries

1/1/2020 Investment in equity securities 3,000,000
Cash 3,000,000

12/31/2020 Cash 100,000

Dividend income 100,000

1/1/2021 Investment in associate 12,000,000

Cash 8,500,000
Investment in equity securities 3,000,000
Gain on reclassification 500,000

12/31/2021 Investment in associate 2,000,000

Investment income 2,000,000

Investment income 200,000

Investment in associate 200,000

Cash 1,500,000
Investment in associate 1,500,000

PROBLEM 4 – LOSS OF SIGNIFICANT INFLUENCE

On January 1, 2020, THANOS Corp. acquired a 30% interest in INFINITY Corp.

for ₱ 2,000,000 which was equal to the carrying amount of interest acquired.
During 2020, INFINITY reported net income of ₱ 1,500,000 and paid dividends of
₱ 500,000.

Subsequently, INFINITY reported net income of ₱ 1,000,000 for the six months
ended June 30, 2021 and ₱ 2,500,000 for the year ended December 31, 2021
but paid dividends of ₱ 1,000,000 on October 1, 2021.

On July 1, 2021, THANOS sold 50% of the investment for ₱ 2,000,000. The fair
value of the retained investment is ₱ 2,200,000 on July 1, 2021 and ₱ 2,400,000
on December 31, 2020. The retained investments are to be measured at fair
value through profit or loss.

REQUIRED:
1. Compute for the following.
a. Carrying amount of the investment before the disposal on June 30, 2021
b. Gain or loss on sale of investment to be reported for 2020
c. Total amount of income to be recognized by THANOS in 2021
2. Prepare all appropriate journal entries relevant to the investment in 2020 and
2021.
ANSWERS:
Requirement 1.
a. Investment in associate, 1/1/2020 2,000,000
Investment income for 2020 (1.5M * 30%) 450,000
Dividends (500,000 * 30%) (150,000)
Investment in associate, 12/31/2020 2,300,000

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Investment income for six months ended 6/30/2021 (1M * 30%) 300,000
Investment in associate, 6/30/2021 2,600,000

b. Proceeds on sale 2,000,000

Carrying amount of investment sold (2,600,000 * 50%) (1,300,000)
Gain on sale of investment 700,000

c. Determine all incomes and gains to P/L related to the transaction in for the
period 2021.

Fair value of investment in FVPL on reclassification 2,200,000

Carrying amount of investment retained (2,600,000 * 50%) (1,300,000)
Gain on reclassification 900,000

Fair value of investment at FVPL on 12/31/2021 2,400,000

Carrying amount of investment in FVPL, 12/31/2020 (2,200,000)
Unrealized gain – P/L 200,000

Dividend income for 2021 (1M * 15%) 150,000

Investment income for 2021 300,000

Gain on sale of investment 700,000
Gain on reclassification 900,000
Unrealized gain – P/L 200,000
Dividend income for 2021 150,000
Total income for 2021 2,250,000

Requirement 2. Journal Entries

1/1/2020 Investment in associate 2,000,000
Cash 2,000,000

12/31/2020 Investment in associate 450,000

Investment income 450,000

Cash 150,000
Investment in associate 150,000

6/30/2021 Investment in associate 300,000

Investment income 300,000

Cash 2,000,000
Investment in associate 1,300,000
Gain on sale of investment in associate 700,000

Investment inequity securities – FVPL 2,200,000

Investment in associate 1,300,000
Gain on reclassification 900,000

12/31/2021 Investment inequity securities – FVPL 200,000

Investment income 200,000

Cash 150,000
Dividend income 150,000

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 RIZAL TECHNOLOGICAL UNIVERSITY
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Assessment

Provide the requirement for the following problems. Provide the solutions as
necessary.
1. On January 1, 2020, PARKER Corp. acquired 40% of the outstanding
ordinary shares of OSBORN Corp. for ₱ 6,500,000. The carrying amount of
net assets of OSBORN Corp. equaled ₱ 12,500,000. Any excess of cost over
carrying amount is attributable to equipment with remaining useful life of 10
years. During the year, OSBORN reported net loss of ₱ 4,000,000 and paid
dividends of ₱ 2,500,000.

Required:
1. Prepare journal entries for the current year.
2. Compute for the carrying amount of the investment at year-end.

2. During the current year, HAWKEYE Inc. owns 2,400 ordinary shares of
RONIN Inc. acquired at ₱ 100 per share. The shares represent less than 5%
ownership in RONIN Inc. The following transactions have occurred:

a. Received cash dividend of ₱ 10 per share.

b. Received a share dividend of one ordinary share for every four shares
held.
c. Received a preference share dividend of one share for every four
ordinary shares held. Ordinary shares are selling ex-dividend at ₱ 125
while preference share is selling at ₱ 250.
d. A stock split of ordinary shares is made (4-for-1 split)
e. Received a dividend of one ordinary share of BARTON Corp. for every
six shares of RONIN Inc. held. Fair value of BARTON Corp.’s ordinary
shares is ₱ 50 per share.

Required:
Prepare journal entries for each of the transactions enumerated above.

3. STRANGE Inc. has the following transactions relating to investments during

2020:

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 RIZAL TECHNOLOGICAL UNIVERSITY
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January 8 Acquired 10,000 shares of ANCIENT ONE Inc. for ₱ 1,000,000

paying additional ₱ 20,000 for brokerage and another ₱ 5,000
for commission.

February 29 Received dividends from ANCIENT ONE Inc. declared January

3, 2020 to the stockholder of record January 31, 2020, ₱
20,000.

On December 31, 2020 and 2021, the market value per share if the ANCIENT
ONE stock is Php 95 and Php 120, respectively.

Required:
Prepare journal entries for each of the transactions enumerated above
assuming:
a. FVPL b. FVOCI
4. On January 2, 2020, DANVERS Corp. purchased 10,000 shares of Php200
par value ordinary shares at Php240 per share of CHEWIE Corp. On March
2, 2020, CHEWIE issued stock rights to its shareholders. The holder needs
five rights to purchase on share of ordinary share at par. The market value of
the stock on that date was Php 320 per share. There was no quoted price for
the rights.

Required: based on the above data, compute for the theoretical value of the
rights assuming the stock is selling:
1. Right-on 2. Ex-right

5. On January 1, 2020, BANNER Inc. acquired 10% of the outstanding ordinary

shares of ABOMINATION Inc. for Php 900,000. These shares are designated
as investments in FVOCI. ABOMINATION reported profits for the year 2020
amounting to Php 6,000,000 and paid dividends of Php 2,000,000.

On January 2, 2021, BANNER gained the ability to exercise significant

influence on ABOMINATION by acquiring an additional 20% of
ABOMINATION’s outstanding shares for Php 2,600,000. The two purchases
were made at prices proportionate to the value assigned to ABOMINATION’s
net assets, which equaled their carrying amounts. ABOMINATION reported
profits for the year 2021 amounting to Php 6,500,000 and paid dividends of
Php 3,000,000.

The fair values of the investments on December 31, 2020 and 2021 were Php
1,380,000 and Php 5,100,000, respectively.

Required:
1. Prepare journal entries to record the above data.
2. Compute for the carrying amount of the investment on December 31,
2021.

INTERMEDIATE ACCOUNTING PART 1 28