INVESTMENT IN EQUITY SECURITIES

By: Mhelka J. Tiodianco

 Investment in equity
securities

-means the acquisition of equity securities for the

purpose of accruing income through dividends and
increase in market value, or controlling another
entity.
 Equity securities

Ordinary Shares
Other Share Capital

Preference Shares
 To acquire
Equity securities OWNERSHIP
SHARES

SHAREHOLDERS
Rights Options
 Ownership interest or
SHARE Right of a shareholder in
an entity.

Share in earnings
Election of Directors
SHARE Subscription of additional
CERTIFICATE shares

Share in net assets upon

liquidation
Acquisition The Application Guidance of PFRS 9, provides
that when a financial asset is recognized liability,
of equity an entity shall measure it at fair value plus
securities transaction costs that are directly attributable to
the acquisition.

“The fair value is usually the transaction price,

meaning, the fair value of the consideration
given.”
As a rule, transaction costs that are directly
attributable to the acquisition of the financial
asset shall be capitalized as cost of the financial
asset.
However, transaction costs directly attributable
to the acquisition of financial asset held for
trading or financial asset at fair value through
profit or loss shall be expensed immediately.
 Acquisition by Exchange

If the equity securities are

acquired in an exchange, Fair value of the asset
the acquisition cost is given
determined by reference to
the following in the order of Fair value of the asset
priority. received
Carrying amount of the
asset given
 Lump sum If two or more equity securities
are acquired at a single cost or
Acquisition lump sum, the single cost is
allocated to the securities
If only one security has a acquired on the basis of their fair
known market value, an
amount is allocated to the value.
security with a known market
value equal to its market
value.

The remainder of the single cost

is then allocated to the other
security with no known market
value.
 Investments in equity securities are
Investment accounted for as one of the following
categories:
Categories
a.Trading securities or financial assets at fair
value through profit or loss

b. Financial assets at fair value through other

comprehensive income

c. Investment in associate

d. Investment in subsidiary

e. Investment in unquoted equity instrument

 Under the Application Guidance
Investment in
B5.4.14 of PFRS 9, all investments in
unquoted equity equity instruments must be
instruments measured at fair value.

However, investments in unquoted

equity instruments are measured at
cost if the fair value cannot be
measured reliably.
 PFRS 9, paragraph 3.2.12, provides that on
Sale of derecognition of financial asset measured at
fair value through profit or loss, the
equity difference between the consideration
received and the carrying amount of the
securities financial asset shall be recognized in profit
or loss.

When equity securities are of the

same class acquired on different
dates at different costs, a problem
will arise as to the determination of
cost of securities sold when only a
portion of this securities is
subsequently sold.
In such case, the entity
shall determine the cost of
the securities sold using
either the FIFO or average
cost approach.
 If the equity securities are measured at fair
Cash value through profit or loss, or at fair value
through other comprehensive income or at
Dividends cost, dividends earned are considered as
income.
a. When the cash dividends are earned but not received:
Dividends receivable xx
Dividend income xx
#
b. When the cash dividends are subsequently received:
Cash xx
Dividend receivable xx
#

The Cash Dividends do not affect investment

 When are dividends
considered earned?

Date of declaration Date of record

This is the date on which the This is the date on which the stock and
payment of dividends is approved transfer book of the corporation is
by the Board of Directors. closed for registration.

Date of payment

This is the date on which the

dividends declared shall be paid.
Between the date of declaration and the record date, the
shares are selling “dividend-on”

This means that when shares are sold after the date of
declaration but prior to record date, they carry with them
the right to receive dividends.

Between the date of record and the date of payment, the

shares are selling “ex-dividend”

This means that the shares can be sold, and still the
original shareholder has the right to receive the dividends
on payment date.
 “The Board of Directors at their meeting on
Example of Formal November 15, 2015, declared an annual
dividend Declaration dividend on ordinary share of P5, payable on
January 30, 2016, to shareholders of record
at the close of business on January 15, 2016.”

Date of declaration – November 15, 2015

Date of record – January 15, 2016

Date of payment – January 30, 2016

 When to
recognize
dividends as
income?
Only the remainder of the
sale price should be used
as basis for determining
gain or loss on the sale of
the investment.
Dividends shall be recognized as revenue when the
shareholder's right to receive payment is established.
Accordingly, the dividends shall be recognized as
revenue on the date of declaration.
The reason is that when dividends are declared, the
shareholder has already acquired the right thereto so
much so that if the shares are subsequently sold, the
sale price normally includes the accrued dividends.
Once a dividend has been declared, a legal liability
binding on the corporation is created.
When shares are sold “dividend-on” and the dividend
accrued is specifically included in the sale price, that
portion of the sale price pertaining to the accrued
dividend should be credited to dividend income.
 Property dividends
Property or dividends in
dividends kind are dividends
in the form of
property or
noncash assets.

Property dividends are also considered as income and

recorded at fair value.
Noncash assets xx
Dividend income xx
 Liquidating dividends
Liquidating represent return of
dividends invested capital, and
therefore, are not
income. The payment
may be in the form of
cash or noncash
assets.

The liquidating dividend is recognized as follows:

Cash or other appropriate amount xx
Investment in equity securities xx
 Problem 23-4
Acclaim Company purchased shares of another entity as permanent
investment.
January 2, 2015 2,000 shares at 50 100,000
December 20, 2015 3,000 shares at 66 198,000

The transactions for 2016 are as follows:

July 15 Received cash dividend of P5 per share.
Dec. 15 Received 20% stock dividend.
28 Sold 3,000 shares at P60 per share. Use FIFO approach.
Shares Cost per share Total cost
Original shares 2,000 50 100,000
July 15 Cash 25,000
3,000 66 198,000
Dividend Income (5,000xP5)
Dec. 28 Cash (3,000x60) 180,000 25,000
Stock dividend 1,000 - -
Investment in equity securities 133,000
New shares 6,000 49.67 298,000
Gain on sale of investment 47,000
Dec. 15 Memo-Received 1,000 shares representing 20% stock dividend
2,000 sharesx20%=400 + 2,000
on 5,000 original X 100,000
shares held. Shares now100,000
held, 6,000 shares.
3,000 sharesx20%=600/3,600 x 198,000 33,000
133,000
Problem 32-2 Accessible Company purchased for a lump sum of P3,075,000
Accessible Company the following long-term instruments.

A Corporation share capital 8,000 shares

B Corporation share capital 16,000 shares
C Corporation bond P 1,000,000 face value

At the time of Purchase, the securities were quoted at the following

prices:
A share, P100
B share, 150
C bond, 90

Required:
Prepare Journal Entry to record the lump sum acquisition with proper
allocation of the single cost.
Problem 32-2
Accessible Company

Market Value Fraction Allocated cost

A (8,000x 100) 800,000 8/41 600,000

B (16,000 x 150) 2,400,000 24/41 1,800,000
C (1,000,000 x 90%) 900,000 9/41 675,000
4,100,000 3,075,000

Investment in A shares 600,000

Investment in B shares 1,800,000
Investment in C shares 675,000
Cash 3,075,000
 Problem 23-5
1. Distraught Company acquired 40,000 ordinary shares of Aye Company at P50 per
share.

Investment in Aye Company shares (40,000 x 50) 2,000,000

Cash 2,000,000
Market Value Fraction Cost
2. The Aye Company shares are exchanged in a 5-for-1 split.
Ordinary Shares (200,000 x 15) 3,000,000 30/32 1,875,000
Preference Shares (20,000 x 10) 200,000 2/32 125,000
Memo- Received 200,000 Aye Ordinary3,200,000
shares as a result of 5 for 1 split of 40,000
2,000,000
original shares.

3. Received a preference share dividend of 1 share for every 10 ordinary shares held.
Ordinary shares is selling ex-dividend at 15 and preference share is selling at 10

Investment in Aye preference shares 125,000

Dividend income (200,000/4 = 50,000 x 6) 125,000
 Problem 23-5
4. Received a dividend in kind of 1 ordinary share of Bee Company, market price, P6,
for every four Aye ordinary shares held.

Investment in Bee Ordinary shares 300,000

Dividend Income (200,000/4 = 50,000 x 6) 300,000

Sold 80,000 ordinary shares of Aye Company at P15 per share.

Cash (80,000 x 15) 1,200,000

Investment in Aye Ordinary shares (80,000/200,000 x 1,875,000) 750,000
Gain on sale of investment 450,000
Problem 23 - 21
Maxim Company acquired 40,000 ordinary shares on
October 1 for P6,600,000 to be held for trading. On
November 30, the investee distributed a 10% ordinary stock
dividend when the market price of the share was P250. On
December 31, the entity sold 4,000 shares for P1,000,000.
What amount should be reported as gain on sale of
investment in the current year?
a.) 340,000
b.) 400,000
c.) 500,000
d.) 600,000
Problem 23 - 21
Original shares on October 1 40,000

Stock dividend on November 30 (10%) 4,000

Total Shares 44,000
Shares sold on December 31 ( 4,000)
Balance 40,000

Sales price 1,000,000

Cost of shares sold (4,000/44,000*6,600,000) (600,000)
Gain on sale 400,000
Problem 23 - 22
Presumptuous Company revealed the following information pertaining
to dividends from nontrading investments in ordinary shares during
the year ended December 31, 2015:

• The entity owned a 10% interest in Beal Company, which declared a

cash dividend of P500,000 on November 30, 2015 to shareholders of
record on December 31, 2015 and payable on January 15, 2016.
• On October 15, 2015, the entity received a liquidating dividend of
P100,000 from Clay Mining Company.

What amount of dividend income should be reported for the current

year?

a.) 500,000 Cash Dividend 500,000

b.) 600,000
x 10%
c.) 150,000
d.) 50,000 Dividend Income 50,000 (D.)