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CHAPTER 7

INVESTMENTS IN EQUITY SECURITIES AND DEBT SECURITIES


PROBLEMS
7-1

(Victoria Court)
(a)
Classified as FVPL
Cash
Gain on Sale of Trading Equity Investments
Equity Investments FVPL
To record sale of Y Co. Ordinary Shares
Unrealized Loss on Equity Investments P and L
Equity Investments - FVPL
To record valuation at end of year.

X Co.
Z Co.
Total
(b)

7-2

MV12/31/Yr 1
P330,000
350,000
P680,000

c.

10,000
160,000

72,000
72,000

Unrealized Holding
Gains(Losses)
P(42,000)
(30,000)
P(72,000)

Market12/31/Yr 2
P288,000
320,000
P608,000

Classified as equity investments at fair value through other


comprehensive income
Cash
170,000
Equity Investments at FV through OCI
160,000
Gain on Sale of Equity Investments
10,000
To record sale of Y Co. Common
Retained Earnings
Unrealized Gains and Losses on Equity
Investments at FV through OCI

40,000

Unrealized Gain/Loss on Equity Investments at FV - OCI


Equity Investments at FV through OCI

72,000

(A Company)
a.
Cash
Dividend Revenue
2,400 shares x 7.50
b.

170,000

40,000

72,000

18,000
18,000

Memo entry.
Received additional 600 shares of B Corp. ordinary shares as
bonus issue on 2,400 shares previously held.
Equity Investments - A Preference
Dividend Revenue
600 x 250 = 150,000

150,000
150,000

d.

Memo entry. Received additional shares of B Corp. ordinary shares on a 4-for-1


stock split of the 2,400 shares previously held. Total shares held are now 9,600.

e.

Equity Investments - C Ordinary


Dividend Revenue
2,400/6 = 400 shares x 50

20,000
20,000

Chapter 7 Investments in Equity Securities and Debt Securities

7-3

(Inn Corporation)
(a)
December 31, Year 2 ledger balance (30,000 x P65)

P1,950,000

Year 3
Memo: Received 6,000 shares of NPA Co. ordinary
As 20% bonus issue on the 30,000 shares previously
held.
Cash (15,000 x 70)
1,050,000
Equity Investments FVPL
Gain on Sale of Equity Investments
1,950,000 x 15,000/36,000 = 812,500
Equity Investments FVPL
374,500
Unrealized Gain on Equity Investments
at FVPL
21,000 x 72 =
1,512,000
1,950,000 812,500 =
1,137,500
Unrealized gain
374,500

7-4

812,500
237,500

374,500

(b)

Gain on sale
Unrealized gain on equity investments at FVPL
Total amount reported in profit or loss

P237,500
374,500
P612,000

(c)

Equity Investments at Fair Value

P1,512,000

Inna Corporation
(a)
December 31, Year 2 ledger balance (30,000 x P65)
Cost
Unrealized Gain or Loss on Equity Investments (Equity)

P1,950,000
1,800,000
P 150,000

Year 3
Memo: Received 6,000 shares of NPA Co. ordinary
As 20% bonus issue on the 30,000 shares previously
held.
Cash (15,000 x 70)
1,050,000
Equity Investments at FV through OCI
Gain on Sale of Equity Investments
1,950,000 x 15,000/36,000 = 812,500

812,500
237,500

Unrealized Gain or Loss on Equity Investments


62,500
Retained Earnings
150,000 x 15,000/36,000 = 62,500

62,500

Equity Investments at FV through OCI


374,500
Unrealized Gain on Equity Investments
at FV through OCI
21,000 x 72 =
1,512,000
1,950,000 812,500 =
1,137,500
Unrealized gain
374,500

65

374,500

Chapter 7 Investments in Equity Securities and Debt Securities

7-5

(b)

Gain on sale

(c)

Equity Investments at Fair Value through OCI

(d)

Unrealized Gain or Loss in Equity , 12/31 Year 3


(150,000 62,500 + 374,500)

P462,000

Cost (1,800,000 x 21,000/36,000)


Fair value, December 31, Year 3
Unrealized Gain (Loss) in Equity

P1,050,000
1,512,000
P 462,000

(a)

Sales price (5,000 x 54)


CV at date of sale
Gain on sale of Dizon shares

P270,000
250,000
P 20,000

(b)

Cumulative balance of Unrealized Gains and Losses


(in equity) - see below

P35,000

# of
shares
3,500
1,000
3,000

Cost
P133,000
180,000
177,000
P490,000

(Melody Corporation)
a.
Initial measurement of stock rights received
b.

7-7

P1,512,000

(Gypsy Corporation)

Monterey Preference
Garcia Ordinary
Barney Corporation

7-6

P237,500

FV, 12/31/
Year 3
P135,000
190,000
200,000
P525,000

2,000 x P4

Unrealized
Gain (Loss)
P 2,000
10,000
23,000
P35,000

P 8,000

Cost of new shares acquired


Cash paid (300 shares x P80)
Stockrights exercised (300 x 5 x P4)
Cost of shares acquired

P 24,000
6,000
P30,000

Cost per share (30,000 / 300 shares)

c.

Sales price of stock rights (500 x 4.50)


CV of stock rights sold (500 x 4)
Gain on sale of stockrights

P 2,250
2,000
P
250

d.

Market value at December 31, Year 3 (98 x 2,300 shares)


P225,400
Cost of shares (P170,000 + 30,000)
200,000
Balance in unrealized gain/loss account at December 31, Year 3 P 25,400

(Anti Corporation)
a.
Equity Investments - Stock Rights (FVPL)
Investment Income
10,000 x 5
b.
Cash
Equity Investments - Stock Rights (FVPL)

66

100

50,000
50,000
50,000
50,000

Chapter 7 Investments in Equity Securities and Debt Securities

c.

Equity Investments Pro Corp. Ordinary (FVPL)


Equity Investments Stockrights (FVPL)
Cash
10,000/5 = 2,000 shares
2,000 x 50 = 100,000

150,000
50,000
100,000

90,000
Equity Investments Pro Corp. Ordinary (FVPL)
Unrealized Gain on Equity Investments at FVPL
90,000
Market value (12,000 shares x 75)
Carrying value before this adjustment
660,000 + 150,000
Unrealized gain
7-8

(EDSA Company)
(a)
1.
150
2+
2.
2,000
3.
5,500
(b)

1.
2.

7-9

135
1
x 5
(1,000 x 5)

145 135
2
2,000 x 5

=
=
=

900,000
810,000
90,000

P5.00
P10,000
P500 Gain

P5.00

P10,000

(Tolits Corporation)
Year 2

a.

Equity Investments at FV through OCI Diana


Ordinary
Cash

b.

Memorandum entry. Received 500 additional


shares of Diana ordinary shares as a result of 2for-1 split.

c.

Equity Investments at FV through OCI Smith


Preference
Cash
(1,000 x 120) + 1,200

d.

e.

f.

Cash
Gain on Sale of Equity Investments
Equity Investments at FV through OCI Diana
Ordinary
(54,000 / 1,000) x 250 shares = 13,500
Stock Rights Diana Ordinary
Investment Income
750 shares x 3
Equity Investments at FV through OCI Diana
Ordinary
Stock Rights Diana Ordinary (60% x 2,250)
Cash 450/2= 225; 225 x P55

67

54,000
54,000

121,200
121,200
15,000
1,500
13,500

2,250
2,250

13,725
1,350
12,375

Chapter 7 Investments in Equity Securities and Debt Securities

f.
g.

h.
i.

Cash
Stock Rights Diana Ordinary
(40% x 750) x 3

7-10

900

Cash (100 x 56)


Loss on sale of Equity Investments
Equity Investments at FV through OCI Diana
Ordinary
13,725/ 225 = 61; 61 x 100 = 6,100

5,600
500

Cash (1,000 x 100 x 8%)


Dividend Revenue

8,000

6,100

8,000

Unrealized Gains and Losses on Equity


Investments through OCI
Equity Investments at FV through OCI Diana
ordinary
Equity Investments at FV through OCI - Smith

Diana 1 (875 sh)


Smith (1,000 x 115)
Total
b.

900

Market
CV
54,250 48,125
115,000 121,200
169,250 169,325

75
6,125

6,200

Unreal
6,125
(6,200)
75

Gain on sale of Diana


Receipt of stockrights
Loss on sale of Diana Securities
Dividend revenue
Total income recognized in profit or loss in 2010

P1,500
2,250
( 500)
8,000
P11,250

(Carlo Company)
Year 2

Apr. 1

May 15

Cash (5,000 x 25)


Loss on Sale of Trading Securities
Trading Securities Avi Ordinary
Equity Investments at FV through OCI Ghio
Preference
Cash

July 10

Memorandum entry. Received 4,000 additional


shares of Darrel ordinary representing a 20%
bonus issue. Shares now held are 24,000.

Nov. 30

Cash (1 x 24,000)
Dividend Revenue

Dec. 31

125,000
14,000
139,000
30,550
30,550

24,000
24,000

Unrealized Loss on Trading Securities


Trading Securities Avi Ordinary
(5,000 x 26) 139,000

68

9,000
9,000

Chapter 7 Investments in Equity Securities and Debt Securities

Dec

31

Equity Investments at FV through OCI - Darrel


Equity Investments at FV through OCI - Ghio
Net Unrealized Gains/Losses on AFS Securities
116,650 6,000 balance
Darrel
Ghio
Total

7-11

(b)

110,650

Change in FV
110,000
650
110,650

2,000,000
2,000,000

Investment in Associates
Income from Associates
20% x 1,500,000

300,000
300,000

3.

Memo. Received 2,000 additional shares of


Atlanta ordinary as 10% bonus issue. Shares
now held are 22,000.

4.

Investment in Associates
Income from Associates
20% x 3,000,000

600,000

Cash
Investment in Associates
20% x 1,000,000

200,000

5.

600,000

200,000

Investment cost
Share in income 2011
Share in income 2012
Share in dividends
Carrying amount, December 31, 2012

P2,000,000
300,000
600,000
(200,000)
P2,700,000

(Byron, Inc.)
2012

Jan.

Dec. 31
31

7-13

CV
370,000
30,550
394,550

(Hostel Company)
(a)
1.
Investment in Associates
Cash
2.

7-12

FV
480,000
31,200
511,200

110,000
650

Investment in Associates Pirates Ordinary


Cash

5,160,000

Investment in Associates Pirates Ordinary


Income from Associates (30% x 3,600,000)

1,080,000

Cash (30% x 400,000)


Investment in Associates Pirates Ordinary

5,160,000
1,080,000
120,000
120,000

(Barbie, Inc.)
(a).
2012

Mar.

Dec. 31

Investment in Associates Kitchie


Cash
Cash (30% x 800,000)
Investment in Associates Kitchie

69

1,365,000
1,365,000
240,000
240,000

Chapter 7 Investments in Equity Securities and Debt Securities

31

31

Investment in Associates Kitchie


Income from Associates
(1.2M x 10/12) x 30%
Income from Associates Kitchie
Investment in Associates Kitchie
30% (3,550,000 + 50,000 + 750,000)=
1,305,000; Goodwill = 1,365,000
1,305,000 = 60,000

300,000
300,000
52,500
52,500

Amortization of undervaluation of assets


(30% x 750,000) / 5 yrs. = 45,000
45,000 x 10/12 = 37,500
50,000 x 30% = 15,000
37,500 + 15,000 = 52,500

(b)

7-14

Acquisition cost, March 1, 2012


Cash dividends received
Income from associates (initial share)
Adjustment in reported income
Investment carrying value, December 31, 2012

P1,365,000
( 240,000)
300,000
( 52,500)
P1,372,500

Income reported by Barbie from its investment in associates:


(300,000 52,500)

247,500

(Richmonde Corporation)
(a)
Year 1

Jan.

Dec. 31

31

Equity Investments at FV through OCI Pen


Cash

900,000

Cash
Dividend Revenue
10% x 2,000,000

200,000

Equity Investments at FV through OCI Pen


Unrealized Gains/Losses on Equity
Investments - OCI

480,000

900,000
200,000

480,000

Year 2

Jan.

Investment in Associates Pen, Inc. (at FV)


Equity Investments at FV through OCI Pen
Unrealized Gains/Losses on Equity Investments at
FV through OCI
Retained Earnings

1
Dec. 31
31

1,380,000
1,380,000
480,000
480,000

Investment in Associates Pen, Inc.


Cash

2,600,000

Investment in Associates Pen, Inc.


Income from Associates (30% x 6,500,000)

1,950,000

Cash
Investment in Associates (30% x 3,000,000)

70

2,600,000

1,950,000

900,000
900,000

Chapter 7 Investments in Equity Securities and Debt Securities

(b)

7-15

Cost transferred from Equity Investments at FV


Additional investment
Share in income
Share in dividends
Carrying amount, December 31, Year 2

1,380,000
2,400,000
1,950,000
(900,000)
4,830,000

(E Corporation)
(a)
Year 1

Jan.

Aug. 1
Dec. 31

Investment in Associates F Company


Cash (50,000 x 165)

8,250,000
8,250,000

Cash
Investment in Associates F Company

210,000

Investment in Associates F Company


Income from Associates

170,000

210,000
170,000

25% x 680,000

Year 2

Dec. 31
31

Cash
Investment in Associates F Company

210,000

Investment in Associates F Company


Income from Associates F Company

250,000

210,000
250,000

25% x 1,000,000

Year 3

Jan. 2

Cash (20,000 x 175)


Investment in Associates F Company
Gain on Sale of Investment in Associates
Acquisition cost
Share in income (Year1)
Share in dividends
(Year1)
Share in dividends (Year2)
Share income (Year 1)
Investment carrying amount
Portion sold
CV of investment sold

3,500,000
3,300,000
200,000

8,250,000
170,000
(210,000)
(210,000)
250,000
8,250,000
40%
3,300,000

Equity Investments at FV through OCI


Investment in Associates F Company
Investment Income
30,000 x 175 = 5,250,000

5,250,000
4,950,000
300,000

8,250,000 3,300,000 = 4,950,000

Dec. 31
31

Cash
Dividend Revenue

120,000

Equity Investments at FV through OCI


Unrealized Gains/Losses on Equity
Investments through OCI

450,000

30,000 x (190

120,000

- 175) =

71

450,000

Chapter 7 Investments in Equity Securities and Debt Securities

(b).

Year 1
Cost/Carrying Value, beg of year
Income from associates
Cash dividends received
Sale of shares
Carrying value, end of year
Market value 30,000 x 190

Year 2

P8,250,000
170,000
(210,000)

P8,210,000
250,000
(210,000)

P8,210,000

P8,250,000

Year 3

P5,700,000

7-16
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
7-17

A and B
A
B and C
A and B
B
C
C
A
B
A, B and C

11.
12.
13.
14.
15.

C
A and B
B
A
B

(Abu Company)
(a)
Date
01/01/ Yr 1
12/31/ Yr 1
12/31/ Yr 2
12/31/Yr 3
12/31/Yr 4
12/31/Yr 5

Interest Received

Interest Revenue

Premium
Amortization

1,200,000
1,200,000
1,200,000
1,200,000
1,200,000

1,158,450
1,152,633
1,146,002
1,138,442
1,129,827*

41,550
47,367
53,998
61,558
70,173*

Carrying Value
8,274,646
8,233,096
8,185,729
8,131,731
8,070,173
8,000,000

*rounded off.
(b)
2009

Jan.

Dec. 31

2010

Dec. 31

7-18
(a)

Debt Investments at Amortized Cost


Cash

8,274,646

Cash
Debt Investments at Amortized Cost
Interest Revenue

1,200,000

Cash
Debt Investments at Amortized Cost
Interest Revenue

1,200,000

8,274,646
41,550
1,158,450

47,367
1,152,633

(South Company)
(1) Securities are classified as financial assets at fair value through profit and
loss.
Year 1

June 1
Dec. 1

Debt Investments at FVPL


Cash

3,691,500
3,691,500

Cash
Interest Revenue (4M x 8% x )

72

160,000
160,000

Chapter 7 Investments in Equity Securities and Debt Securities

Dec.

31
31

Interest Receivable
Interest Revenue (4M x 8% x 1/12)

26,667
26,667

Debt Investments at FVPL


Unrealized Gain on Debt Investments at
FVPL

188,500
188,500

4M x 0.97 = 3,880,000
3,880,000 3,691,500 = 188,500

Year 2

Jan. 1
June 1
Dec. 1
31
Dec. 31

Interest Receivable
Interest Revenue

26,667

Cash
Interest Revenue

160,000

Cash
Interest Revenue

160,000

Interest Receivable
Interest Revenue

26,667

Debt Investments at FVPL


Unrealized Gain on Debt Investments at
FVPL

80,000

26,667
160,000
160,000
26,667

80,000

4M x 0.99 = 3,960,000
3,960,000 3.880,000 = 80,000

(2) Securities are classified as at amortized cost


To facilitate computation, a partial amortization table is presented below.
Interest
Interest
Amortization
Date
Received
Revenue
of Discount
Amortized Cost
June 1, Yr 1
Dec 1, Yr 1
June 1, Yr 2
Dec. 1, Yr 2
June 1, Yr 3
Dec. 1, Yr 3
June 1, Yr 4
Dec. 1, Yr 4
Year 1

June 1
Dec. 1

31

160,000
160,000
160,000
160,000
160,000
160,000
160,000

184,575
185,804
187,094
188,449
189,871
191,365
192,933

3,691,500
3,716,075
3,741,879
3,768,973
3,797,422
3,827,293
3,858,658
3,891,591

24,575
25,804
27,094
28,449
29,871
31,365
32,933

Debt Investments at Amortized Cost


Cash

3,691,500
3,691,500

Cash
Debt Investments at Amortized Cost
Interest Revenue (see above table)

160,000
24,575

Interest Receivable
Debt Investments at Amortized Cost
Interest Revenue

26,667
4,301

184,575

30,968

160,000 x 1/6 = 26,667; 25,804 x 1/6 = 4,301


Year 2

Jan. 1

Interest Revenue
Interest Receivable
Debt Investments at Amortized Cost

73

30,968
26,667
4,301

Chapter 7 Investments in Equity Securities and Debt Securities

June 1

Dec. 1

31

Cash
Debt Investments at Amortized Cost
Interest Revenue(see above table)

160,000
25,804

Cash
Debt Investments at Amortized Cost
Interest Revenue (see above table)

160,000
27,094

185,804

187,094

Interest Receivable
Debt Investments at Amortized Cost
Interest Revenue

26,667
4,742
31,409

160,000 x 1/6 = 26,667; 28,449 x 1/6= 4,742

(b). Journal entry/entries to record sale of investment on November 1, Yr4.


(1) Securities are classified as financial assets at fair value through profit and
loss.
Year 4

Nov. 1

Cash
Loss on Sale of Debt Investments at FVPL
Interest Revenue
Debt Investments at FVPL

3,925,000
128,333
133,333
3,920,000

Acc. Int. = 4M x 8% x 5/12 = 133,333


Sales price (3,925,000133,333) 3,791,667
Carrying value (4 M x 0.98)
3,920,000
Loss on sale
128,333

(2) Securities are classified as at amortized cost


Year 4

Nov. 1

7-19

(1)

Debt Investments at Amortized Cost


Interest Receivable
Interest Revenue 192,933 x 5/6
32,933 x 5/6 = 27,444
Cash
Loss on Sale of Debt Investments at Amortized
Cost
Interest Receivable
Debt Investments at Amortized Cost
CV of Debt Investments sold:
As of June 1, Yr 4
3,858,658
Amortization June 1 to
Nov. 1, Yr 4
27,444
As of Nov. 1, Yr 4
3,886,102
Sales price
3,791,667
Loss on sale
94,435

27,444
133,333
160,777
3,925,000
94,435

133,333
3,886,102

Grow Company
Classified as Debt Investments at FV through Profit or Loss
(a)
Interest income (1,000,000 x 12%)
(b)
Sales price (600,000 x 1.01)
Carrying value, 12/31/Yr2 (600,000 x 1.06)
Loss on sale
Carrying value, 12/31/Yr2 (FV) (1,000,000 x 1.06)
(c)
(d)
Carrying value, 12/31/Yr 400,000 x 1.04

74

P120,000
P606,000
636,000
P 30,000
P1,060,000
P 416,000

Chapter 7 Investments in Equity Securities and Debt Securities

(2)

Classified as at Amortized Cost

Date
1/1/Yr 1
12/31/Yr 1
12/31/Yr 2
12/31/Yr 3
(a)
(b)

(c)

(d)

7-20

Nom Int

Amortization Table
Effect Int
Prem Amort

120,000
120,000
120,000

106,339
104,973
103,471

13,661
15,027
16,529

Amortized cost, end


1,063,394
1,049,733
1,034,706
1,018,177

Carrying value, 12/31/yr 2 (see table)


Sales price
Carrying value, 1/1Yr 3 (1,034,706 x 6/10) = P620,824
Amortization 1/1/Yr3 4/1/Yr3
16,529 x 3/12 x 600/1000
( 2,479)
Loss on sale
Interest income for Yr 3:
Jan 1 to Mar 31 103,471 x 3/12
Apr 1 to Dec 31 103,471 x 400/1000 x 9/12
Total interest income for Yr 3
Carrying value, 12/31/Yr3
1,018,177 x 400/1000

P1,034,706
P 606,000

618,345
12,345

P25,868
31,041
P56,909
P407,271

(Powerpuff Company)
Feb. 1

April 1

July 1

Oct. 1

Dec. 31

31

Equity Investments - FVPL Blossom Ordinary


Cash
Debt Investments FVPL Peach Co. Bonds
Cash

374,000
374,000
1,010,000
1,010,000

Debt Investments FVPL Buttercup Bonds


Interest Receivable (150,000 x 12% x 4/12)
Cash

150,000
6,000

Cash
Interest Income (1,000,000 x 10% x 6/12)

50,000

Interest Receivable
Interest Income
1M x 10% x 3/12 = 25,000
150,000 x 12% x 6/12 = 9,000
25,000 + 9,000 = 34,000

34,000

Unrealized Loss on FVPL


Equity Investments FVPL - Blossom Ordinary
Debt Investments FVPL - Buttercup Bonds
Debt Investments FVPL - Peach Bonds

11,000
6,000
3,000

Cost
374,000
1,010,000
150,000
1,534,000

Blossom Ordinary
Peach 10% Bonds
Buttercup 12% Bonds

75

156,000

50,000

34,000

Fair value
380,000
990,000
153,000
1,523,000

20,000
UGL
6,000
(20,000)
3,000
(11,000)

Chapter 7 Investments in Equity Securities and Debt Securities

7-21

(Narito Company)

Date
Jan. 1, Yr 1
Dec. 31, Yr 1
Dec. 31, Yr 2
Dec. 31, Yr 3
Dec. 31, Yr 4
Dec. 31, Yr 5
Year 1

Jan. 1
Dec. 31

Year 2

Dec. 31

31

Nominal
Interest

Amortization Table
Effective
Interest

Premium
Amortization

7,000
7,000
7,000
7,000
7,000

5,433
5,355
5,272
5,186
5,094

1,567
1,645
1,728
1,814
1,906

Debt Investments at Amortized Cost Wolf Bonds


Cash

Dec. 31

108,660
108,660

Cash
Debt Investments at Amortized Cost Wolf
Bonds
Interest Income

7,000

Cash
Debt Investments at Amortized Cost Wolf
Bonds
Interest Income

7,000

Impairment Loss Debt Investments


Debt Investments at Amortized Cost Wolf
Bonds

5,448

Fair value (impaired)*


Amortized cost (see table)
Impairment loss
*When stated rate equals market rate, the
market price will equal face value.
Year 3

Amortized Cost,
End
108,660
107,093
105,448
103,720
101,906
100,000

1,567
5,433

1,645
5,355
5,448
100,000
105,448
5,448

Cash
Interest Income
(Note: No amortization is necessary since
amortized cost is now equal to face value)

7,000

Cash
Interest Income

7,000

7,000

Year 4

Dec. 31
31

7,000

Debt Investments at Amortized Cost Wolf


Bonds
Gain from Recovery of Impairment Debt
Investments

76

1,906
1,906

Chapter 7 Investments in Equity Securities and Debt Securities

Fair value:
PV of face at 4% for 1 period (100,000 x 0.9615)
PV of interest at 4% for 1 period (7,000 x 0.9615)
Fair value
Amortized cost (Original table at 5% effective interest)
Recording recovery of impairment shall not bring the
amortized cost at an amount higher than the
amortized cost had no impairment been previously
recorded. Hence, recovery is limited to
Amortized cost (less than fair value)
Carrying value (before this adjustment)
Recovery

7-22
1.
2.
3.
4.
5.
7-23

B and C
A
B and C
A
B and C

6.
7.
8.
9.
10.

A
A
A
C
B and C

11.
12.
13.
14.
15.

96,150
6,731
102,881
101,906

101,906
100,000
1,906

B
B and C
A
A
C

Raffy Company)
To facilitate computation, a partial amortization table is presented below.
June
Dec.
Dec.
Dec.
Dec.

Date
1, 2010
31, 2010
31, 2011
31, 2012
31, 2013

Interest
Received

Interest Revenue

Amortization
of Discount

350,000
600,000
600,000
600,000

312,267
531,542
524,696
517,166

37,733
68,458
75,304
82,834

HTM
Carrying Value
5,353,150
5,315,417
5,246,959
5,171,655
5,088,821

2010

June 1

Dec. 31

Held to Maturity Securities Blessie Corp. Bonds


Interest Revenue (5M x 12% x 5/12)
Cash

5,353,150
250,000
5,603,150

Cash
Interest Revenue
Held to Maturity Securities Blessie

600,000

Cash
Interest Revenue
Held to Maturity Securities Blessie

600,000

Cash
Interest Revenue
Held to Maturity Securities Blessie

600,000

Interest Receivable (3M x 12% x 8/12)


Held to Maturity Securities Blessie
Interest Revenue (517,166 x 3/5 x 8/12)

240,000

562,267
37,733

2011

Dec. 31

2012

Dec. 31

2013

Sept. 1

77

531,542
68,458
524,696
75,304
33,134
206,866

Chapter 7 Investments in Equity Securities and Debt Securities

Sept

Cash (3,090,000 + 240,000)


Gain on sale of HTM Securities
Interest Receivable
Held to Maturity Securities Blessie
CV of HTM securities sold:
As of 12/31/11 (5,171,655 x 3/5)
Amort from 1/1/12-9/1/12
CV as of 9/1/12
Sales price
Gain on sale

3,330,000
20,141
240,000
3,069,859
3,102,993
33,134
3,069,859
3,090,000
20,141

Available for Sale Securities Blessie


Held to Maturity Securities
5,171,655 3,102,993 = 2,068,662

Dec. 31

2,068,662
2,068,662

Cash
Interest Revenue
Available for Sale Securities Blessie
2M x 12%
5,171,655
2,068,662
240,000

Dec 31

240,000
206,866
33,134

= 240,000
3,102,993 = 2,068,662
x 10% = 206,866
206,866 = 33,134

Market Adjustment AFS


Unrealized Gain or Loss on AFS

34,472
34,472

Amortized cost
2,068,662 33,134 =
P2,035,528*
Market value 2M x 103.5%
2,070,000
Market Adjustment
P 34,472
*or 5,088,821 x 2/5 = P2,035,528

7-24

(Grow Company)
Date
1/1/Yr 1
12/31/Yr 1
12/31/Yr 2
12/31/Yr 3
(a)

(b)
(c)

Nom Int

Amortization Table
Effect Int
Prem Amort

120,000
120,000
120,000

106,339
104,973
103,471

13,661
15,027
16,529

Market value, 12/31/ Yr 2 (1.06 x 1M)


Amortized cost, 12/31/Year 2
Unrealized Gain or Loss (In Equity)
Interest income for Yr 2
Market value, 12/31/Yr 3 (1.04 x 400,000)
Amortized cost (1,018,177 x 4/10)
Unrealized Gain on 12/31/Yr 3

78

Amortized cost, end


1,063,394
1,049,733
1,034,706
1,018,177
P1,060,000
1,034,706
P 25,394
P 104,973
P 416,000
407,271
P
8,729

Chapter 7 Investments in Equity Securities and Debt Securities

7-25

(Naruto Company)

Date
Jan. 1, 2010
Dec. 31, 2010
Dec. 31, 2011
Dec. 31, 2012
Dec. 31, 2013
Dec. 31, 2014
(a)
(b)
(c)

Nominal
Interest

Amortization Table
Effective
Interest

Premium
Amortization

7,000
7,000
7,000
7,000
7,000

5,433
5,355
5,272
5,186
5,094

1,567
1,645
1,728
1,814
1,906

Amortized Cost,
End
108,660
107,093
105,448
103,720
101,906
100,000

Interest income for 2010


P5,433
Carrying amount at December 31, 2011 (amortized cost)
P105,448
After the sale, the investment shall be reclassified as AFS, applying tainting rule
in IAS 39.
Fair value of remaining 105,650 x 40/100
P42,260
Amortized cost of remaining 103,720 x 40/100
41,488
Unrealized gain in equity, December 31, 2011
P
772
Interest income for 2013 5,186 x 40/100
P 2,074

(d)
7-26

Narito
Classified as Available for Sale Securities
Amortization Table
Nominal
Effective
Premium
Amortized Cost,
Date
Interest
Interest
Amortization
End
Jan. 1, 2010
108,660
Dec. 31, 2010
7,000
5,433
1,567
107,093
Dec. 31, 2011
7,000
5,355
1,645
105,448
Dec. 31, 2012
7,000
5,272
1,728
103,720
Dec. 31, 2013
7,000
5,186
1,814
101,906
Dec. 31, 2014
7,000
5,094
1,906
100,000
(Note: Based on the table, the term of the bonds is 5 years from January 1, 2009)
2010
Jan. 1

Dec. 31

31

Available for Sale Securities Wolverine Bonds


Cash

108,660
108,660

Cash
Available for Sale Securities Wolverine Bonds
Interest Income

7,000

Unrealized Loss on AFS AFS Debt


Market Adjustment AFS Debt

3,627

1,567
5,433

Market value (market rate is 6%; remaining term 4 yrs.


PV of face (100,000 x 0.7921
PV of interest (7,000 x 3.4651
Market value
Amortized cost, 12/31/09
Unrealized loss

79

3,627

79,210
24,256
103,466
107,093
3,627

Chapter 7 Investments in Equity Securities and Debt Securities

2011
Dec. 31

31

Cash
Available for Sale Securities Wolverine Bonds
Interest Income

7,000

Impairment Loss
Market Adjustment AFS Debt
Available for Sale Securities Wolverine Bonds
Unrealized Loss on AFS

5,448
3,627

Fair value (impaired)*


Amortized cost (see table)
Impairment loss
*When stated rate equals market rate, the
market price will equal face value.
2012
Dec. 31

31

1,645
5,355

5,448
3,627
100,000
105,448
5,448

Cash
Interest Income
(Note: No amortization is necessary since
amortized cost is now equal to face value)

7,000
7,000

Market Adjustment AFS Debt


Unrealized Gain/Loss on AFS Debt

914
914

Market Value (market rate is 6.5%;remaining term 2 yrs)


PV of face (100,000 x 0.8817)
PV of interest (7,000 x 1.8206)
Market value
Amortized cost
Unrealized Gain
2013
Dec. 31

Dec. 31

31

Cash
Interest Income

7,000

Available for Sale Securities Wolverine Bonds


Gain from Recovery of Previous Impairment

1,906

7,000

1,906

Market Adjustment AFS Debt


Unrealized Gain/Loss on AFS Debt

975
975

Fair value:
PV of face at 4% for 1 period (100,000 x 0.9615)
PV of interest at 4% for 1 period (7,000 x 0.9615)
Fair value
Amortized cost (Original table at 7% effective interest)
Unrealized Gain
MULTIPLE CHOICE QUESTIONS

Theory
MC1
MC2
MC3
MC4

B
B
A
A

MC5
MC6
MC7
MC8

88,170
12,744
100,914
100,000
914

D
A
C
D

MC9
MC10
MC11
MC12

80

B
B
C
A

96,150
6,731
102,881
101,906
975

Chapter 7 Investments in Equity Securities and Debt Securities

Problems
MC13
MC14

B
D

MC15

MC16
MC17

A
D

MC18
MC19
MC20

D
B

MC21
MC22
MC23

A
B
B
B

MC24

MC25
MC26

D
B

MC27
MC28
MC29

A
C
B

MC30
MC31
MC32
MC33
MC34
MC35

C
B
A
A
C
C

MC36
MC37

C
B

MC38

MC39
MC40
MC41

D
B
D

MC44

MC45

535,000 525,000 = 10,000


FV 12/31/ Yr 2 (600 x 440) + (2,000 x 138) = 540,000
FV 12/31/Yr 1 = 270,000 + 280,600 = 550,600
Change in FV = 540,000 550,600 = 10,600 decrease or debit
10,000 x 150 = 1,500,000; 20% x 3M = 600,000
10,000 x 50 = 500,000; 1,500,000 + 600,000 500,000 = 1,600,000
1,000 x 50 = 150,000; 150,000 + 2,250 = 152,250; 152,250 (1,000 x 10) = 142,250
Net SP = (500 x 25) 500 = 12,000; CV = 500 x 20 = 10,000;
Gain = 12,000 10,000 = 2,000
960-500 = 460; 460 + 600 = 1,060; 1,060/10 = 106 shares
88 1.10 = 80
Unit cost per share is still 80; stock rights received are credited to income.
Following old principle 80 4 = 76
4,400 x 80 = 352,000
1,200,000 (3 x 40,000) + (25% x 640,000) = 1,240,000
40% x 450,000 = 180,000
150,000 12 = 12,500; 180,000 12,500 = 167,500
25,000 x 180 = 4,500,000; 25% x (2,400,000 480,000) = 480,000
4,500,000 + 480,000 60,000 60,000 = 4,860,000
CV at date of reclassification is equal to FV = 15,000 x 200 = 3,000,000
Following old principle = 4,860,000 x 15/25 = 2,916,000
10,000 x 200 = 2,000,000; 4,860,000 x 10/25 = 1,944,000
2,000,000 1,944,000 = 56,000
750,000 + 1,500,000 = 2,250,000
40% x 1,200,000 = 480,000; (40% x 900,000) 18 = 20,000
40% x 100,000 = 40,000; 480,000 20,000 40,000 = 420,000
4,000,000 + 420,000 (40% x 200,000) = 4,340,000
1,000 x (140 - 130) + 900 x (170 180) + 800 x (200= 220) = 15,000 additional loss
1,000 x (20) + 15,000 = 35,000
(1.04 x 1,000,000) = 1,040,000; interest receivable = 1,000,000 x 12% x 4/12 = 40,000
8,750,000 x 5% = 437,500
3,692,000 x 5% = 184,600; 4M x 4% = 160,000
184,600 160,000 = 24,600; 3,692,000 + 24,600 = 3,716,600
3,692,000 x 5% = 184,600
912,400 x 10% = 91,240; 1,000,000 x8% = 80,000
91,240-80,000 = 11,240; 912,400 + 11,240 = 923,640
7,850,000 (8M x .08 x 6/12) = 7,530,000 selling price; 7,383,000 x 5% = 369,150
8M x 4% = 320,000; 369,150 320,000 = 49,150
7,383,000 + 49,150 = 7,432,150 CV Dec. 1, Year 1;
7,432,150 x 5% = 371,608
371,608 320,000 = 51,608; 7,342,150 + 51,608 = 7,483,758 CV June 1, Yr 2.
7,530,000 7,483,758 = 46,242
Carrying amount is equal to FV
500,000 x 4% = 20,000
460,000 472,500 = 12,500 loss
Selling price = 3,000 x 120 = 360,000; cost of shares sold = 560,000 x 3,000/6,000 =
280,000; Gain = 360,000 280,000 = 80,000
Cost of shares sold (for 2,400 shares, P200,000) + 600 /3,600 x 360,000 = 200,000 +
60,000 = 260,000; Gain = 360,000 260,000 = 100,000

81

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