INVESTMENTS

Problem 1

An entity provided the following information on December 31, 2019:

Trading Nontrading
Aggregate cost 3,600,000 5,500,000
Aggregate fair value 3,200,000 4,500,000
Aggregate lower of cost or market applied individually 3,040,000 4,200,000
The cost of disposal are estimated at 100,000 for trading securities and 150,000 for non trading
securities. The non trading securities are designated as measurement at FVOCI.
1. What total amount should be reported as unrealized loss in 2019 income statement?

Problem 2

On January 1, 2019, an entity purchased equity investments held for trading.

Purchase price Transaction cost Market – 12/31/2019
Security A 1,000,000 100,000 1,200,000
Security B 2,000,000 200,000 1,500,000
Security C 3,000,000 300,000 3,100,000
On July 1, 2020, the entity sold Security A for 1,900,000.
2. What amount of unrealized loss should be recognized in the 2019 income statement?
3. What amount should be reported as gain on sale of trading securities in the 2020 income
statement?

Problem 3

On January 1, 2019, an entity purchased nontrading equity investments which are irrevocably
designated at FVOCI:
Purchase price Transaction cost Market – 12/31/2019
Security A 1,000,000 100,000 1,500,000
Security B 2,000,000 200,000 3,000,000
Security C 4,000,000 400,000 4,700,000
On July 1, 2020, the entity sold Security C for 5,200,000.
4. What amount should be reported as unrealized gain or loss in 2019 as component of other
comprehensive income?
5. What is the net adjustment to retained earnings as a result of the sale of investments in 2020?

Problem 4

An entity received dividends from ordinary share investments during the current year:
 A share dividend of 10,000 shares from A company when the market price of the share was P10.
 A cash dividend of 1,500,000 from B company in which the entity owned a 15% interest.
 5,000 shares of C company in lieu of cash dividend of P20 per share. The market price of the
share was P150. The entity had 50,000 shares of C company and owned 5% interest in C
company.
6. What amount of dividend income should be reported for the current year?
Problem 5
An entity provided the following data pertaining to equity investments for the current year:
 On October 1, the entity received 600,000 liquidating dividend from A company. The entity
owned a 10% interest in A company.
 The entity owned a 20% interest in B company which declared and paid a 4,000,000 cash
dividend to shareholders on December 31.
 On December 1, the entity received from C company a dividend in kind of one share of D
company for every 4 C company shares held. The entity had 100,000 C company shares which
have a market price of P50 per share on December 1. The market price of D company share
was P10.
7. What amount should be reported as dividend income for the current year?

Problem 6

An entity owned 50,000 shares of another entity. These 50,000 shares were originally purchased for
P100 per share. The investee distributed 50,000 rights to the entity. The entity was entitled to buy one
new share for P140 and five of these rights. Each share had a market value of P150 and each right had a
market value of P10 on the date of issuance.
The entity exercised all rights. The share rights are accounted for separately and measured initially at
fair value.
8. What total cost should be recorded for the new shares that are acquired by exercising the
rights?

Problem 7

An entity issued rights to subscribe to its share capital, the ownership of 4 shares entitling the
shareholders to subscribe for 1 share at P100. An investor owned 50,000 shares with total cost of
5,000,000. The share is quoted right on at 125. The share rights are accounted for separately and
measured initially at fair value.
9. What is the total cost of the new investment assuming all of the share rights are exercised by
the investor?

INVESTMENT IN ASSOCIATES

Problem 1

On January 1, 2019, an entity purchased 40% of the outstanding ordinary shares of another entity for
5,000,000 when the net assets of the investee amounted to 10,000,000.

At acquisition date, the carrying amounts of the identifiable assets and liabilities of the investee were
equal to fair value, except for land whose fair value was 2,000,000 greater than carrying amount and
inventory whose fair value was 1,500,000 greater than the cost.

The land was sold in 2019 and one half of the inventory was sold during 2019.

During 2019, the investee reported net income of 8,000,00, issued 10% share dividend aand paid cash
dividend of 2,500,000.
 1. What is the investment income for 2019?
2. What is the carrying amount of the investment on December 31, 2019?

Problem 2

On January 1, 2019, an entity acquired 40% of the ordinary shares of an associate. On such date, assets
and liabilities of the investee were recorded at fair value and the acquisition showed that goodwill of
1,000,000 was acquired. The investee reported net income of 8,000,000 for 2019.

In December 2019, the investee sold inventory costing 3,000,000 to the investor for 5,000,000. The
inventory remained unsold by the investor on December 31, 2019.

On January 1, 2019, the investee sold an equipment to the investor with carrying amount of 2,500,000
for 4,000,000. The remaining life of the equipment is 5 years.

3. What amount of investment income should be reported for 2019?

Problem 3

An entity owned 100% of another entity’s preference shares and 20% of ordinary shares. The investee’s
share capital outstanding on December 31, 2019 included 5,000,000 of 10% cumulative preference
shares and 10,000,000 of ordinary shares.

The investee reported net income of 8,000,000 for 2019. No dividend was declared for both preference
share and ordinary shares in 2019.

4. What amount should be reported as investment income for 2019?

Problem 4

On January 1, 2019, an entity acquired a 10% interest in an investee for 3,000,000. The investment was
accounted for under the cost method. During 2019, the investee reported net income of 4,000,000 and
paid dividend of 1,000,000.

On January 1, 2020 the entity acquired aa further 15% interest in the investee for 8,500,000. On such
date, the carrying amount of the net assets of the investee was 36,000,000 and the fair value of the 10%
existing interest was 3,500,000. The fair value of the net assets of the investee is equal to carrying
amount except for an equipment whose fair value was 4,000,000 greater than the carrying amount. The
equipment had a remaining liefe of 5 years.

The investee reported net income of 8,000,000 for 2020 and paid dividend of 6,000,000 om December
31, 2020.

5. What amount of investment income should be recognized in 2019?

6. What total amount of income should be recognized by the investor in 2020?
7. What is the carrying amount of the investment in associate on December 31, 2020?

Problem 5
On January 1, 2019, an entity acquired 30% of the voting share capital of another entity for 2,000,
000, which was equal to the carrying amount of interest, acquired. The investee reported net income pf
P1, 500,000 for 2019 and paid dividend of P500, 000 on December 31, 2019.

The investee reported net income of P1,000,000 for the six months ended June 30, 2020 and P2,500,000
for the year ended December 31, 2020 but paid dividend of P1,000,000 on October 2020.

On July 1, 2020, the investor sold half of the investment for P2,000,000. The fair value of the retained
investment is P2,200,000 on July 1, 2020 and P2,400,000 on December 31, 2020. The retained
investments is to be measured at FVPL.

8. What is the carrying amount of the investment before the disposal on June 30, 2020?
9. What amount of gain on sale of investment should be reported for 2020?
10. What total amount of income should be reported in 2020?

BOND INVESTMENT

Problem 1

On January 1, 2019, an entity purchased as a long-term investment P5, 000,000 face value 8% bonds for
P4, 530, 000. The bonds are purchased to yield 10% interest. The bonds pay interest annually on
December 31. The effective interest method of amortization is used.

1. What is the interest income for 2020?

2. What is the carrying amount of the investment in bonds on December 31, 2020?

Problem 2

On January 1, 2019, an entity paid P5, 990,000 for a 10% bond with face amount of P5,000,000. Interest
is payable semi-annually on June 30 and December 31. The bond is purchased to yield 8%. The effective
interest method is used.

3. What is the interest income for 2019?

4. What is the carrying amount of the bond investment on December 31, 2019?

Problem 3

On January 1, 2019, an entity purchased 12% bonds with face amount of P5, 000,000 for P5, 500,000
including transaction cost of P100, 000. The bonds provide an effective yield of 10%. The bonds are
dated January 1, 2019 and pay interest annually on December 31 of each year. The bonds are quoted at
115 on December 31, 2019. The entity has irrevocably elected to use the fair value option.

5. What is the carrying amount of the bond investment on December 31, 2019?
6. What amount of gain from change in fair value should be reported for 2019?
7. What amount of interest income should be reported for 2019?
Problem 4

On January 1, 2019, an entity purchased bonds with face amount of P5, 000,000. The entity paid P4,
500,000 plus transaction cost of P168, 600. The bonds mature on December 31, 2022 and pay 6%
interest annually on December 31 of each year with 8% effective yield.

The bonds are quoted at 105 on December 31, 2019 and 110 on December 31, 2020.

The business model in managing the financial asset is to collect contractual cash flows that are solely
payments of principal and interest and to sell the bonds in the open market.

The entity has not elected the fair value option.

On December 31, 2021, the bonds are quoted at 115 and the market interest rate is 10%.

8. What amount of unrealized gain should be reported as component of OCI I the statement of
comprehensive income for 2019?
9. What amount of cumulative unrealized gain should be reported as component of OCI in the
statement of changes in equity for 2020?
10. What amount of unrealized gain should be reported as component of OCI in the statement of
comprehensive income for 2020?
11. What is the interest income for 2021?
12. What is the carrying amount of the investment on December 31, 2021?

DERIVATIVES
Problem 1

On January 1, 2019, an entity borrowed P5, 000,000 from a bank at a variable rate of interest for 2
years. Interest will be paid annually to the bank on December 31 and the principal is due on December
31, 2020.

Under the agreement, the market rate of interest every January 1 resets the variable rate for that period
and the amount of interest to be paid on December 31.

In conjunction with the loan, the entity entered into a “receive variable, pay fixed” interest rate swap
agreement with another bank speculator as a cash flow hedge.

The market rates of interest are 10% on January 1, 2019 and 12% on January 1, 2020. The “underlying
fixed interest rate is 10%. The PV of 1 at 10% for one period is .91 and the PV of 1 at 12% for one period
is .89.

1. What is the derivative asset or liability on December 31, 2019?

2. What amount should be reported as interest expense for 2020?

Problem 2
On January 1, 2019, an entity received a four-year P5, 000,000 loan with interest payments occurring at
the end of each year and the principal to be repaid on December 31, 2022. The interest for 2019 is the
prevailing market rate of 10% on January 1, 2019, and the market interest rate every January 1 resets
the variable rate of interest for that year.

The “underlying” fixed interest rate is 10%. In conjunction with the loan, the entity entered into a
“receive variable, pay fixed” interest rate swap agreement as cash flow hedge. The interest swap
payment will be made on December 3 of each year.

The market rate of interest is 6% on January 1, 2020 and 8% on January 1, 2021. The PV of an ordinary
annuity of 1 at 6% for three periods is 2.67 and the PV on ordinary annuity of 1 at 8% for two periods is
1.78.

3. What is the derivative asset or liability on December 31, 2019?

4. What is the derivative asset or liability on December 31, 2020?
5. What amount of interest expense should be reported for 2020?

Problem 3

An entity operates a chain of seafood restaurants. On July 1, 2019, the entity determined that it would
need to purchase 50,000 kilos of deluxe fish on July 1, 2020. On July 1, 2019, the entity negotiated a
forward contract as a cash flow hedge with a reputable bank to purchase 50,000 kilos of deluxe fish on
July 1, 2020 at a strike price of P50 per kilo or P2, 500,000.

This derivative forward contract provides that if the market price of deluxe fish on July 1, 2019 is more
than P50, the difference is paid by the bank to the entity. On the other hand, if the market price on July
1, 2020 is less than P50, the entity will pay the difference to the bank.

The market price per kilo of the deluxe fish is P55 on December 31, 2019 and P52 on July 1, 2020.

6. What is the derivative asset or liability on December 31, 2019?

7. What amount should be recognized as cost of purchases on July 1, 2020?

Problem 4

An entity produces colorful 100% cotton shirts and needs 50,000 kilos of raw materials in the production
process. On December 1, 2019, the entity purchased a call option as a cash flow hedge to buy 50,000
kilos on July 1, 2020.The option strike price is P100 per kilo. The entity paid P50, 000 for the call option.

This derivative option contract means that if the market price is higher than P100, the entity can
exercise the option and buy the asset at the strike option price of P100. If the market price is lower than
P100, the entity can throw away the option and buy the asset at the cheaper price.

The market price per kilo is P110 on December 31, 2019 and P115 on July 1, 2020.

8. What is the derivative asset on December 31, 2019?

9. What is the cost of purchases on July 1, 2020?
 10. Assume the market price is P110 on December 31, 2019 and P90 on July 1, 2020. What amount
should be recognized as loss on call option in 2020?
11. Assume the market price is P110 on December 31, 2019 and P90 on July 1, 2020. What is the
derivative liability on July 1, 2020?

INVESTMENT PROPERTY AND OTHER INVESTMENT

Problem 1

A parent and its subsidiaries provided the following properties owned by the group.
Land held for undermined future use 1,000,000
Vacant building to be leased out under an operating lease 2,000,000
Property held for use in production 4,000,000
Property held by a subsidiary, a real estate firm, in the ordinary course 3,000,000
of business
Building owned by subsidiary and the subsidiary provides security and 2,500,000
Maintenance services to the lessees
Land leased to a subsidiary under an operating lease 1,500,000
Equipment lease to an unrelated party under and operating lease 500,000
Building under construction for use as investment property 3,500,000

1. In the consolidated statement of financial position of the parent and its subsidiaries, what total
amount should be reported as investment property?
2. What total amount should be included in property, plant and equipment in the consolidated
statement of financial position of the parent and its subsidiaries?

Problem 2

An entity purchased an investment property on January 1, 2019 at a cost of P4, 000,000. The property
had a useful life of 20 years and on December 31, 2020 had a fair value of P4, 800,000.

On December 31, 2020, the property was sold for net proceeds of P4, 500,000. The entity used the cost
model to account for investment property.

3. What is the gain to be recognized for 2020 regarding the disposal of the property?

Problem 3

On January 1, 2019, an entity acquired three investment properties.

Fair Value Fair Value

Initial Cost December 31, 2019 December 31, 2020

Property 1 2,700,000 3,200,000 4,000,000

Property 2 3,450,000 3,000,000 2,100,000
Property 3 3,300,000 3,900,000 3,600,000
Each property had an estimated useful life of 10years. The accounting policy is to use the fair value
model for investment property. What is the gain or loss to be recognized for the year ended December
31, 2020?

Problem 4

On January 1, 2019, an entity adopted a plan to accumulate funds for a new building to be erected
beginning January 1, 2023 at an estimated cost of P20, 000,000. The entity intends to make four equal
deposits in a fund beginning December 31, 2019 that will earn interest rate at 12% compounded
annually. The future value of an ordinary annuity of 1 at 12% for 4 periods is 4.78, and the future value
of annuity of 1 in advance at 12% for 4 periods is 5.35.

4. What is the annual deposit to the fund of?

Problem 5

An entity purchased P2, 000,000 ordinary life policy on its president. The entity is the beneficiary under
the life insurance policy. The entity reported the following data for the current year:

Cash Surrender value, January 1 50,000

Cash Surrender value, December 31 60,000
Annual advance premium paid on January 1 100,000
Dividend received on July 1 5,000

The policy was purchased in 2016.

5. What amount should be reported as life insurance expense for the current year?

Problem 6

An entity purchased a P2, 000,000 life insurance policy for its president and the entity is the beneficiary.
During the current year, dividend of P10, 000 was applied to increase the cash surrender value. The
entity provided the following data for current year:

Cash surrender value – January 1 180,000

Cash surrender value – December 31 220,000
Annual advance premium paid on January 1 90,000

6. What amount should be reported as life insurance expense for the current year?

Problem 7

An entity insured the life of its president for P2, 000,000, the entity being the beneficiary under the life
insurance policy. The entity reported the following data for the current year:

Cash surrender value – January 1 80,000

Cash surrender value – December 31 100,000
Annual premium paid on January 1 160,000
The president died on October 1 and the policy was settled on December 31.

7. What amount should be reported as life insurance expense the current year?

8. What amount should be reported as gain on life insurance settlement for the current year?