21

FINANCIAL ASSETS AT FAIR VALUE

Problem 21-1 (IFRS)

Raiza Company acquired a financial asset at its market value of P3,200,000. Broker fees of P200,000
were incurred in relation to the purchase. At what amount should the financial asset initially be recog-
nized respectively if it is classified as at fair market value through profit or loss, or as available for sale?

a. 3,400,000 and 3,200,000

b. 3,200,000 and 3,200,000
c. 3,200,000 and 3,400,000
d. 3,400,000 and 3,400,000

Solution 21-1 Answer c

Financial asset at fair value through profit or loss 3,200,000

Financial asset classified as available for sale

(3,200,000 + 200,000) 3,400,000

Under PAS 39, paragraph 43, any transaction cost is not included as part of the initial measurement of a
financial asset at fair value through profit or loss. Actually, a financial asset at fair value through profit or
loss is classified as held for "trading".

However, any transaction cost is included as part of the initial measurement of a financial asset classified
as "available for sale".

Under PFRS 9, the term "available for sale is now eliminated. The equivalent term is "financial asset at
fair value through other comprehensive other income".

Problem 21-2 (IFRS)

On January 1, 2011, Alexis Company purchased marketable equity securities to be hels as "trading" for
P5,000,000. The entity also paid commission, taxes, and other transaction costs amounting to P200,000.
The securities had a market value of P5,500,000 on December 31, 2011 and the transaction costs that
would be incurred on sale are estimated at P110,000. No securities were sold during 2011. What amount
of unrealized gain or loss on these securities should be reported in the 2011 income statement?

a. 500,000 unrealized gain

b. 500,000 unrealized loss
c. 300,000 unrealized gain
d. 400,000 unrealized gain

Solution 21-2 Answer a

Fair Value 5,500,000

Acquisition cost -- Trading 5,000,000

Unrealized gain -- included in profit or loss 500,000

The transaction costs that would be incurred on sale are ignored because the financial asset held for
trading is measured at fair value and not at fair value less cost to sell.

Problem 21-3 (IFRS)

Carmela Company acquired a financial instrument for P4,000,000 on March 31,2011. The financial instru-
ment is classified as financial asset at fair value through other comprehensive income. The direct acqui-
sition costs incurred amounted to P700,000. On December 31, 2011, the fair value of the instrument was
P5,500,000 and the transaction costs that would be incurred on the sale of the investment are estimated
at P600,000. What gain should be realized in other comprehensive income for the year ended

December 31, 2011?

a. 200,000
b. 900,000
c. 800,000
d. 0

Solution 21-3 Answer c

Fair value -- December 31, 2011 5,550,000

Acquisition cost (4,000,000 + 700,000) 4,700,000
Unrealized gain -- other comprehensive income 800,000

The transaction costs of P600,000 that would be incurred on the sale of the investment are ignored
because the financial asset is measured at fair value and not at fair value less cost to sell.

Problem 21-4 (AICPA Adapted)

On December 31, 2011, Fay Company appropriately reported a P100,000 unrealized loss. There was
no change in 2012 in the composition in the portfolio of marketable equity securities held as financial
asset at fair value through other comprehensive income. Pertinent data are as of follows:
Market value
Security Cost December 31, 2012
 A 1,200,000 1,300,000
B 900,000 500,000
C 1,600,000 1,500,000

3,700,000 3,300,000

What amount of loss on these securities should be included in the statement of comprehensive income
for the year ended December 31, 2012 as component of other comprehensive income?

a. 400,000
b. 300,000
c. 100,000
d. 0

Solution 21-4 Answer b

Market value -- (12/31/2012) 3,300,000

Market value -- 12/31/2011 (3,700,000 - 100,000) 3,600,000

Unrealized loss in 2012 ( 300,000 )

Unrealized loss -- 12/31/2011 ( 100,000 )

Cumulative unrealized loss -- 12/31/2012 ( 400,000 )

Only the unrealized loss of P300,000 is shown in the 2012 statement of comprehensive income as
component of other comprehensive income. However, the cumulative unrealized loss P400,000
would appear in the statement of changes in equity.

Actually, if the investment is held as financial asset at fair value through other comprehensive income,
the total or cumulative unrealized gain or loss is always the difference between the market value and
the original acquisition cost.

Market value -- December 31, 2012 3,300,000

Acquisition cost 3,700,000

Cumulative unrealized loss -- December 31, 2012 ( 400,000)

Problem 21-5 (AICPA Adapted)

During 2011, Garr Company purchased marketable equity securities as trading investment. For the
year ended December 31, 2011, the entity recognized an unrealized loss of P230,000. There were no
security transactions during 2012. Pertinent information on December 31, 2012 is as follows:

Security Cost Market value

 A 2,450,000 2,300,000
B 1,800,000 1,820,000
4,250,000 4,120,000

In the 2012 income statement , what amount should be reported as unrealized gain or loss?

a. Unrealized gain of P100,000

b. Unrealized loss of P100,000
c. Unrealized loss of P130,000
d. Unrealized gain of P130,000

Solution 21-5 Answer a

Market value -- 12/31/12 4, 120,000

Market value -- 12/31/11 (4,250,000 - 230,000) 4, 020,000

Unrealized gain in 2012 100,000

Problem 21-6 (IAA)

Lagoon Company purchased the following securities during 2011:

Classification Cost Market value

December 31, 2011

Security A Trading 900,000 1,000,000

Security B Trading 1,000,000 1,600,000

On the July 31, 2012 the entiry sold all of the shares of Security B for a total of P1,100,000. On
December 31, 2012, the shares of Security A had a market value of P600,000. No other acitivity
occurred during 2012 in relation to the trading security portfolio. What is the gain or loss on the
sale of Security B on July 31, 2012?

a. 500,000 gain
b. 500,000 gain
c. 100,000 loss
d. 100,000 loss

Solution 21- 6 Answer b

Sale price of Security B 1,100,000

Carrying amount of Security B -- December 31, 2011 1,600,000
Loss on sale of trading securities ( 500,000)
Problem 21-7 (AICPA Adapted)

During 2011, Latvia Company purchased trading securities with the following cost and market value
on Decemebr 31, 2011:

Security Cost Market value

A - 1,000 shares 200,000 300,000
B - 10,000 shares 1,700,000 1,600,000
C - 20,000 shares 3,100,000 2,900,000

5,000,000 4,800,000

Latvia sold 10,000 shares of Security B on January 15, 2012, for P130 per share, incurring P50,000
in brokage commission and taxes. What amount should be reported as loss on sale of trading invest-
ment in 2012?

a. 450,000
b. 400,000
c. 300,000
d. 350,000

Solution 21-7 Answer d

Sale price (10,000 x P130) 1,300,000

Less: Commission and taxes 50,000

Net sale price

Less: Carrying amount of B shares on 12/31/2011 1,600,000

Loss on sale of trading investment ( 350,000)

Problem 21-8 (IAA)

On January 1, 2011, Lebanon Company purchased equity securities to be held as "at fair value through
other comprehensive income". On December 31, 2011, the cost and market values were:

Cost Market
Security X 2,000,000 2,400,000
Security Y 3,000,000 3,500,000
Security Z 5,000,000 4,900,000

On July 1, 2012, Lebanon sold Security X for P2,500,000. What amount of gain on sale of financial
asset should be reported in the 2012 income statement?
a. 500,000
b. 100,000
c. 400,000
d. 0

Solution 21-8 Answer b

Sale price 2,500,000

Carrying amount of Security X 2,400,000
Gain on sale of financial asset 100,000

The Application Guidance of PFRS 9, paragraph B5.12, provides that amounts recognized in other
comprehensive income are not subsequently transferred to profit or loss. The cumulative gain
or loss may however be transferred within equity, meaning retained earnings.

Problem 21-9 (IAA)

On January 1, 2011, Caraga Company purchased equity securities to be held as financial assets
measured "at fair value through other comprehensive income". The cost and market values were:

Cost Market -- 12/31/2011

Security R 3,000,000 3,200,000

Security S 4,000,000 3,500,000
Security T 5,000,000 4,600,000

On January 31, 2012, Caraga Company sold Security R for P3,500,000. What unrealized gain or loss
on the remaining financial assets ahould be reported in the 2012 statement of comprehensive income
as component of other comprehensive income?

a. 600,000 gain
b. 600,000 loss
c. 300,000 gain
d. 300,000 loss

Solution 21-9 Answer c

Fair value of S and T -- December 31, 2012 8,400,000

Fair value of S and T -- December 31, 2011 8,100,000

Unrealized gain in 2012

Unrealized loss on S and T -- December 31, 2011
(9,000,000 - 8,100,000) ( 900,000 )
Cumulative unrealized loss -- December 31, 2012 ( 600,000 )

The unrealized gain of P300,000 is shown in the 2012 statement of comprehensive income as
component of other comprehensive income. However, cumulative unrealized loss of P600,000
would appear in the statement of changes in equity.

Problem 21- 10 (IAA)

During 2011, Little Company purchased trading securities as a short-term investment. The cost
of securities and their market value on December 31, 2011 follow:

Security Cost Market value

A 650,000 750,000
B 1,000,000 540,000
 C 2,200,000 2,260,000

Before any adjustment related to these trading securities, Little had net income of P3,000,000 for
2011. What is the net income after making any necessary trading security adjustment?

a. 3,000,000
b. 2,700,000
c. 3,300,000
d. 2,540,000

Solution 21-10 Answer b

Total market value 3,550,000

Total cost 3,850,000
Unrealized loss on trading securities ( 300,000)

Net income before adjustment 3,000,000

Unrealized loss on trading securities ( 300,000)
Adjusted net income 2,700,000

Problem 21-11 (IAA)

On January 1, 2011, Remington Company acquired 200,000 ordinary shares of Universal Company
for P9,000,000. At the time of purchase, Universal Company had outstanding 800,000 shares with a
carrying amount of P36,000,000. On December 31, 2011, the following events took place:

* Universal Company reported net income of P1,800,000 for the calendar year 2011.
* Remington Company received from Universal Company dividend of P0.75 per ordinary share.
* The market value of Universal Company share had temporarily declined to P40.

Remington Company has elected to measure the investment at fair value through other comprehensive
income. What is the carrying of the investment on December 31, 2011?

a. 9,000,000
b. 8,000,000
c. 9,300,000
d. 9,450,000

Solution 21-11 Answer b

Market value 12/21/2011 (200,000 x 40) 8,000,000

Acquisition cost 9,000,000
Unrealized loss on financial asset (1,000,000)

Although the interest is 25%, 200,000 shares divided by 800,000 shares, the equity method is not applied
because the investment is classified as financial asset at fair value through other comprehensive income.

The unrealized loss on the financial asset of P1,000,000 is shown in the statement of comprehensive
income as component of other comprehensive income.

Problem 21-12 (AICPA Adapted)

Neal Company held the following financial assets as trading investments on December 31, 2011:

Cost
100,000 shares of Company A
nonredeemable preference
share capital, par value P75 775,000

7,000 shares of Company B

preference share capital, par value P100,
subject to mandatory redemption
by the issuer at par on
December 31, 2012 690,000 625,000
1,465,000 1,450,000

In the December 31, 2011 statement of financial position, what should be reported as carrying amount
of the investments?

a. 1,400,000
b. 1,450,000
c. 1,465,000
d. 1,475,000

Solution 21-12 Answer b

The nonredeemable preference share is an equity security. The redeemable preference share is
a debt security.
Whether equity or debt security, financial assets held for trading are carried at fair value.

Problem 21-13 (AICPA Adapted)

Information regarding Trinidad Company's portfolio of financial assets at fair value through other
comprehensive income is as follows:

Aggregated cost -- December 31, 2011 1,700,000

Unrealized gains -- December 31, 2011 40,000
Unrealized losses -- December 31, 2011 260,000
Unrealized gains during 2011 300,000

On January 1, 2011, Trinidad reported an unrealized losses of P15,000 as a component of other com-
prehensive income.
In its 2011 statement of changes in equity, Trinidad Company should report what amount of unrealized
loss on these securities?

a. 260,000
b. 220,000
c. 205,000
d. 0

Solution 21-13 Answer b

Unrealized losses 260,000

Unrealized gains 40,000

Net unrealized losses -- December 31, 2011 220,000

Unrealized loss -- January 1, 2011 15,000

Increase in unrealized loss 205,000

The increase in unrealized loss of P205,000 is reported in the statement of comprehensive income as
component of other comprehensive income.

However, the 2011 statement of changes in equity should report the cumulative unrealized loss of
P220,000.

Incidentally, the net realized gains represent the gains from the financial assets that are actually
sold and should shown in the statement of comprehensive income as component of profit or loss.

Problem 21-14 (AICPA Adapted)

The following information was extracted from the December 31, 2011 statement of financial position
of Gil Company:

Noncurrent assets:
Financial asset at fair value 3,700,000

Shareholder's equity:
Unrealized loss on financial asset ( 300,000)

Gil Company paid transaction cost of P100,000 related to the acquisition of the investment. This
amount is capitalized as part of the cost of the investment. The entity elected to measure the
financial asset at fair value through other comprehensive income. What was the historical cost of
the financial asset?

a. 3,700,000
b. 3,400,000
c. 3,900,000
d. 4,000,000

Solution 21-13 Answer d

Historical cost (3,700,000 + 300,000) 4,000,000

Problem 21- 15 (AICPA Adapted)

On July 1, 2011, Bellirose Company purchased P1,000,000 face value 8% bonds for P910,000 plus
accrued interest to yield 10%. The bonds mature on January 1, 2018, pay interest annually on January
1, and are classified as trading securities. On December 31, 2011, the bonds had a market value of
P945,000. On February 13, 2012, Bellirose Company sold the bonds for P920,000. On December 31,
2011 what amount should be reported for short-term investments in trading debt securities?

a. 910,000
b. 920,000
c. 945,000
d. 950,000

Solution 21-15 Answer c

Financial asset fair value 945,000

Problem 21-16 (PAS 39)

On January 1, 2011 Agustin Company purchased bonds with face value of P5,000,000 to be held as
"available for sale". The entity paid P4,600,000 plus transaction costs of P142,000. The bonds mature
on December 31, 2013 and pay 6% interest annually on December 31 each year with 8% effective
yield. The bonds are quoted at 105 on December 31, 2011 and 110 on December 31, 2012. What
amount of cumulative unrealized gain on these bonds should be reported in the 2012 statement of
changes in equity?

a. 500,000
b. 250,000
c. 592, 931
d. 164, 291

Solution 21-16 Answer c

 Interest Interest Discount
Date
received income Amortization

1/1/2011
12/31/2011 300,000 379,360 79,360
12/31/2012 300,000 385,709 85,709
12/31/2013 300,000 392,931 92,931

The interest received is equal to 6% multiplied by the face value. The interest income is equal to 8%
multiplied by the carrying amount.

Market value - 12/31/2011 (5,000,000 x 105)

Carrying amount - 12/31/2011 4,821,360

Unrealized gain - December 31, 2011 428,640

Market value-- 12/31/2012 (5,000,000 x 110)

Carrying amount-- 12/31/2012 (4,907,069)
Cumulative unrealized gain -- December 31, 2012 592,931

Under PFRS 9, bonds cannot be classified anymore as "available for sale". Bonds can be classified
only as "financial assets amortized cost" or may be designated as financial assets "at fair value
through profit or loss".
able for sale?

surement of a
ough profit or

asset classified

ncial asset at

trading" for
to P200,000.

What amount
 inancial instru-
direct acqui-
strument was
re estimated
000 )
0,000

1,250,000

alue through
Market -- 12/31/2012

--
3,700,000
4,700,000

300,000
 3,550,000

3,000,000

is not applied
nsive income.

Market
value

825,000

1,450,000
 Carrying
mortization amount

4,742,000
4,821,360
4,907,069
5,000,000

5,250,000

5,550,000
22
INVESTMENT IN EQUITY SECURITIES

Problem 22-1 (AICPA Adapted)

On January 1, 2011, ABC Company purhased 40,000 shares of RST at P100 per share. The invest-
ment in measurement at fair value through other comprehensive income. Brokerage fees measured
to P120,000. A P5 dividend per share of RST had been declared on December 15, 2010 to be paid
on March 31, 2011 to shareholders of record on January 31, 2011. No other transactions occurred
in 2011 affecting the investment in RST shares.

What is the initial measurement of the investment?

a. 4,120,000
b. 4,000,000
c. 3,920,000
d. 3,800,000

Solution 22-1 Answer c

Purchase price (40,000 x 100) 4,000,000

Brokerage 120,000

Total 4,120,000
Less: Purchased dividend (40,000 x 5) 200,000

Cost of investment 3,920,000

The stock was purchased dividend-on, because the date of purchase is January 1, 2011 and divi-
dends were declared on December 15, 2010 to shareholders of record on January 31, 2011.

The purchased dividend is excluded from the cost if investment.

Problem 22-2 (AICPA Adapted)

On January 1, 2011, Adam Company purchased a long-term investment 100,000 ordinary shares of
Mill Company for P40 a share. On December 31, 2011, the market price of Mill's share was P35,
reflecting a temporary decline in market price. On December 28, 2012, Adam sold 80,000 shares of
Mill Company for P30 a share. For the year ended, December 31, 2012, what amount should be
reported as loss on disposal of long-term investment?

a. 1,000,000
b. 900,000
c. 800,000
 d. 400,000

Solution 22-1 Answer c

Sales price (80,000 x 30) 2,400,000

Cost of investment sold (80,000 x 40) (3,200,000)

Loss on disposal of investment ( 800,000)

Problem 22-3 (AICPA Adapted)

Cobb Company purchased 10,000 shares representing 2% ownership of Roe Company on February
15, 2011. Cobb received a stock dividend of P2,000 shares on March 31, 2011, when the carrying
amount per share on Roe's books was P350 and the market value per share was P400. Roe paid a
cash dividend of P15 per share on September 15, 2011. In the income statement for the year ended
Ocotober 31, 2011, what amount should Cobb reported as dividend income?

a. 980,000
b. 880,000
c. 180,000
d. 150,000

Solution 23-3 Answer c

Original shares 10,000

Stock dividend 2,000

Total shares 12,000

Dividend income (12,000 x P15) 180,000

Problem 22-4 (PHILCPA Adapted)

During 2011, Lawan Company bought the shares of Burwood Company as follows:

June 1 20,000 shares @ 100

December 1 30,000 shares @ 120 3,600,000

The transactions for 2012 are:

January 10 Received cash dividend at P10 per share.

January 20 Received 20% stock dividend.
December 10 Sold 30,000 shares at P125 per share.
If the FIFO approach is used, what is the gain on the sale of the shares?
a. 1,150,000

b. 950,000
c. 150,000
d. 550,000

Solution 22-4 Answer a

FIFO approach June 1 December 1

Original shares 20,000 30,000

Stock dividend -- 20% 4,000 6,000
Total shares 24,000 36,000

Sale price (30,000 x 125) 3,750,000

Cost of shares sold:
From June 1 (24,000 shares) 2,000,000
From December 1 (6,000 shares)
(6,000/36,000 x 3,600,000) 600,000 2,600,000
Gain on sale 1,150,000

Average approach

Sale price 3,750,000

Cost of shares sold (30,000/ 60,000 x 5,600,000) 2,800,000
Gain on sale 950,000

Problem 22-5 (AICPA Adapted)

Wood Company owns 20,000 shares of Arlo Company's 200,000 shares of P100 par, 6% cumulative,
nonparticipating preference share capital and 10,000 shares representing 2% ownership of Arlo's
ordinary share capital. During 2011, Arlo declared and paid preference dividends of P2,400,000. No
dividends has been declared or paid during 2010. In addition, Wood received a 5% stock dividend on
ordinary share from Arlo when the quoted market price of Arlo's ordinary share was P10. What
amount should Wood report as dividend income in its 2011 income statement?
2,000,000

5,600,000
dividend on