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Investment in Equity Securities

An equity security is an investment in stock issued by another company. The accounting for an investment in
an equity security is determined by the amount of control of and influence over operating decisions the
company purchasing the stock has over the company issuing the stock. If less than 20% of the stock is
acquired and no significant influence or control exists, the investment is accounted for using the cost method.

If 2050% of the stock is owned, the investor is usually able to significantly influence the company it has
invested in. Assuming the investor does not control the number of positions on the Board of Directors or hold
key officer positions, this investment would be accounted for using the equity method. If the investor has 50%
or more of a company's stock, significant influence and control are deemed to exist and the investor reports its
results using consolidated financial statements. Although percent of voting stock owned serves as a
guideline, the amount of influence and control is used to determine the accounting for equity securities.

Cost method
The cost method of accounting for stock investments records the acquisition costs in an asset account, Equity
Investments. As with debt investments, acquisition costs include commissions and fees paid to acquire the
stock. If 72 shares of the 7,200 shares of PWC Corporation are acquired when the market price is $28 and a
$25 broker's fee is paid, the entry to record the purchase is:

As dividends are received, dividend income is recorded. If PWC Corporation pays a $1 per share cash
dividend, the entry to record the receipt of the dividend increases (debits) cash and increases (credits) dividend
revenue.

Equity investments accounted for by using the cost method are classified as either trading securities or
availableforsale securities, and the value of the investment is adjusted to market value.
When an equity investment accounted for under the cost method is sold, a gain or loss is recognized for the
difference between its acquisition cost and the proceeds received from the sale. Assume 36 of the PWC
Corporation shares purchased were sold for $30 per share and a fee of $25 was paid. The entry to record the
sale would increase (debit) cash for the proceeds received of $1,055 (36 $30 = $1,080 $25 fee), decrease
(credit) equity investments by $1,020.60 ($2,041 72 = $28.35 36 shares) and record a gain on the sale for
the $34.40 difference.

Investments in Associates

Scope
This Standard shall be applied by all entities that are investors with significant influence over, or joint control of,
an investee where the investment leads to the holding of a quantifiable ownership interest.

Definitions
An associate is an entity over which the investor has significant influence.
Significant influence is the power to participate in the financial and operating policy decisions of another
entity but is not control or joint control of those policies.
The equity method is a method of accounting whereby the investment is initially recognized at cost and
adjusted thereafter for the post-acquisition change in the investors share of the investees net
assets/equity of the associate or joint venture.

Significant Influence
Whether an investor has significant influence over the investee is a matter of judgment based on the
nature of the relationship between the investor and the investee.
Presumed significant influence if an investor holds, directly/indirectly (e.g. through subsidiaries) 20% to
50% of voting power of investee unless clearly demonstrable not. (less than 20% presumed not
significant influence, unless such influence clearly demonstrated.)
Substantial/majority ownership by another investor does not necessarily preclude an investor from
having significant influence.
Existence of significant influence is usually evidenced by one/more of the following:
1. Representation on BOD/equivalent governing body of investee.
2. Participation in policy-making processes (including decisions about dividends/other distributions).
3. Material transactions between investor & investee.
4. Interchange of managerial personnel.
5. Provision of essential technical information.
An entity loses significant influence over an investee when it loses the power to participate in the
financial and operating policy decisions of that investee.The loss of significant influence can occur with
or without a change in absolute or relative ownership levels.

Equity Method
Account for investments in associates/joint ventures using equity method except if one of the following (3)
exceptions apply:
1. The entity is a parent that is exempt from preparing consolidated financial statements under IFRS
10 Consolidated Financial Statements
2. All of following apply:
o Investor is 100% subsidiary/partially-owned subsidiary of another entity and its other owners,
including those not otherwise entitled to vote, have been informed about, & do not object to,
investor not applying equity method.
o Investor's debt/equity instruments are not traded in public market (domestic/foreign stock
exchange/over-counter market, including local & regional markets).
o Investor did not file, nor is in process of filing, F/S with securities commission/other regulatory
organization, for purpose of issuing any class of instruments in public market.
o Ultimate/any intermediate parent of investor produces consolidated F/S available to public that
comply with IFRS.
3. When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity
that is a venture capital organisation, or a mutual fund, unit trust and similar entities including
investment-linked insurance funds, the entity may elect to measure investments in those associates
and joint ventures at fair value through profit or loss in accordance with IFRS 9. [IAS 28(2011)

Changes in ownership interests


If an entity's interest in an associate or joint venture is reduced, but the equity method is continued to be
applied, the entity reclassifies to profit or loss the proportion of the gain or loss previously recognised in other
comprehensive income relative to that reduction in ownership interest.

Equity Method Procedures


Initial Recognition Carrying Amount Adjustments
Investment initially Carrying amount / to Adjustments are made to
recognised at cost. recognise investors % of investors % of investees
Generally, cost includes the investees P/L after P/L after acquisition to, e.g.
purchase price and other acquisition date. account for depreciation on
costs directly attributable to FV of assets on acquisition
the acquisition or issuance of Investors % of P/L of date, impairment losses
the asset such as investee recognised in recognized by investee for
professional fees for legal investors P/L. goodwill or PPE.
services, transfer taxes and Adjust for accounting policy
other transaction costs. Distributions received from differences between
Therefore, the cost of an investee carrying amount investee & investor.
investment in an associate or
of investment. Investors F/S prepared
joint venture at initial
using uniform accounting
recognition comprises the
investment's purchase price Adjustments to carrying policies for like transactions
and any directly attributable amount may be necessary & events in similar
expenditure necessary to for changes in investors % circumstances.
acquire it. interest in investee arising Adjust for dividends on
from changes in investees cumulative preference
Goodwill that arose on OCI. e.g. revaluation of shares held by other parties
acquisition is included in PPE, foreign exchange & classified as equity even
carrying amount of translation differences. if not declared.
investment i.e. not Eliminate P/L from
recognized separately. Investors share of those transactions between
changes recognised in OCI investor & investee to
Excess of investors share of investor. extent of investors interest
of identifiable assets & in investee
liabilities over investment Use investees F/S on
cost (i.e. bargain purchase) same date, UNLESS
is included as income in impractical. If impractical
determination of investors adjust for significant
share of investee's P/L in transactions. (less than or
period when acquired equal to 3 months
difference & same from
period to period.)

Recognizing Losses
If investors % of loss is greater than or equal to the interest in investee (i.e. carrying amount of
investment under equity method + long term interest that in substance, form part of net investment )
Discontinue recognising further losses. (Recognize a liability if investor incurred legal/constructive
obligation to make payments on behalf of associate).
If associate subsequently reports profits Resume recognizing investors share of P/L only after its %
of profits equals % of losses not recognized.

\
Discontinue Use of Equity Method
Discontinue equity method when no longer associate/joint venture.
If the investment becomes a subsidiary, the entity accounts for its investment in accordance with IFRS
3 Business Combinations and IFRS 10
If the retained interest is a financial asset, it is measured at fair value and subsequently accounted for
under IFRS 9
Any amounts recognised in other comprehensive income in relation to the investment in the associate
or joint venture are accounted for on the same basis as if the investee had directly disposed of the
related assets or liabilities (which may require reclassification to profit or loss)
If an investment in an associate becomes an investment in a joint venture (or vice versa), the entity
continues to apply the equity method and does not remeasure the retained interest. [IAS 28(2011).24]

Impairment Losses
As goodwill is not recognized separately, it is not tested for impairment separately. Instead the entire
carrying amount is tested as a single asset.
Full impairment loss can be reversed to extent that recoverable amount of entire investment
After application of equity method, including recognising associates losses, investor applies
requirements of IAS 39 to determine if necessary to recognise additional impairment loss with respect
to investors net investment.

The equity method of accounting for stock investments is used when the investor is able to significantly
influence the operating and financial policies or decisions of the company it has invested in. Given this
influence, the investor adjusts the value of its equity investment for dividends received from, and the earnings
(or losses) of, the corporation whose stock has been purchased. The dividends received are accounted for as
a reduction of the investment value because dividends are a partial return of the investor's investment.

Assume The Sisters, Inc. acquired 30% of the stock of 2005 GROUP for $72,000 on Jan. 1. During the year,
2005 GROUP paid dividends totaling $30,000 and had net income of $150,000. Under the equity method, the
$9,000 in dividends ($30,000 30%) received by The Sisters, Inc. would decrease the Investment in 2005
GROUP account rather than be reported as dividend revenue. The same account would increase $45,000 for
The Sisters, Inc. 30% share of net income ($150,000 30%) as they treat their share of net income as
revenue. At the end of the year, the balance in the Investment in 2005 GROUP account would be $108,000.

The entries by The Sisters, Inc. to record the acquisition of 2005 GROUP stock, receipt of dividends, and share
of net income are:
Quizzer

1. On January 1, 2012, Garry, Incorporated purchased 15,000 shares of Lanz Company for
P150,000 giving Garry a 15% ownership of Lanz. On January 1, 2013 Garry purchased an
additional 25,000 shares (25%) of Lanz for P300,000. This last purchase gave Garry the ability
to apply significant influence over Lanz. The book value of Lanz on January 1, 2012, was
P1,000,000. The book value of Lanz on January 1, 2013, was P1,150,000. Any excess of cost
over book value for this second transaction is assigned to a database and amortized over five
years.Lanz reports net income and dividends as follows. These amounts are assumed to have
occurred evenly throughout the years:
Net Dividends
Income
2012 P200,000 P50,000
2013 225,000 50,000
2014 250,000 60,000
On April 1, 2014, just after its first dividend receipt, Garry sells 10,000 shares of its investment.
What was the balance in the investment account at December 31, 2013?

2. JP Inc. bought 30% of Mark Company on January 1, 2013 for P450,000. The equity method of
accounting was used. The book value and fair value of the net assets of Mark on that date
were P1,500,000. Mark began supplying inventory to JP as follows:
Cost to Transfer Amount Held by
Year Mark Price JP at Year-End
2013 P30,000 P45,000 P 9,000
2014 P48,000 P80,000 P20,000
Mark reported net income of P100,000 in 2013 and P120,000 in 2014 while paying P40,000 in
dividends each year.
What is the Equity in Mark Income that should be reported by JP in 2014?
What is the balance in JPs Investment in Mark account at December 31, 2013?

3. Equity investments acquired by an entity which are accounted for by recognizing unrealized holding
gains or losses as component of other comprehensive income are
a. Nontrading where an entity has holdings of less than 20%.
b. Investments where an entity has holdings of between 20% and 50%.
c. Investments where an entity has holdings of more than 50%.
d. Trading investments where an entity has holdings of less than 20%.

4. On January 1, 2013, Vic Corporation acquired 30 percent of Roger Company's stock for P150,000. On
the acquisition date, Roger reported net assets of P450,000 valued at historical cost and P500,000
stated at fair value. The difference was due to the increased value of buildings with a remaining life of
15 years. During 2013 and 2014 Roger reported net income of P25,000 and P15,000 and paid
dividends of P10,000 and P12,000, respectively. Vic uses the equity method.
What amount of investment income will be reported by Vic for 2014?

Had Vic Corporation used the cost method, what would have been the balance in the investment
account on Dec 31, 2014?

5. On June 30, 2020, Rene Company purchased 25% of the outstanding ordinary shares of IB
Co. at a total cost of 2,100,000. The book value of IB Co.s net assets on acquisition date was
7,200,000. For the following reasons, Rene was willing to pay more than book value for the IB
Co. stock:
1 IB Co. has depreciable assets with a current fair value of 180,000 more than
their book value. These assets have a remaining useful life of 10 years.
2 All other identifiable tangible and intangible assets of IB Co. have current fair
values that are equal to their carrying amounts.
3 IB Co. owns a tract of land with a current fair value of 900,000 more than its
carrying
amount.
IB Co. reported net income of 1,620,000, earned evenly during the current year ended
December 31, 2020. Also in the current year, it declared and paid cash dividends of 315,000 to
its ordinary shareholders. Market value of IB Co.s ordinary shares at December 31, 2020, is 9
million. Rene Companys financial year-end is December 31.

What is the total amount of goodwill of IB Co. based on the price paid by Rene Company?

6. On January 1, 2013, Mike, Incorporated, paid P100,000 for a 30% interest in Rose Corporation. This
investee had assets with a book value of P550,000 and liabilities of P300,000. A patent held by Rose
having a book value of P10,000 was actually worth P40,000 with a six year remaining life. Any goodwill
associated with this acquisition is considered to have an indefinite life. During 2013, Rose reported
income of P50,000 and paid dividends of P20,000 while in 2014 it reported income of P75,000 and
dividends of P30,000. Assume Mike has the ability to significantly influence the operations of Rose.
The equity in income of Rose for 2013, is

7. On January 1, 2014, Rafa Company acquired 30 percent of Dave Company's common stock, at
underlying book value of P100,000. Dave has 100,000 shares of P2 par value, 5 percent cumulative
preferred stock outstanding. No dividends are in arrears. Dave reported net income of P150,000 for
2014 and paid total dividends of P72,000. Rafa uses the equity method to account for this investment.
What amount of investment income will Rafa Company report from its investment in Dave for the year?

What amount would be reported by Rafa Company as the balance in its investment account on
December 31, 2014?

8. Ted Company invested in a debt instrument on July 1, 2018. At this date, the cost and fair
value of the instrument is 1,000,000. The companys practice is to buy securities to be available
for sale when circumstances warrant, not to profit from short-term differences in price and not
necessarily to hold them to maturity. Hence, the debt instrument acquired is classified as
available-for-sale and measured at fair value, and changes in fair value are classified as
component of other comprehensive income.
The following table sets out the changes in the fair value of the debt instrument, and the nature
of the change in each year:
Year Fair Value Change Nature of Change
2019 (100,000) No objective evidence of impairment
2020 (200,000) Objective evidence of impairment
2021 15,000 Objective evidence of reversal of
impairment
The impairment loss to be recognized in 2019 is

9. Topy Inc. owns 30% of Dave Co. and applies the equity method. During the current year, Topy bought
inventory costing P66,000 and then sold it to Dave for P120,000. At year-end, only P24,000 of
merchandise was still being held by Dave. What amount of intercompany inventory profit must be
deferred by Topy?

10. When an investor's accounting period ends on a date that does not coincide with an interest receipt
date for bonds held as an investment, the investor must
a. Make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the
amount of interest accrued since the last interest receipt date.
b. Make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the
total amount of interest to be received at the next interest receipt date.
c. Notify the issuer and request that a special payment be made for the appropriate portion of
the interest period.
d. Do nothing special and ignore the fact that the accounting period does not coincide with the
bond's interest period.

11. On January 1, 2013, Jose Company acquired 40 percent of Tina Company's common stock. For this
acquisition, Jose paid P45,000 above book value. The full differential was attributed to equipment with
a remaining life of ten years and zero salvage value at the date of acquisition. During 2013 and 2014,
Tina reported net income of P90,000 and P50,000 and paid dividends of P40,000 and P60,000,
respectively. Jose reported a balance in its investment account of P230,000 on December 31, 2014. It
uses the equity method in accounting for this investment
During 2014, Jose will report:
a. a decrease in the investment account balance of P15,500
b. a decrease in the investment account balance of P8,500
c. an increase in the investment account balance of P20,000
d. an increase in the investment account balance of P8,000
12. Google Co. received a cash dividend from a common stock investment. Should Google report an
increase in the investment account if it has classified the stock as FVOCI or uses the equity method of
accounting?
a. FVOCI (Yes); Equity (Yes)
b. FVOCI (No); Equity (No)
c. FVOCI (Yes); Equity (No)
d. FVOCI (No); Equity (Yes)

13. How is goodwill arising from investments in associates accounted for?


a. Recognized as a separate asset either in the group financial statements or in the separate
financial statements but not amortized.
b. Included in the carrying amount of the investment and the entire investment in associate is
tested for impairment under PAS 36.
c. Included in the carrying amount of the investment and not amortized but tested separately
for impairment at least annually.
d. Not accounted for separately; however, presented as a separate asset in the investors
separate financial statements.

14. Equity method shall cease to be applied only when the investor loses significant influence over the
associate. Which of the following is not true?
a. The loss of significant influence can occur with or without a change in the percentage of
ownership.
b. There is a presumption of loss of significant influence when the associate is operating under
severe long-term restrictions that significantly impair its ability to transfer funds to the
investor.
c. There is a presumption of loss of significant influence if the ownership interest falls below
20%.
d. An entity loses significant influence over an investee when it loses the power to participate
in the financial and operating policy decisions of that investee.

15. Significant influence may be lost in any of the following, except


a. The associate is operating under severe long-term restrictions that significantly impair its
ability to transfer funds to the investor.
b. The investor retains its 20% interest in the associate but grants its voting rights to an
unrelated party.
c. The investor loses its right to appoint board of directors in the associate.
d. The investor purchases additional 31% interest in the associate.

16. Which of the following items does not affect the Investments in Associate account of the investor?
a. Amortization of excess relating to undervalued land reported by the associate
b. Cash dividends received from the associate
c. Share in net loss of the associate
d. Share in Other comprehensive income recognized by the associate

17. Bliss Co. uses the equity method to account for its investment in Nirvana, Inc. common stock. How
should Bliss record a 2% stock dividend received from Nirvana?
a. As dividend revenue at Nirvana's carrying value of the stock.
b. As a reduction in the total cost of Nirvana stock owned.
c. As dividend revenue at the market value of the stock.
d. As a memorandum entry reducing the unit cost of all Nirvana stock owned.

18. The following statements relate to the accounting for investments in equity instruments.
I Whenever an investment in marketable equity securities does not qualify for
accounting using the equity method, the investor is required to recognize as
dividend income cash dividends received from the investee.
II The cost measurement for equity investments is permitted in separate financial
statements.
III An investor may still be able to exercise significant influence over an investee,
even if the investment is less than 20% of the voting stock of the investee.
IV No adjustment to the investment account is made when changing from the
equity to the fair value measurement, or vice versa..
a. I, III
b. I, II
c. I, II, III
d. I, II, IV
19. According to PAS 28, significant influence is the investors participation in the financial and operating
policy decisions of the investee but not control of these decisions. Which of the following may an
investor be unable to exercise significant influence?
a. material intercompany transactions
b. technological dependency
c. participation in policy making process
d. majority ownership of the investee concentrated among a small group of shareholders who
operate the investee without regard to the views of the investor

20. When the accounting policies used by the investor and the associate do not match
a. In no instance should the accounting policies used by the investor and the associate be
different.
b. PAS 28 does not require appropriate adjustments to the associates financial statements to
conform them to the investors accounting policies for reporting like transactions and other
events in similar circumstances when it was not practicable to use uniform accounting
policies.
c. PAS 28 requires the entity to discontinue the use of the equity method.
d. PAS 28 requires appropriate adjustments to the associates financial statements to conform
them to the investors accounting policies for reporting like transactions and other events in
similar circumstances.

21. An investors share in the losses of an associate equals or exceeds its interest in the associate. Which
of the following cannot be undertaken by said investor?
a. Additional losses shall be provided only to the extent that the investor has incurred legal or
constructive obligators or made payments in behalf of the associate
b. The investor shall continue recognizing its share of further losses
c. The investment is reduced to zero
d. If the associate subsequently reports profit, the investor resumes recognizing its share of
profit only after its share of profit equals the share of the losses not previously recognized.

22. On July 1, 2013, Mark Company paid P1,000,000 for 100,000 share (40%) of the outstanding voting
stock of another entity. At that date, the net assets of the investee totaled P2,500,000 and the fair
values of all identifiable assets and liabilities were equal to their carrying amounts. The investee
reported net income of P500,000 for the year ended December 31, 2013, of which P300,000 was for six
months ended December 31, 2013. The investee paid cash dividends of P250,000 on September 30,
2013. The investor has not elected the fair value option of the accounting for the investment. What
amount of the income should be reported from the investment in associate?

23. Al Company has the following securities in its available-for-sale portfolio of securities on
December 31, 2019:
Security Shares Cost Fair Value
Danica Co. ordinary shares 4,500 220,500 207,000
Rose Corp. ordinary shares 15,000 540,000 525,000
Assunta, Inc. preference shares 1,200 180,000 184,800
Totals 940,500 916,800
All of the above securities were bought in 2019. In 2020, Al had the following transactions
relating to its investments:
April 1 Sold the 4,500 ordinary shares of Danica Co. for 65 per share.
May 1 Brought 2,100 ordinary shares of Rita Corp. at 75 plus brokers fee of
5,200.
Als portfolio of available-for-sale securities appeared as follows on December 31, 2020:
Security Shares Cost Fair Value
Rose Corp. ordinary shares 15,000 540,000 525,000
Rita Corp. ordinary shares 2,100 157,500 (a) 151,200
Assunta, Inc. preference shares 1,200 180,000 174,000
Totals 877,500 850,200
(a) The 5,200 brokers fee was recorded as expense.
What is the realized gain or loss on the sale of Danica Co. ordinary shares on April 1,
2020?

24. On January 3, 2013, Marcos Corp. purchased 25% of the voting common stock of Enrile Co.,
paying P2,500,000. Marcos decided to use the equity method to account for this investment. At
the time of the investment, Enriles total stockholders equity was P8,000,000. Marcos
gathered the following information about Enriles assets and liabilities:
Book value Fair value
Buildings (10 year 400,000 500,000
life)
Equipment (5 year 1,000,000 1,300,000
life)
Franchises (8 year 0 400,000
life)
For all other assets and liabilities, book value and fair value were equal. Any excess of cost
over fair value was attributed to goodwill, which has not been impaired.
For 2013, what is the total amount of excess amortization for Marcoss 25% investment in
Enrile?

25. On June 30, 2020, Rene Company purchased 25% of the outstanding ordinary shares of IB
Co. at a total cost of 2,100,000. The book value of IB Co.s net assets on acquisition date was
7,200,000. For the following reasons, Rene was willing to pay more than book value for the IB
Co. stock:
1 IB Co. has depreciable assets with a current fair value of 180,000 more than
their book value. These assets have a remaining useful life of 10 years.
2 All other identifiable tangible and intangible assets of IB Co. have current fair
values that are equal to their carrying amounts.
3 IB Co. owns a tract of land with a current fair value of 900,000 more than its
carrying
amount.
IB Co. reported net income of 1,620,000, earned evenly during the current year ended
December 31, 2020. Also in the current year, it declared and paid cash dividends of 315,000 to
its ordinary shareholders. Market value of IB Co.s ordinary shares at December 31, 2020, is 9
million. Rene Companys financial year-end is December 31.
What amount of investment revenue should Rene report on its income statement for the year
ended December 31, 2020, under the cost method?

26. On January 1, 2012, Nick Inc. acquired 15% of Daryl Co.s outstanding common stock for
P62,400 and categorized the investment as an available-for-sale security. Daryl earned net
income of P96,000 in 2012 and paid dividends of P36,000. On January 1, 2013, Nick bought
an additional 10% of Daryl for P54,000. This second purchase gave Nick the ability to
significantly influence the decision making of Daryl. During 2013, Daryl earned P120,000 and
paid P48,000 in dividends. As of December 31, 2013, Daryl reported a net book value of
P468,000. For both purchases, Nick concluded that Daryl Co.s book values approximated fair
values and attributed any excess cost to goodwill.
On Nicks December 31, 2013 balance sheet, what balance was reported for the Investment in
Daryl Co. account?

27. On January 4, 2020, Mico Company paid 38 million for 2 million shares of Michael Co. ordinary
shares. The stock investment represents a 25% interest in the net assets of Michael and gave
Mico the ability to exercise significant influence over Michaels operations. The book value of
Michaels net assets was 106 million. The fair market value of Michaels depreciable assets
exceeded their book value by 20 million. These assets had an average remaining useful life of
5 years. The remainder of the excess of the cost of the investment over the book value of net
assets purchased was attributable to goodwill.
On December 28, 2020, Mico received dividends of 1.50 per share. Michael reported net
income of 30 million for the year ended December 31, 2020. The market value of Michaels
ordinary shares at December 31, 2020, was 27.50 per share.
What portion of the investment cost is attributable to goodwill?

28. On January 4, 2013, Frances Co. purchased 40,000 shares (40%) of the common stock of
Alan Corp., paying P560,000. At that time, the book value and fair value of Alans net assets
was P1,400,000. The investment gave Frances the ability to exercise significant influence over
the operations of Alan. During 2013, Alan reported income of P150,000 and paid dividends of
P40,000. On January 2, 2014, Frances sold 10,000 shares for P150,000.
What is the balance in the investment account after the sale of the 10,000 shares?