ACC 211 – Intermediate Accounting 2

Topic: Investment in Equity Securities

Exercises

Straight Problems

Case 1: An entity has an investment portfolio consisting of equity securities

as follows:

Acquisition Fair Fair

Cost Value Value
(1/5/20x1) (12/31/20 (12/31/20
x1) x2)
Company A 100,000 120,000 110,000
Company B 80,000 30,000 90,000
Totals 180,000 150,000 200,000

Additional amounts of P4,500 and P3,800, representing taxes, were paid in

acquiring Company A shares and the Company B shares, respectively. On
Jan. 15, 20x3, all Company B shares were sold for P92,000. Transaction costs
of P3,000 were incurred on the sale.

Requirements:
a. Prepare journal entries assuming the investment portfolio is classified
as held for trading securities and the entity does not use a “fair value
adjustment” account.

Date Journal Entries Debit Credit

20X1
Jan. 5 Trading Securities 180,00
Taxes Expense 8,300
Cash 188,300

Dec. Unrealized Loss – Trading Securities 30,000

31
Trading Securities 30,000

20X2
Dec. Trading Securities 50,000
31
Unrealized Gain – Trading 50,000
Securities

20X3
Jan. 15 Cash (92,000 – 3,000) 89,000
 Loss on sale of Trading Securities 1,000
Trading Securities 90,000

b. Prepare journal entries assuming the investment portfolio is classified

as held for trading securities and the entity uses a “fair value
adjustment” account.

Date Journal Entries Debit Credit

20X1
Jan. 5 Trading Securities 180,00
Taxes Expense 8,300
Cash 188,300

Dec. Unrealized Loss – Trading Securities 30,000

31
Fair Value Adjustment 30,000

20X2
Dec. Fair Value Adjustment 50,000
31
Unrealized Gain – Trading 50,000
Securities

20X3
Jan. 15 Cash (92,000 – 3,000) 89,000
Retained Earnings 1,000
Trading Securities 80,000
Fair Value Adjustment 10,000

c. Prepare journal entries assuming the entity irrevocably elected to

measure the investment at Fair Value through Other Comprehensive
Income (FVOCI) and that the entity does not use a fair value
adjustment account.

Date Journal Entries Debit Credit

20X1
Jan. 5 Financial Asset - FVOCI 188,300
Cash 188,300

Dec. Unrealized Loss – OCI 30,000

31
Financial Asset – FVOCI 30,000
 20X2
Dec. Financial Asset - FVOCI 46,000
31
Unrealized Gain – OCI 16,200
Unrealized Loss – OCI 30,000

20X3
Jan. 15 Cash (92,000 – 3,000) 89,000
Retained Earnings 1,000
Financial Asset – FVOCI 90,000

Unrealized Gain - OCI 16,200

Retained Earnings 16,200

Case 2: An entity holds 20,000, P10 par value, shares of Company X as

investment in unquoted equity securities measured at cost, which was
acquired on September 5, 20x0. On April 1, 20x1, the entity receives 5%
share dividends from Company X. The carrying amount of the investment on
this date is P2,310,000 equal to the acquisition cost. The entity sold the
share dividend for P224 on April 30, 20x1.

Requirement: Journal entries for the above transactions (20x0 and 20x1).

Date Journal Entries Debit Credit

20X0
Sep. 5 Investment in Shares 2,310,00
0
Cash 2,310,00
0

20X1
Apr. 1 “Received 1,000 shares representing 5% share dividend on
20,000 shares held. Shares now held, 21,000 shares.”

20X3
Jan. 15 Cash 224,000
Investment in Shares 110,000
Gain on investment 114,000

Case 3: On May 1, 20x1, Company Z declares cash dividend of P20 per

share to shareholders of record on May 15, 20x1, for distribution on May 31,
20x1. Your company purchased 20,000 shares of Company Z for P200 per
share and classifies this investment as investment in FVOCI.
Requirement:
a. Journal entries if your company acquired the shares on May 5, 20x1.

20X1
May 5 Investment in Shares - OCI 3,600,00
0
Cash 3,600,00
0

Dividends Receivable 400,000

Dividend Income 400,000

b. Journal entries if your company acquired the shares on May 21, 20x1.

20X1
May 5 Investment in Shares - OCI 4.000,00
0
Cash 4,000,00
0

Case 5: On October 1, 20x1, an entity acquired 100,000 ordinary shares of

Corporation G for P12 per share to be accounted for at FVPL. Subsequently,
on November 30, Corporation G issued 20% ordinary share dividends when
the shares’ fair value is P14 per share.
Forty thousand (40,000) of these shares were sold on December 15 for P15
per share. Fair value of these shares as of December 31 amounted to P15.50
per share.

Requirement: Journal entries to record the above transactions.

Date Journal Entries Debit Credit

20X1
Oct. 1 Investment in Shares - FPVL 1,200,00
0
Cash 1,200,00
0

Nov. “Received 20,000 shares representing 20% share dividend

30 on 100,000 shares held. Shares now held, 120,000 shares.”

Investment in Shares - FPVL 480,000

 Unrealized Gain in Shares 480,000

Dec. Cash 600,000

15
Investment in Shares - FPVL 560,000
Gain on investment - FPVL 40,000

Dec. Investment in Shares - FPVL 120,000

31
Unrealized Gain in Shares 120,000

Case 6: On January 5, 20x1, an entity acquired 200,000 ordinary shares of

Corporation H for a total of P2,400,000, to be accounted for as FVOCI. On July
1, 40,000 preference shares were received from Corporation H as share
dividends. As of this date, ordinary shares and preference shares had fair
values of P15 per share and P25 per share, respectively. As of December 31,
ordinary shares and preference shares had fair values of P17.50 and P26 per
share.

Requirement: Journal entries to record the above transactions.

Date Journal Entries Debit Credit

20X1
Jan. 5 Investment in Ordinary Shares - FVOCI 2,400,00
0
Cash 2,400,00
0

Jul. 1 Investment in Preference Shares - 600,000

FVOCI
Investment in Ordinary Shares – 600,000
FVOCI

Dec. Investment in Ordinary Shares – 1,700,00

31 FVOCI 0
Investment in Preference Shares – 440,000
FVOCI
Unrealized Gain on investment - 2,140,00
OCI 0

Market Value Fraction Allocated Cost

Ordinary Shares 3,000,000 3/4 1,800,000
Preference 1,000,000 1/4 600,000
Shares
Total 4,000,000 2,400,000
Case 7: An entity’s investment portfolio in Corporation E (measured at cost)
is as follows:

Investment in unquoted equity securities – Corporation E (at cost)

Number of
Lot Acquisition date Acquisition cost
shares
1 July 1, 20x1 10,000 330,000
2 September 21, 20x3 12,000 264,000
3 March 15, 20x5 6,000 132,000
Totals 28,000 726,000

On Feb. 1, 20x5, Corporation E declared 10% share dividends to shareholders

of record as of March 1, 20x5, for distribution on April 1, 20x5. On April 5,
20x5, the entity sold half of the share dividends received at P25 per share.

Requirements:
a. Schedule showing the gain or loss on the sale using (i) FIFO method
and (ii) Average method.

(i) FIFO Method

Share Total Previo New

Number Dividen Share us Cost Per
Acquisitio Acquisitio
Lot of ds s Cost Share
n date n cost
shares per
Share
1 7/1/x1 1,000 11,00 33 30
10,000 0 330,000
2 9/21/x3 1,200 13,20 22 20
12,000 0 264,000
Total 2,200
s 28,000 594,000

Acquisitio Share Share Dividen Selling Gain

n Date Dividend Dividends d Cost Cost (Loss) on
s to be sold Sale
July 1, 1,000 1,000 30,000 25,000 (5,000)
20x1
Septembe 1,200 100 2,000 2,500 500
r 21, 20x3
Total 2,200 1,100 32,000 27,50 (4,500)
0

(ii) Average Cost Method

 Total Total Share New New Dividend Selling Gain
Acquisitio Share Dividen Total Cost Cost Cost (Loss)
n Cost s d Share per on Sale
s Share
726,000 28,00 2,200 30,20 24.04 26,444 27,500 1,056
0 0
(726,00 (1,100 x (1,100
0/ 24.04) x 25)
30,200)

b. Journal entry to record the sale transaction using (i) FIFO method and
(ii) Average method.

(i) FIFO Method

Date Journal Entries Debit Credit

20X5
Apr. 5 Cash 27,500
Loss on Sale of Shares 4,500
Investment in Shares 32,000

(ii) Average Cost Method

Date Journal Entries Debit Credit

20X5
Apr. 5 Cash 27,500
Investment in Shares 26,444
Gain on Sale of Shares 1,056

Case 8: On April 1, 20x1, an entity received 1,000, P5 par value, preference

shares as share dividends on its investment in 10,000, P10 par value,
ordinary shares of Corporation D. The investment in ordinary shares is
measured at cost and has a carrying amount of P300,000.

Requirement: Journal entry to record the receipt of share dividend.

Date Journal Entries Debit Credit

20X1
Apr. 1 Investment in Preference Shares - 14,286
 FVOCI
Investment in Ordinary Shares – 14,286
FVOCI

Market Value Fraction Allocated Cost

Preference 5,000 1/21 14,286
Shares
Ordinary Shares 100,000 20/21 285,714
Total 105,000 300,000

Case 9: An entity holds 1,000 ordinary shares of Corporation J as

investment. On September 30, 20x1, Corporation J issues stock rights on a
“1-for-1” basis. The stock rights are exercisable until June 30, 20x2. The fair
values per stock right are P5 and P6 on September 30, 20x1 and December
31, 20x1, respectively. The stock rights remain outstanding on December 31,
20x1.

Requirement: Journal entries for the year 20x1 related to stock rights.

Date Journal Entries Debit Credit

20X1
Sep. 5 Share Rights (1,000x5) 5,000
Investment in Shares 5,000

Dec. Share Rights 1,000

31
Unrealized Gain on Share Rights 1,000

Case 10: An entity received 10,000 stock rights to subscribe for new shares
at P15 per share for every 4 shares held. The market value of the shares is
P20.

Requirement: Journal entries assuming: (i) shares are selling rights-on; and
(ii) shares are selling ex-rights.

(i) Shares are selling rights-on

Market Value of share right-on

Minus subscription price
------------------------------------- = Value of one right
Number of rights to purchase
One share plus 1

Value of one right = 20 – 15

4+1

Value of one right = 5

5

Value of one right = ₱1 per right

(ii) Shares are selling ex-right

Market Value of share right-on

Minus subscription price
------------------------------------- = Value of one right
Number of rights to purchase
One share

Value of one right = 20 – 15

4

Value of one right = 5

4

Value of one right = ₱1.25 per right