CHAPTER 21

Financial Asset 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 recognized respectively if it is classified as at fair 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, 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 income”.
Problem 21-2(IFRS)

On January 1, 2010, Alexis Company purchased marketable equity securities to be held

as”trading” for P5, 000,000. The entity also paid commission, taxes and other transaction
costs amounting to P200, 000. The securities had market value of P5, 500,000 on December
31, 2010 and the transaction costs that would be incurred an sale are estimated at P100, 000.
No securities were sold during 2010.

What amount of unrealized gain or loss on these securities should be reported in the 2010
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 500, 000

If the financial asset is classified as held for “trading”, any realized gain or loss is included as
a component of profit or loss.

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, 2010. The
financial instrument is classified as financial asset at fair value through other comprehensive
income. The direct acquisition cost incurred amounted to P700, 000. On December 31, 2010,
the fair value of the instrument was P5, 500,000 and transaction costs that would be incurred
on the sale of the investment are estimated at P600, 000.

What gain or loss would be recognized in other comprehensive income for the year ended
December 31, 2010?

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

Solution 21-3 Answer c

Fair value – December 31, 2010 5, 000,000

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 the fair value and not at fair value less cost
to sell.
Problem 21-4 (AICPA Adapted)

On December 31, 2009, Fay Company appropriately reported a P100, 000 unrealized loss.
There was no change during 2010 in the composition of Fay’s portfolio of marketable equity
securities held as financial asset at fair value through other comprehensive income. Pertinent
data are as follows:

Security Cost Market value December 31, 2010

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, 2110 as component of other
comprehensive income?

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

Solution 21- 4 Answer b

Market value – 12/31/2010 3, 300,000

Market value – 12/31/2009 (3, 700,000 – 100, 000) 3, 600,000
Unrealized loss in 2010 (300, 000)
Unrealized loss – 12/31/2009 (100, 000)

Cumulative unrealized loss – December 31, 2010 (400, 000)

Only the unrealized loss of P300, 000 is shown in the 2010 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 a 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 231, 2010 3, 300,000

Acquisition cost 3, 700,000
Cumulative unrealized loss – 12/31/2010 (400, 000)
 Problem 21- 5 (AICPA Adapted)

During 2009, Garr Company purchased marketable equity securities as a trading investment.
For the year ended December 31, 2009, the entity recognized an unrealized loss of P230,
000. There were no security transactions during 2010. Pertinent information on December
31, 2010 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 2010 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 – 12/31/2010 4, 120,000

Market value – 12/31/2009(4, 250,000 – 230, 000) 4, 020,000
Unrealized gain in 2010 100, 000
Problem 21-6 (AICPA Adapted)

The following information was extracted from the December 31, 2010 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 on of P100, 000 related to the acquisition of the investment. This
amount is capitalized 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 financial asset?

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

Solution 21-6 Answer d

Fair value- December 31, 2010 3, 700,000

Add back: Unrealized loss 300, 000
Historical cost 4, 000,000

The transaction of P100, 000 is properly capitalized as cost of the financial asset measured at
fair value through other comprehensive income.
Problem 21-7 (IAA)

Lagoon Company purchased the following securities during 2010:

Classification Cost Market value

December 31, 2010
Security A Trading 900, 000 1, 000, 000
Security B Trading 1, 000,000 1, 600, 000

On July 31, 2011, the entity sold all of the shares of Security B for a total of P1, 000,000. On
December 31, 2011, the shares of Security A had a market value of P600, 000. No other the
activity occurred during 2011 in relation to the trading security portfolio. What is the gain or loss
on the sale of Security B on July 31, 2011?.

a.500, 000 gain

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

Solution 21-7 Answer b

Sales price of Security B 1, 100,000

Carrying amount of Security B – December 31, 2010 1, 600,000
Loss on sale of trading securities (500, 000)

PAS 39, paragraph 26, as amended by PFRS 9, provides that on derecognition of a trading a
financial asset, the difference between the consideration received and the carrying amount of
the asset shall be recognized in profit or loss.
Problem 21-8 (AICPA Adapted)

During 2010, Latvia Company purchased trading equity securities as a short-term investment.
The cost and market value on December 31, 2010 were as follows:

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, 2011, for P130 per share, incurring P50,
000 in brokerage commission and taxes.

What should be reported as loss on sale of trading investment in 2011?

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

Solution 21-8 Answer d

Sales price (1000 x P130) 1, 300,000

Less: Commission and taxes 50,000
Net sales price 1, 250,000
Less: Carrying amount of B shares on 12/31/2010 1, 600,000
Loss on sale of trading investment (350,000)
Problem 21-9 (IAA)

On January 1, 2010, Lebanon Company purchased equity securities to be held as “at fair value
through other comprehensive income” on December 31, 2010, the cost and market value 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, 2011, Lebanon Company sold Security X for P2, 500,000.

What amount of gain on sale of financial asset should be reported in the 2011 income statement?

a. 500, 000
b. 100, 000
c. 400, 000
d. 0

Solution 21-9 Answer b

Sales price 2, 500,000

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

Again, PAS 39, paragraph 26, as amended by PFRS 9, provides that on derecognition of a
financial asset, the difference between the consideration received and the carrying amount of the
asset is recognized in profit or loss.

The Application Guidance of PFRS 9, paragraph B5.12, provides that amount 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.

Accordingly, the cumulative unrealized gain of P400, 000 related to Security X is transferred to
equity or retained earnings as follows:

Unrealized gain – OCI 400, 000

Retained Earnings 400, 000
Problem 21-10 (IAA)

On January 1, 2010, Caraga Company purchased equity securities to be held as ”at fir value
through other comprehensive income.” The cost and market value of the securities were:

Cost Market – 12/31/2010 Market – 12/31/2011

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

Security S 4,000,000 3,500,000 3,700,000
Security T 5,000,000 4,600,000 4,700,000

On January 31, 2011, Caraga Company sold Security R for P3, 500,000.

What unrealized gain or loss on the remaining financial asset should be in the 2011 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 21-10 Answer c

Fair value of S and T – December 31, 2011 8, 400,000

Fair value of S and T – December 31, 2010 8, 100,000
Unrealized gain in 2011 300,000
Unrealized loss on S and T – December 31, 2010
(9, 000,000-8, 100,000) (900, 000)
Cumulative unrealized loss – December 31, 2011 (600, 000)

Total fair value – December 31, 2011 8, 400,000

Total cost of S and T (4, 000,000+5, 000,000) 9, 000,000
Cumulative unrealized loss – December 31, 2011 (600, 000)

The unrealized gain of P300, 000 is shown in the 2011 statement of comprehensive income as
component of other comprehensive income.

However, the cumulative unrealized loss of P600, 000 would appear in the statement of changes
in equity.
Problem 21-11 (IAA)

During 2010, Little Company purchased trading securities at short-term investment. The cost of
the securities and their market value on December 31, 2010 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 2010.

What is the net income after making necessary trading security adjustment?

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

Solution 21-11 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 21-12 (IAA)

On January 1, 2010, Remington Company acquired P200, 000 ordinary shares of Universal
Company for P 9, 000,000. At the time of purchase, Universal Company had outstanding 800,
000 shares with the book value of P36, 000,000. On December 31, 2010, the following events
took place:

Universal Company reported net income of P1, 800,000 for the calendar year.

Remington Company received from Universal Company a dividend of 0.75 per

ordinary share.
The market value of Universal Company share had temporarily declined to 40.

The investment in Universal Company is classified as financial asset at fair value through other
comprehensive income.

What is the carrying amount of the investment on December 31, 2010?

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

Solution 21-12 Answer b

Market value – 12/31/2010 (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 tgrough other
comprehensive income.

The unrealized loss of the financial asset of P1, 000,000 is shown in the statement of
comprehensive income as component of other comprehensive income.
Problem 21-13 (AICPA Adapted)

Neal Company held the following financial asset as trading investments on December 31, 2010:

Cost Market value

100, 000 shares of Company A
Nonredeemable preference share
Capital, par value P75 775, 000 825, 000

7, 000 shares of Company B

Preference share capital, par
Value P100 subject to mandatory
Redemption by the issue at par on
December 31, 2011 690, 000 625000

1,465,000 1,450,000

In the December 31, 2010 statement of financial position, what should be reported as carrying
amount of the investment?

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

Solution 21-13 Answer b

The nonredeemable preference share is an equity security. The redeemable preference share is a
debt security.

Whether equity or debt security, financial asset held for trading are carried at fair value.
Problem 21-14 (AICPA Adapted)

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

Aggregate cost – December 31, 2010 1, 750,000

Unrealized gains – December 31, 2010 40, 000
Unrealized losses – December 31, 2010 260, 000
Net realized gains during 2010 300, 000

On January 1, 2010, Trinidad Company reported an unrealized loss of P15, 000 as component of
other comprehensive income.

In its 2010 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 21-14 Answer b

Unrealized losses 260, 000

Unrealized gains 40, 000
Net unrealized losses – December 31, 2010 220, 000
Unrealized loss – January 1, 2010 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 2010 statement of changes in equity should report the cumulative unrealized loss
of P220, 000.

Incidentally, the net realized gains represent the gains s from the financial assets that are
actually sold should be shown in the statement of comprehensive income as component of profit
or loss.
Problem 21-15 (PAS 39)

On January1, 2010, Agusan 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, 2012 and pay 6% interest annually on December 31 each year
with 8% effective yield. The bonds are quoted at 105 on December 31, 20210 and 110 on
December 31, 2011.What amount of cumulative unrealized gain on these bonds should be
reported in the 2011 statement of changes in equity?

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

Solution 21-15 Answer c

Date Interest Interest Discount Carrying

Received income amortization amount
1/1/2010 4,742,000
12/31/2010 300,000 379,360 79,360 4,821,360
12/31/2011 300,000 385,709 85,709 4,907,069
12/31/2012 300,000 392,931 92931 5,000,000

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

Market value – 12/31/2011 (5,000,000 x 110) 5, 250,000

Unrealized gain – December 31, 2010 428, 640

Market value – 12/31/2011 (5,000,000 x 110) 5, 500,000

Carrying amount – 12/31/2010 (4, 907,069)
Cumulative unrealized gain – December 31, 2011 592, 931

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