Exercise No.5

Key Answers for Exercise No.
1. The following are the different classifications of equity securities, except

C. Investment in equity securities at amortized cost.
2. Investments are assets kept by a company for the purpose of which of the following?
D. All of these are purposes of investments.
3. When a company has acquired a passive interest in another corporation, the acquiring company should
account for the investment:
B. by using the fair value method.
4. An unrealized holding gain or loss on a company's equity investments at fair value through other
comprehensive income should be reflected in the current year financial statements as:
B. other comprehensive income in the equity section of the statement of financial position.
5. Dividends shall be recognized as income on which of the following dates?

A. Date of declaration
6. Debt securities at amortized cost are reported after initial recognition at:
C. amortized cost using effective interest method
7. Debt securities at amortized cost are reported at

B.Carrying value.
8. Which of the following statements is correct regarding the disposal of equity investments?
B.A gain or loss is recognized on the disposal of investment in associates for the difference between the net
disposal proceeds and the carrying amount of the investment.
9. Share dividends of the same class are recorded in what manner?

D.This type of shares dividends is recorded by means of a memorandum entry only.
10. Property dividends shall be recognized

C.in profit or loss at fair value of the property.
Problem Solving
1. At the beginning of current year, Alexis Company purchased marketable equity securities to be held as
"trading" for P5,000,000. The entity also paid transaction cost amounting to P200,000.
The securities had a market value of P5,500,000 at year-end and the transaction cost that would be
incurred on sale is estimated at P100,000. No securities were sold during the current year.
What amount of unrealized gain or loss on these securities should be reported in the income statement for
the current year?
Final Answer: 500,000 – gain
Fair Value 5,500,000

Acquisition Cost – Trading 5,000,000
Unrealized Gain 500,000
Under PFRS 9, any transaction cost is not included as part of the initial measurement of a financial
asset at fair value through profit or loss.
A financial asset held for trading is a financial asset measured at fair value through profit or loss.
The transaction cost that would be incurred on sale is ignored because the financial asset held for
trading is measured at fair value and not at fair value less cost of disposal
2. Wray Company provided the following data for the current year:
 On September 1, Wray Company received a P500,000 cash dividend from Seco Company in which
Wray Company owned a 30% interest.
 On October 1, Wray Company received a P60,000 liquidating dividend from King Company. Wray
Company owned a 5% interest in King Company.
 Wray Company owned a 10% interest in Bow Company, which declared and paid P2,000,000 cash
dividend on November 15.
What amount should be reported as dividend income for the current year?
Final Answer: 200,000
Cash Dividend from Bow Company (10% x 2,000,000) = 200,000

The cash dividend from Seco Company and the liquidating dividend from King Company are not income
but reduction of the investment account.
3. At the beginning of current year, Carmela Company acquired nontrading equity instrument for P4,000,000.
The transaction cost incurred amounted to P700,000.
The equity instrument is irrevocably designated as financial asset at fair value through other
comprehensive income.
The fair value of the instrument was P5,500,000 at year-end and the transaction cost that would be
incurred on the sale of the investment is estimated at P600,000.
What amount of gain should be recognized in other comprehensive income for the current year?
Fair Value 5,500,000

Acquisition Cost – Trading 4,700,000
Unrealized Gain - OCI 800,000
Acquisition Price 4,000,000

Transaction Cost 700,000
Total Acquisition Cost 4,700,000
Under PFRS 9, any transaction cost is included as part of the initial measurement of a financial asset
measured at fair value through other comprehensive income or FVOCI.
The transaction cost that would be incurred on the sale of the investment is ignored because the equity
investment at fair value through other comprehensive is measured at fair value and not fair value less cost
of disposal.
4. On January 1, Eden Company purchased 100,000 ordinary shares at P80 per share to be classified at
FVOCI. On September 30, Eden Company received 100,000 share rights to purchase an additional 20,000
shares at P90 per share.
On September 30, the share had a market value P114 and the share right had a market value of P6. On
December 31, Eden Company exercised all of the share rights.
What amount should be reported as total cost of the new investment by exercising the rights?
Final Answer: 2,400,000
Cash Payment (20,000 x90) 1,800,000

Cost of rights exercised (100,000 x 6) 600,000
Total cost of new investment 2,400,000
5. Rice Company owned 30,000 ordinary shares of Wood Company acquired on July 31 at a total cost of
P1,100,000. On December 1, Rice Company received 30,000 share rights from Wood Company. Each right
entitled the holder to acquire one share at P45.
The market price of Wood Company's share on this date was P50 and the market price of each right was
P10. Rice Company sold the rights on December 31 for P450,000 less a P10,000 commission.
What amount should be reported as gain from the sale of the rights?
Cash Payment (450,000-10,000) 440,000

Initial cost of rights sold equal to fair value (30,000x 10) 300,000
Gain on Sale of Rights 140,000

Exercise No.5

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Key Answers for Exercise No.

1. The following are the different classifications of equity securities, except

5. Dividends shall be recognized as income on which of the following dates?

7. Debt securities at amortized cost are reported at

9. Share dividends of the same class are recorded in what manner?

10. Property dividends shall be recognized

Final Answer: 500,000 – gain

Fair Value 5,500,000

Final Answer: 200,000

Cash Dividend from Bow Company (10% x 2,000,000) = 200,000

Final Answer: 800,000

Fair Value 5,500,000

Acquisition Price 4,000,000

Final Answer: 2,400,000

Cash Payment (20,000 x90) 1,800,000

Final Answer: 140,000

Cash Payment (450,000-10,000) 440,000

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