CHAPTER 7

INVESTMENTS IN EQUITY SECURITIES AND DEBT SECURITIES

PROBLEMS

7-1 (Victoria Court)

(a) Classified as FVPL
Cash 170,000
Gain on Sale of Trading Equity Investments 10,000
Equity Investments FVPL 160,000
To record sale of Y Co. Ordinary Shares

Unrealized Loss on Equity Investments P and L 72,000

Equity Investments - FVPL 72,000
To record valuation at end of year.

Unrealized Holding
MV12/31/Yr 1 Market12/31/Yr 2 Gains(Losses)
X Co. P330,000 P288,000 P(42,000)
Z Co. 350,000 320,000 (30,000)
Total P680,000 P608,000 P(72,000)

(b) Classified as equity investments at fair value through other

comprehensive income
Cash 170,000
Equity Investments at FV through OCI 160,000
Gain on Sale of Equity Investments 10,000
To record sale of Y Co. Common

Retained Earnings 40,000

Unrealized Gains and Losses on Equity
Investments at FV through OCI 40,000

Unrealized Gain/Loss on Equity Investments at FV - OCI 72,000

Equity Investments at FV through OCI 72,000

7-2 (A Company)
a. Cash 18,000
Dividend Revenue 18,000
2,400 shares x 7.50

b. Memo entry. Received additional 600 shares of B Corp. ordinary shares as

bonus issue on 2,400 shares previously held.

c. Equity Investments - A Preference 150,000

Dividend Revenue 150,000
600 x 250 = 150,000

d. Memo entry. Received additional shares of B Corp. ordinary shares on a 4-for-1

stock split of the 2,400 shares previously held. Total shares held are now 9,600.
e. Equity Investments - C Ordinary 20,000
Dividend Revenue 20,000
2,400/6 = 400 shares x 50
Chapter 7 Investments in Equity Securities and Debt Securities

7-3 (Inn Corporation)

(a) December 31, Year 2 ledger balance (30,000 x P65) P1,950,000

Year 3
Memo: Received 6,000 shares of NPA Co. ordinary
As 20% bonus issue on the 30,000 shares previously
held.

Cash (15,000 x 70) 1,050,000

Equity Investments FVPL 812,500
Gain on Sale of Equity Investments 237,500
1,950,000 x 15,000/36,000 = 812,500

Equity Investments FVPL 374,500

Unrealized Gain on Equity Investments 374,500
at FVPL
21,000 x 72 = 1,512,000
1,950,000 812,500 = 1,137,500
Unrealized gain 374,500

(b) Gain on sale P237,500

Unrealized gain on equity investments at FVPL 374,500
Total amount reported in profit or loss P612,000

(c) Equity Investments at Fair Value P1,512,000

7-4 Inna Corporation

(a) December 31, Year 2 ledger balance (30,000 x P65) P1,950,000
Cost 1,800,000
Unrealized Gain or Loss on Equity Investments (Equity) P 150,000

Year 3
Memo: Received 6,000 shares of NPA Co. ordinary
As 20% bonus issue on the 30,000 shares previously
held.

Cash (15,000 x 70) 1,050,000

Equity Investments at FV through OCI 812,500
Gain on Sale of Equity Investments 237,500
1,950,000 x 15,000/36,000 = 812,500

Unrealized Gain or Loss on Equity Investments 62,500

Retained Earnings 62,500
150,000 x 15,000/36,000 = 62,500

Equity Investments at FV through OCI 374,500

Unrealized Gain on Equity Investments 374,500
at FV through OCI
21,000 x 72 = 1,512,000
1,950,000 812,500 = 1,137,500
Unrealized gain 374,500

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Chapter 7 Investments in Equity Securities and Debt Securities

(b) Gain on sale P237,500

(c) Equity Investments at Fair Value through OCI P1,512,000

(d) Unrealized Gain or Loss in Equity , 12/31 Year 3

(150,000 62,500 + 374,500) P462,000

Cost (1,800,000 x 21,000/36,000) P1,050,000

Fair value, December 31, Year 3 1,512,000
Unrealized Gain (Loss) in Equity P 462,000

7-5 (Gypsy Corporation)

(a) Sales price (5,000 x 54) P270,000

CV at date of sale 250,000
Gain on sale of Dizon shares P 20,000

(b) Cumulative balance of Unrealized Gains and Losses

(in equity) - see below P35,000

# of FV, 12/31/ Unrealized

shares Cost Year 3 Gain (Loss)
Monterey Preference 3,500 P133,000 P135,000 P 2,000
Garcia Ordinary 1,000 180,000 190,000 10,000
Barney Corporation 3,000 177,000 200,000 23,000
P490,000 P525,000 P35,000

7-6 (Melody Corporation)

a. Initial measurement of stock rights received 2,000 x P4 P 8,000

b. Cost of new shares acquired

Cash paid (300 shares x P80) P 24,000
Stockrights exercised (300 x 5 x P4) 6,000
Cost of shares acquired P30,000

Cost per share (30,000 / 300 shares) P 100

c. Sales price of stock rights (500 x 4.50) P 2,250

CV of stock rights sold (500 x 4) 2,000
Gain on sale of stockrights P 250

d. Market value at December 31, Year 3 (98 x 2,300 shares) P225,400

Cost of shares (P170,000 + 30,000) 200,000
Balance in unrealized gain/loss account at December 31, Year 3 P 25,400

7-7 (Anti Corporation)

a. Equity Investments - Stock Rights (FVPL) 50,000
Investment Income 50,000
10,000 x 5
b. Cash 50,000
Equity Investments - Stock Rights (FVPL) 50,000

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Chapter 7 Investments in Equity Securities and Debt Securities

c. Equity Investments Pro Corp. Ordinary (FVPL) 150,000

Equity Investments Stockrights (FVPL) 50,000
Cash 100,000
10,000/5 = 2,000 shares
2,000 x 50 = 100,000

Equity Investments Pro Corp. Ordinary (FVPL) 90,000

Unrealized Gain on Equity Investments at FVPL 90,000

Market value (12,000 shares x 75) 900,000

Carrying value before this adjustment
660,000 + 150,000 810,000
Unrealized gain 90,000

7-8 (EDSA Company)

(a)
1. 150 135 = P5.00
2+1
2. 2,000 x 5 = P10,000
3. 5,500 (1,000 x 5) = P500 Gain

(b) 1. 145 135 = P5.00

2
2. 2,000 x 5 = P10,000

7-9 (Tolits Corporation)

Year 2
a. Equity Investments at FV through OCI Diana
Ordinary 54,000
Cash 54,000

b. Memorandum entry. Received 500 additional

shares of Diana ordinary shares as a result of 2-
for-1 split.

c. Equity Investments at FV through OCI Smith 121,200

Preference
Cash 121,200
(1,000 x 120) + 1,200

d. Cash 15,000
Gain on Sale of Equity Investments 1,500
Equity Investments at FV through OCI Diana 13,500
Ordinary
(54,000 / 1,000) x 250 shares = 13,500

e. Stock Rights Diana Ordinary 2,250

Investment Income 2,250
750 shares x 3

f. Equity Investments at FV through OCI Diana

Ordinary 13,725
Stock Rights Diana Ordinary (60% x 2,250) 1,350
Cash 450/2= 225; 225 x P55 12,375

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Chapter 7 Investments in Equity Securities and Debt Securities

Cash 900
f. Stock Rights Diana Ordinary 900
(40% x 750) x 3

g. Cash (100 x 56) 5,600

Loss on sale of Equity Investments 500
Equity Investments at FV through OCI Diana 6,100
Ordinary
13,725/ 225 = 61; 61 x 100 = 6,100

h. Cash (1,000 x 100 x 8%) 8,000

Dividend Revenue 8,000

i. Unrealized Gains and Losses on Equity

Investments through OCI 75
Equity Investments at FV through OCI Diana
ordinary 6,125
Equity Investments at FV through OCI - Smith 6,200

Market CV Unreal
Diana 1 (875 sh) 54,250 48,125 6,125
Smith (1,000 x 115) 115,000 121,200 (6,200)
Total 169,250 169,325 75

b. Gain on sale of Diana P1,500

Receipt of stockrights 2,250
Loss on sale of Diana Securities ( 500)
Dividend revenue 8,000
Total income recognized in profit or loss in 2010 P11,250

7-10 (Carlo Company)

Year 2
Apr. 1 Cash (5,000 x 25) 125,000
Loss on Sale of Trading Securities 14,000
Trading Securities Avi Ordinary 139,000

May 15 Equity Investments at FV through OCI Ghio

Preference 30,550
Cash 30,550

July 10 Memorandum entry. Received 4,000 additional

shares of Darrel ordinary representing a 20%
bonus issue. Shares now held are 24,000.

Nov. 30 Cash (1 x 24,000) 24,000

Dividend Revenue 24,000

Dec. 31 Unrealized Loss on Trading Securities 9,000

Trading Securities Avi Ordinary 9,000
(5,000 x 26) 139,000

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Chapter 7 Investments in Equity Securities and Debt Securities

Dec 31 Equity Investments at FV through OCI - Darrel 110,000

Equity Investments at FV through OCI - Ghio 650
Net Unrealized Gains/Losses on AFS Securities 110,650
116,650 6,000 balance

FV CV Change in FV
Darrel 480,000 370,000 110,000
Ghio 31,200 30,550 650
Total 511,200 394,550 110,650

7-11 (Hostel Company)

(a) 1. Investment in Associates 2,000,000
Cash 2,000,000

2. Investment in Associates 300,000

Income from Associates 300,000
20% x 1,500,000

3. Memo. Received 2,000 additional shares of

Atlanta ordinary as 10% bonus issue. Shares
now held are 22,000.

4. Investment in Associates 600,000

Income from Associates 600,000
20% x 3,000,000

5. Cash 200,000
Investment in Associates 200,000
20% x 1,000,000

(b) Investment cost P2,000,000

Share in income 2011 300,000
Share in income 2012 600,000
Share in dividends (200,000)
Carrying amount, December 31, 2012 P2,700,000

7-12 (Byron, Inc.)

2012
Jan. 1 Investment in Associates Pirates Ordinary 5,160,000
Cash 5,160,000

Dec. 31 Investment in Associates Pirates Ordinary 1,080,000

Income from Associates (30% x 3,600,000) 1,080,000

31 Cash (30% x 400,000) 120,000

Investment in Associates Pirates Ordinary 120,000

7-13 (Barbie, Inc.)

(a).
2012
Mar. 1 Investment in Associates Kitchie 1,365,000
Cash 1,365,000

Dec. 31 Cash (30% x 800,000) 240,000

Investment in Associates Kitchie 240,000

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Chapter 7 Investments in Equity Securities and Debt Securities

31 Investment in Associates Kitchie 300,000

Income from Associates 300,000
(1.2M x 10/12) x 30%

31 Income from Associates Kitchie 52,500

Investment in Associates Kitchie 52,500
30% (3,550,000 + 50,000 + 750,000)=
1,305,000; Goodwill = 1,365,000
1,305,000 = 60,000
Amortization of undervaluation of assets
(30% x 750,000) / 5 yrs. = 45,000
45,000 x 10/12 = 37,500
50,000 x 30% = 15,000
37,500 + 15,000 = 52,500

(b) Acquisition cost, March 1, 2012 P1,365,000

Cash dividends received ( 240,000)
Income from associates (initial share) 300,000
Adjustment in reported income ( 52,500)
Investment carrying value, December 31, 2012 P1,372,500

Income reported by Barbie from its investment in associates:

(300,000 52,500) P 247,500

7-14 (Richmonde Corporation)

(a)
Year 1
Jan. 1 Equity Investments at FV through OCI Pen 900,000
Cash 900,000

Dec. 31 Cash 200,000

Dividend Revenue 200,000
10% x 2,000,000

31 Equity Investments at FV through OCI Pen 480,000

Unrealized Gains/Losses on Equity
Investments - OCI 480,000

Year 2
Jan. 1 Investment in Associates Pen, Inc. (at FV) 1,380,000
Equity Investments at FV through OCI Pen 1,380,000

Unrealized Gains/Losses on Equity Investments at

FV through OCI 480,000
Retained Earnings 480,000

1 Investment in Associates Pen, Inc. 2,600,000

Cash 2,600,000

Dec. 31 Investment in Associates Pen, Inc. 1,950,000

Income from Associates (30% x 6,500,000) 1,950,000

31 Cash 900,000
Investment in Associates (30% x 3,000,000) 900,000

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Chapter 7 Investments in Equity Securities and Debt Securities

(b) Cost transferred from Equity Investments at FV 1,380,000

Additional investment 2,400,000
Share in income 1,950,000
Share in dividends (900,000)
Carrying amount, December 31, Year 2 4,830,000

7-15 (E Corporation)
(a)
Year 1
Jan. 1 Investment in Associates F Company 8,250,000
Cash (50,000 x 165) 8,250,000

Aug. 1 Cash 210,000

Investment in Associates F Company 210,000

Dec. 31 Investment in Associates F Company 170,000

Income from Associates 170,000
25% x 680,000
Year 2
Dec. 31 Cash 210,000
Investment in Associates F Company 210,000

31 Investment in Associates F Company 250,000

Income from Associates F Company 250,000
25% x 1,000,000
Year 3
Jan. 2 Cash (20,000 x 175) 3,500,000
Investment in Associates F Company 3,300,000
Gain on Sale of Investment in Associates 200,000
Acquisition cost 8,250,000
Share in income (Year1) 170,000
Share in dividends (Year1) (210,000)
Share in dividends (Year2) (210,000)
Share income (Year 1) 250,000
Investment carrying amount 8,250,000
Portion sold 40%
CV of investment sold 3,300,000

2 Equity Investments at FV through OCI 5,250,000

Investment in Associates F Company 4,950,000
Investment Income 300,000
30,000 x 175 = 5,250,000
8,250,000 3,300,000 = 4,950,000

Dec. 31 Cash 120,000

Dividend Revenue 120,000

31 Equity Investments at FV through OCI 450,000

Unrealized Gains/Losses on Equity
Investments through OCI 450,000
30,000 x (190 - 175) =

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Chapter 7 Investments in Equity Securities and Debt Securities

(b). Year 1 Year 2 Year 3

Cost/Carrying Value, beg of year P8,250,000 P8,210,000
Income from associates 170,000 250,000
Cash dividends received (210,000) (210,000)
Sale of shares
Carrying value, end of year P8,210,000 P8,250,000
Market value 30,000 x 190 P5,700,000

7-16

1. A and B 11. C
2. A 12. A and B
3. B and C 13. B
4. A and B 14. A
5. B 15. B
6. C
7. C
8. A
9. B
10. A, B and C

7-17 (Abu Company)

(a)
Premium
Date Interest Received Interest Revenue Amortization Carrying Value
01/01/ Yr 1 8,274,646
12/31/ Yr 1 1,200,000 1,158,450 41,550 8,233,096
12/31/ Yr 2 1,200,000 1,152,633 47,367 8,185,729
12/31/Yr 3 1,200,000 1,146,002 53,998 8,131,731
12/31/Yr 4 1,200,000 1,138,442 61,558 8,070,173
12/31/Yr 5 1,200,000 1,129,827* 70,173* 8,000,000
*rounded off.
(b)
2009
Jan. 1 Debt Investments at Amortized Cost 8,274,646
Cash 8,274,646
Dec. 31 Cash 1,200,000
Debt Investments at Amortized Cost 41,550
Interest Revenue 1,158,450
2010
Dec. 31 Cash 1,200,000
Debt Investments at Amortized Cost 47,367
Interest Revenue 1,152,633

7-18 (South Company)

(a)
(1) Securities are classified as financial assets at fair value through profit and
loss.
Year 1
June 1 Debt Investments at FVPL 3,691,500
Cash 3,691,500
Dec. 1 Cash 160,000
Interest Revenue (4M x 8% x ) 160,000

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Chapter 7 Investments in Equity Securities and Debt Securities

Dec. 31 Interest Receivable 26,667

Interest Revenue (4M x 8% x 1/12) 26,667
31 Debt Investments at FVPL 188,500
Unrealized Gain on Debt Investments at
FVPL 188,500
4M x 0.97 = 3,880,000
3,880,000 3,691,500 = 188,500
Year 2
Jan. 1 Interest Receivable 26,667
Interest Revenue 26,667
June 1 Cash 160,000
Interest Revenue 160,000
Dec. 1 Cash 160,000
Interest Revenue 160,000
31 Interest Receivable 26,667
Interest Revenue 26,667
Dec. 31 Debt Investments at FVPL 80,000
Unrealized Gain on Debt Investments at
FVPL 80,000
4M x 0.99 = 3,960,000
3,960,000 3.880,000 = 80,000

(2) Securities are classified as at amortized cost

To facilitate computation, a partial amortization table is presented below.
Interest Interest Amortization
Date Received Revenue of Discount Amortized Cost
June 1, Yr 1 3,691,500
Dec 1, Yr 1 160,000 184,575 24,575 3,716,075
June 1, Yr 2 160,000 185,804 25,804 3,741,879
Dec. 1, Yr 2 160,000 187,094 27,094 3,768,973
June 1, Yr 3 160,000 188,449 28,449 3,797,422
Dec. 1, Yr 3 160,000 189,871 29,871 3,827,293
June 1, Yr 4 160,000 191,365 31,365 3,858,658
Dec. 1, Yr 4 160,000 192,933 32,933 3,891,591

Year 1
June 1 Debt Investments at Amortized Cost 3,691,500
Cash 3,691,500

Dec. 1 Cash 160,000

Debt Investments at Amortized Cost 24,575
Interest Revenue (see above table) 184,575

31 Interest Receivable 26,667

Debt Investments at Amortized Cost 4,301
Interest Revenue 30,968
160,000 x 1/6 = 26,667; 25,804 x 1/6 = 4,301

Year 2
Jan. 1 Interest Revenue 30,968
Interest Receivable 26,667
Debt Investments at Amortized Cost 4,301

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Chapter 7 Investments in Equity Securities and Debt Securities

June 1 Cash 160,000

Debt Investments at Amortized Cost 25,804
Interest Revenue(see above table) 185,804

Dec. 1 Cash 160,000

Debt Investments at Amortized Cost 27,094
Interest Revenue (see above table) 187,094

31 Interest Receivable 26,667

Debt Investments at Amortized Cost 4,742
Interest Revenue 31,409
160,000 x 1/6 = 26,667; 28,449 x 1/6= 4,742

(b). Journal entry/entries to record sale of investment on November 1, Yr4.

(1) Securities are classified as financial assets at fair value through profit and
loss.
Year 4
Nov. 1 Cash 3,925,000
Loss on Sale of Debt Investments at FVPL 128,333
Interest Revenue 133,333
Debt Investments at FVPL 3,920,000
Acc. Int. = 4M x 8% x 5/12 = 133,333
Sales price (3,925,000133,333) 3,791,667
Carrying value (4 M x 0.98) 3,920,000
Loss on sale 128,333
(2) Securities are classified as at amortized cost
Year 4
Nov. 1 Debt Investments at Amortized Cost 27,444
Interest Receivable 133,333
Interest Revenue 192,933 x 5/6 160,777
32,933 x 5/6 = 27,444

1 Cash 3,925,000
Loss on Sale of Debt Investments at Amortized
Cost 94,435
Interest Receivable 133,333
Debt Investments at Amortized Cost 3,886,102
CV of Debt Investments sold:
As of June 1, Yr 4 3,858,658
Amortization June 1 to
Nov. 1, Yr 4 27,444
As of Nov. 1, Yr 4 3,886,102
Sales price 3,791,667
Loss on sale 94,435

7-19 (1) Grow Company

Classified as Debt Investments at FV through Profit or Loss

(a) Interest income (1,000,000 x 12%) P120,000
(b) Sales price (600,000 x 1.01) P606,000
Carrying value, 12/31/Yr2 (600,000 x 1.06) 636,000
Loss on sale P 30,000
(c) Carrying value, 12/31/Yr2 (FV) (1,000,000 x 1.06) P1,060,000
(d) Carrying value, 12/31/Yr 400,000 x 1.04 P 416,000

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Chapter 7 Investments in Equity Securities and Debt Securities

(2) Classified as at Amortized Cost

Amortization Table
Date Nom Int Effect Int Prem Amort Amortized cost, end
1/1/Yr 1 1,063,394
12/31/Yr 1 120,000 106,339 13,661 1,049,733
12/31/Yr 2 120,000 104,973 15,027 1,034,706
12/31/Yr 3 120,000 103,471 16,529 1,018,177

(a) Carrying value, 12/31/yr 2 (see table) P1,034,706

(b) Sales price P 606,000
Carrying value, 1/1Yr 3 (1,034,706 x 6/10) = P620,824
Amortization 1/1/Yr3 4/1/Yr3
16,529 x 3/12 x 600/1000 ( 2,479) 618,345
Loss on sale P 12,345
(c) Interest income for Yr 3:
Jan 1 to Mar 31 103,471 x 3/12 P25,868
Apr 1 to Dec 31 103,471 x 400/1000 x 9/12 31,041
Total interest income for Yr 3 P56,909
(d) Carrying value, 12/31/Yr3
1,018,177 x 400/1000 P407,271

7-20 (Powerpuff Company)

Feb. 1 Equity Investments - FVPL Blossom Ordinary 374,000

Cash 374,000

April 1 Debt Investments FVPL Peach Co. Bonds 1,010,000

Cash 1,010,000

July 1 Debt Investments FVPL Buttercup Bonds 150,000

Interest Receivable (150,000 x 12% x 4/12) 6,000
Cash 156,000

Oct. 1 Cash 50,000

Interest Income (1,000,000 x 10% x 6/12) 50,000

Dec. 31 Interest Receivable 34,000

Interest Income 34,000
1M x 10% x 3/12 = 25,000
150,000 x 12% x 6/12 = 9,000
25,000 + 9,000 = 34,000

31 Unrealized Loss on FVPL 11,000

Equity Investments FVPL - Blossom Ordinary 6,000
Debt Investments FVPL - Buttercup Bonds 3,000
Debt Investments FVPL - Peach Bonds 20,000

Cost Fair value UGL

Blossom Ordinary 374,000 380,000 6,000
Peach 10% Bonds 1,010,000 990,000 (20,000)
Buttercup 12% Bonds 150,000 153,000 3,000
1,534,000 1,523,000 (11,000)

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Chapter 7 Investments in Equity Securities and Debt Securities

7-21 (Narito Company)

Amortization Table
Nominal Effective Premium Amortized Cost,
Date Interest Interest Amortization End
Jan. 1, Yr 1 108,660
Dec. 31, Yr 1 7,000 5,433 1,567 107,093
Dec. 31, Yr 2 7,000 5,355 1,645 105,448
Dec. 31, Yr 3 7,000 5,272 1,728 103,720
Dec. 31, Yr 4 7,000 5,186 1,814 101,906
Dec. 31, Yr 5 7,000 5,094 1,906 100,000

Year 1
Jan. 1 Debt Investments at Amortized Cost Wolf Bonds 108,660
Cash 108,660

Dec. 31 Cash 7,000

Debt Investments at Amortized Cost Wolf 1,567
Bonds
Interest Income 5,433

Year 2
Dec. 31 Cash 7,000
Debt Investments at Amortized Cost Wolf 1,645
Bonds
Interest Income 5,355

31 Impairment Loss Debt Investments 5,448

Debt Investments at Amortized Cost Wolf 5,448
Bonds

Fair value (impaired)* 100,000

Amortized cost (see table) 105,448
Impairment loss 5,448
*When stated rate equals market rate, the
market price will equal face value.

Year 3
Dec. 31 Cash 7,000
Interest Income 7,000
(Note: No amortization is necessary since
amortized cost is now equal to face value)

Year 4
Dec. 31 Cash 7,000
Interest Income 7,000

31 Debt Investments at Amortized Cost Wolf

Bonds 1,906
Gain from Recovery of Impairment Debt
Investments 1,906

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Chapter 7 Investments in Equity Securities and Debt Securities

Fair value:
PV of face at 4% for 1 period (100,000 x 0.9615) 96,150
PV of interest at 4% for 1 period (7,000 x 0.9615) 6,731
Fair value 102,881
Amortized cost (Original table at 5% effective interest) 101,906
Recording recovery of impairment shall not bring the
amortized cost at an amount higher than the
amortized cost had no impairment been previously
recorded. Hence, recovery is limited to
Amortized cost (less than fair value) 101,906
Carrying value (before this adjustment) 100,000
Recovery 1,906

7-22
1. B and C 6. A 11. B
2. A 7. A 12. B and C
3. B and C 8. A 13. A
4. A 9. C 14. A
5. B and C 10. B and C 15. C

7-23 Raffy Company)

To facilitate computation, a partial amortization table is presented below.
Interest Interest Revenue Amortization HTM
Date Received of Discount Carrying Value
June 1, 2009 5,353,150
Dec. 31, 2009 350,000 312,267 37,733 5,315,417
Dec. 31, 2010 600,000 531,542 68,458 5,246,959
Dec. 31, 2011 600,000 524,696 75,304 5,171,655
Dec. 31, 2012 600,000 517,166 82,834 5,088,821

2009
June 1 Held to Maturity Securities Blessie Corp. Bonds 5,353,150
Interest Revenue (5M x 12% x 5/12) 250,000
Cash 5,603,150

Dec. 31 Cash 600,000

Interest Revenue 562,267
Held to Maturity Securities Blessie 37,733

2010
Dec. 31 Cash 600,000
Interest Revenue 531,542
Held to Maturity Securities Blessie 68,458
2011
Dec. 31 Cash 600,000
Interest Revenue 524,696
Held to Maturity Securities Blessie 75,304
2012
Sept. 1 Interest Receivable (3M x 12% x 8/12) 240,000
Held to Maturity Securities Blessie 33,134
Interest Revenue (517,166 x 3/5 x 8/12) 206,866

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Chapter 7 Investments in Equity Securities and Debt Securities

Sept 1 Cash (3,090,000 + 240,000) 3,330,000

Gain on sale of HTM Securities 20,141
Interest Receivable 240,000
Held to Maturity Securities Blessie 3,069,859
CV of HTM securities sold:
As of 12/31/11 (5,171,655 x 3/5) 3,102,993
Amort from 1/1/12-9/1/12 33,134
CV as of 9/1/12 3,069,859
Sales price 3,090,000
Gain on sale 20,141

1 Available for Sale Securities Blessie 2,068,662

Held to Maturity Securities 2,068,662
5,171,655 3,102,993 = 2,068,662

Dec. 31 Cash 240,000

Interest Revenue 206,866
Available for Sale Securities Blessie 33,134
2M x 12% = 240,000
5,171,655 3,102,993 = 2,068,662
2,068,662 x 10% = 206,866
240,000 206,866 = 33,134

Dec 31 Market Adjustment AFS 34,472

Unrealized Gain or Loss on AFS 34,472
Amortized cost
2,068,662 33,134 = P2,035,528*
Market value 2M x 103.5% 2,070,000
Market Adjustment P 34,472
*or 5,088,821 x 2/5 = P2,035,528

7-24 (Grow Company)

Correction to the problem: Change 2011 to Year 2 and 2012 to Year 3
Amortization Table
Date Nom Int Effect Int Prem Amort Amortized cost, end
1/1/Yr 1 1,063,394
12/31/Yr 1 120,000 106,339 13,661 1,049,733
12/31/Yr 2 120,000 104,973 15,027 1,034,706
12/31/Yr 3 120,000 103,471 16,529 1,018,177

(a) Market value, 12/31/ Yr 2 (1.06 x 1M) P1,060,000

Amortized cost, 12/31/Year 2 1,034,706
Unrealized Gain or Loss (In Equity) P 25,394
(b) Interest income for Yr 2 P 104,973
(c) Market value, 12/31/Yr 3 (1.04 x 400,000) P 416,000
Amortized cost (1,018,177 x 4/10) 407,271
Unrealized Gain on 12/31/Yr 3 P 8,729

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Chapter 7 Investments in Equity Securities and Debt Securities

7-25 (Naruto Company)

Amortization Table
Nominal Effective Premium Amortized Cost,
Date Interest Interest Amortization End
Jan. 1, 2009 108,660
Dec. 31, 2009 7,000 5,433 1,567 107,093
Dec. 31, 2010 7,000 5,355 1,645 105,448
Dec. 31, 2011 7,000 5,272 1,728 103,720
Dec. 31, 2012 7,000 5,186 1,814 101,906
Dec. 31, 2013 7,000 5,094 1,906 100,000

(a) Interest income for 2009 P5,433

(b) Carrying amount at December 31, 2010 (amortized cost) P105,448
(c) After the sale, the investment shall be reclassified as AFS, applying tainting rule
in IAS 39.
Fair value of remaining 105,650 x 40/100 P42,260
Amortized cost of remaining 103,720 x 40/100 41,488
Unrealized gain in equity, December 31, 2011 P 772
(d) Interest income for 2012 5,186 x 40/100 P 2,074

7-26 Narito
Classified as Available for Sale Securities
Amortization Table
Nominal Effective Premium Amortized Cost,
Date Interest Interest Amortization End
Jan. 1, 2009 108,660
Dec. 31, 2009 7,000 5,433 1,567 107,093
Dec. 31, 2010 7,000 5,355 1,645 105,448
Dec. 31, 2011 7,000 5,272 1,728 103,720
Dec. 31, 2012 7,000 5,186 1,814 101,906
Dec. 31, 2013 7,000 5,094 1,906 100,000
(Note: Based on the table, the term of the bonds is 5 years from January 1, 2009)

2009
Jan. 1 Available for Sale Securities Wolverine Bonds 108,660
Cash 108,660

Dec. 31 Cash 7,000

Available for Sale Securities Wolverine Bonds 1,567
Interest Income 5,433

31 Unrealized Loss on AFS AFS Debt 3,627

Market Adjustment AFS Debt 3,627

Market value (market rate is 6%; remaining term 4 yrs.

PV of face (100,000 x 0.7921 79,210
PV of interest (7,000 x 3.4651 24,256
Market value 103,466
Amortized cost, 12/31/09 107,093
Unrealized loss 3,627

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Chapter 7 Investments in Equity Securities and Debt Securities

2010
Dec. 31 Cash 7,000
Available for Sale Securities Wolverine Bonds 1,645
Interest Income 5,355

31 Impairment Loss 5,448

Market Adjustment AFS Debt 3,627
Available for Sale Securities Wolverine Bonds 5,448
Unrealized Loss on AFS 3,627

Fair value (impaired)* 100,000

Amortized cost (see table) 105,448
Impairment loss 5,448
*When stated rate equals market rate, the
market price will equal face value.

2011
Dec. 31 Cash 7,000
Interest Income 7,000
(Note: No amortization is necessary since
amortized cost is now equal to face value)

31 Market Adjustment AFS Debt 914

Unrealized Gain/Loss on AFS Debt 914

Market Value (market rate is 6.5%;remaining term 2 yrs)

PV of face (100,000 x 0.8817) 88,170
PV of interest (7,000 x 1.8206) 12,744
Market value 100,914
Amortized cost 100,000
Unrealized Gain 914
2012
Dec. 31 Cash 7,000
Interest Income 7,000

Dec. 31 Available for Sale Securities Wolverine Bonds 1,906

Gain from Recovery of Previous Impairment 1,906

31 Market Adjustment AFS Debt 975

Unrealized Gain/Loss on AFS Debt 975

Fair value:
PV of face at 4% for 1 period (100,000 x 0.9615) 96,150
PV of interest at 4% for 1 period (7,000 x 0.9615) 6,731
Fair value 102,881
Amortized cost (Original table at 7% effective interest) 101,906
Unrealized Gain 975

MULTIPLE CHOICE QUESTIONS

Theory
MC1 B MC5 D MC9 B
MC2 B MC6 A MC10 B
MC3 A MC7 C MC11 C
MC4 A MC8 D MC12 A

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Chapter 7 Investments in Equity Securities and Debt Securities

Problems
MC13 B 535,000 525,000 = 10,000
MC14 D FV 12/31/ Yr 2 (600 x 440) + (2,000 x 138) = 540,000
FV 12/31/Yr 1 = 270,000 + 280,600 = 550,600
Change in FV = 540,000 550,600 = 10,600 decrease or debit
MC15 C 10,000 x 150 = 1,500,000; 20% x 3M = 600,000
10,000 x 50 = 500,000; 1,500,000 + 600,000 500,000 = 1,600,000
MC16 A 1,000 x 50 = 150,000; 150,000 + 2,250 = 152,250; 152,250 (1,000 x 10) = 142,250
MC17 D Net SP = (500 x 25) 500 = 12,000; CV = 500 x 20 = 10,000;
Gain = 12,000 10,000 = 2,000
MC18 D 960-500 = 460; 460 + 600 = 1,060; 1,060/10 = 106 shares
MC19 B 88 1.10 = 80
MC20 Unit cost per share is still 80; stock rights received are credited to income.
A Following old principle 80 4 = 76
MC21 B 4,400 x 80 = 352,000
MC22 B 1,200,000 (3 x 40,000) + (25% x 640,000) = 1,240,000
MC23 B 40% x 450,000 = 180,000
150,000 12 = 12,500; 180,000 12,500 = 167,500
MC24 A 25,000 x 180 = 4,500,000; 25% x (2,400,000 480,000) = 480,000
4,500,000 + 480,000 60,000 60,000 = 4,860,000
MC25 CV at date of reclassification is equal to FV = 15,000 x 200 = 3,000,000
D Following old principle = 4,860,000 x 15/25 = 2,916,000
MC26 B 10,000 x 200 = 2,000,000; 4,860,000 x 10/25 = 1,944,000
2,000,000 1,944,000 = 56,000
MC27 A
MC28 C 750,000 + 1,500,000 = 2,250,000
MC29 B 40% x 1,200,000 = 480,000; (40% x 900,000) 18 = 20,000
40% x 100,000 = 40,000; 480,000 20,000 40,000 = 420,000
MC30 C 4,000,000 + 420,000 (40% x 200,000) = 4,340,000
MC31 B 1,000 x (140 - 130) + 900 x (170 180) + 800 x (200= 220) = 15,000 additional loss
MC32 A 1,000 x (20) + 15,000 = 35,000
MC33 A (1.04 x 1,000,000) = 1,040,000; interest receivable = 1,000,000 x 12% x 4/12 = 40,000
MC34 C 8,750,000 x 5% = 437,500
MC35 C 3,692,000 x 5% = 184,600; 4M x 4% = 160,000
184,600 160,000 = 24,600; 3,692,000 + 24,600 = 3,716,600
MC36 C 3,692,000 x 5% = 184,600
MC37 B 912,400 x 10% = 91,240; 1,000,000 x8% = 80,000
91,240-80,000 = 11,240; 912,400 + 11,240 = 923,640
MC38 D 7,850,000 (8M x .08 x 6/12) = 7,530,000 selling price; 7,383,000 x 5% = 369,150
8M x 4% = 320,000; 369,150 320,000 = 49,150
7,383,000 + 49,150 = 7,432,150 CV Dec. 1, Year 1;
7,432,150 x 5% = 371,608
371,608 320,000 = 51,608; 7,342,150 + 51,608 = 7,483,758 CV June 1, Yr 2.
7,530,000 7,483,758 = 46,242
MC39 D Carrying amount is equal to FV
MC40 B 500,000 x 4% = 20,000
MC41 D 460,000 472,500 = 12,500 loss

MC44 C Selling price = 3,000 x 120 = 360,000; cost of shares sold = 560,000 x 3,000/6,000 =
280,000; Gain = 360,000 280,000 = 80,000
MC45 D Cost of shares sold (for 2,400 shares, P200,000) + 600 /3,600 x 360,000 = 200,000 +
60,000 = 260,000; Gain = 360,000 260,000 = 100,000

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