HAND-OUT NO.

9: EQUITY INVESTMENTS AT FAIR VALUE

Brian Christian S. Villaluz, CPA
FINANCIAL ACCOUNTING AND REPORTING
HAND-OUT NO. 9: Equity Investments at Fair Value

EQUITY INVESTMENTS/SECURITIES
1. Equity investments at fair value through profit or loss
2. Equity investments at fair value through other comprehensive income
3. Investment in associates
4. Investment in subsidiaries

EQUITY INVESTMENTS AT FAIR VALUE

An entity may make an irrevocable election at initial recognition to classify an investment as FVOCI. Note that the
irrevocable choices are available only on initial recognition. Once the election is made, the classification is permanent
until the financial asset is derecognized.

Problem 1: (Equity Investments – FVPL)

On April 30, 2018, Honey Company purchased 12,000 shares of ABC Co. for P200,000. Transaction costs paid amounted
to P10,000. The equity securities meet the definition of held for trading securities. On December 31, 2018, the shares are
quoted at P20. If the shares are sold on this date, the cost to sell would be P1.00 per share.

On January 3, 2019, half of the investment was sold at P30 per share. Transaction costs incurred on the sale amounted to
P6,000.

1. Prepare the necessary journal entries to record the foregoing.

2. How much is the initial measurement of the ABC Co. shares?
3. How much shall be recognized as gain on fair value changes in the income statement for the year ended December
31, 2018?
4. How much shall be recognized as gain or loss on sale of investment?

Problem 2: (FVPL) [Answer: A]

EE Company acquired trading equity instrument for P4,000,000 on April 30, 2018.

The equity instrument is classified as financial asset at fair value through profit or loss.

The transaction cost incurred amounted to P700,000.

On December 31, 2018, the fair value of the instrument was P5,500,000.

What amount of gain should be recognized in the income statement for the year ended December 31, 2018?
A. 1,500,000 B. 700,000
C. 800,000 D. -0-

Problem 3: (FVPL) [Answer: A; D]

During 2018, LL Company purchased trading securities with the following cost and market value on December 31, 2018:

Security Cost Market value

X – 1,000 shares 200,000 300,000
Y – 10,000 shares 1,700,000 1,600,000
Z – 20,000 shares 3,100,000 2,900,000
5,000,000 4,800,000

The company sold 10,000 shares of Security Y on January 15, 2019, for P150 per share.

1. What amount of unrealized gain or loss should be reported in the income statement for 2018?
A. 200,000 loss B. 200,000 gain
C. 300,000 loss D. 300,000 gain

2. What amount should be reported as gain or loss on sale of trading securities in 2019?
A. 200,000 gain B. 200,000 loss
Page 1 of 4
 HAND-OUT NO. 9: EQUITY INVESTMENTS AT FAIR VALUE
Brian Christian S. Villaluz, CPA
C. 100,000 gain D. 100,000 loss

Problem 4: (FVOCI)
On April 30, 2018, Honey Company purchased 12,000 shares of ABC Co. for P200,000. Transaction costs paid amounted
to P10,000. The shares do not meet the definition of held for trading. The management made an irrevocable choice to
subsequently measure the shares at fair value through other comprehensive income. On December 31, 2018, the shares
are quoted at P20. If the shares are sold on this date, the cost to sell would be P1.00 per share.

On December 31, 2019, the shares are quoted at P13. If the shares are sold on this date, the cost to sell would be P1.50
per share.

On January 3, 2020, 9,000 shares were sold at P15 per share.

1. Prepare the necessary journal entries to record the foregoing.

2. How much is the initial measurement of the ABC Co. shares?
3. How much shall be recognized as gain on fair value changes in the statement of comprehensive income for the
year ended December 31, 2018?
4. How much shall be recognized as gain or loss on sale of investment?
5. What amount shall be recycled from OCI to retained earnings in 2020?

Problem 5: (FVOCI) [Answer: C]

EE Company acquired non-trading equity instrument for P4,000,000 on April 30, 2018.

The equity instrument is classified as financial asset at fair value through other comprehensive income.

The transaction cost incurred amounted to P700,000.

On December 31, 2018, the fair value of the instrument was P5,500,000.

What amount of gain should be recognized in other comprehensive income for the year ended December 31, 2018?
A. 1,500,000 B. 700,000
C. 800,000 D. -0-

Problem 6: (FVOCI) [Answer: A; B; C]

On December 31, 2018, SS Company appropriately reported a P100,000 unrealized loss.

There was no change during 2019 in the composition of the portfolio of non-trading equity securities held at fair value
through other comprehensive income.

Security Cost Market value

December 31, 2019
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

1. What is the market value of the investment on December 31, 2018?

A. 3,600,000 B. 3,700,000
C. 3,500,000 D. 3,800,000

2. What amount of loss on these securities should be included in the statement of comprehensive income for the year
ended December 31, 2019 as component of other comprehensive income?
A. 400,000 B. 300,000
C. 100,000 D. -0-

3. What cumulative amount of loss on these securities should be reported in the statement of changes in equity for
the year ended December 31, 2019 as component of other comprehensive income?
A. 100,000 B. 200,000
Page 2 of 4
 HAND-OUT NO. 9: EQUITY INVESTMENTS AT FAIR VALUE
Brian Christian S. Villaluz, CPA
C. 400,000 D. -0-

Problem 7: (FVOCI) [Answer: A]

On January 1, 2020, QQ Company purchased equity securities to be held at fair value through other comprehensive income.
On December 31, 2020, the cost and market value were:

Cost Market
Security A 2,000,000 2,400,000
Security B 3,000,000 3,500,000
Security C 5,000,000 4,900,000

On July 1, 2021, the company sold security A for P2,500,000.

What amount should be recognized directly in retained earnings as a result of the sale of financial asset in 2018?
A. 500,000 B. 100,000
C. 400,000 D. -0-

Problem 8: (Other Considerations; Dividends-On vs. Ex-Dividends)

On January 1, 2018, HH Company purchased 40,000 shares at P100 per share to be held for trading. Brokerage fees
amounted to P120,000.

A P5 dividend per share had been declared on December 15, 2017, to be paid on March 31, 2018 to shareholders of record
on January 31, 2018. No other transactions occurred in 2018 affecting the investment.

What is the initial measurement of the investment?

A. 4,120,000 B. 4,000,000
C. 3,920,000 D. 3,800,000

Problem 9: (Other Considerations; Dividend Income)

BB Company purchased 10,000 shares representing passive ownership of DD Company on February 1, 2019.

BB Company received a stock dividend of 2,000 shares on March 31, 2019, when the carrying amount per share was P350
and the market value per share was P400.

DD Company paid a cash dividend of P15 per share on September 15, 2019.

In the income statement for the year ended December 31, 2019, what amount should be reported as dividend income?
A. 980,000 B. 880,000
C. 180,000 D. 150,000

Problem 10: (Other Considerations; Dividend Income)

Hipolito Company owns 20,000 shares of Homer Company’s 200,000 shares of P100 par, 6% cumulative, non-participating
preference share capital and 10,000 shares representing 2% ownership of Homer’s ordinary share capital.

During 2018, Homer Company declared and paid preference dividends of P2,400,000. No dividends had been declared or
paid during 2017.

In addition, Hipolito Company received a 5% share dividend on ordinary share from Homer Company when the quoted
market price of Homer’s ordinary share was P10.

What amount should be reported as dividend income for 2018?

A. 120,000 B. 125,000
C. 240,000 D. 245,000

FINANCIAL ACCOUNTING THEORIES

1. According to IFRS 9 Financial Instruments, a financial instrument is recognized
A. When the instrument has probable economic benefits that can be measured reliably.
B. When the entity enters to a binding contract to deliver a variable number of its own equity instrument.
Page 3 of 4
 HAND-OUT NO. 9: EQUITY INVESTMENTS AT FAIR VALUE
Brian Christian S. Villaluz, CPA
C. Only when the instrument requires receipt of another financial instrument under conditions which are potentially
favorable.
D. Only when the entity becomes a party to the contractual provisions of the instrument.

2. Financial assets are initially measured at

A. Fair value
B. Fair value plus direct transaction costs
C. Fair value plus direct transaction costs, except for financial assets measured at FVPL, which are initially
measured at fair value only.
D. Cost, if the financial assets are unquoted.

3. Which of the following is measured at fair value with fair value changes recognized in profit or loss?
A. Held to maturity securities
B. Financial assets designated at FVPL
C. Financial assets designated at FVOCI
D. All of these

4. An entity acquires shares of stocks of another entity. The shares are listed. The investment management strategy
of the entity is to hold financial assets and sell them to realize fair value gains. Which of the following statements is
correct?
A. The entity may classify the investment as subsequently measured at FVPL.
B. The entity may classify the investment as subsequently measured at FVOCI.
C. Either A or B
D. The entity may classify the investment as non-current.

5. ABC Co. acquired equity securities of DEF Co. to be held as investments. On initial recognition, the equity securities
were part of a portfolio of identified financial instruments that are managed together and for which there is evidence
of a recent actual pattern of short-term profit taking. ABC would most likely measure the investment at
A. FVPL
B. FVOCI
C. Amortized cost
D. A or B

6. According to IFRS 9 Financial Instruments, on initial recognition, the entity has the option of designating financial
assets to be measured at FVPL
A. If doing so enhances the qualitative characteristic of financial information presented in the financial statements.
B. If doing so significantly reduces or eliminates “accounting mismatch”
C. If it is required by “shadow accounting”.
D. At the entity’s management’s absolute discretion

7. A permanent decline in the fair value of an investment in equity securities that the entity made an irrevocable
election at initial recognition to subsequently measure at FVOCI is recognized in
A. Profit or loss
B. Other comprehensive income
C. Either a or b
D. Not recognized

8. When an investment in equity securities that were elected at initial recognition to be subsequently measured at fair
value through other comprehensive income is derecognized, the cumulative balance of gains or losses previously
recognized in other comprehensive income is
A. Recognized in profit or loss as a reclassification adjustment.
B. Recognized in profit or loss as an adjustment to the realized gain or loss on derecognition.
C. Transferred directly in equity.
D. Any of these as an accounting policy choice.

END OF HANDOUT

Page 4 of 4