Intermediate Accounting 1 – Financial Assets at Fair Value (Investments) Basic Concepts

Problem 1

At the beginning of current year 2018, Gala Company purchased equity securities for P5,200,000. The entity also paid
commission, taxes and other transaction costs amounting to P200,000. The securities are quoted at P5,500,000 at year-end.
No securities were sold during the year. The transaction costs that would have been incurred on the disposal of the
investment are estimated at P100,000.

In 2019, no securities were sold. The quoted price of the securities end of 2019 is P4,500,000.

In 2020, half of the securities was sold at a selling price of 2,500,000. The entity incurred disposal costs worth P30,000. The
remaining securities are quoted at P2,750,000 at year end.

Required:

A. Provide journal entries to record the above transactions:

1. Assuming the entity has elected irrevocably to present changes in fair value in other comprehensive
income.
2. Assuming the equity securities are held for trading.

B. Compute the carrying value of the financial assets as of:

1. January 1, 2018.
2. December 31, 2018.
3. December 31, 2019.
4. December 31, 2020.

C. Assuming the securities are carried at fair value through OCI, what is the balance of the cumulative gains or
losses presented as a component of stockholders’ equity as of:
1. December 31, 2018.
2. December 31, 2019.
3. December 31, 2020.

D. Assuming the securities are held as trading securities, determine the amount presented as a component of
profit or loss as a result of change in fair value in periods:
1. 2018.
2. 2019.
3. 2020.

Problem 2

Aborigine Company reported the following accounts in the statement of financial position on January 1, 2018.

Noncurrent assets
Financial asset – FVOCI 4,000,000
Market adjustment for unrealized (500,000)
loss
Market Value 3,500,000

Other comprehensive income

Unrealized loss (500,000)

An analysis of the investment portfolio revealed the following on December 31, 2018.

Cost Market
XYZ ordinary share ( 5,000 1,000,000 1,200,000
shares)
ABC ordinary share (10,000 2,500,000 2,000,000
shares)
RST preference share (1,000 500,000 200,000
shares)

On July 1, 2019, one-half of ABC ordinary shares were sold for P230/share. On December 31, 2019, the remaining
investments have the following market value:

XYZ ordinary share 1,000,000

ABC ordinary share 1,500,000
RST preference share 150,000

Determine the following.

1. Entry to record the change in the fair value of the investment on December 31, 2018.
2. Entries to record the sale of ABC ordinary shares.
3. The carrying value of the investment as of December 31, 2019.
4. Cumulative unrealized gain/(loss) as of December 31, 2019 to be presented in the 2019 Statement of
Financial Position.