EXAMINATION about INVESTMENT 4

General Rule: Read the following carefully and answer it wisely. All solutions are needed, so put it in the last
page. (10 Points)

1. On January 1, 2010, May Company appropriately reported a debit balance of P125,000 in the fair value
adjustment in conformity with the valuation of available for sale securities. There was no change during 2010 in
the composition on the portfolio of available for sale investments. Pertinent data on December 31, 2010 are as
following:
Securities Cost Market
C P 1,500,000 P 1,625,000
P 1,250,000 1,000,000
A 2,250,000 1,750,000
Total P 5,000,000 P 4,375,000
Questions 1: By what amount the available for sale securities decreased during 2010?
a. None c. P500,000
b. P625,000 d. P750,000
Solution: D
Aggregate FMV P4,375,000
Less: Aggregate Cost P5,000,000
Required FV adjustments P 625,000
Add: FV adjustment 1.1.10 (debit
Balance or unrealized gain) P 125,000
Total decrease in value of AFS P 750,000

Question 2: What amount of unrealized loss should May Company report in its December 31, 2010 shareholders’ equity
related to its investment?
a. None c. P500,000
b. P625,000 d. P750,000
Solution: B
Aggregate FMV P4,375,000
Less: Aggregate Cost P5,000,000
Required FV adjustments P 625,000

2. During 2009, Parrot Company purchased marketable securities as available for sale. At December 31, 2009, the
balance in the fair value adjustment was P350,000 credit. There were no security transactions during 2010.
Pertinent data on December 31, 2010 are:
Securities Historical Cost Market
C P 1,500,000 P1,625,000
P 1,250,000 1,200,000
A 2,250,000 2,087,500
Total P 5,000,000 P4,912,500

Question 1: What total amount the Available for sale instrument had increased its value in 2010?
a. None c. P87,500
b. P262,500 d. P350,000
Solution: B
Aggregate FMV 12.31.10 P4,912,500
Less: Historical cost P5,000,000
Required FV Adjustments P 87,500
Less: FV adjustment credits P 350,000
Increase in AFS value P 262,500

Question 2: what amount of unrealized loss Parrot Company report in its 2010 shareholders’ equity?
a. None c. P 87,500
b. P262,500 d. P350,000

Solution: C
Aggregate FMV 12.31.10 P4,912,500
Less: Historical cost P5,000,000
Required FV Adjustments P 87,500

3. During 2009, Patrol Company purchased marketable securities as available for sale. At December 31, 2009, the
balance in the fair value adjustment was P200,000 credit. There were no security transactions during 2010.
Pertinent data on December 31,2010 are:
Securities Historical Market
C P1,500,000 P1,600.000
P 1,200,000 1,400,000
A 2,300,000 2,400,000
Total P5,000,000 P5,400,000
What amount of unrealized gain should the company report in its 2010 statement of financial position of the increase in
the value of the security?
a. None c. P200,000
b. P400,000 d. P600,000
Solution: B
Aggregate FMV P5,400,000
Aggregate Historical cost P5,000,000
Total Unrealized Gain P 400,000

4. Trend Company reported the following investment in available for sale securities in its December 31, 2009
statement of financial position:

Brand company, equity instrument, at fair market value, P1,200,000; Unrealized loss reported in equity is P200,000

On December 31, 2010, there was objective evidence that came to the attention of Trend Company that the investment in
Brand Company is impaired. Market value of the investment was established at P800,000. What amount of impairment
loss should Trend Company recognize on the investment as of December 2010?
a. None c. P200,000
b. P400,000 d. P600,000
Solution: D
FMV 12.31.10 P 800,000
FMV 12.31.09 P1,200,000
Impairment Loss P 400,000
Add: Unrealized loss in equity to P/L 200,000
Total Impairment Loss P 600,000
Note: PAS 39, paragraph 67 states that “if there’s an objective evidence that the MV of an investment in AFS securities is
impaired, any cumulative amount of unrealized loss reported in the Equity shall be removed from Equity and recognized
in P/L even though the financial assets has not been derecognized.”

5. Resolve Company has investment in financial equity instrument in Marcus Company acquired at a cost of
P900,000 in 2009. This investment was classified as available for sale securities. At the close of the accounting
year 2009, observable objective evidence came to the knowledge of Resolve Company that Marcus Company is in
deep financial trouble; market value of its securities had been going down. Based on available information as to
this date, Resolve Company’s investment in Marcus has a market value of P700,000 as a result, Resolve
Company recognized the decline in the value of its investment in the 2009 profit or loss as impairment loss.

During the year 2010, due to changes in financial climate there has been a complete turn-around in Marcus Company’s
financial instrument, Due to this objective turn-around in the market value of Resolve Company’s investment, market
value at the close of 2010 was established at P950,000. What amount of impairment reversal should Resolve Company
recognize in its 2010 profit or loss?
a. None c. P 50,000
b. P200,000 d. P250,000
Solution: A
Note: PAS 39, Paragraph 69, Impairment losses recognized in profit or loss for AFS securities shall not be reversed
through profit or loss.