CHAPTER 4

INVESMENTS IN EQUITY
AND DEBT INSTRUMENTS

Exercise 4 – 1

1. A financial instrument is any contract that gives rise to

a. A financial asset
b. A financial liability
c. A financial asset of one entity and a financial liability of another entity
d. A financial asset of one entity and a financial liability or equity instrument of another entity

2. Which of the following cannot be considered a financial asset?

a. Cash
b. A contractual right to receive cash or another financial asset from another entity
c. A contractual right to exchange financial instruments with another entity under conditions
that are potentially unfavorable
d. An equity instrument of another entity

3. What is the presentation of dividends received on preference shares?

a. Deducted from retained earnings
b. Deducted from share premium
c. Other income as part of profit or loss
d. Finance cost as component of other comprehensive income

4. When is a financial asset initially recognized by an entity?

a. A financial asset is recognized when it is probable that future economic benefits will flow
to the entity
b. A financial asset is recognized when the entity obtains control of the instrument
c. A financial asset is recognized when the entity obtains the risks and rewards of ownership
of the financial asset
d. A financial asset is recognized when the entity becomes a party to the contractual
provisions of the instrument

5. All of the following financial assets shall or may be measured at fair value through profit or
loss, except
a. Financial assets held for trading
b. Financial assets designated on initial recognition as at fair value through profit or loss
c. Investments in quoted equity instruments
d. Financial assets at amortized cost
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Exercise 4 – 2

Patton Company purchased ₱4,000,000 of 10% bonds of Scott Co. on January 1, 2020, paying
₱3,849,247. The bonds mature December 31, 2024; interest is payable each July 1 and January 1.
The discount of ₱150,753 provides an effective yield of 11%. Patton Company classifies the debt
instrument as financial asset at fair value through profit or loss. The fair value of the bonds at the
end of each year follows:

December 31, 2020 ₱3,900,000

December 31, 2021 4,100,000
December 31, 2022 4,000,000

1. Determine the carrying amount of the debt instrument at the end of each year from 2020 to
2022.
2. Determine the interest income recognized by Patton on the bonds every year from 2020 to
2022.
3. Determine the gain or loss on change in fair value recognized in Patton’s profit or loss
statement during each year from 2020 to 2022.

Exercise 4 – 3
On January 1, 2020, Beckham acquired a ₱2,000,000, 10% bond for ₱2,159,708. The ongoing
interest rate on the date of the acquisition of the bonds was 8%. Beckham classifies the bonds as
financial asset at fair value through other comprehensive income. The fair value of the bonds at
the end of each year is listed below:

December 31, 2020 102

December 31, 2021 98
December 31, 2022 101

1. Determine the carrying amount of the debt instrument at the end of each year from 2020 to
2022.
2. Determine the interest income recognized by Beckham on the bonds every year from 2020 to
2022.
3. Determine the gain or loss on change in fair value recognized in Patton’s statement of other
comprehensive income during each year from 2020 to 2022.
4. Determine the ending balance of Unrealized Gain or Loss on Financial Asset at Fair Value
through other comprehensive income found in Beckham’s shareholders’ equity at the end of
each year from 2020 to 2022.

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Exercise 4 – 4
On January 1, 2020, Corr Co. purchased a ₱3,000,000, 12%, five-year bond. The bonds were
acquired to yield 14%, and pay interest annually. Corr purchased the bonds solely for the collection
of the interest. The fair value of the bonds at the end of each year from 2020 to 2022 is listed
below:

December 31, 2020 97

December 31, 2021 98
December 31, 2022 100

1. How much is the initial cost of the debt instrument?

2. Determine the interest income recognized by Corr on the bonds during each year from 2020
to 2022.
3. Prepare an amortization table to show the carrying amount of the bonds at the end of each
year from 2020 to 2022.

Exercise 4 – 5
On January 1, 2020, Hough Co. purchased 100,000 ordinary shares of Derek Co. at ₱20 per share.
The shares are classified as financial asset at fair value through profit or loss. Derek declared and
paid dividends of ₱2 and ₱3 per share during 2020 and 2021. At the end of 2020 and 2021, Derek’s
shares have a fair value of ₱18 and ₱22, respectively.

1. Determine the dividend income recognized by Hough on the equity instrument in 2020 and
2021.
2. Determine the carrying amount of the equity instrument on Hough’s statement of financial
statement on December 31, 2020 and December 31, 2021.
3. Determine the unrealized gain or loss on change in fair value recognized by Hough in its profit
or loss statement for the year ended December 31, 2020 and December 31, 2021.

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Exercise 4 – 6
On January 1, 2020, Blunt Co. purchased 50,000 ordinary shares of Powter Co. at ₱16 per share.
The shares are classified as financial asset at fair value through other comprehensive income.
Powter declared and paid dividends of ₱4 and ₱5 per share in 2020 and 2021, respectively. At the
end of 2020 and 2021, Powter’s shares were trading at ₱17 and ₱14, respectively.
1. Determine the dividend income recognized by Blunt on the equity instrument in 2020 and 2021.
2. Determine the carrying amount of the equity instrument on Blunt’s statement of financial
statement on December 31, 2020 and December 31, 2021.
3. Determine the unrealized gain or loss on change in fair value recognized by Blunt in its profit
or loss statement for the year ended December 31, 2020 and December 31, 2021.
4. Determine the cumulative balance of the unrealized gain or loss recognized in the other
comprehensive income of Blunt’s shareholders’ equity on December 31, 2020 and December
31, 2021.

Exercise 4 – 7

On January 1, 2020, Levesque Co. purchased 500,000 ordinary shares of Rowland Co. at ₱14 per
share, representing a 25% ownership in Rowland. This allowed Levesque to exercise significant
control over Rowland. Rowland declared and paid dividends of ₱1 and ₱2 in 2020 and 2021,
respectively. At the end of 2020 and 2021, Rowland’s shares were trading at ₱15 and ₱17 per
share. Rowland’s net income in 2020 and 2021 was ₱2,400,000 and ₱3,200,000, respectively.

1. Determine the investment income recognized by Levesque in 2020 and 2021.

2. Determine the carrying amount of Levesque’s investment on December 31, 2020, and
December 31, 2021.

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