FAR EASTERN UNIVERSITY

ACCOUNTING FOR EQUITY INVESTMENTS

FINANCIAL ACCOUNTING AND REPORTING-THEORIES

1. Equity investments acquired by a corporation which are accounted for by recognizing unrealized holding gains or
losses as other comprehensive income and as a separate component of equity most likely are
a. non-trading where a company has holdings of less than 20%.
b. trading investments where a company has holdings of less than 20%.
c. Investments where a company has holdings of between 20% and 50%.
d. investments where a company has holdings of more than 50%.

2. Susan Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt
of those dividends affect the investment account of the investor under each of the following accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect

3. All of the following statements regarding accounting for investment at fair value is correct?
a. they should be recognized in the financial statements as assets and liabilities.
b. they should be reported at fair value.
c. gains and losses resulting from speculation should be deferred.
d. gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of
hedge.

4. Which securities are purchased with the intent of selling them in the near future?
a. Investment in associates
b. Equity investment at fair value through other comprehensive income
c. Equity investment at fair value through profit or loss
d. Debt investment at amortized cost

5. For which type of investments would unrealized holding gain or loss be recorded directly in an owner’s equity
account?
a. Investment in associates
b. Equity investment at fair value through OCI
c. Equity investment at fair value through P&L

6. If the combined market value of equity investment at fair value through profit or loss at the end of the year is less
than the market value of the same portfolio of trading securities at the beginning of the year, the difference should
be accounted for by:
a. reporting an unrealized loss in security investment in the stockholders’ equity section of the balance sheet
b. reporting an unrealized loss in security investments in the income statement
c. a footnote to the financial statements
d. a debit to equity investment

7. Nolan has a portfolio of marketable equity securities which it does not intend to sell in the near term. How should
Nola classify these securities, and how should it report unrealized gains and losses from these securities?
Classify as Report as a
a. Equity investments Component of income from
@ FVTPL continuing operations
b. Equity investment Separate component of other
@FVTOCI comprehensive income
c. Equity investment Separate component of other
@ FVTPL comprehensive income
d. Equity investment Component of income from
@ FVTOCI continuing operations

8. Cash dividend received by an investor in equity investment at FVTPL and FVTOCI from the investee should be
accounted for as
a. a decrease in the carrying value of the investment
b. an increase in the carrying value of the investment
c. investment income

9. How would the investor in equity investment at fair value through other comprehensive income account for
investee’s earnings?
a. given no recognition on the investor’s accounting records
b. recognized as investment revenue by the investor
c. recorded as an increase in the investment account by the investor
d. recorded as a valuation account

10. The unrealized loss on security investment account for equity investment at fair value through other comprehensive
income should be reported as a component of:
a. income from continuing operation
b. extraordinary items
c. long-term investment
d. shareholders’ equity

11. An equity investment designated at fair value through profit or loss and fair value through other comprehensive
income should account transaction costs incurred at initial recognition as:
a. expensed for FVTPL and capitalized for FVTOCI
b. capitalized for FVTPL and expensed for FVTOCI
c. both expensed when incurred
 d. both capitalized

12. When equity investments at fair value through other comprehensive income at the end is greater than the fair value
at the beginning, an entry to adjust the investment would include a:
a. A debit to equity investment at FVTPL
b. A debit to impairment loss
c. A credit to gain on remeasurement
d. A credit to unrealized gain – OCI

13. A debit balance in unrealized gain (loss) – OCI at the end of the period is:
a. the amount of gain recognized in OCI for the current period.
b. the cumulative amount of loss recognized in equity as of end of reporting period.
c. the amount of loss recognized in profit or loss for the current period.
d. the cumulative amount of gain recognized in equity as of end of reporting period.

14. Transaction costs incurred on purchased of equity investment designated through other comprehensive income
should?
a. capitalized as part of initial cost of the investment.
b. expensed in profit or loss
c. deferred expense and should be recognized as expense when investment is sold.
d. Ignore.

15. Dividend received for an equity investment designated through profit or loss should be?
a. Added to value of investment
b. Deducted to value of investment
c. Recognized as dividend income in profit or loss
d. Ignore

FINANCIAL ACCOUNTING AND REPORTING-PROBLEMS

Problem 1: On January 1, 2019, Backstreet Co. purchased 15,000 shares of Nsync Inc. for P600,000. Commission paid
to the broker is 5% of the total purchase price. On December 31, 2019 and December 31, 2020, the shares were
quoted at P50 and P52 per share, respectively. On January 3, 2021, all of the 15,000 shares were sold at P62 per
share. Commission paid for the sale amounted to P50,000.

CLASSIFICATION FVTPL FVTOCI

1. At what amount should the equity investment be initially recorded?
2. How much is the unrealized gain (loss) recognized in the 2019 profit or loss?
3. How much is the unrealized gain (loss) recognized in the 2019 other comprehensive
income?
4. How much is the cumulative unrealized gain (loss) recognized in 2019 other
comprehensive income?
5. How much is the cumulative unrealized gain (loss) recognized in other comprehensive
income as of December 31, 2020?
6. How much is the realized gain (loss) recognized in profit or loss as a result of sale of
investments on January 3, 2021?
7. How much is the cumulative unrealized gain (loss) in other comprehensive income as
of December 31, 2021?

*Assume that Backstreet Co. elect to transfer any cumulative balance on OCI when the investment is disposed.

Problem 2: Color Company began business in January of 2021. During the year, Color purchased a portfolio of
securities listed below. In its December 31, 2021 balance sheet, Color appropriately reported a P300,000 debit
balance in its “Unrealized gain/loss” account. The composition of the securities did not change during the year 2022.
Pertinent data are as follows:

Security Cost Market Value, December 31, 2022

BE (FVPL) P2,000,000 P2,750,000
BI (FVOCI) 3,600,000 3,250,000
KO (FVOCI) 3,900,000 4,000,000
P9,500,000 P10,000,000

8. How much is the carrying value of Investment on December 31, 2021?

a. P9,800,000 c. P9,500,000
b. P9,200,000 d. P10,000,000

9. How much is the unrealized gain or loss that should presented in the Equity section of the
Balance Sheet on December 31, 2022?
a. P250,000 UG c. 800,000 UG
b. P250,000 UL d. 800,000 UL

Problem 3: Swan Corporation acquired 10,000 Maid Company shares on February 5, 2021 at P50 which includes a P10
per share broker’s fees and commissions. A P50,000 cash dividends were received from Maid Company on March 20,
2021. These dividends were declared on January 5 payable to shareholders as of February 10. Maid shares were split 2
for 1 on November 1. The shares were selling at P32 per share on December 31, 2021. The investments were designated
as FVPL.

10. How much is initial carrying value of investment at date of acquisition?

a. P500,000 c. P450,000
b. P400,000 d. P350,000
11. How much should be recognized as dividend income?
a. 50,000 c. 290,000
b.100,000 d. 0

Problem 4: Geese Corp. received the following dividends from ordinary share (15%) and preference share (25%)
investments during the current year:
• A cash dividend of P 100,000 from ordinary share investment
• A cash dividend of P 50,000 from preference share investment
• A property dividend costing P 500,000 which had a market value of P600,000
•
12. How much is the total dividend income that should reported for the current year?
a. 750,000 c. 150,000
b. 700,000 d. 650,000

Problem 5: Comfort Company purchased 10,000 shares of Velvet ordinary shares at P90 share on January 3,
2019. On December 31, 2019 Comfort received 2,000 shares of Velvet ordinary shares in lieu of cash dividend of P10
per share. On this date, the Velvet ordinary share has a quoted market price of P60 per share.

13. In its 2019 statement of comprehensive income, Comfort should report dividend income at

a. P120,000 c. P10,000
b. P100,000 d. none

Problem 6: In January 2020, Golden Company invested in P900,000 equity securities representing 15%
interest in Rings Company. Golden Company incurred transaction cost of P100,000. On December 31, 2020, this
investment has a market value of P950,000. On July 1, 2021,Golden Company sold all the investments for
P1,200,000.

14. What amount of gain on sale should Golden Company recognize in profit or loss assuming the security
was classified as Investment at FVPL?
a. 250,000 c. 200,000
b. 300,000 d. 0

15. How much is the amount transferred to Retained earnings upon sale assuming the security was
classified as Investment at FVOCI?
a. 50,000 c. 200,000
b. 300,000 d. 250,000

Problem 7: On January 2, 2021, Marco Company purchased 25,000 shares (30%) of Polo Company’s ordinary shares
for P220 per share. Marco also paid transaction cost of P100,000. The fair value of the net assets acquired is P5,000,000.
During 2021, Polo reported the following in its Statement of Comprehensive Income: a P4,500,000 net income and a
P500,000 revaluation surplus at the end of the year. Marco Company received cash dividends of P1,250,000 on
December 31, 2021.

16. What is the carrying value of the Investment on December 31, 2021?
a. P5,850,000 c. P4,970,000
b. P5,180,000 d. P4,800,000

Problem 8: On January 1, 2020, Girls Generation Company acquired 10% of the outstanding voting shares of Twice
Incorporated for P900,000. These shares were designated as equity investments at fair value through other
comprehensive income. On July 1, 2021, Girls Generation gained the ability to exercise significant influence over financial
and operating policies of Twice Incorporated by acquiring additional 20% of the outstanding shares for P2,600,000. The
purchase prices for these two acquisitions approximate their carrying values at date of acquisition. Data for 2020 and
2021 follow:
Year 2020 2021
Dividends paid P2,000,000 P3,000,000
Profit for the year 6,000,000 6,500,000

The fair values of the investments at December 31, 2020 and 2021 were P1,380,000 and P5,100,000, respectively. All
dividends and net income were evenly incurred and paid during the period.

17. How much is the amount recognized as unrealized gain (loss) in other comprehensive income in 2020?
a. None c. P340,000
b. P250,000 d. P480,000

18. What is the initial cost of the investment in associate upon reclassification on July 1, 2021?
a. P2,550,000 c. P3,900,000
b. P3,050,000 d. P3,940,000

19. What is the carrying value of the investment in Associate as of December 31, 2021?
a. P3,875,000 c. P5,275,000
b. P4,425,000 d. P6,145,000

20. How much is the total investment income recognized in its December 31, 2021 statement of
comprehensive income?
a. P1,205,000 c. P2,175,000
 b. P1,125,000 d. P3,000,000

Problem 9: Table owns 50% and 20% of Chair Corporation’s ordinary and preference shares, respectively. Chair’s
shares outstanding at December 31, 2019 follow:
Ordinary share P4,000,000
10% cumulative preference share 900,000

Chair reported net income of P600,000 for the year ended December 31, 2019 and declared the current year dividend
on the preference shares.

21. What total amount of revenue should Table Company disclose in the statement of comprehensive income
related to its investment in Chair Company for the year ended December 31, 2019?
a. None c. P273,000
b. P255,000 d. P300,000

Problem 10: On January 1, 2020, Orange Corp. acquired 200,000 shares representing 40% interest of Kahel’s ordinary
shares for P4,500,000. Kahel reported during 2021 a total net income of P4,000,000 and foreign translation loss of
P500,000. Kahel also distributed total cash dividends of P3,000,000 at year end. On January 1, 2021, Kahel issued
300,000 shares at P 23 per share. Orange Corp.’s ownership of Kahel shares remains at 200,000 shares in 2021.

22. How much is the total net dilution gain/loss that should be recognized by Orange Corp.?
a. P112,500 gain b. P187,500 gain c. P187,500 loss d. P112,500 loss

23. What is the carrying value of Investment in Kahel after the recognition of dilution gain/loss?
a. P5,212,500 b. P4,857,500 c. P4,912,500 d. P5,287,500

Problem 11: On January 1, 2020, Green Corp. acquired 30,000 shares representing 10% interest of Berde’s ordinary
shares for P4,000,000. Green does not have any significant influence nor control over the financial and operating policy
of Berde. Berde reported during 2020 a total net income of P4,000,000 and distributed dividends of P400,000. On
January 1, 2021, Green purchased additional 20% interest of Berde’s ordinary shares for P7,500,000. The fair value of
the 10% interest is P3,750,000. The net assets of Berde are fairly valued. During 2021, Berde reported net income of
P5,000,000 and distributed a total dividend of P300,000.

24. What is the carrying value of the Investment on December 31, 2021?
a. P12,190,000 b. P12,660,000 c. P10,310,000 d. P12,910,000

Problem 12: Bloom Corporation acquired 30% of Gloom Company’s 100,000 voting stock on January 2, 2018 for
P2,000,000 when the net assets of Gloom Company was P6,000,000. Gloom earned P1,000,000 and P1,500,000 in
2018 and 2019, respectively. Gloom Company paid dividends of P300,000 in 2018 and P500,000 in 2019. Market value
of Gloom’s ordinary shares is P80 on December 31, 2018 and P90 on December 31, 2019. On January 2, 2019, Bloom
Company sold 12,000 shares of its investment at the prevailing market value of P80 of Gloom’s shares.

25. How much is the gain or loss on sale taken to Profit or Loss on January 2, 2019?
a. none c. P114,000
b. P76,000 d. P190,000
26. If after the sale Bloom Company reclassified its remaining investment to Investment at Fair Value
through Profit or Loss, how much is the total net amount of income that should be reported in Profit or
Loss for the year 2019?
a. P190,000 c. P370,000
b. P280,000 d. P460,000

27. If after the sale Bloom Company reclassified its remaining investment to Investment at Fair Value
through Other Comprehensive Income, how much is the total net amount of income that should be
reported in Profit or Loss for the year 2019?
a. P190,000 c. P370,000
b. P280,000 d. P460,000