INVESTMENTS

FINANCIAL ACCOUNTING AND REPORTING

DEFINITION
Assets held by an entity for the
• Accretion of wealth through distribution such as:
• Interest;
• Royalties;
• Dividends; and
• Rentals.
• Capital appreciation, or
• Other benefits obtained through trading relationships.
PURPOSES OF INVESTMENTS
✓Accretion of wealth (interest, dividends, royalties, and rentals)
✓Capital appreciation (e.g. investments in land and real estate held
for appreciation, direct investments in gold, diamonds, and other
precious commodities)
✓Ownership control (investments in subsidiaries and associates)
✓Meeting business requirements (sinking fund, preference share
redemption fund, plant expansion fund and other noncurrent fund)
✓Protection (interest in life insurance contract-cash surrender value)
CATEGORIES OF INVESTMENTS
1. Trading securities or financial asset at fair value through profit or
loss (FVPL);
2. Financial asset at fair value through other comprehensive income
(FVOCI);
3. Investments in non-trading equity securities
4. Investments in bonds or financial asset at amortized cost
5. Investments in associate
6. Investments in subsidiary
7. Investment property
8. Investment fund
9. Investment in joint venture
FINANCIAL INSTRUMENT
PAS 32, par. 11
Financial instrument as any contract that gives rise to a
financial asset of one entity and a financial liability or an equity
instrument of another entity.
Characteristics:
a. There must be a contract.
b. There are at least two parties to the contract.
c. The contract shall give rise to a financial asset of one party and
financial liability or equity instrument of another party.
FINANCIAL ASSET
A financial asset is any asset that is:
a. Cash
b. A contractual right to receive cash or another financial asset from
another entity.
c. A contractual right to receive cash or another financial asset from
another entity.
d. An equity instrument of another entity.
FINANCIAL ASSET
Examples of financial assets
a. Trade accounts receivable
b. Notes receivable
c. Loans receivable
d. Bonds receivable
FINANCIAL ASSET
Not considered as financial assets
❑ Intangible assets
❑ Physical assets
❑ Prepaid expenses
❑ Leased assets
CLASSIFICATION OF FINANCIAL ASSET
PFRS 9, par. 4.1.1 financial assets are classified into three, namely:
1. Financial assets at fair value through profit or loss – include
both equity securities and debt securities.
2. Financial assets at fair value through other comprehensive
income – include both equity securities and debt securities.
3. Financial assets at amortized cost – include only debt securities.
CLASSIFICATION OF FINANCIAL ASSET
a. To hold investments in order to realize fair value changes.
b. To hold investments in order to collect contractual cash flows.
EQUITY SECURITY
▪ Any instrument representing:
▪ Ownership shares;
▪ Ordinary shares,
▪ Preference shares,
▪ Rights or options to acquire ownership shares
▪ Right, warrants, or options to acquire or dispose of ownership
shares at a fixed or determinable price.
DEBT SECURITY
▪ Security that represents a creditor relationship with an
entity.
▪ With a maturity date and a maturity value
▪ Examples of debt securities include the following:
▪ Corporate bonds
▪ BSP treasury bills
▪ Government securities
▪ Commercial papers
▪ Preference shares with mandatory redemption date or are
redeemable at the option of the holder.
INITIAL MEASUREMENT OF FINANCIAL ASSETS
PFRS 9, par. 5.1.1, at initial recognition, an entity shall measure a
financial asset at:
➢Fair value (transaction price – fair value of consideration given) plus
transaction costs (directly attributable to the acquisition of the financial
asset)
➢ Transaction costs – capitalized as cost of the financial asset
➢ If held for trading (FVPL) – transaction costs are expensed outright
➢Includes the following:
➢ Fees and commissions paid to agents, advisers, brokers, and dealers,
➢ Levies by regulatory agencies and securities exchanges,
➢ Transfer taxes and duties.
SUBSEQUENT MEASUREMENT OF FINANCIAL ASSETS
PFRS 9, par. 5.2.1 provides that after initial recognition, an
entity shall measure a financial asset at:
➢Fair value through profit or loss (FVPL)
➢Fair value through other comprehensive income (FVOCI)
➢Amortized cost
FINANCIAL ASSETS @ FVPL
➢ Held for trading (trading securities) – required by the
Standard
➢ Quoted equity instruments - by consequence
➢ Irrevocable designation (initial recognition @ FVPL)
➢ All debt instruments that do not satisfy requirements for
measurement at amortized cost and at FVOCI – default
FINANCIAL ASSETS HELD FOR TRADING
Financial asset is held for trading if:
a. It is acquired principally for the purpose of selling or
repurchasing it in the near term;
b. On initial recognition, it is part of a portfolio of identified
financial assets that are managed together and for which
there is evidence of a recent actual pattern of short-term
profit taking.
c. It is a derivative, except for a derivative that is a financial
guarantee contract or a designated and an effective
hedging instrument.
EQUITY INVESTMENTS @ FVOCI
➢ Irrevocable election to present in other comprehensive income
or OCI subsequent changes in fair value of an investment in
equity instrument that is not held for trading.
➢ Amount recognized in OCI is not reclassified to profit or loss
under any circumstances.
➢ Derecognition – amount may be transferred to equity or
retained earnings.
➢ Held for trading – present gain or loss in OCI is not allowed.
Subsequent changes in fair value are always included in profit or
loss.
DEBT INVESTMENT AT AMORTIZED COST
PFRS 9, par. 4.1.2 provides that a financial asset shall be measured at
amortized cost if both of the following conditions are met:
a. The business model is to hold the financial asset in order to collect
contractual cash flows on specified date.
b. The contractual cash flows are solely payments of principal and interest
on the principal amount outstanding.
* Financial asset shall be measured at amortized cost.
DEBT INVESTMENT AT FAIR VALUE THROUGH OCI
PFRS 9, par. 4.1.2A provides that a financial asset shall be measured at fair
value through other comprehensive income if both of the following
conditions are met:
a. The business model is achieved both by collecting contractual cash flows
and by selling the financial asset.
b. The contractual cash flows are solely payments of principal and interest
on the principal outstanding.
MEASUREMENT OF EQUITY INVESTMENTS
1. Held for trading – at fair value through profit or loss;
2. Not held for trading – as a rule, at fair value through profit or
loss;
3. Not held for trading – at fair value through other
comprehensive income by irrevocable election;
4. All other investments in quoted equity instruments – at fair
value through profit or loss;
5. Investments in unquoted equity instruments – at cost;
6. Investments of 20% to 50% - equity method of accounting;
7. Investments of more than 50% - consolidation method
MEASUREMENT OF DEBT INVESTMENTS
1. Held for trading – at fair value through profit or loss;
2. Held for collection of contractual cash flow –at amortized cost;
3. Held for collection of contractual cash flows – at fair value
through profit or loss by irrevocable designation or fair value
option;
4. Held for collection of contractual cash flows and for sale of the
financial asset – at fair value through other comprehensive
income.
5. Held for collection of contractual cash flows and for sale of the
financial asset – at fair value through profit or loss by
irrevocable designation or fair value option.
GAIN AND LOSS – FINANCIAL ASSET @FVPL
PFRS 9, par. 5.7.1, gain and loss on financial asset measured at fair
value shall be presented in profit or loss, except:
a. When the financial asset is part of a hedging relationship;
b. When the financial asset is an investment in non-trading equity
instrument and the entity has irrevocably elected to present
unrealized gain and loss in other comprehensive income.
c. When the financial asset is a debt investment that is measured
at fair value through other comprehensive income.
GAIN AND LOSS – FINANCIAL ASSET @AMORTIZED COST
PFRS 9, par. 5.7.2, gain and loss on financial asset measured at
amortized cost and is not part of a hedging relationship shall be
recognized in profit or loss when the financial asset is
derecognized, sold, impaired or reclassified, and through the
amortization process
ILLUSTRATION
On January 1, 2016, an entity purchased marketable equity securities
for P5,000,000. The equity securities qualify as financial asset held for
trading. The entity also paid P50,000 as commission to the broker.

Trading securities; or 5,000,000

Financial Asset - FVPL
Commission expense 50,000
Cash 5,050,000
To record purchase of marketable equity securities.
ILLUSTRATION
On December 31, 2016, the trading securities have a fair value of
P6,000,000. The increase in value is recorded as follows:
Trading securities 1,000,000
Unrealized gain – TS (Other income) 1,000,000
To record increase in value of financial assets held for trading.
On December 31, 2016, the statement of financial position will report
the trading securities at fair value of P6,000,000 with a disclosure of the
cost of P5,000,000.
ILLUSTRATION
On December 31, 2017, the trading securities have a fair value of
P4,500,000. The decrease in fair value is recorded as follows:
Unrealized loss – TS 1,500,000
Trading Securities 1,500,000
To record decrease in fair value of financial assets held for
sale.

On December 31, 2017, the trading securities will be carried at

P4,500,000, with disclosure of the cost of P5,000,000.
ILLUSTRATION – SALE OF TS
On December 31, 2018, the trading securities are sold for P5,200,000.
The sale is simply recorded as follows:
Cash 5,200,000
Trading Securities 4,500,000
Gain on sale of trading securities 700,000
To record sale of trading securities.
ILLUSTRATION – SALE OF TS
On January 1, 2016, an entity acquired trading securities with the
following market value on December 31, 2016.
Cost Market Gain (Loss)
ABC Preference Share 200,000 150,000 (50,000)
XYZ Ordinary Share 800,000 950,000 150,000
RST Ordinary Share 1,000,000 1,100,000 100,000
MNO Bonds 3,000,000 2,500,000 (500,000)
5,000,000 4,700,000 (300,000)
ILLUSTRATION – SALE OF TS
The acquisition on January 1, 2016 is recorded as follows:
Trading securities 5,000,000
Cash 5,000,000
To record acquisition of trading securities.
ILLUSTRATION – SALE OF TS
On December 31, 2016, the net decrease in market value is recorded as
follows:
Unrealized loss – TS 300,000
Cash 300,000
To record net decrease in market value.

On December 31, 2016, the statement of financial position will report

the trading securities at fair value of P4,700,000.
ILLUSTRATION – SALE OF TS
On January 15, 2017, the ABC preference share is sold for P80,000. The
journal entry to record the sale is:
Cash 80,000
Loss on sale of trading securities 70,000
Trading securities 150,000
To record the sale of ABC preference shares.

On December 31, 2016, the statement of financial position will report

the trading securities at fair value of P4,700,000.
ILLUSTRATION – SALE OF TS
On December 31, 2017, the remaining trading securities have the
following carrying amount and market value:
CA Market Gain (Loss)
XYZ Ordinary Share 950,000 1,000,000 50,000
RST Ordinary Share 1,100,000 1,500,000 400,000
MNO Bonds 2,500,000 2,400,000 (100,000)
4,550,000 4,900,000 350,000
ILLUSTRATION – SALE OF TS
The journal entry to record the net increase in market value is as
follows:
Trading securities 350,000
Unrealized gain – TS 350,000
To record the net increase in market value.

On December 31, 2017, the statement of financial position will report

the trading securities at fair value of P4,900,000.
ILLUSTRATION – EQUITY INVESTMENT AT FVOCI
On January 1, 2016, an entity purchased marketable equity securities
for P1,000,000. The entity paid commission and taxes of P100,000.
Financial asset – FVOCI 1,100,000
Cash 1,100,000
To record acquisition of marketable equity securities.
ILLUSTRATION – EQUITY INVESTMENT AT FVOCI
On December 31, 2016, the securities have a market value of
P1,300,000. The increase in market value is:
Financial asset – FVOCI (Noncurrent 200,000
Asset)
Unrealized gain - OCI 200,000
To record increase in market value.

The financial asset – FVOCI on December 31, 2016 is carried at the

market value of P1,300,000, with disclosure of the cost of P1,100,000.
ILLUSTRATION – EQUITY INVESTMENT AT FVOCI
On December 31, 2017, the securities have a market value of
P1,600,000. The increase in market value is:
Financial asset – FVOCI 300,000
Unrealized gain - OCI 300,000
To record increase in market value.
ILLUSTRATION – SALE OF EQUITY INVESTMENT AT FVOCI
On July 1, 2018, the securities are sold for P2,000,000. The journal
entry to record the sale is:
Cash 2,000,000
Financial asset – FVOCI 1,600,000
Retained earnings - 400,000
To record sale of securities.
ILLUSTRATION – SALE OF EQUITY INVESTMENT AT FVOCI
On July 1, 2018, the securities are sold for P2,000,000. The journal
entry to record the sale is:
Unrealized gain – OCI 500,000
Retained earnings - 500,000
To record transfer of cumulative unrealized gain to
retained earnings.
*The amount recognized in other comprehensive income is not
reclassified to profit or loss under any circumstances.
ILLUSTRATION – SALE OF EQUITY INVESTMENT AT FVOCI
On January 1, 2016, an entity purchased marketable equity securities
for P2,000,000. The securities do not qualify as financial asset held for
trading.
Financial asset – FVOCI 2,000,000
Cash 2,000,000
To record acquisition of marketable equity securities.
ILLUSTRATION – SALE OF EQUITY INVESTMENT AT FVOCI
On December 31, 2016, the securities have a market value of
P1,800,000. The decrease in market value is recorded as follows:
Unrealized loss – OCI 200,000
Financial Asset - FVOCI 200,000
To record decrease in market value.
*The unrealized loss is reported as a deduction as component of other
comprehensive income in the 2016 statement of comprehensive income.
On December 31, 2016, statement of financial position will report the
financial asset – FVOCI at market value of P1,800,000 with disclosure of
the cost of P2,000,000.
ILLUSTRATION – SALE OF EQUITY INVESTMENT AT FVOCI
On December 31, 2017, the securities have a market value of
P1,300,000. The decrease in market value is recorded as follows:
Unrealized loss – OCI 500,000
Financial Asset - FVOCI 500,000
To record decrease in market value.
The financial asset – FVOCI is carried at market value of P1,300,000 in
the December 31, 2017 statement of financial position with disclosure of
the cost of P2,000,000.
*The total unrealized loss is 700,000. However, only P500,000 will be reported in the 2017 statement of
comprehensive income. The total amount of P700,000 will appear in the statement of changes in
equity.
ILLUSTRATION – SALE OF EQUITY INVESTMENT AT FVOCI
On July 1, 2018, the securities are sold for P1,200,000. The journal
entry to record the sale is:
Cash 1,200,000
Retained earnings 100,000
Financial Asset – FVOCI 1,300,000
To record the sale of securities.
ILLUSTRATION – SALE OF EQUITY INVESTMENT @ FVOCI
On July 1, 2018, the securities are sold for P1,200,000. The journal
entry to record the sale is:
Retained earnings 700,000
Unrealized loss - OCI 700,000
To record the transfer of unrealized loss to retained
earnings.
ILLUSTRATION – SALE OF EQUITY INVESTMENT @ FVOCI
On January 1, 2016, an entity purchased marketable equity securities
not qualifying as financial asset held for trading. The entity elected to
present changes in fair value as component of other comprehensive
income. On December 31, 2016, the securities have the following cost and
market value:
Cost Market Gain(Loss)
Security A 1,000,000 1,100,000 100,000
Security B 2,000,000 2,700,000 700,000
Security C 3,000,000 2,800,000 (200,000)
6,000,000 6,600,000 600,000
ILLUSTRATION – SALE OF EQUITY INVESTMENT @ FVOCI
The net increase in market value is P600,000. The entry to record the
net increase is:
Financial Asset –FVOCI 600,000
Unrealized gain - OCI 600,000
To record the net increase in market value.
ILLUSTRATION – SALE OF EQUITY INVESTMENT @ FVOCI
On July 1, 2017, Security A was sold for P1,400,000. The journal entry to
record the sale is:
Cash 1,400,000
Financial asset – FVOCI 1,100,000
Retained Earnings 300,000
To record the sale of Security A.
PRACTICE MAKES PERFECT!
Template Company provided the following with respect to marketable
equity securities held as “trading”.
1. The entity carried the following securities on December 31, 2016:
Cost Market
A ordinary – 4,000 shares 330,000 300,000
B ordinary – 1,000 shares 200,000 160,000
C preference – 2,000 shares 300,000 310,000
830,000 770,000
PRACTICE MAKES PERFECT!
Template Company provided the following with respect to marketable
equity securities held as “trading”.
2. On June 30, 2017, the entity sold all the B ordinary shares for
P140,000.
3. On December 31, 2017, the securities are quoted as follows:
A Ordinary 80
C Preference 180

Prepare journal entries to record the transactions.

 PRACTICE MAKES PERFECT!
• Entry to record the change in market value of trading securities.
Cost Market Gain (Loss) On Dec. 31, 2016,
A ordinary – 4,000 shares 330,000 300,000 (30,000) trading securities are
reported at market of
B ordinary – 1,000 shares 200,000 160,000 (40,000) 770,000. A disclosure in
C preference – 2,000 shares 300,000 310,000 10,000 the notes to financial
statements the
Unrealized loss is presented in the income 830,000 770,000 (60,000) individual securities with
statement as other expense. corresponding carrying
Unrealized loss – TS 60,000 amounts.

Trading securities 60,000

To record net decrease in market value of trading securities.
PRACTICE MAKES PERFECT!
2. On June 30, 2017, the entity sold all the B ordinary shares for
P140,000.
Cash 140,000
Loss on sale of trading securities 20,000
Trading securities 160,000
To record sale of trading securities. The difference between the
consideration received and the
carrying amount is recognized as gain
or loss on disposal to be reported in
the income statement.
PRACTICE MAKES PERFECT!
Entry to record the change in trading securities.
A ordinary 80
C Preference 180
Cost Market Gain (Loss)
A ordinary – 4,000 shares 300,000 320,000 20,000)
C preference – 2,000 shares 310,000 360,000 50,000
610,000 680,000 70,000

Trading securities 70,000

Unrealized gain-TS 70,000
To record net increase in trading securities.
PRACTICE MAKES PERFECT!
On January 1, 2016, Spark Company purchased the following trading
securities:
Cost Fair Value December 31, 2016
Aura Company ordinary 600,000 650,000
Bora Company preference 350,000 200,000
Cara Company bonds 500,000 400,000
1,450,000 1,250,000
PRACTICE MAKES PERFECT!
On January 1, 2016, Spark Company purchased the following trading
securities: Cost
Aura Company ordinary 600,000
Bora Company preference 350,000
Cara Company bonds 500,000
1,450,000

Entry to record purchase of trading securities.

Trading securities 1,450,000
Cash 1,450,000
To record purchase of trading securities.
PRACTICE MAKES PERFECT!
Dec. 31, 2016
Entry to record change in market value of trading securities.
Cost MV Gain
(Loss)
Aura Company ordinary 600,000 650,000 50,000
Bora Company preference 350,000 200,000 (150,000)
Cara Company bonds 500,000 400,000 (100,000)
1,450,000 1,250,000 (200,000)

Unrealized loss –TS 200,000

Trading Securities 200,000
To record net decrease in market value of trading securities.
PRACTICE MAKES PERFECT!
On October 1, 2017, the entity sold one-half of Aura Company
ordinary for P375,000. On October 31, 2017, the fair value of the
remaining securities was P800,000.
Entry to record sale of one-half of ordinary Aura trading securities.
Cash 375,000
Trading securities 325,000
(650,000 x ½)
Gain on sale of TS 50,000
To record sale of one-half of ordinary Aura trading securities.
PRACTICE MAKES PERFECT!
Entry to record the change in market value of trading securities.
Cost Fair Value Gain (loss)
Aura Company ordinary 325,000
Bora Company preference 200,000
Cara Company bonds 400,000
925,000 800,000 (125,000)

Unrealized loss – TS 125,000

Trading securities 125,000
To record decrease in market value of trading securities.
INVESTMENT IN EQUITY SECURITIES
ACQUISITION OF EQUITY INVESTMENTS
➢ INITIAL MEASUREMET
➢ FAIR VALUE plus TRANSACTION PRICE (consideration given) –
CAPITALIZED
➢ But if it is FINANCIAL ASSET held for trading or FVPL shall be
EXPENSED IMMEDIATELY.
ACQUISITION BY EXCHANGE
➢ Fair value of asset GIVEN
➢ Fair value of asset RECEIVED
➢ Carrying amount of asset GIVEN
CASH DIVIDENDS
➢ FVPL or FVOCI – dividends earned are considered as INCOME.
➢Do not affect the INVESTMENT account
a. When cash dividends are earned but not received:
Dividends receivable xx
Dividend income xx

b. When the cash dividends are subsequently received:

Cash xx
Dividend receivable xx
PROPERTY DIVIDENDS (DIVIDENDS IN KIND)
➢ Considered as INCOME and recorded at FAIR
VALUE
Noncash assets xx
Dividend income xx
LIQUIDATING DIVIDENDS
➢ Return of invested capital (not income)
Cash /other appropriate amount xx
Investment in equity securities xx
STOCK DIVIDENDS (BONUS ISSUE)
➢ Kinds of stock dividends
➢ Same class
➢ Different from those held
STOCK DIVIDENDS (BONUS ISSUE)
➢ Same class
➢ Recorded only by memorandum entry by the shareholder
➢ Stock dividends do not affect the total cost of the investment but
reduce the cost of the investment per share
➢ The original cost after the stock dividend will now apply to a
greater number of shares, original shares plus those received as
stock dividends.
STOCK DIVIDENDS (BONUS ISSUE)
➢ Different class
➢ Original cost of the investment is apportioned between
the original shares and the stock dividends on the basis of
market value of each at the date of receipt.
SHARES RECEIVED IN LIEU OF CASH DIVIDENDS
➢ INCOME at FAIR VALUE of the shares received. Such shares are
property dividends.
➢If no fair value is available, income is equal to the CASH DIVIDENDS
that would have been received.
CASH RECEIVED IN LIEU OF STOCK DIVIDENDS
➢ “As if” approach is followed – stock dividends are
assumed to be received and subsequently sold at the cash
received.
➢ Gain or loss is recognized.
PRACTICE MAKES PERFECT!
Accessible Company purchased for a lump sum of P3,075,000 the
following long-term investments.
A Corporation share capital 8,000 shares
B Corporation share capital 16,000 shares
C Corporation bond P 1,000,000 face value

At the time of purchase, the securities were quoted at the following

prices: A share, 100; B share, 150; and C bond, 90.
Required:
Prepare journal entries to record the lump sum acquisition with proper
allocation of the single cost.
PRACTICE MAKES PERFECT!
Determine the allocated cost for each security.
Market Value Fraction Allocated cost
A Corp. (8,000 x 100) 800,000 8/41 600,000
B Corp. (16,000 x 150) 2,400,000 24/41 1,800,000
C Corp. (1,000,000 x 90%) 900,000 9/41 675,000
4,100,000 3,075,000
PRACTICE MAKES PERFECT!
Entry to record the lump sum acquisition of long-term investments.
Investment in A shares 600,000
Investment in B shares 1,800,000
Investment in C shares 675,000
Cash 3,075,000
To record the lump sum acquisition of long-term
investments.
PRACTICE MAKES PERFECT!
Inane Company purchased shares to be measured at cost because the shares are unquoted.
Purchases were in the following order:
a. Purchased 1,000 ordinary shares of Star Company at P300 per share plus transaction costs
of P9,000.
b. Purchased 4,000 ordinary shares of Star Company at P250 per share plus transaction costs
of P30,000.
c. Sold 1,500 ordinary shares of Star Company at P280 per share minus transaction costs of
P15,000.
Required:
1. Prepare journal entries to record transactions a and b.
2. Prepare journal entry to record transactions c under each of the following assumptions:
a. The shares sold are accounted on FIFO basis.
b. The shares sold are accounted on an average basis.
PRACTICE MAKES PERFECT!
a. Purchased 1,000 ordinary shares of Star Company at P300 per share
plus transaction costs of P9,000.
Investment in equity securities
(1,000 shares x 300) + 9,000 309,000
Cash 309,000
To record purchase of ordinary shares of Star Company.
PRACTICE MAKES PERFECT!
b. Purchased 4,000 ordinary shares of Star Company at P250 per share
plus transaction costs of P30,000.
Investment in equity securities
(4,000 shares x 250) + 30,000 1,030,000
Cash 1,030,000
To record purchase of ordinary shares of Star Company.
PRACTICE MAKES PERFECT!
a. The shares sold are accounted on FIFO basis.
Cash (1,500 x 280) – 15,000 405,000
Loss on sale of investment 32,750
Investment in equity securities 437,750
To record sale of ordinary shares of Star Company.

Lot No. 1 – 1,000 shares 309,000

Lot No. 2 – 500 shares
500/4,000 x 1,030,000 128,750
437,750
PRACTICE MAKES PERFECT!
b. The shares sold are accounted on an average basis.
Cash 405,000
Investment in equity securities
(1,500/5,000 x 1,339,000) 401,700
Gain on sale of investment 3,300
To record sale of ordinary shares of Star Company.
PRACTICE MAKES PERFECT!
Distraught Company provided the following chronological transactions:
1. Distraught Company acquired 40,000 ordinary shares of Aye Company at P50 per
share.
2. The Aye Company shares are exchanged in a 5-for-1 split.
3. Received a preference share dividend of 1 share for every 10 ordinary shares held.
Ordinary share is selling ex-dividend at 15 per share and preference share is selling
at 10.
4. Received a dividend in kind of 1 ordinary share of Bee Company, market price, P6,
for every four Aye ordinary shares held.
5. Sold 80,000 ordinary shares of Aye Company at P15 per share.
Required: Prepare journal entries to record the transactions.
PRACTICE MAKES PERFECT!
1. Distraught Company acquired 40,000 ordinary shares of Aye Company
at P50 per share.
Investment in equity securities
(40,000 x 50) 2,000,000
Cash 2,000,000
To record purchase of ordinary shares of Aye Company.
PRACTICE MAKES PERFECT!
2. The Aye Company shares are exchanged in a 5-for-1 split.
Memo – Received 200,000 shares of Aye ordinary shares as a result of a 5
for 1 split.
PRACTICE MAKES PERFECT!
3. Received a preference share dividend of 1 share for every 10 ordinary shares held.
Ordinary share is selling ex-dividend at 15 and preference share is selling at 10.
Investment in Aye preference share 125,000
Investment in Aye ordinary share 125,000
To record receipt of stock dividends on ordinary shares of Aye Company.

Ordinary shares (200,000 x 15) 3,000,000 3,000/3,200 1,875,000

Preference shares (20,000 x10) 200,000 200/3,200 125,000

3,200,000 2,000,000
PRACTICE MAKES PERFECT!
4. Received a dividend in kind of 1 ordinary share of Bee Company, market price, P6
for every four Aye ordinary shares held.
Investment in Bee ordinary share 300,000
(200,000 /4 shares x 6)
Dividend income 300,000
To record receipt of property dividend on ordinary shares of Bee Company.
PRACTICE MAKES PERFECT!
5. Sold 80,000 ordinary shares of Aye Company at P15 per share.
Cash (80,000 x 15) 1,200,000
Investment in Aye ordinary shares
(80,000/200,000 x 1,875,000) 750,000
Gain on sale of investment 450,000
To record sale of investment in Aye ordinary shares.
INVESTMENTS IN ASSOCIATE
PRACTICE MAKES PERFECT!
Civility Company provided the following chronological transactions:
1. Purchased 20,000 ordinary shares of an investee for P2,400,000.
2. The investee reported a net income of P1,500,000 for 2016.
3. Received a 10% stock dividend from the investee.
4. The investee reported a net loss of P300,000 for 2017.
5. The investee paid a cash dividend of P500,000 to ordinary shareholders on
December 31, 2017.
6. Sold 5,500 ordinary shares at P200 per share on December 31, 2017 resulting to loss
of significant influence.
7. The quoted market price of the investee’s share is P180 on December 31, 2017.
Prepare journal entries to record the transactions under equity and cost method.
PRACTICE MAKES PERFECT!
Equity Method
1. Purchased 20,000 ordinary shares of an investee for P2,400,000.
Investment in associate 2,400,000
Cash 2,400,000
To record purchase of investment.
PRACTICE MAKES PERFECT!
Equity Method
2. The investee reported a net income of P1,500,000 for 2016.
Investment in associate 300,000
Investment income 300,000
(20% x 1,500,000)
To record income from investment.
PRACTICE MAKES PERFECT!
Equity Method
3. Received a 10% stock dividend from the investee.
Memo – Received 2,000 shares as 10% stock dividend on 20,000 original
shares. Shares now held 22,000.
PRACTICE MAKES PERFECT!
Equity Method
4. The investee reported a net loss of P300,000 for 2017.
Investment loss 60,000
(20% x 300,000)
Investment in associate 60,000
To record net loss from investment.
PRACTICE MAKES PERFECT!
Equity Method
5. The investee paid a cash dividend of P500,000 to ordinary shareholders on
December 31, 2017.
Cash (20% x 500,000) 100,000
Investment in associate 100,000
To record receipt of cash dividend.
PRACTICE MAKES PERFECT!
Equity Method
6. Sold 5,500 ordinary shares at P200 per share on December 31, 2017 resulting to
loss of significant influence.
Cash (5,500 x 200) 1,100,000
Investment in associate 635,000
(5,500/22,000 x 2,540,000)
Gain on sale of investment 465,000
To record sale of ordinary shares.
PRACTICE MAKES PERFECT!
Equity Method
7. The quoted market price of the investee’s share is P180 on December 31, 2017.
Investment in associate 1,065,000
Gain from remeasurement to fair value 1,065,000
To record gain from remeasurement to fair value of investment.

Fair value (16,500 x 180) 2,970,000

Carrying amount 1,905,000
Gain from remeasurement 1,065,000
PRACTICE MAKES PERFECT!
Cost Method
1. Purchased 20,000 ordinary shares of an investee for P2,400,000.
Investment in equity securities 2,400,000
Cash 2,400,000
To record purchase of investment.
PRACTICE MAKES PERFECT!
Cost Method
2. The investee reported a net income of P1,500,000 for 2016.
No entry.
PRACTICE MAKES PERFECT!
Cost Method
3. Received a 10% stock dividend from the investee.
Memo – Received 2,000 shares as 10% stock dividend on 20,000 original
shares. Shares now held 22,000.
PRACTICE MAKES PERFECT!
Cost Method
4. The investee reported a net loss of P300,000 for 2017.
No entry.
PRACTICE MAKES PERFECT!
Cost Method
5. The investee paid a cash dividend of P500,000 to ordinary shareholders on
December 31, 2017.
Cash (20% x 500,000) 100,000
Dividend income 100,000
To record receipt of cash dividend.
PRACTICE MAKES PERFECT!
Cost Method
6. Sold 5,500 ordinary shares at P200 per share on December 31, 2017 resulting to
loss of significant influence.
Cash (5,500 x 200) 1,100,000
Investment in equity securities 600,000
(5,500/22,000 x 2,400,000)
Gain on sale of investment 500,000
To record sale of ordinary shares.
PRACTICE MAKES PERFECT!
Cost Method
7. The quoted market price of the investee’s share is P180 on December 31, 2017.
No entry.
PRACTICE MAKES PERFECT!
At the beginning of current year, Marissa Company acquired 25% of the
outstanding shares of an investee at a total cost of P7,000,000. At the time,
the carrying amount of the net assets of Marissa Company totaled
P24,000,000.
The investee owned equipment with 5-year remaining life and with a
fair value of P2,000,000 more than carrying amount. The investee owned
land with a fair value of P1,000,000 more carrying amount.
The investee earned net income of P5,000,000 evenly during the
current year. The investee declared and paid a cash dividend of P3,000,000
to shareholders at year-end. The fair value of the investment at year-end is
P7,500,000.
PRACTICE MAKES PERFECT!
Required:
1. Prepare journal entries relating to the investment for the current year.
2. Compute goodwill.
3. Compute investment income for the current year.
4. Compute the carrying amount of the investment at year-end.
PRACTICE MAKES PERFECT!
• To record acquisition of shares of an investee.
Investment in associate 7,000,000
Cash 7,000,000
To record acquisition of 25% outstanding shares of an investee.
PRACTICE MAKES PERFECT!
• To record 25% share of the investment income of the investee.
Investment in associate 1,250,000
Investment income 1,250,000
(25% x 5,000,000)
To record 25% share of the investment income of the investee.
PRACTICE MAKES PERFECT!
To record amortization of excess of cost attributable to undervaluation of
equipment.
Investment income 100,000
Investment in associate 100,000
(500,000 / 5)
To record amortization of excess of cost attributable to undervaluation
of equipment.
 PRACTICE MAKES PERFECT!
2. Compute the goodwill.
Acquisition cost 7,000,000
Carrying amount of net assets
(25% x 24,000,000) 6,000,000
Excess of cost over carrying 1,000,000
amount
Undervaluation of equipment
(25% x 2,000,000) (500,000)
Land (25% x 1,000,000) (250,000)
Goodwill 250,000
PRACTICE MAKES PERFECT!
3. Compute the investment income for the current year.
Share in net income 1,250,000
Amortization of excess attributable
to undervaluation of equipment (100,000)
Investment income 1,150,000
PRACTICE MAKES PERFECT!
4. Compute the carrying amount of the investment at year-end.
Acquisition cost 7,000,000
Share in net income 1,250,000
Share in cash dividend (750,000)
Amortization of excess attributable to equipment (100,000)
Carrying amount 7,400,000
FINANCIAL ASSET AT AMORTIZED COST
DEFINITION OF A BOND
❑ Formal unconditional promise made under seal to pay a specified sum
of money at a determinable future date and to make periodic interest
payments at a stated rate until the principal sum is paid.
❑ Debt security
❑ Evidenced by a certificate and the contractual agreement between the
issuer and investor is contained in another document known as “bond
indenture”.
CLASSIFICATION OF BOND INVESTMENTS
1. Financial Assets held for trading
2. Financial asset at amortized cost
3. Financial asset at fair value through other comprehensive income
4. Financial asset at fair value through profit or loss by irrevocable
designation or by fair value option.
INITIAL MEASUREMENT
PFRS 9, par. 5.1.1
Bond investments are recognized initially at fair value
plus transaction costs that are directly attributable to
the acquisition.
SUBSEQUENT MEASUREMENT
a. At fair value through profit or loss;
b. At amortized cost; and
c. At fair value through other comprehensive income.
PRACTICE MAKES PERFECT!
At the beginning of current year, Icon Company acquired
bonds with face amount of P4,000,000 at a cost of P3,761,000.
The bonds are held for trading. Bonds pay interest of 12%
semiannually on January1 and July 1 and mature on January 1,
2020.
The bonds have an effective yield of 14% and are quoted at
105 at year-end.
Required
Prepare journal entries for the current year.
PRACTICE MAKES PERFECT!
To record acquisition of bonds held for trading.
Jan. 1 Trading securities 3,761,000
Cash 3,761,000
To record acquisition of bonds held for trading.
PRACTICE MAKES PERFECT!
To record semiannual interest collection.
Jul. 1 Cash 240,000
Interest income 240,000
(4,000,000 x 12% x 6/12)
To record semiannual interest collection.
PRACTICE MAKES PERFECT!
To record accrued interest.
Dec. 31 Accrued interest receivable 240,000
(4,000,000 x 12% x 6/12)
Interest income 240,000
To record accrued interest.
PRACTICE MAKES PERFECT!
Jan. 1 Trading securities 3,761,000
Cash 3,761,000
To record acquisition of bonds held for trading.

Jul. 1 Cash 240,000

Interest income 240,000
(4,000,000 x 12% x 6/12)
To record semiannual interest collection.

Dec. 31 Accrued interest receivable 240,000

(4,000,000 x 12% x 6/12)
Interest income 240,000
To record accrued interest.
PRACTICE MAKES PERFECT!
To record increase in market value of bonds held for trading.
Dec. 31 Trading securities 439,000
Unrealized gain – TS 439,000
(4,000,000 X 105%)
(4,200,000 – 3,761,000)
To record increase in market value of bonds held for
trading.
PRACTICE MAKES PERFECT!
Mature Company carried out the following transactions in bond
investments held for trading during the current year:
Aug. 1 Purchased 5,000, P1,000, 12% bonds of Acme Company at 104 plus
accrued interest of P150,000. The bonds pay interest semiannually on
May 1 and November 1.
31 Purchased 2,000, P1,000, 12% bonds of Avco Company at 98 plus
accrued interest. Semiannually payment of interest, June 30 and
December 31.
Dec. 1 Sold 2,000 of the Acme bonds at 102 plus accrued interest. Brokerage
fee, P160,000
31 The following quotations were obtained:
Acme bonds 98
Avco bonds 99
PRACTICE MAKES PERFECT!
Required:
a. Prepare journal entries to record the transactions.
b. Present the investments on December 31.
PRACTICE MAKES PERFECT!
To record purchase of trading securities.
Aug. 1 Trading securities
(5,000 x P1,000 x 104%) 5,200,000
Interest income
(5,000,000 x 12% x 3/12) 150,000
Cash 5,350,000
To record purchase of trading securities.
PRACTICE MAKES PERFECT!
To record purchase of trading securities.
Aug. 31 Trading securities
(2,000 x P1,000 x 98%) 1,960,000
Interest income
(2,000,000 x 12% x 2/12) 40,000
Cash 2,000,000
To record purchase of trading securities.
PRACTICE MAKES PERFECT!
To record semiannual interest collection.
Nov. 1 Cash
(5,000,000 x 12% x 6/12) 300,000
Interest income 300,000
To record semiannual interest collection.
PRACTICE MAKES PERFECT!
To record sale of 2,000 Acme bonds.
Dec. 1 Cash
(2,000,000 x 102%) – 160,000 +
20,000 1,900,000
Loss on sale of trading securities 200,000
Trading securities
(2,000/5,000 x 5,200,000) 2,080,000
Interest income
(2,000,000 x 12% x 1/12) 20,000
To record sale of 2,000 Acme bonds.
PRACTICE MAKES PERFECT!
To record semiannual collection of interest.
Dec. 31 Cash
(2,000,000 x 12% x 6/12) 120,000
Interest income 120,000
To record semiannual collection of interest.
PRACTICE MAKES PERFECT!
To record accrued interest.
Dec. 31 Accrued interest receivable
(3,000,000 x 12% x 2/12) 60,000
Interest income 60,000
To record accrued interest.
PRACTICE MAKES PERFECT!
To record changes in fair value.
Dec. 31 Unrealized loss – TS 160,000
Trading securities 160,000
To record changes in fair value.
PRACTICE MAKES PERFECT!
Carrying amount Market
Acme bonds
(3,000,000 x 98%) 3,120,000 2,940,000
Avco bonds
(2,000,000 x 99%) 1,960,000 1,980,000
5,080,000 4,920,000
EFFECTIVE INTEREST METHOD
PRACTICE MAKES PERFECT!
On January 1, 2016, Charisma Company purchased bonds with
face value of P2,000,000 for P1,900,500 including transaction
costs of P100,500 to be held as financial assets at amortized cost.
The bonds mature on December 31, 2018 and pay interest of 8%
annually every December 31 with a 10% effective yield.
Required:
1. Prepare a table of amortization of the discount.
2. Prepare journal entries for 2016, 2017 and 2018.
PRACTICE MAKES PERFECT!
Interest Interest
Received income Discount Carrying
Date 8% 10% amortization amount
Jan. 1, 16 1,900,500
Dec. 31, 16 160,000 190,050 30,050 1,930,550
Dec. 31, 17 160,000 193,055 33,055 1,963,605
Dec. 31, 18 160,000 196,395 36,395 2,000,000
PRACTICE MAKES PERFECT!
To record purchase of bonds for 2016.
2016
Jan. 1 Investment in bonds 1,900,500
Cash 1,900,500
To record purchase of bonds.
PRACTICE MAKES PERFECT!
To record collection of interest for 2016.
2016
Dec. 31 Cash 160,000
Interest income 160,000
To record collection of interest.
PRACTICE MAKES PERFECT!
To record discount amortization for 2016.
2016
Dec. 31 Investment in bonds 30,050
Interest income 30,050
To record discount amortization.
PRACTICE MAKES PERFECT!
2016
Jan. 1 Investment in bonds 1,900,500
Cash 1,900,500
To record purchase of bonds.

Dec. 31 Cash 160,000

Interest income 160,000
To record collection of interest.

31 Investment in bonds 30,050

Interest income 30,050
To record discount amortization.
PRACTICE MAKES PERFECT!
To record collection of interest for 2017.
2017
Dec. 31 Cash 160,000
Interest income 160,000
To record collection of interest.
PRACTICE MAKES PERFECT!
To record discount amortization for 2017.
2017
Dec 31 Investment in bonds 33,055
Interest income 33,055
To record discount amortization.
PRACTICE MAKES PERFECT!

2017
Dec. 31 Cash 160,000
Interest income 160,000
To record collection of interest.

31 Investment in bonds 33,055

Interest income 33,055
To record discount amortization.
PRACTICE MAKES PERFECT!
To record collection of interest for 2018.
2018
Dec. 31 Cash 160,000
Interest income 160,000
To record collection of interest.
PRACTICE MAKES PERFECT!
To record discount amortization for 2018.
2018
Dec 31 Investment in bonds 36,395
Interest income 36,395
To record discount amortization.
PRACTICE MAKES PERFECT!
To record maturity of bonds for 2018.
2018
Dec 31 Cash 2,000,000
Investment in bonds 2,000,000
To record maturity of bonds.
PRACTICE MAKES PERFECT!
2018
Dec. 31 Cash 160,000
Interest income 160,000
To record collection of interest.

31 Investment in bonds 36,395

Interest income 36,395
To record discount amortization.

31 Cash 2,000,000

Investment in bonds 2,000,000

To record maturity of bonds.

PRACTICE MAKES PERFECT!
On January 1, 2016, Fancy Company acquired P8,000,000, 12%
bonds to be held as financial assets at amortized cost for
P8,400,000 plus transaction costs of P198,400.
Interest is payable annually on December 31. The bonds
mature on January 1, 2021.
The effective interest method of amortization is used. The
bonds have a 10% effective yield.
Required:
Prepare journal entries for 2016.
PRACTICE MAKES PERFECT!
Interest Interest
Received income Premium Carrying
Date 12% 10% amortization amount
Jan. 1, 2016 8,598,4 00
Dec. 31, 2016 960,000 859,840 100,160 8,498,240
PRACTICE MAKES PERFECT!
To record acquisition of bonds held as financial asset at
amortized cost for 2016.
2016
Jan. 1 Investment in bonds 8,598,400
Cash 8,598,400
To record acquisition of bonds held as financial asset at
amortized cost.
PRACTICE MAKES PERFECT!
To record collection of interest for 2016.
2016
Dec. 31 Cash (8,000,000 x 12%) 960,000
Interest income 960,000
To record collection of interest.
PRACTICE MAKES PERFECT!
To record premium amortization of bonds for 2016.
2016
Dec. 31 Interest income 100,160
Investment in bonds 100,160
To record premium amortization of bonds.
PRACTICE MAKES PERFECT!
2016
Jan. 1 Investment in bonds 8,598,400
Cash 8,598,400
To record acquisition of bonds held as financial asset
at amortized cost.

Dec. 31 Cash (8,000,000 x 12%) 960,000

Interest income 960,000
To record collection of interest.
PRACTICE MAKES PERFECT!
2016
Dec. 31 Interest income 100,160
Investment in bonds 100,160
To record premium amortization of bonds.
INVESTMENT PROPERTY
DEFINITION
PAS 40
Property (land or building or part of a building or both) held
by an owner or by the lessee under a finance lease to earn
rentals or for capital appreciation or both.
DEFINITION
An investment property is not held:
a. For use in the production or supply of goods or services or for
administrative purposes;
b. For sale in the ordinary course of business.
INVESTMENT PROPERTY
▪ Held to earn rentals or for capital appreciation or both;
▪ Generates cash flows that are largely independent of
the other assets of the entity;
INVESTMENT PROPERTY
▪ Land held for capital appreciation;
▪ Land held for a currently undetermined use;
▪ Building owned by the reporting entity, or held by the entity under a
finance lease, and leased out under an operating lease;
▪ Building that is vacant but is held to be leased out under an operating
lease;
▪ Property that is being constructed or developed for future use as
investment property.
NOT INVESTMENT PROPERTY
▪ Owner-occupied property or property held for use in the production or
supply of goods or services or for administrative purposes;
▪ Property held for future use as owner-occupied property;
▪ Property held for future development and subsequent use as owner-
occupied property;
▪ Property occupied by employees, whether or not the employees pay rent at
market rate;
▪ Owner-occupied property awaiting disposal;
▪ Property held for sale in the ordinary course of business or in the process of
construction or development for such sale;
▪ Property being constructed or developed on behalf of third parties;
▪ Property that is leased to another entity under a finance lease.
PARTLY INVESTMENT AND PARTLY OWNER-OCCUPIED
▪ Portion could be sold or lease out separately, an entity shall account
the portions separately as investment property and owner-occupied
property;
▪ If the portions could not be sold separately, the property is investment
property if only an insignificant portion is held for manufacturing or
administrative purposes;
PROPERTY LEASED TO AN AFFILIATE
▪ From the perspective of the individual entity that owns it, the property
leased to another subsidiary or its parents is considered an investment
property;
▪ However, from the perspective of the group as a whole and for
purposes of consolidated financial statements, the property is treated
as owner-occupied property.
RECOGNITION OF INVESTMENT PROPERTY
Investment property shall be recognized as an asset when and only when:
a. It is probable that the future economic benefits that are associated
with the investment property will flow to the entity;
b. The cost of the investment property can be measured reliably;
INITIAL MEASUREMENT
▪ Investment property shall be measured initially at its cost. Transaction costs
shall be included in the initial measurement.
▪ The cost of a purchased investment property comprises the purchase price
and any directly attributable expenditure;
▪ Directly attributable expenditure includes:
▪ Professional fees for legal services
▪ Property transfer taxes;
▪ Other transaction costs;
▪ Self-constructed investment property – cost at the date when the
construction or development is complete;
▪ If payment is deferred – the cost is the cash price equivalent; the difference
is recognized as interest expense over the credit period.
INITIAL MEASUREMENT
▪ Cost of investment property acquired in exchange for a nonmonetary
asset or a combination of monetary and nonmonetary asset;
▪ Cost is measured at fair value unless the exchange transaction lacks
commercial substance;
▪ If the fair value of neither the asset received nor the asset given up is
reliably measurable, the cost is equal to the carrying amount of the
asset given up;
COSTS EXCLUDED FROM COST OF INVESTMENT PROPERTY
a. Start up costs, unless they are necessary to bring the property to the
condition necessary for its intended use;
b. Operating losses incurred before the investment property achieves the
planned level of occupancy;
c. Abnormal amounts of wasted material, labor or other resources
incurred in constructing or developing the property.
SUBSEQUENT MEASUREMENT
a. Fair value model
▪ Investment property is carried at fair value model;
▪ Any changes in fair value are included in profit or loss and shown in the
income statement of the current year;
b. Cost Model
▪ Investment property is carried at cost less any accumulated depreciation
and any accumulated impairment losses;
▪ Fair value of the investment property shall be disclosed.
FAIR VALUE OF INVESTMENT PROPERTY
▪ Fair value of an asset is the price that would be received to sell an asset
in an orderly transaction between market participants at the
measurement date;
▪ The price in the principal market used to measure the fair value shall
not be adjusted for transaction costs;
▪ Transaction costs are directly attributable to the disposal of an asset
and would not have been incurred had the decision to sell the asset
not been made
TRANSFERS OF INVESTMENT PROPERTY
▪ Commencement of owner occupation – transfer from investment
property to owner-occupied property;
▪ Commencement of development with a view to sale – transfer from
investment property to inventory;
▪ End of owner-occupation – transfer from owner-occupied property to
investment property;
▪ Commencement of an operating lease to another entity – transfer from
owner-occupied property to investment property.
PRACTICE MAKES PERFECT!
Classic Company and its subsidiaries own the following properties that are
accounted for in accordance with international accounting standards.
Land held by the parent for undetermined use 5,000,000
A vacant building owned by the parent and to be leased out under
an operating lease 3,000,000
Property held by a subsidiary, a real estate firm, in the ordinary
course of business 2,000,0000
Property held by the parent for use in production 4,000,000
Building owned by a subsidiary and for which the subsidiary
provides security and maintenance services to the lessees 1,500,000
Land leased by the parent to a subsidiary under an operating lease 2,500,000
Property under construction for use as investment property 6,000,000
Land held for future factory site 3,500,000
Machinery leased out by parent to an unrelated party under an 1,000,000
operating lease
PRACTICE MAKES PERFECT!
Required:
1. Compute the total investment property that should be reported in the
consolidated statement of financial position of Classic Company and
its subsidiaries.
2. Indicate the classification of the assets that are excluded from
investment property.
PRACTICE MAKES PERFECT!
1. Compute the total investment property that should be reported in the consolidated
statement of financial position of Classic Company and its subsidiaries.
Land held by the parent for undetermined use 5,000,000
A vacant building owned by the parent and to be leased out
under an operating lease 3,000,000
Building owned by a subsidiary and for which the subsidiary
provides security and maintenance services to the lessees 1,500,000
Property under construction for use as investment property 6,000,000
Total 15,500,000
PRACTICE MAKES PERFECT!
2. Indicate the classification of the assets that are excluded from investment property.
Property held by a subsidiary, a real estate
firm, in the ordinary course of business 2,000,0000 Inventory
Property held by the parent for use in 4,000,000 PPE
production
Land leased by the parent to a subsidiary 2,500,000 PPE
under an operating lease
Land held for future factory site 3,500,000 PPE
Machinery leased out by parent to an 1,000,000 PPE
unrelated party under an operating lease
PRACTICE MAKES PERFECT!
Galore Company ventured into construction of a condominium in Makati which is
rated as the largest state-of-the-art structure.
The board of directors decided that instead of selling the condominium, the entity
would hold this property for purposes of earning rentals by letting out space to
business executives in the area.
The construction of the condominium was completed and the property was placed
in service on January 1, 2016.
The cost of the construction was P50,000,000. The useful life of the condominium is
25 years and its residual value is P5,000,000.
An independent valuation expert provided the following fair value at each
subsequent year-end:
PRACTICE MAKES PERFECT!
An independent valuation expert provided the following fair value at each
subsequent year-end:
December 31, 2016 55,000,000
December 31, 2017 53,000,000
December 31, 2018 60,000,000
Required: Prepare journal entries for 2016, 2017 and 2018.
1. The investment property is accounted for under the cost model.
2. The investment property is accounted for under the fair value model.
PRACTICE MAKES PERFECT!
The investment property is accounted for under the cost model.
2016 Investment property 50,000,000
Cash 50,000,000
To record the cost of construction of condominium.

Depreciation expense
(50,000,000 – 5,000,000) / 25 years 1,800,000
Accumulated depreciation 1,800,000
To record depreciation for investment property.
PRACTICE MAKES PERFECT!
The investment property is accounted for under the cost model.
2017
Depreciation expense 1,800,000
Accumulated depreciation 1,800,000
To record depreciation for investment property.
PRACTICE MAKES PERFECT!
The investment property is accounted for under the cost model.

2018
Depreciation expense 1,800,000
Accumulated depreciation 1,800,000
To record depreciation for investment property.
PRACTICE MAKES PERFECT!
The investment property is accounted for under the fair value model.
2016 Investment property 50,000,000
Cash 50,000,000
To record the cost of construction of condominium.

Investment property 5,000,000

Gain from change in fair value 5,000,000
To record changes in fair value of investment property.
PRACTICE MAKES PERFECT!
The investment property is accounted for under the cost model.
2017
Loss from change in fair value 1,800,000
Accumulated depreciation 1,800,000
To record depreciation for investment property.
FUND AND OTHER INVESTMENTS
FUND
▪ Cash and other assets set aside for specific purpose either by reason of
the action of management or by virtue of a contract or legal
requirement.
▪ For current purposes include:
▪ Petty cash fund
▪ Payroll fund
▪ Interest fund
▪ Dividend fund
▪ Tax fund
FUND
▪ For noncurrent purposes include:
▪ Sinking fund
▪ Preference share redemption fund
▪ Plant expansion fund
▪ Contingency fund
▪ Insurance fund
▪ Contemplated as long term or noncurrent investment for noncurrent
purposes
MEASUREMENT OF FUND
▪ Cash plus the cost of securities adjusted for discount or premium
amortization, and other assets in the fund.
SINKING FUND OR REDEMPTION FUND
▪ Fund set aside for the liquidation of long-term debt, more particularly
long-term bonds payable.
▪ Depends whether the fund is under:
▪ Administration of the entity;
▪ Charge of a trustee.
SINKING FUND OR REDEMPTION FUND
Fund under the administration of the entity
▪ The entity records the fund transactions currently;
▪ Makes a distinction whether the fund is in the form of cash, securities, and
other assets.
SINKING FUND OR REDEMPTION FUND
An entity records sinking fund transactions currently and maintains a balance in the
retained earnings appropriated for sinking fund account equal to the sinking fund.
There is no trustee.
2016
Dec. 31 Transferred P2,000,000 cash to the sinking fund.
Sinking fund cash 2,000,000
Cash 2,000,000
To record sinking fund cash.
SINKING FUND OR REDEMPTION FUND
2016
Dec. 31 Appropriated retained earnings for an amount equal to the
fund.
Retained earnings 2,000,000
Retained earnings – SF 2,000,000
To record appropriation of retained earnings for sinking
fund.
SINKING FUND OR REDEMPTION FUND
2017
Apr. 1 Invested the sinking fund cash in P2,000,000 face value 12% bonds. The
purchase price is equal to the face value. Interest is payable
semiannually on April 1 and October 1.
Sinking fund securities 2,000,000
Sinking fund cash 2,000,000
To record investment of sinking fund cash to bonds.
SINKING FUND OR REDEMPTION FUND
2017
Oct. 1 Received interest on the sinking fund securities, P120,000.
Sinking fund cash 120,000
Sinking fund income 120,000
To record interest on the sinking fund securities.
SINKING FUND OR REDEMPTION FUND
2017
Dec. 31 Transferred another P2,000,000 cash to the fund.
Sinking fund cash 2,000,000
Cash 2,000,000
To record transfer of cash to the sinking fund.
SINKING FUND OR REDEMPTION FUND
2017
Dec. 31 Interest accrued on the sinking fund securities for three months,
P60,000 (P2,000,000 x 12% x 3/12)
Accrued interest receivable 60,000
Sinking fund income 60,000
To record accrual of interest on the sinking fund securities.
SINKING FUND OR REDEMPTION FUND
2017
Dec. 31 Appropriated retained earnings for an amount equal to fund:
Retained earnings 60,000
Sinking fund income 60,000
To record accrual of interest on the sinking fund securities.
PRACTICE MAKES PERFECT!
Acclaim Company had the following sinking fund transactions. The entity records
the transactions currently and maintains a balance in the retained earnings
appropriated for sinking fund account equal to the sinking fund. There is no trustee.

2016
Jan. 1 Transferred P400,000 cash to the sinking fund.
April 1 Invested the sinking fund cash in P400,000 face value 12% bonds.
The purchase price is P384,000. Interest is payable semiannually
April 1 and October 1. The discount is to be amortized over 4 years.
Oct. 1 Received interest on the sinking fund securities.
Dec. 31 Transferred another P400,000 cash to the fund.
 PRACTICE MAKES PERFECT!
2017
Apr. 1 Received semiannual interest on the sinking fund securities.
1 Paid the fund custodian fee, P12,000.
Oct. 1 Received semiannual interest on the sinking fund securities.
1 Sold the sinking fund securities at 106.
Dec. 31 Transferred another P400,000 cash to the fund.
2018
July 1 Retired bonds payable of P1,000,000 plus accrued interest of P100,000.
1 Returned the residual sinking fund cash to the general cash.

Required: Prepare journal entries for 2016, 2017 and 2018 in connection with the sinking
fund.
PRACTICE MAKES PERFECT!
2016
Jan. 1 Transferred P400,000 cash to the sinking fund.

Sinking fund cash 400,000

Cash 400,000
To record cash to the sinking fund.
PRACTICE MAKES PERFECT!
2016
April 1 Invested the sinking fund cash in P400,000 face value 12% bonds.
The purchase price is P384,000. Interest is payable semiannually
April 1 and October 1. The discount is to be amortized over 4 years.

Sinking fund securities 384,000

Sinking fund cash 384,000
To record investment in bonds from sinking fund cash.
PRACTICE MAKES PERFECT!
2016
Oct. 1 Received interest on the sinking fund securities.
Sinking fund cash 24,000
Sinking fund income
(400,000 x 12% x 6/12) 24,000
To record collection of interest on the sinking fund securities.
PRACTICE MAKES PERFECT!
2016
Dec. 31 Transferred another P400,000 cash to the fund.
Sinking fund cash 400,000
Cash 400,000
To record transfer of cash to the sinking fund.
PRACTICE MAKES PERFECT!
2016
Dec. 31 Accrued interest on sinking fund securities.
Accrued interest receivable 12,000
Sinking fund income
(400,000 x 12% x 3/12) 12,000
To record accrued interest on sinking fund securities.
PRACTICE MAKES PERFECT!
2016
Dec. 31 To record amortization of discount on sinking fund securities.
Sinking fund securities 3,000
Sinking fund income 3,000
To record amortization of discount on sinking fund securities for
9 months (16,000 / 4 years = 4,000 x 9/12).
PRACTICE MAKES PERFECT!
2016
Dec. 31 To record appropriation of retained earnings.
Retained earnings 439,000
Retained earnings appropriated for sinking fund 439,000
To record appropriation of retained earnings.
Sinking fund cash 440,000
Sinking fund securities 387,000
Accrued interest receivable 12,000
Total 839,000
Less: Appropriated retained earnings balance 400,000
Additional appropriation 439,000
PRACTICE MAKES PERFECT!
2017
Jan. 1 To record reversal of accrued interest.

Sinking fund income 12,000

Accrued interest receivable 12,000
To record reversal of accrued interest.
PRACTICE MAKES PERFECT!
2017
Apr. 1 Received semiannual interest on the sinking fund securities.
Sinking fund cash 24,000
Sinking fund income 24,000
To record semiannual interest on the sinking fund securities.
PRACTICE MAKES PERFECT!
2017
Apr. 1 Paid the fund custodian fee, P12,000.
Sinking fund expenses 12,000
Sinking fund cash 12,000
To record fund custodian fee.
PRACTICE MAKES PERFECT!
2017
Oct. 1 Received semiannual interest on the sinking fund securities.

Sinking fund cash 24,000

Sinking fund income 24,000
To record semiannual interest on the sinking fund securities.
PRACTICE MAKES PERFECT!
2017
Oct. 1 To record amortization of discount.

Sinking fund securities 3,000

(4,000 x 9/12)
Sinking fund income 3,000
To record amortization of discount.
PRACTICE MAKES PERFECT!
2017
Oct. 1 Sold the sinking fund securities at 106.

Sinking fund cash 424,000

(400,000 x 106%)
Sinking fund securities 390,000
Gain on sale of securities 34,000
To record sale of sinking fund securities.
PRACTICE MAKES PERFECT!
2017
Dec. 31 Transferred another P400,000 cash to the fund.
Sinking fund cash 400,000
Cash 400,000
To record transfer of cash to the sinking fund.
PRACTICE MAKES PERFECT!
2017
Dec. 31 To record appropriation for sinking fund.
Retained earnings 461,000
Retained earnings appropriated for sinking fund 461,000
To record appropriation for sinking fund.

Sinking fund cash 1,300,000

Less: Appropriated retained earnings balance 839,000
Additional appropriation 461,000
PRACTICE MAKES PERFECT!
2018
July 1 Retired bonds payable of P1,000,000 plus accrued interest of P100,000.

Bonds payable 1,000,000

Interest expense 100,000
Sinking fund cash 1,100,000
To record retirement of bonds payable.
PRACTICE MAKES PERFECT!
2018

July 1 Returned the residual sinking fund cash to the general cash.

Cash 200,000
Sinking fund cash 200,000
To record return of sinking fund to the general cash.
PRACTICE MAKES PERFECT!
2018
July 1 To record return of retained earnings appropriated to retained earnings.
Retained earnings appropriated for sinking fund 1,300,000
Retained earnings 1,300,000
To record return of retained earnings appropriated to retained
earnings.
PRACTICE MAKES PERFECT!
On January 1, 2016, Fanatic Company adopted a plan to accumulated fund for
environmental improvement beginning July 1, 2016 at an estimated cost of P2,000,000.
The entity plans to make four equal annual deposits in a fund that will earn interest
at 10% compounded annually. The first deposit is made on July 1, 2016 and every July 1
thereafter.
Future amount of ordinary annuity of 1 at 10% for 4 4.6410
periods
Future amount of annuity in advance of 1 at 10% for 4 5.1051
periods

Required:
a. Compute the annual deposit to the fund.
b. Prepare a schedule of fund accumulation.
PRACTICE MAKES PERFECT!
a. Compute the annual deposit to the fund.
Annual contribution (2,000,000 / 5.1051) 391,765
PRACTICE MAKES PERFECT!
b. Prepare a schedule of fund accumulation.
Date Interest Annual Fund balance
income contribution
7/01/2016 391,765 391,765
7/01/2017 39,176 391,765 822,706
7/01/2018 82,271 391,765 1,296,742
7/01/2019 129,674 391,765 1,818,181
7/01/2020 181,819 - 2,000,000
PRACTICE MAKES PERFECT!
Garulous Company insured the life of the president for P2,000,000, the entity being the beneficiary
of an ordinary life policy. The annual premium is P60,000. The policy was dated January 1, 2016 and
carried the following cash surrender value:
End of policy year Cash surrender value
2016 -
2017 -
2018 60,000
2019 84,000
2020 116,000

The entity followed the calendar year as the accounting period. The president died on June 30, 2020
and the policy was collected on July 31, 2020.
Required:
Prepare journal entries from January 1, 2016 to July 31, 2020.
PRACTICE MAKES PERFECT!
2016
Jan 1
Life insurance 60,000
Cash 60,000
To record the annual premium of life insurance.
PRACTICE MAKES PERFECT!
2017
Jan 1
Life insurance 60,000
Cash 60,000
To record the annual premium of life insurance.
PRACTICE MAKES PERFECT!
2018
Jan 1
Life insurance 60,000
Cash 60,000
To record the annual premium of life insurance.
PRACTICE MAKES PERFECT!
2018
Dec 31
Cash surrender value 60,000
Life insurance (1/3) 20,000
Retained earnings 40,000
To record the cash surrender value at the end of the third
policy year.
PRACTICE MAKES PERFECT!
2019
Jan 1
Life insurance 60,000
Cash 60,000
To record the annual premium of life insurance.
PRACTICE MAKES PERFECT!
2019
Dec 31
Cash surrender value 24,000
Life insurance 24,000
To record the cash surrender value at the end of the fourth
year.

Balance, Dec. 31, 2019 84,000

Balance, Dec. 31, 2018 60,000
Inc. in cash surrender value 24,000
PRACTICE MAKES PERFECT!
2020
Jan 1
Life insurance 60,000
Cash 60,000
To record the annual premium of life insurance.
PRACTICE MAKES PERFECT!
2020
Jun 30
Cash surrender value 16,000
Life insurance 16,000
To record the cash surrender value at the end of the fifth
year.

Balance, Dec. 31, 2020 116,000

Balance, Dec. 31, 2019 84,000
Inc. in cash surrender value 32,000
Jan. 1 to Jun. 30, 2020 1/2
Increase 16,000
PRACTICE MAKES PERFECT!
2020
Jul 31
Cash 2,000,000
Cash surrender value 100,000
Life insurance (60,000 x 6/12) 30,000
Gain on sale of life insurance settlement 1,870,000
To record the life insurance settlement