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MODULE 7 PACKET
AE 15 and ELEC 1 – INTERMEDIATE ACCOUNTING
MODULE 7 INVESTMENT IN EQUITY SECURITIES:

Welcome to Module 7
In this module, we will discuss the accounting for financial assets, particularly investment in equity
securities. At the end of this module, you will be answering multiple choice questions and straight
problems.

CONSULTATION HOURS:
Virtual time: During your class schedule (either Monday or Tuesday)
Phone or Messenger: Every Thursday from 8am to 11am and 1pm to 4pm

MODULE 7 LEARNING OBJECTIVES:

By the end of this module, the students will be able to:
1. Solve problems related to trading, available for sale, held to maturity securities and its subsequent
reclassifications and other investments
2. Properly record the acquisition and sale of equity securities.
3. Discuss the concept on the different types of dividends, its valuation and proper recording in the books
of the Corporation
4. Show the effect of share split, redemption of share & stock right in the financial statement

COURSE CONTENT FOR MODULE 7:

ACTIVITY DESCRIPTION TIME TO COMPLETE

Lecture discussion Financial Asset at Fair Value 1.5 hours

Activity Problem Solving 1.5 hours

Assigned Reading Equity Investments 1 hour

ACTIVITY 7 Problem Solving 45 minutes

Summative quiz for module 7 (to be

Quiz 1.75 hours
announced)

Answers to ACTIVITY 7 will be due on October 7, 2020 thru Google Classroom or Facebook Groups.
Correct answers will be posted thereafter for your reference.

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LECTURE DISCUSSIONS

7.1 FINANCIAL ASSETS AT FAIR VALUE

Investments are assets held by an entity for the accretion of wealth through distribution such as interest,
royalties, dividends and rentals, for capital appreciation or for other benefits to the investing entity such as
those obtained through trading relationships.

Purposes of investments:
a. For accretion of wealth or regular income through interest, dividends, royalties and rentals
b. For capital appreciation as in the case of investments in land & real estate held for appreciation
and direct investments in gold, diamonds and other precious commodities
c. For ownership control as in the case of investments in subsidiaries and associates
d. For meeting business requirements as in the case of sinking fund , preference share fund, plant
expansion fund , and other non-current fund.
e. For protection is in the case of interest in life insurance contract in the form of cash surrender value

Examples of investments
1. trading securities or financial asset at fair value through profit or loss
2. financial asset at fair value through other comprehensive income
3. investment in non-trading equity securities
4. investment in bonds are financial asset at amortized cost
5. investment in associate
6. investment in subsidiary
7. investment property
8. investment in fund
9. investment in joint venture

Investments are classified either as current or non-current assets. Current investments are those by
nature readily realizable and are intended to be held for not more than one year. Non-current or long term
investments are intended to be held for more than one year or are not expected to be realized within twelve
months after the end of the reporting period.

Financial asset is any asset that is cash, a contractual right to receive cash or another financial asset from
another entity , a contractual right to exchange financial instrument with another entity under conditions
that are potentially favorable, and an equity instrument of another equity.

Classification of financial assets:

1. Financial assets at fair value through profit or loss (FVPL) - include equity securities and debt
securities
2. Financial assets at fair value through other comprehensive income (FVOCI) - include both equity
securities and debt securities
3. Financial assets at amortized cost - include only debt securities

Financial assets may be held to realize fair value changes or to collect contractual cash flows.

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An equity security represents ownership shares and right , warrants or options to acquire or dispose of
ownership shares at a fixed or determinable price. Ownership shares include ordinary shares,
preference share and rights or options to acquire ownership shares.

Debt security represents a creditor relationship with an entity. it has a maturity date and a maturity
value. examples are corporate bonds, BSP treasury bills, government securities , commercial papers ,
preference shares with mandatory redemption date or are redeemable at the option of the holder.

Taken from Intermediate Accounting 1A, Millan 2019

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1. Financial Assets measured at FVPL

Trading Securities - Individual Trading Securities – Group / Portfolio

On January 1, 2019, an entity purchased Cost Market Gain(Loss)
marketable securities for P4,000,000. A
commission of P40,000 was paid to the ABC share 200,000 150,000 (50,000)
broker. DEF share 800,000 900,000 100,000
The acquisition may be debited to Financial asset - GHI share 400,000 325,000 (75,000)
FVPL. Commission is expensed outright for
FVPL, and is not capitalized. 1,400,000 1,375,000 (25,000)

Trading securities 4,000,000 Trading securities 1,400,000

Commission expense 40,000 Cash 1,400,000
Cash 4,040,000
On December 31, 2019, the trading securities To record the decrease in value in December 31,
have a fair value of P5,000,000. 2019
Trading securities 1,000,000 Unrealized loss – TS 25,000
Unrealized gain - TS 1,000,000 Trading securities 25,000
classified as other income offsetting is allowed among different securities.
reported as other expense

The statement of financial position will report The statement of financial position will report
trading securities at fair value of P5,000,000. trading securities at fair value of P1,375,000.
On December 31, 2020, the trading securities On January 15, 2020 the ABC share is sold for
have a fair value of P3,500,000 P80,000
Unrealized loss - TS 1,500,000 Cash 80,000
Trading securities 1,500,000 Loss on sale of trading sec 70,000
Trading securities 150,000
On December 31, 2021 the trading securities are Dec. 31, 2020 values:
sold for P4,150,000.
Carrying Amount Market Gain(Loss)
The difference between a cash received and the DEF shares 900,000 950,000 50,000
carrying amount of the trading investment is GHI shares 325,000 400,000 75,000
recognized as gain or loss on disposal to be reported 1,225,000 1,350,000 125,000
in the income statement.
Cash 4,150,000 Trading securities 125,000
Trading securities 3,500,000 Unrealized gain - TS 125,000
Gain on sale of trading sec 650,000
Trading securities will be reported at market value of
P1,350,000

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2. Financial Assets measured at FVOCI

On January 1, 20x1 an entity purchased marketable equity securities for P85,000 and paid commission
and taxes of P5,000. The securities do not qualify as financial asset for trading. It made an
irrevocable election to present unrealized gain and loss in other comprehensive income. The
commission and taxes are capitalized as cost of the investment.
Financial asset - FVOCI 90,000 Financial asset - FVOCI is normally a non-current asset.
Cash 90,000
On December 31, 20x1, the market value of the Unrealized loss - OCI 15,000
shares was P 75,000. Financial asset - FVOCI 15,000
On December 31, 20x2, the financial asset has a Financial asset - FVOCI 25,000
value of P100,000. Unrealized gain - OCI 25,000
The financial asset on December 31 20x2 is now carried at its market value of P100,000.

The investment is presented in the comparative financial statements as follows

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The P25,000 will be

reported in the statement
of comprehensive income
of 20x2.

In 20x2, the total/net

unrealized gain is P10,000
(loss of 15,000 and gain of
25,000). This amount will
appear in the statement of
changes in equity.

Taken from Intermediate Accounting 1A, Millan 2019

SALE OF EQUITY INVESTMENT

Gain or loss on disposal of equity investment measured at fair value through other comprehensive income
is recognized in retained earnings.

On July 20x3, the securities are sold for P130,000 Cash 130,000
Financial asset – FVOCI 100,000
Retained Earnings 30,000
The cumulative gain or loss previously recognized Unrealized gain – OCI 10,000
in other comprehensive income is also transferred Retained Earnings 10,000
to retained earnings.

The amount recognized in other comprehensive income is not reclassified to profit or loss under any
circumstances.

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EXERCISES – Answers to be discussed online or FB video

1. In 2019, Barter Company purchased trading securities:

Cost Market value, December 31, 2019

Security B 700,000 800,000
Security C 1,200,000 1,600,000

On July 31, 2020, the entity sold all of the shares of Security B for P1,300,000. On December 31,
2020, the shares of Security A had a market value of P600,000. No other activity occurred during
2020 in relation to the trading security portfolio .

What total loss on the trading securities should be reported in the income statement for 2020?
a. P100,000 b. P200,000 c. P300,000 d. P500,000

2. On January 1, 2019, Jee Company purchased nontrading investments at P4,000,000 which are
irrevocably designated as FVOCI. Transaction costs is at P400,000. The market value on December
31, 2019 was P4,800,000. On June 30, 2020, the entity sold the securities for P5,000,000. What
amount of gain on sale should be recognized in the income statement for 2020?
a. 0 b. P200,000 c. P400,000 d. P600,000

3. During 2019, Hug Company Purchased marketable equity securities for P1,850,000 To be held as
trading investments. The company appropriately reported an unrealized loss of P200,000 in income
statement for 2019. In December 2020, market value of the securities was at P2,000,000. What
amount of unrealized gain on these securities should be included in the 2020 income statement?
a. 0 b. P150,000 c. P350,000 d. P550,000

Prepare the Journal Entries for Opal Corporation:

1. During 2019, it purchased a financial asset – FVOCI at P3,000,000.
2. At the end of the year, the market value is P2,800,000.
3. On January 10, 2020, the entity sold the shares for P2,500,000.

Prepare the Journal Entries for Teehee Corporation:

1. Acquired marketable equity securities held as trading for P830,000 on August 1, 2019.
2. On December 31 2019 the market value was P770,000.
3. Shares with a cost of P160,000 were sold for P180,000 on July 1, 2020.
4. The remaining shares had a market value of P680,000 on December 31, 2020.

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7.2 EQUITY INVESTMENTS

All about acquisitions ….

If the equity securities are acquired in an exchange, the acquisition cost is determined by reference to the
following in the order of priority:
a. fair value of asset given
b. fair value of asset received
c. carrying amount of asset given

If two or more equity securities are required of a single cost or lump sum the single cost or lump sum, the
single cost is allocated to the securities acquired in the basis of their fair value.

If only one security has a known market value, an amount is allocated to the security with a known market
value equal to its market value. The remainder of the single cost is then allocated to the other security
with no known market value.

Investments in equity securities are accounted for as follows:

a. Trading securities or financial assets at fair value through profit or loss
b. Financial assets at fair value through other comprehensive income
c. Investment in associate
d. Investment in subsidiary
e. Investment in unquoted equity instruments

Investments in unquoted equity instruments are measured at cost if the fair value cannot be measured
reliably.

If the equity securities are measured at fair value through profit or loss or at fair value through other
comprehensive income or at cost, dividends earned are considered as income. Cash dividends do not
affect the investment account.

When the cash dividends are earned but not Dividends receivable XX
received: Dividend income XX
When the cash dividends are subsequently Cash XX
received Dividends receivable XX
Receipt of property dividends Noncash Assets XX
Dividend income XX
Liquidating dividends represent return of invested Cash/other account XX
capital and are NOT INCOME Investment in shares XX

Example:
A shareholder owns 1,000 shares costing Cash 120,000
P100,000. The shareholder receives notice of dividend Investment in shares 100,000
declaration of P4 per share or P4,000. Prior to record Dividend income 4,000
date, the shareholder sells the investment for Gain on sale of investment 16,000
P120,000 which includes the dividend of P4,000.

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Dividend-On and Ex-Dividend

Dividend-On Buyer gets the dividends, but the

Date of declaration Purchase price includes dividends investment is recorded at purchase price
less purchased dividends.
Date of record
Ex - dividend The seller will receive the dividends.
Date of distribution Purchase price excludes dividends Initial measurement = purchase price

Kinds of Share Dividends

Share dividends may be the same as those held or different from those held. Share dividends whether of
the same class or different are not income since there is no distribution of the assets of the entity.

The assets of the entity are the same before and after the issuance of the share dividends. The
shareholder receives additional shares but still has the same proportionate equity interest in the entity –
more share but at a reduced market value.

A shareholder owns 10,000 shares costing P120 each. The shareholder receives 20% share dividend or
2,000 shares. The effect is:

Shares Cost per share Total cost

Original shares 10,000 120 1,200,000
Share dividends 2,000 -
12,000 New cost is computed 1.2M/12,000 = 100 1,200,000

The total cost of P1,200,000 now applies to 12,000 shares which reduced cost per share from P120 to
P100.

A shareholder may receive a share dividend which is different from the original shares. The original cost
of the investment is apportioned between the original shares and the share dividends on the basis of
market value of each at the date of receipt.

For example , a shareholder owns 10,000 ordinary shares costing P800,000. The shareholder then
received a 10% share dividend in the form of preference shares. The market value of ordinary share is
P150, and the market value of preference share is P100.

Shares Market Value Fraction Allocated cost

Original shares 10,000 (P150) 1,500,000 15/16 x 800,000 750,000
Preference shares 1,000 (P100) 100,000 1/16 x 800,000 50,000
1,600,000 800,000

Journal Entry: Investment in preference shares 50,000

Investment in ordinary shares 50,000

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Shares received in lieu of cash dividends

When cash dividends are declared and received, it is without doubt that they are income. A problem will
arise when shares are received in lieu of cash dividends declared. It is generally accepted that shares
received in lieu of cash dividends or income at fair value of the shares received . The reason is that such
shares are in effect property dividends . in the absence of fair value of the shares received, the income
is equal to the cash dividends that would have been received.

For example, a shareholder owns 10,000 shares costing P1,000,000. Subsequently, the shareholder
receives 1,000 shares in lieu of cash dividend of P10 per share. The market value per share is P140.

Receipt of Investment in shares 140,000 If no market Investment in shares 100,000

1,000 shares Dividend Income 140,000 value Dividend Income 100,000

Cash received in lieu of share dividends

When share dividends are declared and received, unquestionably, they are not income.

For example, a shareholder owns 10,000 shares costing P1,100,000. The shareholder receives
P120,000 cash in lieu of 1,000 shares declared as 10% share dividend.
1,000 share dividends x P100 cost per share
As if The P1,100,000 now applies to 11,000 shares resulting Cash 120,000
Approach: to a cost of P100 per share. The 1,000 share dividends Investment in shares 100,000
are assumed to be sold for the cash received. Gain on investment 20,000

Under the BIR Approach, the cash received of P120,000 is debited to cash and credited to dividend
income.

Share Split

A Corporation may restructure its capital through share split by effecting a change in the number of shares
without capitalizing retained earnings or changing the amount of its legal capital.

Split up is a transaction whereby the outstanding shares are called in and replaced by a larger number,
accompanied by a reduction in the par or stated value of each share.

For example, if a shareholder owns 1,000 shares and the share split up 5-for-1, the shareholder
receives 5,000 new shares in exchange for the 1,000 original shares.

Split down is a transaction whereby the outstanding shares are called in and replaced by smaller
number, accompanied by an increase in the par or stated value of each share.

Like when a shareholder owns 5,000 shares and the share is split down 5-for-1, the shareholder receives
1,000 new shares in exchange for the 5,000 old shares.

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Share split does not affect the total cost of investment. But there is a decrease or an increase in the cost
per share because the total cost now will apply to a larger or smaller number of shares.

Only a memorandum entry is made for the receipt of new shares due to share split.

Special Assessments

Special assessments are additional capital contribution of the shareholders. They are recorded as
additional cost of investment.

A shareholder owns 10,000 shares costing P250,000. A resolution was passed by the directors that the
shareholders shall contribute P5 for each share held to the corporation. The shareholder will record the
transaction as by debiting Investment in Shares and crediting Cash for P50,000.

Redemption of Shares

Preference shares may be called in for redemption and cancellation by the entity issuing them. On part
of the shareholder, the redemption of share is recorded in the same manner as sale of
share. Redemption price = Sales price

If a shareholder acquires 1,000 preference Investment in preference shares 10,000

shares for P10 per share Cash 10,000
The shares are called in by the issuing Cash (1,000 shares x 11) 11,000
entity at P11 per share. Investment in preference shares 10,000
Gain on investment 1,000

Share Rights

A share right or preemptive right is a legal right granted to shareholders to subscribe for new shares issued
by a corporation at a specified price during a definite period. A shareholder receives one right for every
share owned. If a shareholder owns 5,000 shares, he will receive 5,000 share rights.

A share right is valuable to a shareholder because the price at which the new shares are sold generally
below the prevailing market price. This gives the shareholders the chance to preserve their equity interest
in the corporation and Is evidenced by instruments or certificates called share warrants.

A shareholder acquired 1,000 shares costing P180,000 Investment in shares 180,000

Cash 180,000
1,000 share rights were received to subscribe for new Share rights 10,000
shares at P100 per share for every 5 rights held. Investment in shares 10,000
Market value: Share = P150; Right = P10 (1,000 shares @ P10)

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Acquisition of new investment through exercise of Investment in shares 30,000

share right. 1 share for every 5 rights will be acquired, Cash 20,000
hence 1,000 rights / 5 = 200 shares @ P100 Share rights 10,000

Cost of NEW INVESTMENT = # of shares * price per share PLUS # of rights * market value of right

Share rights may either be sold or left to expire.

Sold share rights valued at P30,000 for P50,000 Cash 50,000

Share rights 30,000
Gain on sale of share rights 20,000
Rights are not exercised and expired Loss on share rights 30,000
Share rights 30,000

Rights-on

After the date of declaration but before the date of record, shares are said to be selling rights-on, that
is they are sold together with the stock rights. Neither one of them can be sold separately.

Ex-rights

After the date of record but before the date of expiration, shares are said to be selling ex-rights. The
shares are sold separately from the stock rights and the latter should be accounted for separately.

The formula for the theoretical or parity value are as follows:

Shares are Market value of share rights-on less subscription price

Value of 1 right =
selling rights-on: Number of rights to purchase one share plus 1

Shares are Market value of share ex-rights less subscription price

Value of 1 right =
selling ex-right: Number of rights to purchase one share

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ACTIVITY 7 - Write your answers in a sheet of paper, take its picture and upload in Module 7 Assignment
in Google Classroom.

Problem 1

Prepare the journal entries for Rare Company with the following transactions:
1. Purchased 80,000 shares, par P10 at P40 per share as long-term investment
2. Received a share dividend of one share for every four owned
3. Received a cash dividend of P5 per share
4. Received share rights to purchase one share of P30 for every five rights held. On this date, the
share right has a market value of P5 (share rights can also come from share dividends)
5. Sold 40,000 rights at P7 each
6. Exercised the remaining rights

Problem 2

Prepare the journal entries when Dream opted to receive 1,000 shares instead of cash dividends of P8 per
share from Scape Co. Dream Company who holds 10,000 shares as investment in equity securities.
The market value of the shares received is P10 per share.

Problem 3

Back Inc. holds 10,000 shares of Front Co. costing P115,000. On May 1, 2020, Back Inc. receives P14,000
cash in lieu of 1,500 share dividends. What is the entry to record the cash received and the shares
assumed to have been received and sold?

MCQs

On January 1, 2020, Cage Company purchased 100,000 ordinary shares at P80 per share to be classified
as nontrading through other comprehensive income.

On September 30, 2020, the entity received 100,000 share rights to purchase 20,000 shares at P90 per
share. Each share had a market value of P114 and the share right had a market value of P6. The share
rights had an expiration date of February 1, 2021.

1. What amount should be reported on September 30, 2020 as investment in share rights?
a. P100,000 b. P400,000 c. P500,000 d. P600,000

2. What is the total cost of the new investment if all of the share rights are exercised?
a. P1,600,000 b. P1,800,000 c. P2,200,000 d. P2,400,000

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