ACCOUNTING FOR INVESTMENTS

FELIX LIWAG DOMINGO, CPA, CMA

Investments, definition:
 Assets held by an entity for the accretion of wealth through distribution of such interest,
royalties, dividends and rentals, for capital appreciation or for other benefits to the investing
entity such as those obtained through trading relationship.

 Statement classification:
● Current investments are by their very nature readily realizable and are intended to hold
for not more than one year.
 Examples, trading securities

● Non-current or long-term investments are other than current investments

 Intended to be held for more than one year, or
 Not expected to be realized within 12 months after the end of reporting period.
Financial instruments
 Any contract that gives rise to a financial asset of one entity and financial liability or equity
instruments of another entity.

● Financial asset, is any assets that is:

a) Cash
b) Contractual right to receive cash or another financial asset
c) Contractual right to exchange financial instruments under conditions that are
potentially favourable
d) Equity instruments

● Financial liability, is any liability that is a contractual obligation:

a) To deliver cash or other financial asset to another entity.
b) To exchange financial instruments under conditions that are potentially
unfavourable

● Equity securities, is any contract that evidence a residual interest in the assets of an
entity after deducting all its liabilities
Classification of Financial Assets
1. Financial asset at Fair Value
2. Financial asset at Amortized Cost

 Financial asset at Fair Value includes both Equity and Debt Securities while financial
assets at Amortized cost include only Debt Securities.

 Under PAS 39, the usual categories, such as loans and receivables, available for sale and
held to maturity are now eliminated.

 Equity security, any instruments representing ownership shares and right, warrants or option
to acquire or dispose of ownership shares at a fixed or determinable price.
● Includes, ordinary shares, preference shares and other share capital.
● Not include redeemable preference share, treasury shares and convertible debt.

 Debt Security, represents a creditor relationship with an entity,

● This security has a maturity date and a maturity value.
Financial asset at Fair Value
The following financial assets shall be measured at “Fair Value through Profit and Loss”:
1. Financial assets held for trading or Trading Securities, these financial assets are
measured at fair value through profit and loss by requirement, meaning, required by the
standard.
● A financial asset is held for trading, if:
a) Acquired principally for the purpose of selling or repurchasing it in the near term.
b) Initial recognition, it is part of a portfolio of identifiable 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 financial guarantee contract or a
designated and an effective hedging instrument.

2. Financial assets that are irrevocably designated on initial recognition as at fair value through
profit and loss.

3. All other investments in quoted equity instruments.

Initial measurement of financial assets
 An entity shall measure a financial asset at fair value (transaction price) plus, in the case of
financial assets not at fair value though profit and loss, transaction costs that are directly
attributable to the acquisition of the financial asset.

● Transaction costs include:

a) fees and commissions paid to agents, advisors, brokers, and dealers,
b) levies by regulatory agencies and securities exchanges, and
c) transfer taxes and duties

● Transaction costs not include:

a) Debt premiums and discounts,
b) Financing costs, and
c) Internal administrative or holding costs

● If the financial assets are held for trading or if the financial assets are measured at fair
value through profit and loss, transaction costs are expensed outright.
Subsequent measurement, after initial recognition:
 An entity shall measure a financial asset either at fair value or amortized cost, depending on
the entity’s business model for managing financial assets:
● To hold investments in order to:
a) realize fair value changes
b) collect contractual cash flows

Measurement at Amortized Cost

 The following condition should be met:
● The business model is to hold the financial assets in order to collect contractual cash
flows on specific date,
● The contractual cash flows are solely payments of principal and interest on the principal
amount outstanding.

Measurement at Fair Value

 Financial assets that do not meet the conditions for amortized costs are measurement hall be
measured at fair value.
● However, in initial recognition, an entity may irrevocably designate a financial asset as
measured at fair value through profit or loss even if the financial asset satisfies the
measurements at amortized cost.
Unrealized Gains and Losses – Trading Securities
 Gains and losses on financial assets measured at fair value shall be presented in profit and
loss, unless, Financial asset is:
● Part of a hedging relationship,
● An investment in equity instruments and the entity has irrevocably elected to present the
unrealized gains and losses on other comprehensive income.
 Unrealized Gain if Fair Value is greater than Carrying Amount
 Unrealized Loss if Fair Value is less than Carrying Amount

Gains and losses – Financial Assets at Amortized Cost

 Unrealized gains and losses on financial assets at amortized cost are not recognized simply
because such investments are not reported at fair value.

 Gains and losses on financial assets measured at amortized cost and are not part of hedging
relationship shall be recognized in profit or loss when the financial assets are derecognized,
sold, impaired ore reclassified, and through amortization process.
Reclassification
 An entity shall reclassify financial assets only when it changes its business model for
managing the financial assets.
● The entity shall apply the reclassification prospectively from the reclassification date.
● The entity shall not restate any previously recognized gains or losses and interest.

 Reclassification date is the first day after of the reporting period following the change in
business model that results in an entity reclassifying financial asset.

 The following would not result to a change in business model:

● Change in intention related to a particular financial asset
● Temporary disappearance of a particular market of a financial asset
● Transfer of financial asset between parts of the entity with different business model

Reclassification from Fair Value to Amortized Cost

 The fair value at the reclassification date becomes the new carrying amount of the financial
asset at amortized cost.
● The difference between the new carrying amount of the financial asset at amortized cost
and the face value of the financial asset shall be amortized through profit and loss over
the remaining life of the financial asset using effective interest method.
Reclassification from Amortized Cost to Fair Value
 The fair value is determined at reclassification date.
● The difference between the previous carrying amount and fair value is recognized in
profit or loss.

Impairment – Financial Asset at Fair Value

 There is no impairment loss on financial asset measured at fair value, whether through profit or
loss, or other comprehensive income
● If the decline in value of financial asset measured at fair value through other
comprehensive income is judge to be non-temporary, the unrealized loss will continue to
be reported as component of other comprehensive income rather than as an impairment
loss.
Impairment – Financial Asset at Amortized Cost
 An entity shall access at the end of each reporting period whether there is any objective
evidence that a financial asset or group of financial assets measured at amortized cost is
impaired.

● If there is objective evidence that an impairment loss on financial assets has been
incurred, the amount of the loss is measured as the difference between the carrying
amount and the present value of estimated future cash flows discounted at the original
effective interest rate.

● The carrying amount of the asset shall be reduced either directly or through the use of an
allowance account.

● The amount of the loss shall be recognized in profit or loss

ACCOUNTING FOR INVESTMENTS
Problems – Multiple Choices
1. Rey Company acquired financial assets at the market value of P320,000. Broker fees of
P20,000 were incurred in relation to the purchase. At what amount should the financial asset
initially be recognized respectively if it is classified as fair value through profit or loss, or as fair
value through other comprehensive income?

a. 340,000 and 320,000 c. 320,000 and 340,000

b. 320,000 and 320,000 d. 340,000 and 340,000

 Answer (c) is correct.

Financial asset at fair value through profit or loss 320,000

Financial asset at fair value through other comprehensive income 340,000

(320,00 + 20,000)
2. On January 1, 20X1, Alex Company purchased marketable equity securities to be held as
“trading” for P500,000. The entity also paid commission, taxes, and other transaction costs
amounting to P20,000. The securities had a market value of P550,000 on December 31, 20X1
and the transaction costs that would be incurred on sale are estimated to be P10,000. No
securities were sold during 20X1. What amount of unrealized gain or loss on these securities
should be reported in the 20X1 income statement?

a. 50,000 unrealized gain c. 30,000 unrealized gain

b. 50,000 unrealized loss d. 40,000 unrealized gain

 Answer (a) is correct.

Fair value 550,000
Less: Acquisition cost – Trading (500,000)
Unrealized gain (included in profit or loss) 50,000

The transaction costs that would be incurred on sale are ignored because the financial
asset held for trading is measured at fair value and not at fair value less cost of disposal.
3. Candy Company acquired financial instrument for P400,000 on March 31, 20X1. The financial
instruments are classified as financial asset at fair value through other comprehensive income.
The direct acquisition cost incurred amounted to P70,000. On December 31, 20X1, the fair
value of the instrument was P550,000 and the transaction costs that would be incurred on the
sale of the investment are estimated at P60,000. What gain should be recognized in other
comprehensive income for the year ended December 31, 20X1?

a. 20,000 c. 80,000
b. 90,000 d. 0

 Answer (c) is correct.

Fair value – December 31, 20X1 550,000
Less: Acquisition cost (400,000 + 70,000) (470,000)
Unrealized gain (included in other comprehensive income) 80,000
4. On December 31, 20X1, Faith Company appropriately reported a P100,000 unrealized loss.
There was no change during 20X2 in the composition of the portfolio of marketable equity
securities held as financial asset at fair value through other comprehensive income. Pertinent
data are as follows:
Market Value
Security Cost December 31, 20X4
A 1,200,000 1,300,000
B 900,000 500,000
C 1,600,000 1,500,000
3,700,000 3,300,000

What amount of loss on these securities should be included in the statement of comprehensive
income for the year ended December 31, 20X2 as component of comprehensive income?

a. 400,000 c. 100,000
b. 300,000 d. 0
 Answer (c) is correct.

Market value – December 31, 20X2 3,300,000

Less: Market value – December 31, 20X3 (3,700,000 - 100,000) (3,600,000)
Unrealized loss in 20X2 (300,000)
Unrealized loss in 20X1 (100,000)
Cumulative unrealized loss – 20X2 (400,000)
5. During 20X1, Green Company purchased marketable equity securities as a trading investment.
For the year ended December 31, 20X1, the entity recognized an unrealized loss of P2,300,000.
There is no security transaction during 20X2. Pertinent information on December 31, 20X2 is as
follows:
Security Cost Market Value
A 24,500,000 23,000,000
B 18,000,000 18,200,000
42,500,000 41,200,000

In the 20X2 income statement, what amount should be reported as unrealized gain or loss?

a. Unrealized gain of P1,000,000 c. Unrealized loss of P1,300,000

b. Unrealized loss of P1,000,000 d. Unrealized gain of P1,300,000

 Answer (a) is correct.

Market value – December 31, 20X2 41,200,000
Less: Market value – December 31, 20X1 (42,500,000 – 2,300,000) 40,200,000
Unrealized gain in 20X2 1,000,000
Items 6 to 7 are based on the following information:
Inspiration Company had trading and non-trading investment held throughout 20X1 and 20X2. The
non-trading investments are measured at fair value through other comprehensive income. The
investment had a cost of P30,000,000 for trading and P30,000,000 for non-trading. The investments
had the following fair value at year-end:
December December
31, 20X1 31, 20X2
Trading 40,000,000 38,000,000
Non-trading 32,000,000 37,000,000

6. What amount of unrealized gain or loss should be reported in the income statement for 20X2?

a. 2,000,000 gain c. 3,000,000 gain

b. 2,000,000 loss d. 3,000,000 loss

 Answer (b) is correct.

Trading – December 31, 20X2 38,000,000
Less: Trading – December 31, 20X1 40,000,000
Unrealized loss in 20X2 (2,000,000)
Items 6 to 7 are based on the following information:
Inspiration Company had trading and non-trading investment held throughout 20X1 and 20X2. The
non-trading investments are measured at fair value through other comprehensive income. The
investment had a cost of P30,000,000 for trading and P30,000,000 for non-trading. The investments
had the following fair value at year-end:
December December
31, 20X1 31, 20X2
Trading 40,000,000 38,000,000
Non-trading 32,000,000 37,000,000

7. What amount of cumulative unrealized gain or loss should be reported as component of other
comprehensive income in the statement of change in equity on December 31, 20X2?

a. 5,000,000 gain c. 7,000,000 gain

b. 5,000,000 loss d. 7,000,000 loss

 Answer (c) is correct.

Non-Trading – December 31, 20X2 37,000,000
Less: Non-Trading – Historical cost 30,000,000
Cumulative unrealized gain – December 31, 20X2 7,000,000
8. General Company purchased the following securities during 20X1:
Market Value
Classification Cost Dec. 31, 20X1
Security A Trading 9,000,000 10,000,000
Security B Trading 10,000,000 16,000,000

On July 31, 20X2, the entity sold all of the shares of Security B for a total of P11,000,000. On
December 31, 20X2, the shares of Security A had a market value of P6,000,000. No other
activity occurred during 20X2 in relation to the trading securities portfolio. What is the gain or
loss on the sale of Security B on July 31, 20X2?

a. 5,000,000 gain c. 1,000,000 gain

b. 5,000,000 loss d. 1,000,000 loss

 Answer (b) is correct.

Sale price of Security B 11,000,000
Less: Carrying amount of Security B – Dec 31, 20X1 16,000,000
Loss on sale of trading securities (5,000,000)
9. On January 1, 20X1, Lebanon Company purchased equity securities to be held as at fair value
through other comprehensive income. On December 31, 20X1, the cost and market value were:
Cost Market Value
Security A 2,000,000 2,400,000
Security B 3,000,000 3,500,000
Security C 5,000,000 4,900,000
On July 1, 20X2, the entity sold Security A for P2,500,000. What amount of gain on sale of
financial asset should be reported in 20X2?

a. 500,000 c. 400,000
b. 100,000 d. 0

 Answer (b) is correct.

Sale price 2,500,000
Less: Carrying amount of Security A 2,400,000
Gain on sale of financial asset 100,000
10. Neal Company held the following financial assets as trading investments on December 31, 20X1
Market
Cost Value
100,000 shares of Company A non-redeemable preference 775,000 825,000
Share capital, par value P75
7,000 shares of Company B preference share capital par value 690,000 625,000
P100, subject to mandatory redemption by the issuer at par
on December 31, 20X1
1,465,000 1,450,000

In the December 31, 20X1 statement of financial position, what is the total carrying amount of
the investments?

a. 1,400,000 c. 1,465,000
b. 1,450,000 d. 1,475,000

 Answer (b) is correct. The non-redeemable preference share is an equity security. The
redeemable preference share is a debt security. Whether equity or debt security, financial
assets held for trading are carried at fair value.
Items 11 to 18 are based on the following information:
Toyota Motors invested its excess cash in equity securities during 20X4, the business model for
these investments is to profit from trading on price changes.

As of December 31, 20X4, the equity investment portfolio consisted of the following:
Investment Quantity Cost Fair Value
Lapid, Inc. 1,000 shares P450,000 P630,000
Villar Co. 2,000 shares 1,200,000 1,260,000
Estrada Corp. 2,000 shares 2,160,000 1,800,000
P3,810,000 P3,690,000
During the year 20X5, Toyota Motors sold 2,000 shares of Villar Co. for P1,146,000 and purchase
2,000 more shares of Lapid, Inc. and 1,000 shares of Bato Co. On December 31, 20X5, Toyota’s
equity securities portfolio consisted of the following:
Investment Quantity Cost Fair Value
Lapid, Inc. 1,000 shares P450,000 P600,000
Lapid, Inc. 2,000 shares 990,000 1,200,000
Bato Co. 1,000 shares 480,000 360,000
Estrada Corp. 2,000 shares 2,160,000 660,000
P4,080,000 P2,820,000
During the year 20X6, Toyota Motors sold 3,000 shares Lapid, Inc. for P1,197,000 and 500 shares
of Bato Co. at a loss of P81,000. On December 31, 20X6, Toyota’s Equity Investment portfolio
consisted of the following:
Investment Quantity Cost Fair Value
Bato Co. 500 shares P240,000 P180,000
Estrada Corp. 2,000 shares 2,160,000 2,460,000
P2,400,000 P2,640,000
11. In the December 31, 20X4, statement of financial position, what should be reported as carrying
amount of the investment?

a. 3,690,000 c. 3,810,000
b. 3,450,000 d. 4,050,000

 Answer (a) is correct. Trading securities, at fair value P3,690,000

12. In the 20X4, income statement, what amount should be reported as unrealized gain or loss?

a. Unrealized gain of P120,000 c. Unrealized gain of P360,000

b. Unrealized loss of P120,000 d. Unrealized loss of P360,000

 Answer (b) is correct.

Fair value, Dec 31, 20X4 3,690,000
Less: Acquisition cost 3,810,000
Unrealized loss 120,000
13. What is the gain or loss on the sale of Villar Co. Investment?

a. 54,000 gain c. 114,000 gain

b. 54,000 loss d. 114,000 loss

 Answer (d) is correct.

Sales price of Villar securities 1,146,000
Less: Carrying amount, Dec 31, 20X4 1,260,000
Loss on sale of Villar securities 114,000
14. What is the carrying amount of the investment on December 31, 20X5?

a. 4,080,000 c. 2,820,000
b. 4,440,000 d. 2,460,000

 Answer (c) is correct. Trading securities, at fair value P2,820,000

15. What amount of unrealized gain or loss should be reported in the income statement for the year
ended December 31, 20X5?

a. 1,260,000 unrealized gain c. 1,080,000 unrealized gain

b. 1,260,000 unrealized loss d. 1,080,000 unrealized loss

 Answer (b) is correct. Unrealized loss (P3,900,000 – P2,820,000) P1,080,000

Carrying
Investment Quantity Amount Fair Value
Lapid, Inc. 1,000 shares P630,000 P600,000
Lapid, Inc. 2,000 shares 990,000 1,200,000
Bato Co. 1,000 shares 480,000 360,000
Estrada Corp. 2,000 shares 1,800,000 660,000
P3,900,000 P2,820,000
16. What should be reported a loss on sale of trading securities in 20X6?

a. 603,000 c. 243,000
b. 324,000 d. 684,000

 Answer (d) is correct.

Sales price of Lapid, Inc. securities P1,197,000
Less: Carrying amount, Dec. 31, 20X5
1,000 shares P600,000
2,000 shares 1,200,000 (1,800,000)
Loss on sale of Lapid, Inc security P(603,000)
Add: Loss on sales Bato Co. securities (81,000)
Total realized loss in 20X6 P(684,000)
17. What amount of unrealized gain or loss should be reported in the income statement for the year
ended December 31, 20X6?

a. 1,800,000 unrealized gain c. 2,400,000 unrealized gain

b. 1,800,000 unrealized loss d. 2,400,000 unrealized loss

 Answer (a) is correct. Unrealized gain (P840,000 – P2,640,000) P1,800,000

Investment Quantity Cost Fair Value
Bato Co. 500 shares P180,000 P180,000
Estrada Corp. 2,000 shares 660,000 2,460,000
P840,000 P2,640,000
18. In the December 31, 20X6, statement of financial position, what should be reported as carrying
amount of trading securities?

a. 2,400,000 c. 2,640,000
b. 2,340,000 d. 2,700,000

 Answer (c) is correct. Trading securities, at fair value P2,640,000

Items 19 to 23 are based on the following information:
During the course of your audit of the financial statement of Fisherman Corporation for the year
ended December 31, 20X1, you found a new account, “Investment in Equity Securities”. Your audit
revealed that during 20X1, Fisherman began a program of investments, and all investment-related
transactions were entered in this account. Your analysis of this account for 20X1 follows:

Fisherman Corporation
Analysis of Investment in Equity Securities
For the year ended December 31, 20X1
Debit Credit
(a) Barakuda Company Ordinary Shares
Feb. 14 Purchase 36,000 shares @ P55 per shares P1,980,000
Jul. 26 Received 3,600 ordinary shares of Barakuda Company
Sep. 28 Sold the 3,600ordianry shares of Barakuda Company P252,000
July 26 @ P70 per share

(b) Tamban, Inc. Ordinary Shares

Apr. 30 Purchase 180,000 shares @ P40 per shares P7,200,000
Oct. 28 Received dividend of P1.20 per share P216,000
Additional information:
a. the fair value of each security as of the 20X1 date each transaction follow:
Security Feb. 14 Apr. 30 Jul. 26 Sep. 28 Dec. 31
Barakuda Company P55 P62 P70 P74
Tamban, Inc. P40 32
Fisherman Corp. 25 28 30 33 35

b. All of the investments of Fisherman Corporation are nominal in respect to percentage of

ownership (5% or less)
c. Each investment is considered by Fisherman Corporation to be non-trading. Fisherman
Corporation has made an irrevocable election to present in other comprehensive income
subsequent changes in fair value of its non-trading equity securities.

19. What amount should be reported as gain on sale of non-trading equity securities in 20X1?

a. 72,000 c. 54,000
b. 18,000 d. 0
 Answer (a) is correct.
Sales price of Barakuda ordinary shares (3,600 × P70) P252,000
Less: Acquisition cost (P1,980,000 × 3,600/39,600) 180,000
Gain on sale of Barakuda ordinary shares P72,000
20. The receipt of 3,600 share dividend would cause the investment balance to increase by:

a. 223,200 c. 198,000
b. 252,000 d. 0

 Answer (d) is correct. The receipt of share dividend does not affect the total cost of the
investment.
21. What entry is necessary to correct the recording of the cash dividend received from Tamban,
Inc?

a. Cash.......................................................................216,000
Dividend Income..............................................................216,000
b. Cash.......................................................................216,000
Investment in equity securities.........................................216,000
c. Investment in equity securities..............................216,000
Dividend Income...............................................................216,000
d. Dividend Income...................................................216,000
Investment in equity securities..........................................216,000

 Answer (c) is correct.

Investment in equity securities..............................216,000
Dividend Income................................................................216,000
(180,000 shares × P1.20)
22. What amount of unrealized gain or loss should be reported in 20X1 statement of comprehensive
income as component of other comprehensive income?

a. 1,440,000 gain c. 576,000 gain

b. 1,440,000 loss d. 576,000 loss

 Answer (d) is correct. Unrealized loss (P9,000,000 – P8,424,000) = P576,000

Investment Quantity Cost Fair Value
Barakuda Company 36,000 shares P1,800,000 P2,664,000
Tamban, Inc. 180,000 shares 7,200,000 5,760,000
P9,000,000 P8,424,000

Barakuda Company = 36,000 shares × P74 = P2,664,000

Tamban, Inc. = 180,000 shares × P32 = P5,760,000
23. What amount should be reported as Investment in Equity Securities in the statement of financial
position on December 31, 20X1?

a. 9,000,000 c. 7,560,000
b. 8,424,000 d. 9,864,000

 Answer (b) is correct. Investment in equity securities, at fair value P8,424,000