Accounting 3A

Financial Accounting
Financial Assets / Investment in Equity Securities

Problem I:
Neptune Inc.s investments in debt and equity securities include the following information.
a. On March 1, 2012, Neptune Inc. purchased from another investor P 1,000,000 in debt securities of
Universal Bonds with stated interest rate of 10% payable every January 1 and July 1 of each year. To the
face value was added the accrued interest in the total amount paid to the previous investor. The securities
were designated as trading securities.
b. On June 1, Neptune, Inc purchased 10,000 shares of equity securities of Hera Drilling for P 100 per
share together with Php 7,500 commission and other transaction costs. These non-trading equity
securities are to be measured at fair value through other comprehensive income.
Required:
1. At what amount shall the securities of Hera Drilling be recorded on initial recognition
2. What is the entry to record the acquisition of debt securities on March 1?.
3. How much was the interest income recognized for the Universal Bonds at th end of 2012?

Problem I1:
Vida Rica Corp. currently owns 15% of Hercules Minings common shares. These shares were purchased two
years ago for Php 5,200,000 and have a fair value of Php 5,600,000 at the end of the previous year 2010. Vida
Rica Corp., on initial recognition, made an irrevocable election to present in other comprehensive income any
subsequent changes in the fair value of its investment in securities.
In 2011, Vida Rica Corp. purchased 100,000 shares of Vulcan Corp. for P 800,000. These shares have a fair
value of P 850,000 at the end of the year. The company also purchased in the same year 100,000 shares of
Phildep Mines at Php 40 per share. The shares have a fair value of Php 42 each at the end of the year.
The fair value of the investment in Hercules Mining at the end of the current year 2011 was Php 5,675,000.
Required: Compute the following
1. The amount of unrealized loss to be reported as component of other comprehensive income at
the end of 2010.
2. The cumulative unrealized gain/loss that should be shown on the statement of changes in equity
for the year ended December 31, 2011
3. The amount of unrealized gain/loss should be reported on Vida Corp.s income statement for the year ended
December 31, 201i

Problem III:
On January 1, 2013, Classic Co. paid Php 1,200,000 for bonds with face value of 1,400,000 of 8% and interest
dates of January 1 and July 1. The bonds were to held as financial assets at amortized cost. At the time of
purchase, the market yield of bonds with similar risk and maturity was 10%. Because of changes in market
conditions, the fair value of the bonds at December 31, 2013 was P 1,500,000.
Required:
1. What amount of the investment would be reported at the end of 2013?
2. How much is the unrealized holding gain or loss to be classified as component of other comprehensive
income at December 31, 2013
3. What is the amount of interest income to be reported in the companys income statement for the year
ended December 31, 2013

Problem IV:
Splash Corp. had the following non-trading equity securities in its records in 2012.
Fair value
Security
Cost
Dec. 31, 2012
Unity
P 200,000
P 250,000
Global
350,000
400,000
These securities were from the start classified as at fair value through other comprehensive income. The Unity
securities were all sold on September 21, 2013, for a total amount of P 275,000. The Global securities had a fair
value of P 420,000 as of the end of 2013. There were no other transactions during the year with regard to
securities.
Required: Compute the following:
1. The amount realized gain to be shown in the 2013 income statement
2. The cumulative unrealized gain (loss) to be reported in the statement of changes in equity for in 2013.

Problem V:
Presented below is part of an amortization table and the corresponding fair value relative to Havana Corp.s 3year, P 300,000 bond with a 10% interest rate. The instrument was purchased on December 31, 2012 for P
315,500 and has an 8% yield.
Date
12/31/12
12/31/13

Interest
received

Interest
income

Premium
amortization

P 30,000

P 25,240

P 4,760

Carrying
amount
P 315,500
310,740

Fair value
P 332,500

Required:
1. If the bonds are held as financial assets measured at amortized cost, how much is the carrying amount of
the investment account on December 31, 2014
2. Compute the amount of interest income recognized in 2014
3. What is the accumulated net decrease in the amount of investment as of 2015?

Problem VI:
On December 31, 2011, the records of Mabuhay Corp. showed 7,000 common shares of Mercury Corp. with
cost and fair value of P 350,000 and P 325,000 respectively and 10,000 common shares of Athena Corp. with
cost and fair value of Php 250,000 and Php 300,000 respectively.
The above securities were bought in 2011. The following year, the following securities transactions were made:
Aug. 1 Half of the shares of Mercury Corp, were sold P 55 and transaction costs amounted to P 5,000
Sept. 1 The company bought 2,000 common shares of Mars Corp. at P 23. Transaction costs amounted
to P 500.
At the end of 2012, the trading securities were as follows:
_Cost__
Fair value
3,500 common shares of Mercury Corp. P 175,000
P 165,000 (the estimated transaction costs of
P 5,000 that would be incurred on the sale of the securities has been deducted from the fair value)
10,000 common shares of Athena Corp.
250,000
325,000 (the estimated transaction costs of
P1,500 that would be incurred on the sale of the securities) has been deducted from the fair value)
2,000 common shares of Mars Corp.
46,000
48,888

Required: Compute the following:

1. Amount of unrealized gain on these securities to be reported in the 2012 income statement
2. Gain or loss on the sale of Mercury ordinary shares on Aug 1, 2012
3. Amount of the trading securities to be reported in Mabuhay Corp.s statement of financial position
on December 31, 2012

Problem VII:
Apex Corp. buys and sells securities expecting to earn profits on short-term differences in price. During 2012,
the company made the following purchases of securities.
Security
Cost
Fair value , Dec. 31
BDO P 150,000
P 175,000
CBC
200,000
178,000
SMF
280,000
256,000
The company had a net income of P 375,000 excluding any possible adjustments relating to its securities.
Required: Compute the following:
1. Net income after the necessary adjusting entry for the trading security adjustments
2. Net income if the fair value of CBC was P 210,000

Problem VIII:
On December 31, 2013, Marina Corp. had the following data available regarding its investment in equity
securities:
Overseas Oil ordinary shares :
Aug 3 Received 5,000 ordinary shares as share dividends. Prior to this, the company had 100,000
shares of Overseas Oil with fair value of Php 48 per share on December 31, 2012.
Oct.30 Sold the all of the ordinary shares received as share dividends at P 47 per share
Philodrill Corp ordinary shares:
Apr. 30 Purchased 180,000 shares at P 40 per share
Oct. 30 Received dividend of P 2.00 per share plus share dividends of 10%
Additional information :
a. All of the above investments are not enough to have significant influence on the investees.
b. The fair value for each security as of the 2014 date of each transaction follows.
Apr 30 Aug. 3 Oct 30 Dec 31
Overseas
P50
P 50
P 52
Philodrill
P 40
32
c. Marina Corp. made an irrevocable election to present in other comprehensive income the changes in
fair value of these securities.
Required: Compute the following:
1. What are the journal entries to record the receipt of cash and share dividends?
2. What amount should be reported as gain on sale of non-trading equity securities in 2013?
3. How much will be the increase in the investment balance due to the receipt of the 5,600 share dividends?
4. What is the gain on sale of the Overseas Oil securities?
5. What is the amount of unrealized gain or loss in the 2013 statement of comprehensive income?
6. What is the carrying amount of the Investment in equity securities to be reported on December 31, 2013?

Problem IX:
The following data were taken from the records of Heredia Securities, Inc. regarding its debt and equity
securities on December 31, 2012.

Financial Instruments
2,500 ordinary shares SMB Corp.
P 200,000 MPH Corp. 8.0% bonds
P 400,000 MGZ Corp.10.0% bonds

Cost
P 152,000
215,250
410,500

Fair value
P 150,000
217,000
420,750

Interest on these bonds are received every January 1 and July 1 of each year. Heredia Securities uses the income
approach to record the purchase of bonds with accrued interest. In 2013 and 2014, the following transactions
were found ion the books of Heredia Securities with regard to its trading securities.
2013
Jan. 1
July 1

Received semiannual interest on bonds.

Sold P 200,000 of 10.0% MGZ bonds at 102.5 plus accrued interest. Brokers commission was
P 3,500
July 31 Received dividend of P 2.00 per share on the SMB ordinary shares.
Sep. 1 Received semiannual interest on bonds and then sold the 8.0% MPH bonds at 101,75. Expenses
related to the sale amounted to Php 5,000
Dec 31 The market prices of the financial instruments as of this date:
SMB ordinary shares
P 62.00
MPH 8.0& bonds
102.50
MGZ 10.0%bonds
103.00
2014
Jan 2 Received the semiannual interest on bonds
June 30 Sold the other MGZ 10.0% bonds at 103.5. This price includes the accrued interest. Commission for
the broker was P 2,000.
Required: Compute the following:
1. The total amount of interest and dividend income for 2013
2. The amount to be reported as gain or loss on sale of trading securities in 2013
3. The amount of unrealized gain or loss to be reported in the income statement for the year 2013
4. The carrying amount of the remaining trading securities on December 31, 2013
5. The gain or loss on the sale of the balance of the MGZ bonds in 2014