Chapter 9

Investments

PROBLEM 1: TRUE OR FALSE

1. FALSE – both business model and contractual cash flows characteristics
2. TRUE
3. FALSE
4. TRUE
5. TRUE
6. FALSE
7. FALSE
8. FALSE - FVOCI
9. FALSE - P/L
10. FALSE - ₱5

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. D

2. C

3. D

4. B

5. A

6. B

7. Solutions:

Case #1:
Answer: (120 – 35) = 85

Case #2:
The most advantageous market is determined as follows:
Active market #1 Active market #2
Market price 100 120
Transaction costs (5) (5)
Transport costs (10) (35)
Amount received from sale 85 80

Answer: (100 – 10) = 90

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8. Answer: ₱2.00 level 2 input x 1,000 shares = ₱2,000

9. B

10. B

11. Solutions:
Requirement (a):
1/1/x1
Held for trading securities (12,000 x 3) 36,000
Commission expense 1,800
Cash 37,800

12/31/x1
Held for trading securities [(12,000 x 5) – 36,000] 24,000
Unrealized gain – P/L 24,000

1/6/x1
Cash [(12,000 x 8) – 4,800] 91,200
Held for trading securities (12,000 x 5) 60,000
Realized gain 31,200

Requirement (b):
1/1/x1
Held for trading securities (12,000 x 3) 36,000
Commission expense 1,800
Cash in bank 37,800

12/31/x1
Fair value adjustment [(12,000 x 5) – 36,000] 24,000
Unrealized gain – P/L 24,000

1/6/x1
Cash [(12,000 x 8) – 4,800] 91,200
Fair value adjustment 24,000
Held for trading securities (12,000 x 3) 36,000
Realized gain – P/L 31,200

Requirement (c):
1/1/x1
Investment in FVOCI securities [(12,000 x 3) + 1,800] 37,800
Cash in bank 37,800

12/31/x1
Investment in equity securities - FVOCI 22,200
Unrealized gain – OCI [(12,000 x 5) – 37,800] 22,200

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1/6/x1
Investment in equity securities - FVOCI 31,200
Unrealized gain – OCI 31,200*

*(12,000 x 8) – 4,800 = 91,200 – 60,000 = 31,200

Cash [(12,000 x 8) – 4,800] 91,200

Investment in equity securities - FVOCI (12,000 x 5) 91,200

Unrealized gain – OCI 53,400

Retained earnings 53,400

12. Solutions:
Requirement (a):
2001
Dec. 31 Unrealized Loss – P/L 20,000
Held for Trading Securities 20,000

Unrealized loss – OCI 40,000

Investment in equity securities - FVOCI 40,000

2002
Dec. 31 Held for Trading Securities 4,000
Unrealized Gain – P/L 4,000

Dec. 31 Unrealized loss – OCI 240,000

Investment in equity securities – 240,000
FVOCI

Requirement (b):
Effect on 2001 profit (loss):
Recognized decline in value of held for trading securities ₱(20,000)

Effect on 2002 profit (loss):

Recognized increase in value of held for trading securities ₱ 4,000

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PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a):
1/1/x1
Held for trading securities (2,000 x 10) 20,000
Commission expense 1,000
Cash 21,000

12/31/x1
Unrealized loss – P/L [(2,000 x 6) – 20,000] 8,000
Held for trading securities 8,000

1/6/x1
Cash [(2,000 x ½ x 3) – 150] 2,850
Realized loss 3,150
Held for trading securities (2,000 x ½ x 6) 6,000

Requirement (b):
1/1/x1
Held for trading securities (2,000 x 10) 20,000
Commission expense 1,000
Cash 21,000

12/31/x1
Unrealized loss – P/L [(2,000 x 6) – 20,000] 8,000
Fair value adjustment 8,000

1/6/x1
Cash [(2,000 x ½ x 3) – 150] 2,850
Fair value adjustment (8,000 x ½) 4,000
Realized loss 3,150
Held for trading securities (2,000 x ½ x 10) 10,000

Requirement (c):
1/1/x1
Investment in equity securities - FVOCI [(2,000 x 10) + 1,000] 21,000
Cash 21,000

12/31/x1
Unrealized loss – OCI [(2,000 x 6) – 21,000] 9,000
Investment in equity securities - FVOCI 9,000

1/6/x1
Unrealized loss – OCI 3,150
Investment in equity securities - FVOCI 3,150*

* [(2,000 x ½ x 3) – 150] = 2,850 – (1,000 x 6) = 3,150

Cash [(2,000 x ½ x 3) – 150] 2,850

Investment in FVOCI securities 2,850**

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**[(21,000 - 9,000) x ½] – 3,150 = 2,850

Retained earnings 7,650

Unrealized loss – OCI 7,650***

*** (9,000 x ½) + 3,150 = 7,650

2. Solutions:
Requirement (a): 10,000 x 13 = 130,000

Requirement (b): (10,000 x 20) – [(10,000 x 15) + 7,500] = 42,500 gain

Requirement (c): [10,000 x (20 – 13)] = 70,000 gain

Requirement (d): 0

Requirement (e): [7,000 x (25 - 1.25)] – (7,000 x 20) = 26,250 gain

3. Solution:
Held for trading securities 7,000
Unrealized Gain on Trading Securities 7,000

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PROBLEM 4: CLASSROOM ACTIVITIES
ACTIVITY #1:
Solution:
Investment in PLDT shares (FVPL) 47,280
Unrealized gain – P/L 47,280

(100 sh. x 2,364 closing price) = 236,400 - 189,120 = 47,280

ACTIVITY #2:
Solutions:
Requirement (a):
FVPL – because ABC’s business model is neither “hold to collect” nor “hold
to collect and sell.”

Requirement (b):
Held for trading securities 1,910.10*
Unrealized gain – P/L 1,910.10

* Given on the print screen of the portfolio.

Requirement (c):
SYMBOL SHARES PRICE PAID ACQUISITION COST
GLO 250 2,350.00 587,500.00
JFC 1,000 208.80 208,800.00
BDOPBF:PM 10 1,554.67 15,546.70
ABS 10,000 65.20 652,000.00
SNLFMNY:PM 10,000 1.228 12,280.00
1,476,126.70

Requirement (d):
1,478,036.80 (given on the print screen, “VALUE” column)

Requirement (e):

SYMBOL TYPE
GLO EQUITY
JFC EQUITY
BDOPBF DEBT
ABS EQUITY
SNLFMNY DEBT

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Requirement (f):
(250 x 2,400 x 95%) net proceeds – (250 x 2,372) carrying amount = (23,000)
loss

ACTIVITY #3:
1. A
2. A
3. D
4. C
5. A
6. C
7. A

PROBLEM 5: MULTIPLE CHOICE - THEORY

1. D 6. B 11. A 16. D
2. B 7. B 12. C 17. C
3. C 8. D 13. D 18. A
4. C 9. C 14. B 19. C
5. B 10. C 15. A 20. C

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PROBLEM 6: MULTIPLE CHOICE: COMPUTATIONAL
1. C
Solution:
Market A B
Quoted Price 76 74
Transaction Costs (5) (2)
Net price 71 72

The “most advantageous” market is Market B and the quoted price in

this market is 74.

2. C
Solution:
Market New York London
Quoted Price 103 106
Transaction Costs (1) (5)
Net price 102 101

The “most advantageous” market is New York Stock Exchange and

the quoted price in this market is 103.

3. B (20,000 shares x 27) = 540,000

4. C – the fair value on Dec. 31, 2003
5. C (82K + 132K + 28K) = 242,000 total fair value
6. A
7. C (120K -150K) = (30K); (185K – 225K) = (40K)
8. B
9. B 370,000 cost less 4,000 credit balance in allowance = 366,000 fair
value on December 31, 20x1;
(363,000 fair value on Dec. 31, 20x2 – 366,000) = 3,000 unrealized loss
in P/L
10. B (155,000 – 100,000) = 55,000
11. D 130,000 FV 12/31/03 – 150,000 cost = 20,000
12. D 370,000 cost plus 4,000 debit balance in allowance = 374,000 fair
value on December 31, 20x1;
(363,000 fair value on Dec. 31, 20x2 – 374,000) = 11,000 unrealized
loss in P/L credited to the Market Adjustment - Trading Securities
account
13. A (160,000 - 130,000) = 30,000 unrealized gain
14. B (525,000 – 510,000) = 15,000 decrease in fair value
15. B [(1,000 sh. x 15) – 1,500] = 13,500 net proceeds – 15,300 carrying
amount = 1,800 loss
16. C [(1,000 shares x 25) – 1,200] = 23,800 net proceeds; (45,900 x
1,000/2,000) = 22,950 carrying amount of investment sold; 23,800 –
22,950 = 850 gain
17. D (1,250 – 1,000) x 10 shares = 2,500 x 70% = 1,750. Since the
tax rate is given, the unrealized gain is computed at net of tax.

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18. A 360K – 320K = 40,000 unrealized loss in P/L for FVPL ; no fair value
change is recognized in P/L for the investment in FVOCI
19. C [(2,000 sh. x 14) – 1,400] = 26,600 net proceeds – 29,500 fair value on
Dec. 31, 20x1 = 2,900 realized loss

20. B (240K fair value Dec. 31, 20x2 – 180K fair value Dec. 31, 20x1 =
60,000 unrealized gain in OCI;
(240K fair value Dec. 31, 20x2 – 200K original cost) = 40K accumulated
OCI