INVESTMENTS: PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Petty cash fund 10,000
Cash in bank 40,000
Notes receivable 130,000
Discount on note receivable (7,000)
Loans receivable 80,000
Loss allowance on loans receivable (4,000)
Held for trading securities 60,000
Investment in associate 40,000
Plant expansion fund 75,000
Total financial assets 424,000

2. Solutions:

Requirement (a):
Market price in Market #2 265
Less: Transport costs (15)
Fair value 250

Requirement (b):
The ‘most advantageous market’ is determined as follows:
Market #1 Market #2
Market price 270 265
Transaction costs (6) (5)
Transport costs (10) (15)
Sale proceeds 254 245

❖ Market #1 is the ‘most advantageous market’ because the sale proceeds is higher.
The fair value is measured as follows:

Market price in Market #1 270

Less: Transport costs (10)
Fair value 260

3. Solution:
Acquisiti Held for trading securities 390,000
on
Taxes and licenses 18,500
Cash 408,500
Sale Cash [(3,000 x 82) – 12,300] 233,700
Loss 6,300
Held for trading sec. (3,000 x 80) 240,000
Dec. 31, Held for trading securities 22,000
20x1 Gain (a) 22,000
(a)
Fair value on 12/31/x1 (10,000 sh. + 5,000 sh. – 3,000 sh.) x ₱81 972,000
Carrying amount (10,000 sh. x ₱80) beg. + 390,000 Dr. – 240,000 Cr. 950,000
Gain 22,000

Realized loss on sale (6,300)

Unrealized gain on fair value change 22,000
Net gain 15,700

❖ Reconciliation:
Held for trading - beg. 800,000
Acquisitions during the year 390,000
Total 1,190,000
Held for trading - end. 972,000
Net proceeds from sale 233,700
Total 1,205,700
Total net gain from fair value change and sale 15,700

4. Solution:
12/3/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

1/16/x2
Cash [(12,000 x ₱8) – ₱4,800] 91,200
Held for trading securities (12,000 x ₱5) 60,000
Realized gain 31,200

5. Solution:
12/3/x1
Held for trading securities (12,000 x ₱3) 36,000
Commission expense 1,800
Cash 37,800

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

1/16/x2
Cash [(12,000 x ₱8) – ₱4,800] 91,200
Held for trading securities 36,000
Fair value adjustment 24,000
Realized gain 31,200

6. Solution:
12/3/x1
Investment in equity securities – FVOCI 37,800
[(12,000 x ₱3) + ₱1,800]
Cash 37,800

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

1/16/x2
Investment in equity securities - FVOCI 31,200
 Unrealized gain – OCI [(12,000 x ₱8) – 4,800] – 60,000 31,200

Cash [(12,000 x ₱8) – 4,800] 91,200

Investment in equity securities – FVOCI 91,200

Unrealized gain – OCI (22,200 + 31,200) 53,400

Retained earnings 53,400

INVESTMENTS IN DEBT SECURITIES: PROBLEM 6: FOR CLASSROOM

DISCUSSION

Solutions:
Requirement (a):
Date Interest received Interest income Amortization Present value
1/1/x1 941,725
1/1/x2 120,000 131,842 11,842 953,567
1/1/x3 120,000 133,499 13,499 967,066
1/1/x4 120,000 135,389 15,389 982,455
1/1/x5 120,000 137,545 17,545 1,000,000

Requirement (b):
(1,000,000 – 967,066) = 32,934 discount

Requirement (c):
1/1/x1
Investment in bonds 941,725
Cash 941,725

12/31/x1
Interest receivable 120,000
Investment in bonds 11,842
Interest income 131,842

1/1/x2
Cash 120,000
Interest receivable 120,000

12/31/x2
Interest receivable 120,000
Investment in bonds 13,499
Interest income 133,499

1/1/x3
Cash 120,000
Interest receivable 120,000

12/31/x3
Interest receivable 120,000
Investment in bonds 15,389
Interest income 135,389

1/1/x4
 Cash 120,000
Interest receivable 120,000

12/31/x4
Interest receivable 120,000
Investment in bonds 17,545
Interest income 137,545

1/1/x5
Cash 120,000
Interest receivable 120,000

Cash 1,000,000
Investment in bonds 1,000,000

Solution:
Date Interest received Interest income Amortization Present value
1/1/x1 1,075,939
12/31/x1 120,000 96,835 23,165 1,052,774
12/31/x2 120,000 94,750 25,250 1,027,524
12/31/x3 120,000 92,476 27,524 1,000,000

Solution:
Mar. Investment in bonds (2M x 98%) – 60,000 1,900,000
31, Interest income (₱2M x 12% x 3/12) 60,000
20x1 Cash (2M x 98%) 1,960,000

Solution:
Purchase price (2M x 1,900,
95%) 000
40,5
Commission 10
Initial carrying 1,940,5
amount 10

Trial and error:

There is discount. Therefore, the effective interest rate must be higher than the
nominal rate of 12%.

First trial: (using 13%)

Future cash flows x PV factor at x% = Present value
(2M x PV of ₱1 @ 13%, n=4) + (2M x 12% x PV of an ordinary annuity of ₱1 @ 13%,
n=4) = 1,940,510
1,226,637 + 713,873 = 1,940,510
1,940,510 is equal to 1,940,510

The effective interest rate is 13%.

Solution:
Interest
Interest Amortization Present value
Date received income
Jan. 1, 20x1 1,940,510
Dec. 31, 20x1 240,000 252,266 12,266 1,952,776
Dec. 31, 20x2 240,000 253,861 13,861 1,966,637
Dec. 31, 20x3 240,000 255,663 15,663 1,982,300
Dec. 31, 20x4 240,000 257,700 17,700 2,000,000

Sale price (2M x 92% x 1/2) 920,000

Transaction costs (46,000)
Net disposal proceeds 874,000
Carrying amount on date of sale (1,982,300 x ½) (991,150)
Loss on sale (117,150)

Jan. Cash [(2M x 92% x 1/2) - 46K] 874,000

1, Loss on sale (squeeze) 117,150
20x4 Investment in bonds (1,982,300 x ½) 991,150

Solution:
Interest
Interest Amortization Present value
Date received income
Jan. 1, 20x1 1,940,510
Dec. 31, 20x1 240,000 252,266 12,266 1,952,776
Dec. 31, 20x2 240,000 253,861 13,861 1,966,637
Dec. 31, 20x3 240,000 255,663 15,663 1,982,300
July 1, 20x4 120,000 128,850 8,850 1,991,150

Sale price including accrued interest (2M x 92%) 1,840,000

Accrued interest (see table above) (120,000)
Sale price excluding accrued interest 1,720,000
Transaction costs (82,000)
Net disposal proceeds 1,638,000
Carrying amount on date of sale (see table above) (1,991,150)
Loss on sale (353,150)

July Interest receivable 120,000

1, Investment in bonds at amortized 8,850
20x4 cost Interest income 128,850
to record the discount amortization
July Cash (2M x 92% – 82K) 1,758,000
1, Loss on sale (squeeze) 353,150
20x4 Investment in bonds at amortized 1,991,15
cost Interest receivable 0
to record the sale 120,000
 Solution:
Purchase price of bonds = Present value of future cash flows

Future cash flows PV factors Present value

Principal 2,000,000 0.751315 1,502,630
Interest 240,000 2.486852 596,844
Estimated purchase price on Jan. 1, 20x1 2,099,474

Solution:
Requirement (a):
Principal + Interest
Date outstanding principal balance Total collections
on
Dec. 31, 20x1 2,000,000 + (6,000,000 x 10%) 2,600,000
Dec. 31, 20x2 2,000,000 + (4,000,000 x 10%) 2,400,000
Dec. 31, 20x3 2,000,000 + (2,000,000 x 10%) 2,200,000

Date Collections Interest

Amortization Present value
income
Jan. 1, 20x1 5,800,610
Dec. 31, 20x1 2,600,000 696,073 1,903,927 3,896,683
Dec. 31, 20x2 2,400,000 467,602 1,932,398 1,964,285
Dec. 31, 20x3 2,200,000 235,715 1,964,285 0

Requirement (b):
Current portion of serial bonds 1,932,398
Noncurrent portion of serial bonds 1,964,285
Total carrying amount of serial bonds – Dec. 31, 20x1 3,896,683

Solution:

Interest Unearned Present value of

Date income interest cash flow
a = b x b = previous
16% bal. + a
1/1/x1 I 5,116,292
12/31/x1 818,607 G 5,934,899
12/31/x2 949,584 N 6,884,483
12/31/x3 1,101,517 7,986,000
Dec. 31, Cash 120,000
20x2 Interest income 103,471
Investment in bonds – FVOCI 12/31/x1 16,529
12/31/x2
Dec. 31,value
Present Investment inand
(Principal bonds – FVOCI
interest receivable) 46,529
5,934,899 6,884,483
20x2 Unrealized
Interest receivable gain (loss)
(6Mx10%); – OCI** x 110% x
[600K+(6M 46,529
10%)] (600,000) (1,260,000)
Carrying amount of investment (Principal) 5,334,899 5,624,483

Alternative solution: Longcut

Interest
Interest Amorti- Present
Date income PV of cash flow receivable
zation value
(a) =ER x
(b) of (b)=+prev.
(b) (a) bal. (b)
(d) = (a) -
1/1/x1 5,116,292 (c) = PV + (d)
5,116,292
12/31/x1 818,607 5,934,899 600,000 218,607 5,334,899
12/31/x2 949,584 6,884,483 660,000 289,584 5,624,483
12/31/x3 1,101,517 7,986,000 726,000 375,517 6,000,000
Alternative solution: Shortcut
(5,116,292 x 116%) – 600,000 = 5,334,899
(5,116,292 x 116% x 116%) – 1,260,000 = 5,624,483

Solution:
Initial recognition:
Jan. 1, Investment in bonds – FVOCI 1,049,737
20x1 Cash 1,049,737

Subsequent measurement (Dec. 31, 20x1):

Interest Interest Amortizatio Present
Date received income n value
Jan. 1, 1,049,7
20x1 37
Dec. 31, 1,034,7
20x1 120,000 104,974 15,026 11
Dec. 31, 1,018,1
20x2 120,000 103,471 16,529 82
Dec. 31, 1,000,0
20x3 120,000 101,818 18,182 00

Dec. 31, Cash 120,000

20x1 Interest income 104,974
Investment in bonds – FVOCI 15,026
Dec. 31, Unrealized gain (loss) – OCI* 14,711
20x1 Investment in bonds – FVOCI 14,711

* Fair value - 12/31/x1 (1M x 102%) 1,020,000

Amortized cost - 12/31/x1 (see table above) 1,034,711
Unrealized loss - OCI (14,711)

Subsequent measurement (Dec. 31, 20x2):

** Fair value - 12/31/x2 (1M x 105%) 1,050,000

Amortized cost - 12/31/x2 (see table above) 1,018,182
Cumulative balance of gain in equity – 12/31/x2 31,818
Less: Cumulative balance of loss in equity – 12/31/x1 (14,711)
Unrealized gain - OCI 46,529(a)
(a) Positive amount minus a negative amount results to addition.

Derecognition
Jan. Unrealized gain (loss) – OCI (a) 10,000
4, Investment in bonds – FVOCI 10,000
20x3 to recognize the change in fair value
Jan. Cash 1,040,000
4, Investment in bonds – FVOCI 1,040,000
20x3 to derecognize the investment
Jan. Unrealized gain (loss) – OCI (b) 21,818
4, Gain on sale – P/L (b) 21,818
20x3 to derecognize the cumulative fair value
gains

(a) [1M x (104% - 105%)] = 10,000

(b)
Net proceeds (1M x 104%) 1,040,000
Amortized cost – 1/1/x3 (see table above) 1,018,182
Cumulative gain in equity/Reclassification adjustment – 1/4/x3 21,818

The movements in the accounts are analyzed as follows:

Investment in bonds – FVOCI
1/1/x1 1,049,7
37
15,026 12/31/x1 amortization
12/31/x1 fair value
14,711 change
1,020,0
12/31/x1 00
16,529 12/31/x2 amortization
12/31/x2 fair value 46,5
change 29
1,050,0
12/31/x2 00
1/4/x3 fair value
10,000 change
1,040,0
00 1/4/x3 derecognition
0

Unrealized gain (loss) - OCI

12/31/x1 Loss in OCI 14,7

11
12/31/x1 – Loss (Debit
14,7
bal.)
11
46,5
12/31/x2 Gain in OCI
29
31,8 12/31/x2 – Gain (Credit
18 bal.)
 10,0
1/4/x3 Loss in OCI
00
Reclassification adj. to
P/L 21,8
18 1/4/x3 derecognition
0

ADDITIONAL CONCEPTS: PROBLEM 5: FOR CLASSROOM DISCUSSION

1. Solutions:
(a) FVPL
Date Trade date accounting Settlement date accounting
Dec. 29, FVPL asset 1,000
20x1 Payable 1,000 No entry
Dec. 31, FVPL asset 750 Receivable 750
20x1 Unrealized gain – P/L 750 Unrealized gain – P/L 750
Jan. 3, Unrealized loss – P/L 250 FVPL asset 1,500
20x2 Payable 1,000 Unrealized loss – P/L 250
FVPL asset 250 Receivable 750
Cash 1,000 Cash 1,000

(b) FVOCI
Date Trade date accounting Settlement accounting
Dec. 29, FVOCI asset 1,000
20x1 Payable 1,000 No entry
Dec. 31, FVOCI 750 Receivable 750
20x1 Unrealized gain – OCI 750 Unrealized gain – OCI 750

Jan. 3, Unrealized loss – OCI 250 FVOCI asset 1,500

20x2 Payable 1,000 Unrealized loss – OCI 250
FVOCI asset 250 Receivable 750
Cash 1,000 Cash 1,000

(c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. Amortized cost asset 1,000
29, Payable 1,000 No entry
20x1
Dec. 31,
20x1 No entry No entry
Jan. 3, Payable 1,000 Amortized cost asset 1,000
20x2 Cash 1,000 Cash 1,000

2. Solutions:
(a) FVPL
Date Trade date accounting Settlement accounting
Dec. 29, Receivable 1,000 Unrealized loss – P/L 200
20x1 Loss on sale 200 FVPL asset 200
FVPL asset 1,200
Dec. 31,
20x1 No entry No entry

Jan. 3, Cash 1,000 Cash 1,000

20x2 Receivable 1,000 FVPL asset 1,000

(b) FVOCI
Date Trade date accounting Settlement accounting
Dec. Unrealized loss – OCI Unrealized loss – OCI
29, 200 200
20x1
200 FVOCI asset 200 FVOCI asset

Receivable 1,000 1,000

FVOCI asset

Loss on sale 200 200

Unrealized loss - OCI
Dec.
31, No entry No entry
20x1
Jan. 3, Cash 1,000 Cash 1,000
20x2 Receivable 1,000 FVOCI asset 1,000

Loss on sale 200

Unrealized loss - OCI 200

(c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. Receivable 1,000
29, Loss on sale 200 No entry
20x1 Amortized cost asset 1,200
Dec.
31, No entry No entry
20x1
Jan. 3, Cash 1,000 Cash 1,000
20x2 Receivable 1,000 Loss on sale 200
Amortized cost 1,200
asset

3. Solutions:

(a) : Amortized cost to FVPL

Jan. FVPL asset 240,000
1,
Amortized cost asset 200,000
20x3
Gain on reclassification – P/L 40,000

(b) : FVPL to Amortized cost

Jan. FVPL asset 40,000
1, Unrealized gain – P/L 40,000
20x3
Jan. Amortized cost asset 240,000
1, FVPL asset 240,000
20x3

(c) : Amortized cost to FVOCI

Jan. FVOCI asset 240,000
1,
Amortized cost asset 200,000
20x3
Gain on reclassification – OCI 40,000

(d) : FVOCI to Amortized cost

Jan. FVOCI asset 40,000
1, Unrealized gain – OCI 40,000
20x3
Jan. Amortized cost asset (squeeze) 190,000
1,
Unrealized gain – OCI (10K + 40K) 50,000
20x3
FVOCI asset 240,000

(e) : FVPL to FVOCI

Jan. FVPL asset 40,000
1, Unrealized gain – P/L 40,000
20x3
Jan. FVOCI asset 240,000
1, FVPL asset 240,000
20x3

(f) : FVOCI to FVPL

Jan. FVOCI asset 40,000
1, Unrealized gain – OCI 40,000
20x3
Jan. FVPL asset 240,000
1, FVOCI asset 240,000
20x3
Jan. Unrealized gain – OCI 50,000
1, Gain on reclassification – P/L 50,000
20x3

4. Solution:
Dec. 31, Impairment loss – P/L 9,000
20x1
Unrealized loss – OCI 21,000
Investment in bonds – FVOCI 30,000

5. Solutions:
Case 1: Amortized cost to FVPL – Cessation of impairment
Jan. FVPL asset 490,000
1, Loss allowance 6,000
20x3
Loss on reclassification – P/L (squeeze) 4,000
Amortized cost asset 500,000

Case 2: FVPL to AC – Commencement of impairment

Jan. Unrealized loss – P/L 10,000
1,
20x3
FVPL asset 10,000
to record the change in fair value on reclassification
date
Jan. Amortized cost asset 490,000
1,
20x3
FVPL asset 490,000
to record the reclassification
Jan. Impairment loss – P/L 4,000
1,
20x3
Loss allowance 4,000
to record the commencement of accounting
for impairment

Case 3: Amortized cost to FVOCI – Retention of impairment

Jan. FVOCI asset 490,000
1,
Loss allowance 6,000
20x3
Loss on reclassification - OCI 4,000
Amortized cost asset 500,000

Case 4: FVOCI to Amortized cost – Retention of impairment

Jan. Impairment loss 6,000
1,
Unrealized loss – OCI 4,000
20x3
FVOCI asset 10,000
to recognize the impairment loss and change in fair
value on reclassification date
Jan. Amortized cost asset (squeeze) 500,000
1,
FVOCI asset 490,000
20x3
Loss allowance 6,000
Unrealized loss – OCI 4,000
to record the reclassification

Case 5: FVPL to FVOCI – Commencement of impairment

Jan. Unrealized loss – P/L 10,000
1,
20x3
FVPL asset 10,000
to record the change in fair value on reclassification
date
Jan. FVOCI asset 490,000
1,
FVPL asset 490,000
20x3
to record the reclassification
Jan. Impairment loss – P/L 4,000
1,
20x3
Unrealized gain (loss) - OCI 4,000
to record the commencement of accounting
for impairment

Case 6: FVOCI to FVPL – Cessation of impairment

Jan. Impairment loss 6,000
1,
20x3
Unrealized loss – OCI 4,000
FVOCI asset 10,000
to recognize the impairment loss and change in fair
value on reclassification date
 Jan. FVPL asset 490,000
1,
20x3
FVOCI asset 490,000
to record the reclassification
Jan. 1, Loss on reclassification – P/L 4,000

20x3 Unrealized loss – OCI 4,000

to record the reclassification adjustment to P/L

6. Solution:
Dat Cash 400,00
e Dividend income 0 400,00
0
Dat Inventory 240,00
e Dividend income 0 240,00
0
Dat Investment in FVOCI securities 260,00
e Unrealized gain – OCI 0 260,00
0

7. Solution:
April
1, No entry (Memo entry only)
20x1
April Cash [(20,000 sh. x 5%) x ₱224] 224,00
30, Investment in stocks (a) 0 110,000
20x1 Gain on sale of 114,000
investment
(a)
{2,310,000 x [(20,000 x 5%) / (20,000 x 105%)} = 110,000 cost allocated to the shares sold

8. Solutions:
Requirement (a): Dividend-on
May Investment in FVOCI securities (a) 3,600,000
5, Dividend income (20 x 20,000 sh.) 400,000
20x1 Cash (200 x 20,000 sh.) 4,000,000
May 31, Cash 400,000
20x1 Dividend income 400,000
(a)
(200 purchase price - 20 dividend) x 20,000 sh. = 3,600,000

Requirement (b): Ex-dividend

May 21, Investment in FVOCI securities 4,000,000
20x1 Cash (200 x 20,000 sh.) 4,000,000
May 31,
20x1
No entry

9. Solution:
Sept. 30, Stock rights (1,000 rts. x ₱5) 5,000
20x1 Unrealized gain – P/L 5,000
Dec. 31, Stock rights [1,000 x (₱6 - ₱5)] 1,000
20x1 Unrealized gain – P/L 1,000
10. Solution:

T/P value
FV of share right-on - Subscription price
of 1 right = No. of rts. needed to purchase one share + 1

T/P value 40 - 30
of 1 right = 4+1

Theoretical/parity value of 1 right = ₱2

Dec. Stock rights (10,000 x ₱2) 20,000

25,
Unrealized gain – P/L 20,000
20x1

LONG TERM INVESTMENT: PROBLEM 5: FOR CLASSROOM DISCUSSION

1. Solution:

Jan. 1, 20x1
Prepaid insurance 50,000
Cash 50,000

Dec. 31, 20x1

Insurance expense 50,000
Prepaid insurance 50,000

December 31, 20x3

Cash surrender value 90,000
Insurance expense 30,000
Retained earnings 60,000

September 1, 20x4
Cash 3,000
Insurance expense 3,000

December 31, 20x4

Cash surrender value 20,000
Insurance expense 20,000

Jan. 1, 20x5
Prepaid insurance 50,000
Cash 50,000

Aug. 1, 20x5
Cash 5,000,000
Prepaid insurance (50K x 6/12) 25,000
Cash surrender value 120,000
{110K + [(130K – 110K) x 6/12]}
Gain on life insurance 4,855,000
BASIC DERIVATIVES: PROBLEM 5: FOR CLASSROOM DISCUSSION
1. Solutions:
➢ Dec. 15, 20x1 (Contract date)
Hedged item – None Forward contract
(Derivative)
Dec. 15, 20x1
No entry

➢ Dec. 31, 20x1 (Reporting date)

The value of the derivative is computed as follows:
Purchase price under the forward contract
(10,000 x 1.24) 12,400
Purchase price in the market (10,000 x 1.27) 12,700
Gain/ Derivative asset 300

Dec. 31, 20x1

Forward contract (asset).. 300
Gain on forward
contract.. 300
[(1.27 forward rate – 1.24 forward
rate) x 10K]

➢ Jan. 15, 20x2 (Settlement date)

Gross settlement
Jan. 15, 20x2
Cash - foreign currency.. .13,000
(10K x 1.30)
Cash - local currency….
….12,400
Forward contract (asset)…
300
Gain on forward contract....
300
[(1.30 – 1.27) x 10K]

Net cash settlement

Hedged item – None Forward contract
(Derivative)
Jan. 15, 20x2 Jan. 15, 20x2
Cash [(1.30 – 1.24) x 10K]….. 600
Forward contract (asset)…
300
Gain on forward contract....
300
[(1.30 – 1.27) x 10K]

2. Solution:
Hedged item – None Futures contract
(Derivative)
Dec. 1, 20x1
Deposit with broker............10K
Cash………………………..
10K
 to record the initial margin deposit
with the broker

Hedged item – None Futures contract

(Derivative)
Dec. 31, 20x1
Futures contract (asset)... 20K
Gain on futures contract…..
20K
[(100 - 98) x 10,000]

to record the value of the derivative

computed as the change in the
underlying multiplied by the
notional amount.

Hedged item – None Futures contract

(Derivative)
Jan. 31, 20x2
Cash................................40K
Deposit with broker……....
10K
Futures contract (asset)….
20K
Gain on futures contract…
10K
[(98 - 97) x 10,000]

to record the net cash settlement of

the futures contract.

3. Solution:

Hedged item – None Call option (Derivative)

Mar. 1, 20x1
Call option....................400
Cash…............................400

Hedged item – None Call option (Derivative)

June 30, 20x1
Call option...................20,000
[(120 – 100) x 1,000]
Gain on call option……….
20,000

to record the increase in the fair

value of the call option due to the
increase in intrinsic value.

June 30, 20x1

Loss on call option….......300
(400 – 100)
Call
option…..........................300

to record the decrease in the fair

value of the call option due to the
decrease in time value.
 Hedged item – None Call option (Derivative)
July 1, 20x1
Cash…...................20,000
[(120 – 100) x 1,000]
Loss on call option…. . .100
Call option ……..……..
…..20,100
(400 + 20,000 – 300)

to record the net settlement of the

call option contract.

4. Solution:

Analysis:

➢ Jan. 1, 20x1
Hedged item – None Interest rate swap
(Derivative)
Jan. 1, 20x1
No entry

➢ Dec. 31, 20x1

The net cash settlement on the swap is determined as follows:
20x1 20x2
Receive variable (1M x 12% & 15%) 120,000 150,000
Pay 12% fixed 120,000 120,000
Net cash settlement - receipt - 30,000

The net cash settlement in 20x2 is discounted to determine the fair value of the
derivative on Dec. 31, 20x1:
➢ 30,000 x PV of 1 @ 15%, n=1 = 26,087 (asset)

Hedged item – None Interest rate swap

(Derivative)
Dec. 31, 20x1
Interest rate swap…..26,087
Gain on int. rate
swap…..26,087

to recognize the change in the fair

 value of the interest rate swap

➢ Dec. 31, 20x2

Hedged item – None Interest rate swap
(Derivative)
Dec. 31, 20x2
Cash…...................30,000
Interest rate
swap..........26,087
Gain on int. rate
swap......3,913
to record the net cash settlement of
the interest rate swap

INVESTMENT PROPERTY: PROBLEM 2: FOR CLASSROOM DISCUSSION

1. D
2. B
3. B

4. Solution:
 Farming land purchased for its investment potential. Planning permission has
not been obtained for building constructions of any kind. 700,000

APPLICABL
E

OTHER ITEMS STANDARD

 Factory which, due to a decline in activity, is no longer required and is
PFRS 5
now being held for sale.
 Factory in the process of being constructed on behalf of the
PFRS 15
government.
 New office building used as head office which was purchased
specifically in the center of a major city in order to exploit its capital PAS 16
gains potential.

5. C

6. B

7. B

8. A

9. Solution:
Acquisition cost 1,200,000
Professional fees and taxes 50,000
Repairs and renovations 200,000
Total cost 1,450,000

10. Solutions:
Requirement (a): Statement of profit or loss
(20M + 8M) – (15M – 10M) = 3,000,000 unrealized gain

Requirement (b): Statement of financial position

(20M + 8M) = 28,000,000
Requirement (c): Adjusting entry
Investment property 3,000,000
Unrealized gain 3,000,000

11. Solutions:
Requirement (a): Statement of profit or loss
(9M + 9M) ÷ 10 = 1,800,000 depreciation expense

Requirement (b): Statement of financial position

(9M + 9M) x 7/10 = 12,600,000

Requirement (c): Adjusting entry

Depreciation expense 1,800,000
Accumulated depreciation - Investment property 1,800,000

12. D

13. C

14. Solution:
Requirement (a):
Investment property (at fair value) 800,000
Accumulated depreciation 4,000,000
Impairment loss (squeeze) 200,000
Building 5,000,000

Requirement (b):
Investment property (at fair value) 1,400,000
Accumulated depreciation 4,000,000
Building 5,000,000
Revaluation surplus (squeeze) 400,000

Requirement (c):
Investment property (at carrying amount) 1,000,000
Accumulated depreciation 4,000,000
Building 5,000,000