Practice Exercises FOR Financial Assets PDF

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LUANA, JACQUELINE M.PRACTICE EXERCISES FOR FINANCIAL ASSETS @ FAIR VALUEProblem 1 ABC Co. holds 1,000 shares of XYZ Inc. an unlisted entity, as investment in equity securities. The investment was purchased years ago. The following information relates to this investment as of the end of the current r...

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LUANA, JACQUELINE M. PRACTICE EXERCISES FOR FINANCIAL ASSETS @ FAIR VALUE Problem 1 1) ABC Co. holds 1,000 shares of XYZ Inc. an unlisted entity, as investment in equity securities. The investment was purchased years ago. The following information relates to this investment as of the end of the current reporting period. Cost per share Transaction cost per share(historical) Quoted price Recent market transaction price per share Transaction cost per share (current)

P 3.00 1.00 N/A 2.00 0.50

How much is the valuation of the investment in ABC’s current statement of financial position? Answer is 2,000(1,000 shares x Recent market transaction price per share. Problem 2 2) On January 1, 20x1, ABC Co. acquired 12,000 shares of XYZ Co, at P3 per share, the quoted price on this date. ABC Company incurred P 1,800 brokerage commission on the acquisition. Requirement A: HFT, Doesn’t used FV adjustment Account. Trading Securities 36,000 Commission Expense 1,800 Cash 37,800 Requirement B: HFT, Uses Fair Value Adjustment Account Held for Trading Securities 36,000 Commission Expense 1,800 Cash

37,800

Requirement C: FA-FVOCI Financial Assets- FVOCI Cash

37,800

37,800

On December 31, 20x1, the quoted price per share is P5.00. If the shares are acquired on this date, the transaction cost is P0.75 per share. Requirement A: 12,000x5=60,000 60,000-36,000=24,000 Trading Securities 24,000 Unrealized Gain-Trading Securities 24,000 Requirement B: Fair Value Adjustment 24,000 Unrealized Gain-Trading Securities 24,000

Requirement C: Financial Assets-FVOCI Unrealized Gain-FVOCI

24,000 24,000

On January 6, 20x2, all of the shares were sold at P8.00 per share. The commission paid on the sale is P4,800. Requirement A: Cash (12,000x8=96,000-4,800) 91,200 Trading Securities 60,000 Retained Earnings 31,200 Unrealized Gain – Trading Securities Retained Earnings Requirement B: Cash (12,000x8=96,000-4,800) Held for Trading Securities Retained Earnings Fair Value Adjustment Requirement C: Cash (12,000x8=96,000-4,800) Financial Assets-FVOCI Retained Earnings Unrealized Gain – FVOCI Retained Earnings

24,000 24,000

91,200 36,000 31,200 24,000 91,200 60,000 31,200 24,000 24,000

Requirements: a) The investment is classified as held for trading. Prepare the journal entries. ABC Co. does not use a fair value adjustment account. b) The investment is classified as held for trading. Prepare the journal entries. ABC Co. uses a fair value adjustment account (use this account title and recognize it like that of an allowance) c) The investment is classified as FA-FVOCI by election. Prepare the journal entries. ABC Co. does not use a fair value adjustment account. Problem 3 On January 1, 20x1, ABC Co. acquired 10,000 shares of XYZ Inc. at P15 per share, the quoted price on this date. ABC Co. incurred P7,500 brokerage commission for the acquisition. On December 31, 20x1, the quoted price per share was P13.00. If the shares were acquired on this date, the transaction cost is P0.65 per share. On December 31, 20x2, the quoted price per share was P20.00 if the shares were acquired on this date, the transaction cost is P1.00 per share.

On January 6, 20x3, 7,000 of the shares were sold at P25.00 per share. The commission paid on the sale was P1.25 per share. 20x1 Jan 1 Financial Asset- FVOCI 157,500 Cash 157,500 Dec 31 Unrealized Loss-FVOCI 20,000 Financial Asset-FVOCI 20,000 20x2 Dec 31 Financial Asset-FVOCI 70,000 Unrealized Gain-FVOCI 70,000 20x3 Jan 6 Cash 166,250 Financial Asset-FVOCI 140,000 Retained Earnings 26,250 Requirements: a) If the investment is classified as an investment in equity securities at FVOCI, how much is the carrying amount of the investment in ABC’s December 31, 20x1 statement of financial position? Answer: 130,000 is the Carrying Amount as of Dec 31, 20x1 b) If the investment is classified as investment in equity securities, measured at FVOCI, how much is the balance of the cumulative unrealized gains(losses) on fair value changes as of December 31, 20x2? Answer: Unrealized Gain is equal to 42,500 c) If the investment is classified as investment in held for trading securities, how much is the effect of the year-end trading valuation of the investment in ABC’s 20x2 profit or loss? 20,000? 70,000 d) If the investment is classified as investment in equity securities, measured at FVOCI, how much is the effect of the year-end valuation of the investment in ABC’s 20x2 profit or loss? e) If the investment is classified as FVPL, how much is the realized gain(loss) on the January 6, 20x3 sale? 25,250 Problem 4 Webster Inc. carries the following marketable equity securities on its books at December 31, 20x1 and 20x2. All securities were purchased during 20x1 and there were no beginning balances in any market adjustment accounts. HELD FOR TRADING SECURITIES V Company W Company X Company Total

COST

FVOCI (ELECTION) SECURITIES Y Company Z Company Total

COST

50,000 26,000 70,000 P146,000

FV 12.31.20X1 26,000 40,000 60,000 P126,000

FV 12.31.20X2 40,000 40,000 50,000 P130,000

420,000 100,000 P520,000

FV 12.31.20X1 360,000 120,000 P480,000

FV 12.31.20X2 100,000 140,000 P240,000

Requirements: a) Give the entries necessary to record the valuations for both held for trading and FVOCI (election) securities at 12.31.20x1 and 12.31.20x2. b) What net effect would these valuations have on the 2001 and 2002 profit or loss? Requirement A: 20x1 Jan 1

Dec 31

20x2 Dec 31

Trading Securities Financial Asset-FVOCI Cash

146,000 520,000 666,000

Unrealized Loss-Trading Securities Trading Securities

20,000

Unrealized Loss-FVOCI Financial Assets- FVOCI

40,000

Trading Securities Unrealized Gain-TS Unrealized Loss-FVOCI Financial Asset-FVOCI

Requirement B: 20x1- Decrease of 20,000 20X2-Increase of 4,000

20,000

40,000

4,000 4,000 240,000 240,000...