Problem 15 – 1 (ACP)

Template Company provided the following with respect to marketable equity securities held
as “trading”.
1. The entity carried the following securities on December 31, 2020:

Cost Market
A. Ordinary – 4,000 shares 330,000 300,000
B. Ordinary – 1,000 shares 200,000 160,000
C. Preference – 2,000 shares 300,000 310,000
830,000 770,000
2. On June 30, 2021, the entity sold all the B ordinary shares for P140,000.
3. On December 31, 2021, the securities are quoted as follows:
A. Ordinary 80
C. Preference 180
Required:
Prepare the journal entries to record the transactions.
ANSWER:
12/31/20 Unrealized loss – TS 60,000
Trading Securities 60,000
6/30/2010 Cash 140,000
Loss on sale of trading securities 20,000
Trading securities 160,000
12/31/21 Trading securities (680,000 – 610,000) 70,000
Unrealized gain – TS 70,000
Carrying Amount Market
A. Ordinary (4,000 x 80) 300,000 320,000
C. Preference (2,000 x 180) 310,000 360,000
610,000 680,000
Problem 15 – 2 (IAA)
On January 1, 2020, Spark Company purchased the following trading securities:
Fair value
 Cost December 31, 2020
Aura Company ordinary 600,000 650,000
Bora Company preference 350,000 200,000
Cara Company bonds 500,000 400,000
1,450,000 1,250,000
On October 1, 2021, the entity sold one – half of Aura Company ordinary for P375,000.
On December 31, 2021, the fair value of the remaining securities was P800,000.

Required:
Prepare journal entries to record the transactions.
ANSWER:
2020
Jan. 1 Trading Securities 1,450,000
Cash 1,450,000
Dec. 31 Unrealized loss – TS 200,000
Trading Securities 200,000

2021
Oct. 1 Cash 375,000
Trading securities 325,000
Gain on sale of TS 50,000

Sale price 375,000

Carrying amount sold (650,000 x ½) 325,000
Gain on Sale 50,000
Dec. 31 Unrealized loss – TS 125,000
Trading Securities 125,000

Aura 325,000
Bora 200,000
Cara 400,000
Total Carrying amount – Dec. 31, 2019 925,000
Fair Value – Dec. 31, 2020 800,000
Decrease in fair value 125,000
Problem 15 – 3 (IAA)

Splendid Company purchased equity securities during 2020 to be held as investments. The
cost and market value of the investments are:

December 31, 2020 Cost Market

Trading securities 2,000,000 2,500,000
Securities not held for trading 3,000,000 2,900,000

December 31, 2021 Cost Market

Trading securities 2,000,000 2,200,000
Securities not held for trading 3,000,000 2,300,000
The securities not held for trading are measured at fair value through other comprehensive
income be irrevocable election.

Required:
Prepare journal entries for 2020 and 2021.
ANSWER:
December 31, 2019
Trading Securities 500,000
Unrealized Gain – TS (2.5M – 2M) 500,000
Unrealized loss – other comprehensive income 100,000
Financial Asset – FVOCI 100,000
December 31, 2020
Unrealized loss – TS 300,000
Trading securities (2.5M – 2.2M) 300,000
Unrealized loss – other comprehensive income 600,000
Financial Asset – FVOCI 600,000

Problem 15 – 4 (IAA)
Transitory Company acquired the following equity securities:

December 31, 2019 Cost Market

 Moon Company 200,000 120,000
Star Company 400,000 280,000

Sun Company 600,000 650,000

1,200,000 1,050,000

December 31, 2020 Cost Market

Moon Company 200,000 220,000
Star Company 400,000 300,000
Sun Company 600,000 580,000
1,200,000 1,100,000
The equity securities do not qualify as held for trading. The entity has elected irrevocably to
present changes in fair value in other comprehensive income.
Required:
Prepare journal entries on December 31, 2020 and December 31, 2021.
ANSWER:
December 31, 2019
Unrealized loss – other comprehensive income 150,000
Financial asset – FVOCI 150,000
December 31, 2020
Financial Asset – FVOCI 50,000
Unrealized loss – other comprehensive income 50,000

Step-by-Step explanation
    Carrying Amount Market Unrealized gain/(loss)
12/31/2019 Total 1,200,000 1,050,000  (150,000)
When the fair value/ market is lower than the cost, there will be an unrealized loss that the company need to
recognized under other comprehensive income, since the securities were elected irrevocably to be presented
as a Fair value through other comprehensive income. 

    Carrying amount Market Unrealized gain/loss

12/21/2020 Total 1,050,000 1,100,000     50,000
The Market value of the last year's securities will be the beginning carrying amount for the succeeding year.
Since the company incurred an Unrealized gain, we can offset it to the loss recognized on the prior period.
(Note that we can only offset amounts not exceeding to the loss recognized)
SOLUTIONS TO AMOUNTS ENTERED IN THE JOURNAL ENTRIES
December 31, 2019 Cost Market Difference

Moon Company 200,000.00 120,000.00 80,000.00

Star Company 400,000.00 280,000.00 120,000.00

Sun Company 600,000.00 650,000.00 -50,000.00

  1,200,000.00 1,050,000.00 150,000.00

Market Value of Securities at December 31, 2019 1,050,000.00

Less: Cost of the Securities 1,200,000.00

Unrealized Loss on FV Change -150,000.00

 
December 31, 2020 Cost Market Difference
Moon Company 200,000.00 220,000.00 -20,000.00
Star Company 400,000.00 300,000.00 100,000.00
Sun Company 600,000.00 580,000.00 20,000.00
  1,200,000.00 1,100,000.00 100,000.00
Market Value of Securities at December 31, 2020 1,100,000.00
Less: Market Value of the Securities at December 31, 2019 1,050,000.00
Unrealized Gain on Fair Value Change 50,000.00

Problem 15 – 5 (IAA)
Aborigine Company reported the following accounts in the statement of financial position on
January 1, 2020.

Noncurrent assets
Financial asset – FVOCI 4,000,000
Market adjustment for unrealized loss (500,000)
Market value 3,500,000

Other comprehensive income

Unrealized loss (500,000)
An analysis of the investment portfolio revealed the following on December 31, 2020.

Cost Market
XYZ ordinary share 1,000,000 1,200,000
ABC ordinary share 2,500,000 2,000,000
RST preference share 500,000 200,000
4,000,000 3,400,000
On July 1, 2021, the ABC ordinary share was sold for P2,100,000.

On December 31, 2021, the remaining investments have the following market value:
XYZ ordinary share 1,000,000
RST preference share 150,000
Required:
1. Prepare journal entry to recognize the decrease in value on December 31, 2020.
2. Prepare journal entry to record the sale of ABC ordinary share on July 1, 2021.
3. Prepare journal entry on December 31, 2021 to recognize the change in the fair value.

ANSWER:
12/31/20 Unrealized loss – other comprehensive income 600,000
FA – FVOCI (4M – 3.5M) 600,000
7/1/20 Cash 2,100,000
FA – FVOCI 2,000,000
Retained earnings 100,000
Retained earnings 500,000
Unrealized loss – other comprehensive income 500,000
1. Unrealized loss – OCI 250,000
Financial asset – FVOCI 250,000

Carrying Amount Market

XYZ 1,200,000 1,000,000
 RST 200,000 150,000
1,400,000 1,150,000

Total (1,400,000 – 1,150,000 = 250,000)

Total Cost (1,000,000 + 500,000) 1,500,000
Market Value 1,150,000
Cumulative unrealized loss 350,000
Unrealized loss per book 100,000
Increase in unrealized loss 250,000
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Step-by-Step explanation
1st table      
12/31/2020 Cost/Carrying amount Market Value gain/(loss)
XYZ ordinary shares 1,000,000 1,200,000 200,000
ABC  ordinary shares 2,500,000 2,000,000 (500,000)
RST preference shares    500,000    200,000 (300,000)
Total 4,000,000 3,400,000 (600,000)
When Market value is lower than the cost there will be an unrealized loss, (4M - 3.4M) 600,000. Since
the Financial assets are valued at OCI, the loss will be then under other other comprehensive income.
2nd table  
7/1/2021 (first entry)  
Cash/ Purchase price 2,100,000
Less: Market value 2,000,000
Gain on Sale - closed to retained earnings    100,000
7/1/2021 (second entry)  
When the assets are sold, the unrealized loss incurred in the specific assets sold are closed (debited) to
retained earnings. The loss for ABC ordinary shares amounted to 500,000 as computed at the above
table (first table). 
3rd table      
12/31/2021 Cost/Carrying amount Market Value gain/(loss)
XYZ 1,200,000 1,000,000 (200,000)
RST    200,000   150,000   (50,000)
Total 1,200,000 1,150,000 (250,000)
During the year-ended December 31, 2021, there is an unrealized loss again since the market value is
lower than the carrying amount.
(Note: The Carrying amount for this year will be the market value last year)