INVESTMENT IN EQUITY SECURITIES

PROBLEM 1 (Fair Value Method, Initial and Subsequent Recognition of FA-FVPL and FA-FVOCI)

On August 15, 2023, Orion Co. purchased 100,000 ordinary shares of Hercules Co. at P25 per share. Costs directly
attributable to the purchase of the shares amounted to P100,000.
At the end of the year, Hercules’s shares had a fair value of P28 per share.
At the end of 2024, Hercules’s shares had a fair value of P27 per share.
On August 15, 2025, Orion sold all of its shares in Hercules Co. at P29 per share, the fair value of Hercules’s shares
on this date.

Prepare the journal entries in the books of Orion given the following independent assumptions:
1. The shares were classified as financial asset at fair value through profit or loss.
2. The shares were classified as financial asset at fair value through other comprehensive income.

PROBLEM 2 (Fair Value Method, Initial and Subsequent Recognition of FA-FVPL and FA-FVOCI)

On June 30, 2023, Cassiopeia purchased the following shares at a total cost of P3,600,000:
Number of shares Total fair value
Aquila 50,000 450,000
Grus 100,000 1,350,000
Indus 200,000 1,800,000

At the end of the year, the fair values of the shares are as follows:
Aquila P12
Grus 16
Indus 6

On June 30, 2024, Cassiopeia sold half of its holdings in Indus at P7.50 per share.

Prepare the journal entries in the books of Cassiopeia given the following independent assumptions:
1. The shares were classified as financial asset at fair value through profit or loss.
2. The shares were classified as financial asset at fair value through other comprehensive income.

PROBLEM 3 (Exchange; with and without commercial substance)

On April 1, 2023, Cygnus Inc. purchased 50,000 of Vega Inc.’s preference shares in exchange of a tract of Cygnus’s
land which was carried in the books at P1,200,000. The shares were classified as financial assets at fair value through
profit or loss.

Prepare the necessary journal entries on the books of Cygnus given the following independent assumptions:
1. The land had a fair value of P1,400,000.
2. Vega’s shares had a fair value of P23 per share, and the land’s fair value cannot be measured reliably.
3. The fair value of the land nor Vega’s shares cannot be determined reliably.

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PROBLEM 4 (FA-FVPL; Cash and Share Dividends)

At the beginning of 2023, Emir Co. purchased 100,000 of Cetus Co.’s ordinary shares for P3,000,000. The entity
designated the investment as financial asset at fair value through profit or loss.
On June 30, 2023, Cetus declared a P1.50 cash dividend to all of its shareholders of record as of July 31, to be
distributed on August 31.
On September 15, Emir sold 20,000 shares of its investment in Cetus, receiving P650,000.
At the end of 2023, Cetus’s shares had a fair value of P31 per share.

1. Prepare the necessary entries on the books of Emir.

2. Suppose that instead of declaring cash dividends, Cetus declared a 20% share dividend. Prepare the necessary
journal entries on the books of Emir.

PROBLEM 5 (Equity Method, FVA-FVOCI to Associate achieved in stages, PHI, Goodwill and Gain)

At the beginning of 2023, Story Inc. purchased 100,000 shares of Laura Inc.’s ordinary shares at P20 per share, giving
the company 10% ownership in the Laura. At the end of 2023, Laura’s shares were trading at P22 per share. The
shares are treated by Story as financial asset at fair value through other comprehensive income.
At the beginning of 2024, Story purchased another 150,000 shares of Laura at P24 per share (fair value on that
date), an additional 15% ownership, giving the entity a significant influence over Laura. On this date, Laura’s net
assets had a carrying amount of P18,000,000, and the fair value of Laura’s net assets approximates its carrying
amount.
Other details pertaining to the investee are as follows:
Net income Cash dividend*
2023 P3,000,000 P1,500,000
2024 4,000,000 2,000,000
*Cash dividends are declared and paid at the end of the year.

1. Prepare the necessary journal entries in the books of Story in 2023 and 2024.
2. Assuming that the fair value of the shares was at P15 on the date the entity had significant influence, prepare
all the necessary entries in 2024.

PROBLEM 6 (Equity Method, Goodwill, Amortization of Excess)

At the beginning of 2023, Daigle Co. purchased 400,000 ordinary shares of Lauren Co. at P30 per share, giving Daigle
25% ownership and a significant influence over Lauren. On this date, the net assets of Lauren amounted to
P32,000,000.

On the date of acquisition, the carrying amount of Lauren’s identifiable assets and liabilities approximate their
carrying amounts, except for the following:

a. Aggregate fair value of Lauren’s depreciable property plant and equipment is P8,000,000 greater than its
carrying amount. Such items are depreciated over 10 years on the date of acquisition.
b. The fair value of Lauren’s inventories was P2,000,000 greater than its carrying amount. These items were sold
at the end of the year.
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During the year, the Lauren earned a net income of P10,000,000, and declared cash dividends of P2,000,000.

Prepare the journal entries on Daigle’s books in 2023.

PROBLEM 7 (Equity Method, Losses of Associate, Recovery of Losses)

At the beginning of 2023, Grant Corp. 20% of Natalie’s outstanding ordinary shares for P2,000,000, giving Grant a
significant influence over Natalie.

Profits and losses of Natalie during each year from 2023 to 2027 are as follows:

Net income/(loss)
2023 (4,000,000)
2024 (5,000,000)
2025 (3,000,000)
2026 500,000
2027 4,000,000

Prepare the necessary entries on the books of Grant.

PROBLEM 8 (Discontinuing the use of the equity method)

At the beginning of 2023, Sampson Inc. owns 25% of Marty Inc.’s outstanding ordinary shares. The shares owned
are appropriately classified as investment in associate in the books of Sampson on this date, and its carrying amount
was P6,000,000.

On June 30, 2023, Sampson sold half of its holdings in Marty for P4,000,000. Marty’s net income for the first half of
the year was P2,000,000. The fair value of the remaining interest of Sampson in Marty on the date of the sale was
P3,500,000. The remaining interest was reclassified as financial assets at fair value through other comprehensive
income. At the end of the year, the fair value of the remaining interest still held by Sampson was P3,200,000.

Prepare the journal entries in the books of Sampson.

August 2022