Chapter 9 Investments Ia Part 1a

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) 85 80 Amount received from sale Answer: (100 – 10) = 90

1

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) Commission expense Cash 12/31/x1 Held for trading securities [(12,000 x 5) – 36,000] Unrealized gain – P/L 1/6/x1 Cash [(12,000 x 8) – 4,800] Held for trading securities (12,000 x 5) Realized gain Requirement (b): 1/1/x1 Held for trading securities (12,000 x 3) Commission expense Cash in bank 12/31/x1 Fair value adjustment [(12,000 x 5) – 36,000] Unrealized gain – P/L 1/6/x1 Cash [(12,000 x 8) – 4,800] Fair value adjustment Held for trading securities (12,000 x 3) Realized gain – P/L

36,000 1,800 37,800

24,000 24,000

91,200 60,000 31,200

36,000 1,800 37,800

24,000 24,000

91,200 24,000 36,000 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

2

1/6/x1 Investment in equity securities - FVOCI Unrealized gain – OCI

31,200 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 Retained earnings

53,400

53,400

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

20,000 20,000

Unrealized loss – OCI Investment in equity securities - FVOCI

2002 Dec. 31

Dec. 31

40,000 40,000

Held for Trading Securities Unrealized Gain – P/L Unrealized loss – OCI Investment in equity securities – FVOCI

4,000 4,000 240,000

Requirement (b): Effect on 2001 profit (loss): Recognized decline in value of held for trading securities Effect on 2002 profit (loss): Recognized increase in value of held for trading securities

3

240,000

₱(20,000) ₱ 4,000

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

20,000 1,000 21,000

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

8,000

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

2,850 3,150

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

8,000

6,000

20,000 1,000 21,000

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

8,000

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

2,850 4,000 3,150

8,000

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] Investment in equity securities - FVOCI

9,000

1/6/x1 Unrealized loss – OCI Investment in equity securities - FVOCI

3,150

9,000

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] Investment in FVOCI securities

4

2,850 2,850**

**[(21,000 - 9,000) x ½] – 3,150 = 2,850 Retained earnings Unrealized loss – OCI

7,650 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 Unrealized Gain on Trading Securities

5

7,000 7,000

PROBLEM 4: CLASSROOM ACTIVITIES

ACTIVITY #1: Solution: Investment in PLDT shares (FVPL) Unrealized gain – P/L

47,280 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 Unrealized gain – P/L

1,910.10* 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 ABS SNLFMNY

DEBT EQUITY DEBT

6

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

ACTIVITY #3: 1. 2. 3. 4. 5. 6. 7.

A A D C A C A

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

7

D C A C C

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 Quoted Price Transaction Costs Net price

New York 103 (1) 102

London 106 (5) 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. 5. 6. 7. 8. 9.

C – the fair value on Dec. 31, 2003 C (82K + 132K + 28K) = 242,000 total fair value A C (120K -150K) = (30K); (185K – 225K) = (40K) B 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. 8

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

9