question archive Honesto Company's investment account has the following transaction during the year: Jan
Honesto Company's investment account has the following transaction during the year: Jan
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Honesto Company's investment account has the following transaction during the year: Jan. 10, 2020 Acquired the following investments at a lump sum price of P1,000,000:
ABC Company - 1,000 shares (par value, P80; market price is P100 per share)
DEF Corporation - 5,000 shares (par value, P100; market price is P105 per share)
GHI Company - 5,000 shares (par value, P70; the market price is P75 per share)
Honesto Company paid 1% of the price as the broker's fee.
Honesto Company classified all the above securities as trading securities.
Dec. 31, 2020 The following are the fair values of the investment at year-end:
ABC Company - P105 per share
DEF Corporation - P99 per share
GHI Company - P78 per share
June 1, 2021 Honesto Company sold 500 shares of ABC Company at P115 per share.
Sept. 1, 2021 The company purchased 2,000 shares of JKL Company for P300,000. The par value of the JKL share is P160. The company paid 1% of its price as a broker's fee. The company classified this investment at FVTOCI.
Dec. 31, 2021 The following are the fair values of the investment at year-end:
ABC Company - P101 per share
DEF Corporation - P95 per share
GHI Company - P83 per share
JKL Company - P163 per share
Requirements:
1. The necessary journal entries to record the above transactions.
2. How much is the carrying value of the investment at fair value?
3. How much is the unrealized holding gain or loss that will be reported in profit or loss on December 31, 2020?
4. How much is the unrealized holding gain or loss that will be reported in equity on December 31, 2021?
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Answer:
1. Journal Entries:
1/10/2020: (Explanation 1)
Trading Securities 100,000
Transaction Costs 10,000
Cash 110,000
12/31/2020: (Explanation 2)
Unrealized Loss-Trading Securities 10,000
Trading Securities 10,000
6/1/2021: (Explanation 3)
Cash 57,500
Trading Securities 52,500
Gain on Sale of Trading securities 5,000
9/1/2021: (Explanation 4)
Financial Asset @ FVOCI 303,000
Cash 303,000
12/31/2021: (Explanation 5)
Trading Securities 3,000
Unrealized Gain - Trading Securities 3,000
Financial Asset @ FVOCI 23,000
Unrealized Gain - OCI 23,000
2. The total carrying value as of investments at fair value is 1,266,500. (Explanation 6)
3. The unrealized holding loss that will be reported in profit or loss on December 31, 2020 is 10,000. (Explanation 7)
4. The unrealized holding gain that will be reported in equity on December 31, 2021 is 23,000. (Explanation 8)
Step-by-step explanation
- The initial measurement of trading securities is at Fair value. Any transaction costs are immediately expensed in the profit/loss statement. The entity purchased such trading securities in a lump-sum price; therefore, we have to allocate such lump-sum price in the shares' relative fair value. Such allocated costs will become the investment's initial measurement. Coincidentally, the fair value of the trading securities is actually equal to its allocation of lump-sum price.
| Fair Value 1/10/2020 | Fraction | Allocation | |
| ABC (1000 shares x 100) | 100000 | 10.0% | 100000 |
| DEF (5000 shares x 105) | 525000 | 52.5% | 525000 |
| GHI 5000 Shares (5000 x 75) | 375000 | 37.5% | 375000 |
| 1000000 | 1000000 |
2. In order to arrive to the unrealized holding gains/losses, The fair value at the date of acquisition is compared with the ending FV of securities.
To illustrate:
| FV 1/10/2020 | FV 12/31/2020 | Gain/(Loss) |
| 100,000.00 | 105,000.00 | 5,000.00 |
| 525,000.00 | 495,000.00 | (30,000.00) |
| 375,000.00 | 390,000.00 | 15,000.00 |
| Total Unrealized loss -TS | (10,000.00) |
3. on 6/1/2021, ABC's trading securities were sold by an entity, which resulted to a gain on sale. The proceeds of the sale were compared with the carrying amount of the shares sold.
To illustrate:
| Proceeds of sale (500 shares x 115) | 57500 |
| Less: Carrying Amount of ABC Securities (500 shares x 105) | 52500 |
| Gain on sale of ABC shares | 5000 |
4. On 9/1/2021, the entity purchased a securities where its classification / business model is at FVOCI. The initial measurement of the latter is Fair value PLUS any Transaction Costs. Therefore:
| Sale price @ Fair value | 300,000 |
| Add: Transaction Costs (10% of selling price) | 3,000 |
| Total recognized as F..A@FVOCI | 303,000 |
5. In order to arrive to the unrealized holding gains/losses, The fair value at the date of acquisition is compared with the ending FV of securities. The trading securities' unrealized gain/losses are to be presented immediately in the profit/losses statement. The financial asset measured at FVOCI's unrealized gains/losses are presented in the equity as other comprehensive income.
To illustrate:
For trading securities
| Trading Securities | FV 12/31/2020 | FV 12/31/2021 | Gain/(Loss) |
| ABC 500 shares | 52,500.00 | 50500 | (2,000.00) |
| DEF 5000 shares | 495,000.00 | 475000 | (20,000.00) |
| GHI 5000 Shares | 390,000.00 | 415000 | 25,000.00 |
| Total Unrealized gain -TS | 3,000.00 |
For FA@FVOCI:
| FA @ FVOCI | FV 9/1/2021 | FV 12/31/2021 | Gain/(Loss) |
| JKL | 303000 | 326000 | 23000 |
6. The total carrying value as of investments at fair value is computed by adding the CA of both Trading securities and Financial asset at FVOCI, because these securities are measured at fair value.
To illustrate:
| CA as of 12/31/2021 | |
| Trading Securities | 940500 |
| Financial Asset @ FVOCI | 326000 |
| Total | 1266500 |
7. The unrealized holding gain/losses to be presented in equity is the holding gain/losses which are present in the FA@FVOCI
To illustrate:
| FA @ FVOCI | FV 9/1/2021 | FV 12/31/2021 | Gain/(Loss) |
| JKL | 303000 | 326000 | 23000 |
