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    Investment in Equity Securities - Problem 16-5 and 16-7

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    Jessie Dela Cruz
    The document discusses stock rights and accounting for investments in associates. It provides examples of calculating theoretical stock right values, recording stock right transactions, and accounting for share dividends and stock rights using the equity method for investments in associates. Significant influence is defined as 20-50% ownership of an investee, which requires using the equity method to account for investments in associates. Goodwill or gain on bargain purchase may result if the investment cost does not equal the actual investment value.

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    Investment in Equity Securities - Problem 16-5 and 16-7

    Uploaded by

    Jessie Dela Cruz
    322 views4 pages
    The document discusses stock rights and accounting for investments in associates. It provides examples of calculating theoretical stock right values, recording stock right transactions, and accounting for share dividends and stock rights using the equity method for investments in associates. Significant influence is defined as 20-50% ownership of an investee, which requires using the equity method to account for investments in associates. Goodwill or gain on bargain purchase may result if the investment cost does not equal the actual investment value.

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    The document discusses stock rights and accounting for investments in associates. It provides examples of calculating theoretical stock right values, recording stock right transactions, and accounting for share dividends and stock rights using the equity method for investments in associates. Significant influence is defined as 20-50% ownership of an investee, which requires using the equity method to account for investments in associates. Goodwill or gain on bargain purchase may result if the investment cost does not equal the actual investment value.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    322 views4 pages

    Investment in Equity Securities - Problem 16-5 and 16-7

    Uploaded by

    Jessie Dela Cruz
    The document discusses stock rights and accounting for investments in associates. It provides examples of calculating theoretical stock right values, recording stock right transactions, and accounting for share dividends and stock rights using the equity method for investments in associates. Significant influence is defined as 20-50% ownership of an investee, which requires using the equity method to account for investments in associates. Goodwill or gain on bargain purchase may result if the investment cost does not equal the actual investment value.

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    © All Rights Reserved
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    You are on page 1of 4

    Problem 16-5

    The sale of stock right is not applicable in the Philippine Set-up as far as stocks that are actively in the stock market.
    *Date of Record in the stock right can be different from the date of record in relation with dividends.
    *If the stock rights are sold on or before the date of record - RIGHT ON - The buyer will be able to exercise the right.
    *If the stock rights are sold after the date of record - EX RIGHT - The seller will still be able to exercise the right.

    Theoretical value is useful when the stock rights are ACCOUNTED FOR SEPARATELY.
    Theoretical value is used when the fair value is not GIVEN.
    Ex Right = (Market Price - Subscription Price) / No. of Rights needed for a share
    Right On = (Market Price - Subscription Price) / No. of Rights needed for a share + 1

    Ex-Right = (P125 - P100) / 4 = P6.25 per stock right


    Right On = (P125 - P100) / 5 = P5 per stock right

    To record the investment:


    Investment in Vivacious Company 2,100,000.00
    Cash (P84 x 25,000 shares) 2,100,000.00

    To recognize the share right (right on):


    Share Right (P5 x 25,000 shares) 125,000.00
    Investment in Vivacious Company 125,000.00

    Financial Assets:
    Investment in Vivacious Company 1,975,000.00
    Share Right 125,000.00

    To exercise the right: 1 new share = 4 rights; 6,250 new shares = 25,000 rights
    Investment in Vivacious Company 750,000.00
    Cash (P100 x 6,250) 625,000.00
    Share Right 125,000.00

    Problem 16-7
    Investment in Equity Shares 3,200,000.00
    Cash (80,000 shares x P40) 3,200,000.00

    Share Dividend - Memorandum Entry:


    No. of Shares Value per Share Total
    80,000.00 40.00 3,200,000.00
    100,000.00 32.00 3,200,000.00 25.00% Share Dividend

    Cash (P5 x 100,000 shares) 500,000.00


    Dividend Income 500,000.00

    *When the problem is silent, ex-right

    Share Right (P5 x 100,000 share rights) 500,000.00


    Investment in Equity Securities 500,000.00

    What if the fair value of right is not available, therefore market value of shares = P50
    Ex Right Value = (P50 - P30) / 5 = P4 per right
    Right On Value = (P50 - P30) / 5 + 1 = P3.33 per right

    Selling Price (P7 per right x 40,000 rights) 280,000.00


    Less: Carrying Amount (P5 x 40,000 rights) 200,000.00
    Gain on Sale 80,000.00

    Cash 280,000.00
    Share Right 200,000.00
    Gain on Sale 80,000.00

    Investment in Equity Shares 660,000.00


    Share Right 300,000.00
    Cash (12,000 shares x P30) 360,000.00
    No. of Shares Value per Share Total
    80,000.00 40.00 3,200,000.00
    100,000.00 32.00 3,200,000.00 25.00% Share Dividend
    100,000.00 27.00 2,700,000.00 Effect of Allocation of Stock Right Value
    112,000.00 30.00 3,360,000.00

    Selling Price (P35 per share x 80,000 shares) 2,800,000.00


    Less: Carrying Amount (P30 x 80,000 shares) 2,400,000.00
    Gain on Sale 400,000.00

    Cash 2,800,000.00
    Investment in Equity Securities 2,400,000.00
    Gain on Sale 400,000.00

    INVESTMENT IN ASSOCIATES
    *PAS 28 - Investment in Associates and Joint Venture
    *Investment is classified as ASSOCIATE when the INVESTOR has SIGNIFICANT INFLUENCE in the company.
    *Associate = Investee - the company where the shares of the investor originate
    *Investment in Ordinary shares is the only kind of investment qualified for INVESTMENT IN ASSOCIATE
    Significant Influence:
    Quantitative Measure - AT LEAST 20% UP TO 50% Representation:
    Qualitative Measure - Depends on the analysis of role of investor 1 to 19% Ordinary Investment - P&L / OCI - PFRS 9
    20% to 50% Investment in Associate - PAS 28
    EQUITY METHOD will be used for accounting on investment in 51 to 100% Investment in Subsidiary - PFRS 3 and PFRS 10
    associate.
    *Share in the net income, OCI, and dividends of ASSOCIATE
    *No changes in fair value whether P/L or OCI will be recognized; rather the fair value will be disclosed.
    *Impairment may also be recognized.

    Problem 17-1
    Investment Cost is higher than the Actual Investment = DIFFERENCE - trace the difference - if the value cannot be traced already - GOODWILL
    Investment Cost is lower than the Actual Investment = DIFFERENCE - trace the difference - if the value cannot be traced already - GAIN ON BARGAIN PURCHASE
    and PFRS 10

    ON BARGAIN PURCHASE

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