JARD-LEC-INVESTMENTS

ACCOUNTING FOR INVESTMENTS

done by the investor, or the shareholder.

INVESTMENT
Asset held by an enterprise for purposes of accretion of
wealth through distribution of interest, royalties,
dividends, and rentals or for capital appreciation or other
benefits to be obtained.
Not related to the central revenue producing function of
the enterprise. These assets are related to, but not limited
to, the following purposes: (S-C-A-R-F)
Other source of income
Long-term relationship with suppliers and customers
Acquisition of control or significant influence over
another company
Accumulation of funds for future use
For appreciation in value
Expected to contribute to the success of the business
either by exercising certain favorable effects upon sales
and operations or by making an independent contribution
to earnings over the long term.

ACCOUNTING FOR TRADING SECURITIES

Initial Recognition
Recorded at cost.
Cost = purchase price
Any transaction cost directly attributable to its
acquisition does not form part of the cost of
investment and is recorded as an expense.

INVESTMENT IN EQUITY SECURITIES

Investment in ownership shares and potential ownership
shares.
These investments are classified based on the intention of
the holding entity (investor) and the level of influence
acquired by the investor over the operating and financial
policies of the investee, as follows: (T-A-A-S)
Trading securities / Financial assets at fair value
through profit or loss (TS)
The intent is profit maximization through

market appreciation and resale.

Available for sale securities (AFS)
Intent is holding the securities for an indefinite
period of time or when the securities may be
used for tactical asset/liability purposes and
may be sold from time to time to effectively
manage interest rate exposure, prepayment risk
and liquidity needs.
Investment in associate
Significant influence is acquired. (20% or more)
Investment in subsidiaries
Significant control is acquired. (50% or more)

Example:
JARD Corporation purchased 2,000 shares of P100 par
value ordinary shares of EBVC Corporation for P125 per
share plus 1% brokers commission.
Trading Securities
250,000
Cash
250,000
Investment in EBVC Corporation.
Commission Expense
Cash
Payment to broker.
(P250,000 x 1%)

Fundamentals of Accounting 2 Review

Whenever a corporation needs to pool in funds for its
operations, it may issue shares of stock to potential investors in
exchange for cash, non-cash assets, or services. The pro-forma
journal entry is as follows:
Cash

xx
Share Capital - Ordinary
Share Premium - Ordinary

xx
xx

Fundamentals of Accounting 2 has shown us the accounting

treatment in the shoes of the investee, or the issuing company.
In this lecture, which is connected to Financial Accounting &
Reporting 1, we would now look at the accounting treatments
-ADAMSON UNIVERSITY-

Page 1 of 4

2,500
2,500

Subsequent Transactions
Receipt of Dividends
Cash Dividends
Cash
Dividend Revenue

10,000
10,000

Stock Dividends
-no journal entryMemo. Received 400 ordinary shares of EBVC Corporation
as 20% bonus issue on 2,000 shares originally held. The
adjusted cost for the 2,400 shares held is now P104.17 per
share.

Share/Stock Splits
-no journal entry-

Memo. Received additional 2,000 ordinary shares of EBVC

Corporation as a result of 2-for-1 split on 2,00 shares
originally held. The adjusted cost for the 4,000 shares held
is now P62.50 per share.

JARD-LEC-INVESTMENTS

Share/Stock Rights
A right granted to existing shareholders to
subscribe for new share before such shares are
offered for sale to the public.

On Septermber 19, 2014, EBVC Company distributed share

rights entitling shareholders to buy one new ordinary
share for P102 cash and two of these rights. On this date,
market values per ordinary share without rights are P103;
and for the share rights, P9.
Subsequently, JARD Corp sold 500 rights at P9 and
exercised the remaining rights.

reporting period).
Cash
xx
Loss on Sale of TS*
xx
Trading Securities (at carrying value)
Gain on Sale of TS*

ACCOUNTING FOR AVAILABLE FOR SALE SECURITIES

Initial Recognition
Recorded at cost.
Cost = purchase price
Any transaction cost directly attributable to its
acquisition does not form part of the cost of
investment and is recorded as an expense.

Share rights
22,500
Trading Securities
22,500
Receipt of rights.
(2,500 shares x P9 market value of rights)
Cash
Share rights
Sale of 500 share rights.

Example:
JARD Corporation purchased 2,000 shares of P100 par
value ordinary shares of EBVC Corporation for P125 per
share plus 1% brokers commission.

4,500
4,500

Available for Sale Securities

250,000
Cash
250,000
Investment in EBVC Corporation.

Trading Securities
120,000
Share rights
18,000
Cash
102,000
Exercise of 2,000 share rights.

xx
xx

Commission Expense
Cash
Payment to broker.
(P250,000 x 1%)

Statement Presentation and Measurement after Initial

Recognition
Trading securities are presented as current assets at
fair values, with unrealized gains or losses recognized
in profit or loss.
Unrealized gain or loss on TS is computed by
determining the difference in fair value of the
securities.
Carrying value of Trading Securities is equivalent to
its fair value as of reporting date.

2,500
2,500

Subsequent Transactions
Receipt of Dividends
Cash Dividends
Cash
Dividend Revenue

10,000
10,000

Stock Dividends
-no journal entry-

Assume that at balance sheet date 2014, the fair value of

EBVC stocks have a fair value of P130. And at balance
sheet date 2015, these stocks have fair values of P128.
2014
Trading Securities
Unrealized Gain/Loss on TS
(P130 - P125) x 2,500 shares

12,500
12,500

Memo. Received 400 ordinary shares of EBVC Corporation

as 20% bonus issue on 2,000 shares originally held. The
adjusted cost for the 2,400 shares held is now P104.17 per
share.

Share/Stock Splits
-no journal entry-

2015
Unrealized Gain/Loss on TS
Trading Securities
(P130 - P128) x 2,500 shares

5,000
5,000

Memo. Received additional 2,000 ordinary shares of EBVC

Corporation as a result of 2-for-1 split on 2,00 shares
originally held. The adjusted cost for the 4,000 shares held
is now P62.50 per share.

Disposal of Trading Securities

Any gain or loss on the sale is reported in profit or
loss (income statement).
Gain or loss is the difference between the net selling
price and its carrying amount (fair value as of latest

-ADAMSON UNIVERSITY-

Page 2 of 4

JARD-LEC-INVESTMENTS

Share/Stock Rights
A right granted to existing shareholders to
subscribe for new share before such shares are
offered for sale to the public.

On Septermber 19, 2014, EBVC Company distributed share

rights entitling shareholders to buy one new ordinary
share for P102 cash and two of these rights. On this date,
market values per ordinary share without rights are P103;
and for the share rights, P9.

Cash
xx
Loss on Sale of TS*
xx
Available for Sale Securities (at cost)
Gain on Sale of TS*

Available for Sale Securities

120,000
Share rights
18,000
Cash
102,000
Exercise of 2,000 share rights.
Statement Presentation and Measurement after Initial
Recognition
Trading securities are presented as non-current
assets at fair values, with unrealized gains or losses
recognized in equity under other comprehensive
income.
Carrying value of AFS is equivalent to its cost
plus/minus the Market Adjustment - AFS account
(Balance sheet line item).

On January 1, 2014, JARD Comp (Investor) purchases 25%

interest in EBVC Comp (Investee) for P1,000,000. At which time
the carrying value of the Investees net assets is P3,600,000. At
that time, EBVC has an item of property, plant, and equipment
with carrying amount of P4,200,000 and a fair value of
P4,600,000. Said item has a remaining useful life of 5 years as
of January 1, 2014. During the year 2014, EBVC reported net
income of P1,200,000 and declared and paid cash dividends of
P500,000.

Assume that at balance sheet date 2014, the fair value of

EBVC stocks have a fair value of P130. And at balance
sheet date 2015, these stocks have fair values of P128.

In the books of JARD (Investor), the events are recorded as

follows:

Share rights
22,500
Available for Sale Securities
22,500
Receipt of rights.
(2,500 shares x P9 market value of rights)
Cash
Share rights
Sale of 500 share rights.

2014
Market Adjustment - AFS
Unrealized Gain/Loss on AFS
(P130 - P125) x 2,500 shares

4,500
4,500

Investment in Associates
1,000,000
Cash
1,000,000
Purchase of investment.

12,500
12,500

Cash

2015
Unrealized Gain/Loss on AFS
5,000
Market Adjustment - AFS
5,000
Should be balance of Market Adjustment - AFS
account is (P128 - P125) x 2,500 shares.

xx
xx

ACCOUNTING FOR INVESTMENT IN ASSOCIATES

Significant influence is the power to participate in the
financial and operating policy decisions of the investee,
but not control or joint control over those policies.
Significant influence may be evidenced in one or more of
the following:
20% or more of the voting power of the investee
Representation inf the board of directors or
equivalent governing body of the investee
Participation in the policy making process
Material transactions between the investor and
investee
Interchange of managerial personnel
Provision of essential technical information
Investment in associate is accounted under equity method,
meaning:
Dividends are not recorded as revenue, but a return
of investment.
A proportionate share in the investees reported
income subsequently after the date of acquisition.

Subsequently, JARD Corp sold 500 rights at P9 and

exercised the remaining rights.

reporting period).

Disposal of Available for Sale Securities

Any gain or loss on the sale is reported in profit or
loss (income statement).
Gain or loss is the difference between the net selling
price and its carrying amount (fair value as of latest

-ADAMSON UNIVERSITY-

Page 3 of 4

125,000
Investment in Associates
125,000
Receipt of cash dividends.
(P500,000 total dividends x 25% share)

Investment in Associates
Income from Associates
Share in income.
Reported net income (P1.2M x 25%)
Share in adjusted depreciation
Adjusted share in income

280,000
280,000

300,000
(20,000)
280,000

JARD-LEC-INVESTMENTS

SHORTCUT:
Acquisition cost
Less:
Dividends Received
Add:
Share in adjusted income/(loss)
Equal: Carrying value of Investment in Associates
Reclassification of Equity Securities
AFS may be classified into Investment in Associates and
vice versa.
Reclassification to and from Trading Securities is not
allowed.
Reclassification happens when significant influence is
gained or lost by the investor.
Reclassification from Investment in Associates to AFS:
Available for Sale Securities
Investment in Associates

xx
xx

Upon reclassification, determine first the carrying value of

the investment in associates. Such amount will be the
amount at initial recognition of the AFS.
Reclassification from AFS to Investment in Associates:
Investment in Associates
*Unrealized Gain/Loss in AFS
*Market Adjustment - AFS
*Unrealized Gain/Loss in AFS
*Market Adjustment - AFS
Available for Sale Securities

xx
xx
xx
xx
xx
xx

Debit to Investment in Associates = balancing figure

Credit to AFS = Acquisition cost
* = outstanding balance

-ADAMSON UNIVERSITY-

Page 4 of 4