Intermediate Accounting Volume 1

Valix, Peralta and Valix (2020)

• The Application Guidance of PFRS 9 provides
that when financial asset is recognized initially,
an entity shall measure it at fair value plus
transaction costs that are directly attributable to
the acquisition.

• The fair value is usually the transaction price,

meaning the fair value of the consideration given.
• As a rule, transaction costs that are
directly attributable to the acquisition of
the financial asset shall be capitalized
as cost of the financial asset.

• However, transaction costs directly

attributable to the acquisition of
financial asset held for trading or
financial asset at FV through profit or
loss shall be expensed immediately.
Acquisition cost is determined by the
following in the order of priority:
1. Fair value of asset given
2. Fair value of asset received
3. Carrying amount of asset given
• Trading securities or financial assets at fair
value through profit or loss.
• Financial assets at fair value through other
comprehensive income.
• Investment in associate.
• Investment in subsidiary.
• Investment in unquoted equity instruments.
• If two or more equity securities are acquired at a
single cost or lump sum, the single cost is allocated
to the securities acquired on the basis of their fair
value.

• If only one has a known market value, an amount is

allocated to the security with a known market value
equal to its market value

• The remainder of the single cost is then allocated to

the other security with no known market value.
• Under the Application Guidance B5.4.14
of PFRS 9, all investments in equity
instruments shall be measured at fair
value.
• However, investments in unquoted equity
instruments are measured at cost if the
fair value cannot be measured reliably.
PFRS 9, paragraph 3.2.12, provides that on
derecognition of a financial asset, the difference
between the consideration received and the carrying
amount of the financial asset shall be recognized in
profit or loss.

When equity securities are of the same class acquired

on different dates at different costs, a problem will arise
as the determination of cost of securities sold when
only a portion of the securities is subsequently sold.

Use the FIFO or average cost approach.

If the equity securities are measured at fair value
through profit or loss, or at fair value through other
comprehensive income or at cost, dividends earned
are considered as income.
a. When the cash dividends are earned but not
received:
Dividends Receivable xxx
Dividends Income xxx
b. When the cash dividends are subsequently received:
Cash xxx
Dividends Receivable xxx
• The cash dividends do not affect the
investment account. The main
problem in accounting for cash
dividend on investments in equity
securities is timing.

• The question is when are dividends

considered earned?
When are dividends considered earned?

a. Date of declaration -this is the date on

which the payment of dividends is approved
by the Board of Directors.
b. Date of record – this is the date on which
the stock and transfer book of the
corporation is closed for registration.
c. Date of payment- this is the date on which
the dividends declared shall be paid.
 Between the date of
record and date of
payment, the shares are
selling
“ ex-dividend”

• This means that • This means that the

when shares are shares can be sold,
sold after the date of and still the original
declaration but prior shareholder has
to record date, they the right to receive
carry with them the dividends on
right to receive payment date.
dividends.
 “ The Board of Directors at their
meeting on November 15, 2020,
declared an annual dividend on ordinary
share of P5, payable on January 30,
2021, to shareholders of record at the
close business on January 15, 2021.”
• Pas 18, paragraph 29, provides that
“dividends shall be recognized as revenue
when the shareholder’s right to receive
payment is established.”
• Dividends shall be recognized as revenue
at the date of declaration.
• When shares are sold “dividend-on” and
the dividend accrued is specifically
included in the sale price, that portion of
the sale price pertaining to the accrued
dividend should be credited to dividend
income.
• a

• The remainder of the sale price should be

use as the basis for determining the gain
or loss on the sale of investment.
A shareholder owns 1,000 shares costing P100,000.
Subsequently, the shareholder receives notice of
dividend declaration of P5 per share or P5,000.
If prior to record date, the shareholder sells the
investment for P150,000 which includes the
dividend of P5,000, the journal entry to record the
sale is :

Cash 150,000
Investment in shares 100,000
Dividend Income 5,000
Gain on sale of investment 45,000
• Dividends in the form of property or
noncash assets.
• Property dividends are also considered
as income and recorded at fair value.

Noncash assets xxx

Dividend Income xxx
X Company distributes its holding of 10,000 shares
in Y Company as property dividend. The shares of
Y Company have a market value of P100 per
share. A shareholder receives 500 shares of Y
Company as property dividend from X Company.

The property dividend is recorded as follows:

Investment in shares (500x100) 50,000

Dividend Income 50,000
• Represent return of invested capital, and
therefore, are not income. The payment
may be in the form of cash or noncash
assets.
The liquidating dividend is recognized as
follows:
Cash or other appropriate amount xxx
Investment in shares xxx
Liquidating dividends are paid when the
corporation is dissolved and liquidated.
• For wasting asset corporation or mining
entity, liquidating dividends maybe paid even
before dissolution and liquidation.
• When dividends are received from wasting
asset corporation, the dividends are
designated as partly income and partly return
of capital.

That portion representing a liquidating

dividend should be credited to the
investment account.
A shareholder receives a P100,000 dividend designated as
income, P60,000 and liquidating, P40,000.
Journal Entry:

Cash 100,000
Dividend Income 60,000
Investment in shares 40,000

When liquidating dividends exceed cost of investment, the

difference is credited to gain on investment.

When liquidation is completed and the carrying amount is

not fully recovered it is written off as a loss..
• In the form of the issuing entity’s own
shares.
• The IAS term for share dividend is
“bonus issue”.
• Shares of another entity declared as
dividends are property dividends.
• Share dividends may be the same as those
held
• or different from those held

Whether of the same class or different are not

income. Shareholders receives additional
shares but still has the same proportionate
equity interest in the entity.
• Recorded by memorandum entry on the
part of shareholder.

• Example:
“ Received 2,000 shares representing
20% share dividend on 10,000 original
shares held. Shares now held, 12,000
shares.”
There is no effect on the total cost of the investment but
the cost of investment per share is reduced.

Example.
A shareholder owns 10,000 shares costing P120 each or
a total cost of P1,200,000.

The shareholder receives 20% share dividend or 2,000

shares.

Effect:
Shares Cost per Share Total Cost
Original shares 10,000 120 1,200,000
Share Dividends _2,000 __-___ ____-____
12,000 100 1,200,000
• A shareholder may receive a share dividend
which is different from the original share. Even
different class shares are not income. Based on
market value.

• A shareholder owns 10,000 ordinary shares

costing P800,000. Subsequently, the
shareholder receives 10% share dividend in the
form of preference share. The market value of
ordinary share is P150, and the market value of
preference share is P100.
 Market Value Fraction Allocated Cost
Ordinary Share
(10,000 shares x 150) 1,500,000 15/16 750,000
Preference Share
(1,000 shares x 100) 100,000 1/16 50,000
1,600,000 800,000

Journal entry for receipt of PS as share dividends:

Investment in Preference Shares 50,000
Investment in Ordinary Shares 50,000
When cash dividends are declared and
received , it is without doubt that they are
income.

Shares received in lieu of cash dividends

are income at fair value of the shares
received.

In absence of FV of the shares received,

the income is equal to the cash dividends
that would have been received.
 A shareholder owns 10,000 shares costing P1,000,000.
Subsequently the shareholder receives 1,000 shares in
lieu of cash dividend of P10 per share. The market value
per share is P150.

The receipt of the 1,000 shares is recorded as follows:

Investment in shares 150,000
Dividend Income (1,000x150) 150,000

If there is no market value:

Investment in shares 100,000
Dividend Income (10,000x10) 100,000
Example:
A shareholder owns 10,000 shares costing
P1,100,000. Subsequently, the shareholder
receives P150,000 cash in lieu of 1,000 shares
originally declared as 10% share dividend.

In this case the “as if approach” is used – the share

dividends are assumed to be received and
subsequently sold at the cash received.
Example:
The original cost of P1,100,000 applies now to 11,000
shares which is the sum of the original 10,000 shares
and the 1,000 shares assumed to be received as share
dividends. The cost per share would then be P100.
The 1,000 shares representing share dividends are
assumed to be sold for the cash received,
Journal entry:
Cash 150,000
Investment in shares 100,000
(1,000 shares x 100)
Gain on investment 50,000
• All cash received whether originally designated as
cash dividend or share dividend, is recognized as
income.

• Journal entry:

Cash 150,000
Dividend Income 150,000

However, the “as if” approach is theoretically sound

and should be followed for accounting purpose.
• A corporation may restructure its capital
by effecting a change in the number of
shares without capitalizing retained
earnings or changing the amount of its
legal capital. This is known as share
split.

• This may be split up or split down.

• Transaction whereby the outstanding shares
are called in and replaced by a larger
number, accompanied by a reduction in the
par or stated value of each share.
Example:
If a shareholder owns 10,000 shares and
the share is split up 5-for-1, the shareholder
receives 50,000 new shares in exchange for
the 10,000 original shares.
Is transaction whereby the outstanding shares are
c a l l e d i s a n d r e p l a c e d b y s m a l l e r n u m b e r,
accomplished by an increase in the par or stated
value.

For example, if a shareholder owns 10,000 shares and

the share is split down 5-for-1 the shareholder
receives 2,000 new shares in exchange for the
10,000 old shares.

Share split does not affect the total cost of investment.

Only memorandum entry is made to record the receipt of
new share by virtue of share split.

For example, a shareholder owns 10,000 shares costing

P2,000,000. Subsequently, the shareholder receives
notice that share is split 2-for-1. The receipt of new
shares is recorded as follows:

“ Received 20,000 new shares as a result of a 2-for-1 split

of 10,000 original shares.”

The total cost of P2,000,000 will now apply to 20,000

shares or a cost per share of P100. Such cost would
then be the basis for subsequent transaction.
 Special assessments
• These are additional capital contribution of the
shareholders. On the part of the shareholders,
special assessments are recorded as additional
cost of the investments and on the part of the
entity as share premium.

• For example, a shareholder owns 10,000 shares

costing P500,000. Subsequently, the directors
pass a resolution to the effect that the
shareholder shall contribute P5 for each share
held to the corporation.
On the part of the shareholder, the payment of
the assessment is recorded as follows:

Investment in shares(10,000x5) 50,000

Cash 50,000
 Redemption of Share
Shares, particularly preference share, may
be called in for redemption and
cancelation by the entity issuing them.

O n t h e p a r t o f t h e s h a r e h o l d e r, t h e
redemption of share is recorded in the
same manner as sale of share. The
redemption price is treated as the sale
price.
If a shareholder acquires 10,000 preference shares for P100
per share, the entry is:
Investment in preference shares 1,000,000
Cash 1,000,000

Preference share are called in at P110 per share, the entry is:

Cash(10,000sharesx110) 1,100,000
Investment in preference share 1,000,000
Gain on Investment 100,000
 Share right or stock right
Otherwise known as preemptive right is a
legal right granted to shareholders to
subscribe for new shares issued by a
corporation at a specified price during a
definite period.
The IAS term for share right is “right issue”.
A shareholder receives one right for every
share owned.
• The purpose of the share right is to give
the shareholders the chance to preserve
their equity interest in the corporation.

• The ownership of the share right is

evidenced by instruments or certificates
called share warrants.
 Accounting for share rights
PFRS 9 does not address this accounting issue
categorically. But unquestionably, a share right
is a form of a financial asset.

There are two schools of thought on the matter,

namely:

1. Share rights are accounted for separately.

2. Share rights are not accounted for separately.
 Accounted for separately
Under the Application Guidance B5.4.14 of PFRS 9,
all investments in equity instruments and
contracts on those instruments must be
measured at fair value.

Share rights shall be measured initially at fair value.

A portion of the carrying amount of the original

investment in equity securities is allocated to the
share rights at an amount equal to the fair value
of the share rights at the time acquisition.
• Share rights are normally classified as
current asset if the rights are accounted
for separately.
 Not accounted for separately
• Share rights are recognized as embedded derivative but not
a “stand-alone” derivative”.

• An embedded derivative is a “component of a hybrid or

combined contract (host contract) with the effect that some
of the cash flows of the combined contract vary in a way
similar to a stand-alone derivative”.

• PFRS 9, paragraph 4.3.3, provides that an embedded

derivative shall be separated from the host contract and
accounted for separately under certain conditions.
• Further provides that if the host contract is within the
scope of PFRS 9, the classification requirements for
PFRS 9 are applied to the combined host contract in
its entirety.

• Moreover, if the host contract is measured at fair value

through the profit and loss, the embedded derivative is
not separated.

• Accordingly, the share rights as an embedded

derivative is not accounted for separately because the
host contract “investment in equity instrument” is a
financial asset.
 Approach to be followed
PFRS 9, paragraph 4.3.4, states that “this
standard does not address whether an
embedded derivative shall be presented
separately in the statement of financial
position”.

Second approach “not accounted for separately”

stands on solid and authoritative ground.
 Example of formal announcement of share right

“ The Board of Directors Date of declaration is the date on

in their meeting on which the issuance of share rights
December 15, 2020 is approved by the Board of
approved to issue share Directors.
rights to the Date of record is the date on which
shareholders of record the stock and transfer book of the
on January 15, 2021, entity will be closed for registration
entitling the and only those shareholders
shareholders to acquire registered as of the record date are
one share at P100 par entitled to receive share rights.
for every five shares
Expiration date is the date up to which
held, the right to expire
share rights shall be exercised.
on March 31, 2021”.
After such date, share rights would
be worthless.
 Between the date of declaration
and date of record
• During this period the shares are considered to be
selling right-on. The share and the right are
inseparable and are treated as one. The share
cannot be sold without also selling the right or vice
versa.

• Accordingly, in the event of subsequent sale prior

to the record date, the difference between the sale
price and the carrying amount of the investment is
simply considered as gain or loss on sale of
investment.
 Illustration
• A shareholder owns 5,000 shares costing
P500,000. Subsequently, the shareholder
receives notice of share rights to subscribe
for 1,000 shares at the par value of P100
per share. Prior to the issuance of the share
warrants, the shareholder sells the
investment for P750,000.

Cash 750,000
Investment in shares 500,000
Gain on sale of investment 250,000
 Between the date of record and
expiration date
On the date of record, the warrants evidencing
the share rights are issued to the shareholders.
On or after this date, the shares are said to be
selling ex-right.

This means that the share can now be sold

separate from the right or vice versa.
 Illustration- Accounted for separately
A shareholder acquired 10,000 shares costing
P1,800,000. Subsequently, the shareholder
received 10,000 share rights to subscribe for
new shares at P100 per share for every five
rights held. The market value of the share is
P150 and the market value of the right is P10.
Original Investment
Investment in shares 1,800,000
Cash 1,800,000

Receipt of share rights

Share rights 100,000
Investment in shares 100,000
 Exercise of share rights
When share rights are exercised, the cost of the
new investment includes the subscription price
and the cost of the share rights exercised.

Since that there are 10,000 share rights and the

investor can acquire one new share for every 5
rights, the investor would acquire 2,000 new
shares at P100 per share or P200,000.
The journal entry:
Investment in shares 300,000
Cash 200,000
Share rights 100,000

When an investor is entitled only to a fraction of a

share, the investor may purchase additional rights in
order to acquire one full share.

In such a case, the cost of the new investment

includes the subscription price, cost of share rights
originally owned and cost of share rights purchased.
 Sale of share rights
The share rights are financial assets separate from
the original shares. Accordingly, the share rights
can be sold independent ly of t he original
investment.

Thus, if the share rights are not exercised but sold for
P150,000, the journal entry is:

Cash 150,000
Share rights 100,000
Gain on sale of share rights 50,000
 Expiration of share rights
Share rights can be exercised only up to a
certain date after which the share rights
become worthless.

Thus, if the rights are not exercised but expired,

the journal entry is:

Loss on share rights 100,000

Share rights 100,000
Theoretical or parity value of share
right

This is the assumed fair value of the right

that is derived from the market value of
the share.
Tw o f o r m u l a s m a y b e u s e d i n t h e
computation of the theoretical or parity
value of the share right.
When the share is selling right-on

Market value of the share right-on

minus subscription price
= Value of one right
Number of rights to purchase one
share plus 1

When share is selling ex-right

Market value of share ex-right
minus subscription price = Value of one right
Number of rights to purchase one
share
 Illustration – (Prob. 16-5)
Vivacious Company issued rights to subscribe to its share
capital, the ownership of 4 shares entitling the
shareholders to subscribe for 1 share at par, P100. The
investor owned 25,000 shares with total cost of
P2,100,000. The share rights are accounted for
separately.

Required:
1. Assuming the share is quoted at P125 right-on, prepare journal
entries to record receipt of rights and the subsequent exercise of
the rights.

2. Assuming the share right is quoted at P125 ex-right, prepare journal

entries to record receipt of rights and the subsequent exercise of
rights.
1. If the market value of the share of P125 is right-on, the
theoretical value of stock right is computed as follows:
125-100 25
Value of one right= ------------- = ------- = P5.00 per right
4+1 5

Journal entries:
1. Share rights (25,000 x5) 125,000
Investment in shares 125,000

2. Investment in shares 750,000

Share rights 125,000
Cash 625,000
(25,000/4 = 6,250 x 100)
 Allocation of cost
Cost of the original investment 2,100,000
Theoretical value of stock rights
(25,000 x P50 ) 125,000_
Remaining cost of the original investment 1,975,000

Note that the market value of the share is P125 right-

on, meaning, this includes the value of the right of
P5.
Therefore, the value of the share “ex-right” or
excluding the right is P120.
2. If the market value of the share of P125 is ex-right, the theoretical
value of the stock right is computed as follows:
125-100 25
Value of one right = ------------- = --------- = P6.25 per right
4 4
Journal entries:

1. Share rights (25,000 x 6.25) 156,250

Investment in shares 156,250

2. Investment in shares 781,250

Share rights 156,250
Cash (6,250 x 100) 625,000

The cost of P2,100,000 is allocated as follows:

Cost of original Investment 2,100,000
Theoretical value of stock rights (25,000 x P6.25) 156,250_
Remaining cost of original investment 1,943,750
 Illustration- Not accounted for
separately
A shareholder acquired 10,000 shares for
P 1 , 5 0 0 , 0 0 0 . S u b s e q u e n t l y, t h e
shareholder received 10,000 stock rights
to subscribe for new shares at P100 per
share for every five rights held.
The market value of the share is P140, and
the market value of the right is P10. The
share rights are all exercised by the
shareholder.
 Journal entries
a. To record the acquisition of the original investment:
Investment in shares 1,500,000
Cash 1,500,000

b. To record the receipt of the share rights:

Memo Entry- Received 10,000 share rights to subscribe
for new shares at P100 per share for every five rights
held, or a total of 2,000 new shares.

c. To record the exercise of the share rights:

Investment in shares 200,000
Cash 200,000
If the share rights are not exercised but sold, the sale is
simply recorded by debiting cash and crediting the
original investment account. No gain or loss is recognized
from the sale.

If the 10,000 rights are sold for P150,000, the journal entry
is:

Cash 150,000
Investment in shares 150,000

If the share rights are not exercised but expired, only a

memorandum is necessary to record the expiration.
Any subsequent transactions affecting the share shall be
accounted for using either the FIFO or average method.
 PROBLEM 16-1
Acclaim Company purchased shares of another entity as permanent
investment as follows:
January 2 2,000 shares @ P50 100,000
December 20 3,000 shares @ P66 198,000

Transactions for 2021:

July 15 Received cash dividend at P5 per share
Dec 15 Received 20% stock dividend
20 Sold 3,000 shares at P60 per share. Use FIFO approach

Prepare journal entries for 2021.

 Problem 16-1

July 15 Cash 25,000

Dividend income (5,000 x P5) 25,000

Dec 15 Memo: Received 1,000 shares

representing 20% stock dividend on
5,000 original shares held.

Dec 28 Cash (3,000 x P60) 180,000

Investment in shares 133,000

Gain on sale 47,000

Lot 1 (2,400 shares P100,000

Lot 2 (600/3,600 x 198,000 33,000

Cost of Investment Sold P133,000