LEC Investments

JARD-LEC-INVESTMENTS

-ADAMSON UNIVERSITY- Page 1 of 4

ACCOUNTING FOR INVESTMENTS

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 otherbenefits to be obtained.

Not related to the central revenue producing function ofthe enterprise. These assets are related to, but not limitedto, 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 businesseither by exercising certain favorable effects upon salesand operations or by making an independent contributionto earnings over the long term.

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 influenceacquired by the investor over the operating and financialpolicies 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 indefiniteperiod of time or when the securities may beused for tactical asset/liability purposes andmay be sold from time to time to effectivelymanage interest rate exposure, prepayment riskand liquidity needs.

Investment in associate Significant influence is acquired. (20% or more)

Investment in subsidiaries Significant control is acquired. (50% or more)

Fundamentals of Accounting 2 ReviewWhenever a corporation needs to pool in funds for itsoperations, it may issue shares of stock to potential investors inexchange for cash, non-cash assets, or services. The pro-formajournal entry is as follows:

Cash xxShare Capital - Ordinary xxShare Premium - Ordinary xx

Fundamentals of Accounting 2 has shown us the accountingtreatment 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

done by the investor, or the shareholder.

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 ofinvestment and is recorded as an expense.

Example:JARD Corporation purchased 2,000 shares of P100 parvalue ordinary shares of EBVC Corporation for P125 pershare plus 1% brokers commission.

Trading Securities 250,000Cash 250,000

Investment in EBVC Corporation.

Commission Expense 2,500Cash 2,500

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

Subsequent Transactions Receipt of DividendsCash Dividends

Cash 10,000Dividend Revenue 10,000

Stock Dividends

-no journal entry-

Memo. Received 400 ordinary shares of EBVC Corporationas 20% bonus issue on 2,000 shares originally held. Theadjusted cost for the 2,400 shares held is now P104.17 pershare.

Share/Stock Splits

-no journal entry-

Memo. Received additional 2,000 ordinary shares of EBVCCorporation as a result of 2-for-1 split on 2,00 sharesoriginally held. The adjusted cost for the 4,000 shares heldis now P62.50 per share.



Share/Stock Rights A right granted to existing shareholders to

subscribe for new share before such shares areoffered for sale to the public.

On Septermber 19, 2014, EBVC Company distributed sharerights entitling shareholders to buy one new ordinaryshare 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 andexercised the remaining rights.

Share rights 22,500Trading Securities 22,500

Receipt of rights.(2,500 shares x P9 market value of rights)

Cash 4,500Share rights 4,500

Sale of 500 share rights.

Trading Securities 120,000Share rights 18,000Cash 102,000

Exercise of 2,000 share rights.

Statement Presentation and Measurement after InitialRecognition Trading securities are presented as current assets at

fair values, with unrealized gains or losses recognizedin profit or loss.

Unrealized gain or loss on TS is computed bydetermining the difference in fair value of thesecurities.

Carrying value of Trading Securities is equivalent toits fair value as of reporting date.

Assume that at balance sheet date 2014, the fair value ofEBVC stocks have a fair value of P130. And at balancesheet date 2015, these stocks have fair values of P128.

2014Trading Securities 12,500

Unrealized Gain/Loss on TS 12,500(P130 - P125) x 2,500 shares

2015Unrealized Gain/Loss on TS 5,000

Trading Securities 5,000(P130 - P128) x 2,500 shares

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

reporting period).

Cash xxLoss on Sale of TS* xx

Trading Securities (at carrying value) xxGain on Sale of TS* xx

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 ofinvestment and is recorded as an expense.

Example:JARD Corporation purchased 2,000 shares of P100 parvalue ordinary shares of EBVC Corporation for P125 pershare plus 1% brokers commission.

Available for Sale Securities 250,000Cash 250,000

Investment in EBVC Corporation.

Commission Expense 2,500Cash 2,500

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

Subsequent Transactions Receipt of DividendsCash Dividends

Cash 10,000Dividend Revenue 10,000

Stock Dividends

-no journal entry-

Memo. Received 400 ordinary shares of EBVC Corporationas 20% bonus issue on 2,000 shares originally held. Theadjusted cost for the 2,400 shares held is now P104.17 pershare.

Share/Stock Splits

-no journal entry-

Memo. Received additional 2,000 ordinary shares of EBVCCorporation as a result of 2-for-1 split on 2,00 sharesoriginally held. The adjusted cost for the 4,000 shares heldis now P62.50 per share.



Share/Stock Rights A right granted to existing shareholders to

subscribe for new share before such shares areoffered for sale to the public.

On Septermber 19, 2014, EBVC Company distributed sharerights entitling shareholders to buy one new ordinaryshare 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 andexercised the remaining rights.

Share rights 22,500Available for Sale Securities 22,500

Receipt of rights.(2,500 shares x P9 market value of rights)

Cash 4,500Share rights 4,500

Sale of 500 share rights.

Available for Sale Securities 120,000Share rights 18,000Cash 102,000

Exercise of 2,000 share rights.

Statement Presentation and Measurement after InitialRecognition Trading securities are presented as non-current

assets at fair values, with unrealized gains or lossesrecognized in equity under other comprehensiveincome.

Carrying value of AFS is equivalent to its costplus/minus the Market Adjustment - AFS account(Balance sheet line item).

Assume that at balance sheet date 2014, the fair value ofEBVC stocks have a fair value of P130. And at balancesheet date 2015, these stocks have fair values of P128.

2014Market Adjustment - AFS 12,500

Unrealized Gain/Loss on AFS 12,500(P130 - P125) x 2,500 shares

2015Unrealized Gain/Loss on AFS 5,000

Market Adjustment - AFS 5,000Should be balance of Market Adjustment - AFSaccount is (P128 - P125) x 2,500 shares.

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

reporting period).

Cash xxLoss on Sale of TS* xx

Available for Sale Securities (at cost) xxGain on Sale of TS* 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 ofthe 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.

On January 1, 2014, JARD Comp (Investor) purchases 25%interest in EBVC Comp (Investee) for P1,000,000. At which timethe carrying value of the Investees net assets is P3,600,000. Atthat time, EBVC has an item of property, plant, and equipmentwith carrying amount of P4,200,000 and a fair value ofP4,600,000. Said item has a remaining useful life of 5 years asof January 1, 2014. During the year 2014, EBVC reported netincome of P1,200,000 and declared and paid cash dividends ofP500,000.

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

Investment in Associates 1,000,000Cash 1,000,000

Purchase of investment.

Cash 125,000Investment in Associates 125,000

Receipt of cash dividends.(P500,000 total dividends x 25% share)

Investment in Associates 280,000Income from Associates 280,000

Share in income.

Reported net income (P1.2M x 25%) 300,000Share in adjusted depreciation (20,000)Adjusted share in income 280,000



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 xxInvestment in Associates xx

Upon reclassification, determine first the carrying value ofthe investment in associates. Such amount will be theamount at initial recognition of the AFS.

Reclassification from AFS to Investment in Associates:

Investment in Associates xx*Unrealized Gain/Loss in AFS xx*Market Adjustment - AFS xx

*Unrealized Gain/Loss in AFS xx*Market Adjustment - AFS xxAvailable for Sale Securities xx

Debit to Investment in Associates = balancing figureCredit to AFS = Acquisition cost* = outstanding balance

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LEC Investments