Reference no: EM133006926

Question - ABC Co. had the following portfolio of financial assets as of December 31, 2016 before any year-end fair value adjustments:

Investment Tuwae Inc. stocks: 20,000 shares; Balance: $605,000

Investment Puoy Corp. stocks: 40,000 shares; Balance: $1,100,000

The shares of Tuwae Inc. were acquired on February 20, 2016 with an intention of generating short-term profits from the share price fluctuations. The company paid $30.25 per share, which includes $1.25 per share broker's fees and commissions. A $2 per share cash dividends were received on March 30. These dividends were declared by Tuwae Inc. on January 20, 2016 to stockholders as of record date March 1, 2016. The shares of Tuwae Inc. are trading at $30/share at year-end.

The company paid $27.50 per share, including $0.50 per share broker's fees and commissions on the acquisition of Puoy Corp's stocks on March 1, 2016 for trading purposes. A $3 per share dividends were received from the said shares on May 3, 2016. The dividends were declared on April 1 to stockholders as of record date April 20, 2016. The shares of Puoy Corp. are trading at $25/share at year-end.

a. What is the correct balance of the investment in equity securities to be presented in the statement of financial position on December 31, 2016?

b. What is the gain or loss from change in fair value to be recognized in profit or loss in 2016? Is it a gain or loss? Are the statement correct or incorrect?

c. Assuming the use of valuation accounts (i.e., Fair Value Adjustment) to recognize subsequent changes in the fair value of passive equity securities rather than directly adjusting the investment account, the Fair Value Adjustment account will be credited when recognizing any gain from increase in fair value occurring during the period.

d. An investment in associate is initially recorded at cost, excluding any transaction costs incurred.

e. When the consideration received is different from the fair value of the investment on the date of derecognition, a gain or loss in the profit or loss of the company will be recognized from an equity investment accounted for as financial asset at fair value through other comprehensive income.