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Example
If Entity A receives a cash dividend of $10, it makes this journal entry:
Cash 10
Dividend income 10
When an investment held at cost is sold or otherwise derecognized, any difference between its carrying amount and the consideration received is recognized in profit
or loss.
Example
If Entity A sells an investment that is held at cost and that is carried in the statement of financial position at $120, for cash of $170, it would recognize a
realization gain of $50:
This case illustrates when an investment would be measured at cost.
Facts
Cash 170
Financial asset 120
Gain on sale 50
CASE STUDY 7
During 20X6, Entity A acquired these financial instruments:
1. A share quoted on a stock exchange
2. A bond quoted in an active bond market
3. A bond that is not quoted in an active market
4. A share that is not quoted in an active market but whose fair value can be estimated using valuation techniques
5. A share that is not quoted in an active market and whose fair value cannot be measured reliably
6. A derivative that is linked to and must be settled by an unquoted equity instrument whose fair value cannot be measured reliably
Required
Indicate which of the previous items would be measured at cost.
Solution
Only 5. and 6. would be measured at cost.
1. A share quoted on a stock exchange would always be measured at fair value, assuming the market is active.
2. A bond quoted in an active bond market would be measured at fair value or amortized cost, depending on its classification.
3. A bond that is not quoted in an active market would be measured at fair value or amortized cost, depending on its classification.
4. A share that is not quoted in an active market, but whose fair value can be estimated using valuation techniques, would always be measured at fair
value.
5. A share that is not quoted in an active market and whose fair value cannot be measured reliably would be measured at cost.
6. A derivative that is linked to and must be settled by an unquoted equity instrument whose fair value cannot be measured reliably would be
measured at cost.
Amortized Cost
Amortized cost is the cost of an asset or liability as adjusted, as necessary, to achieve a constant effective interest rate over the life of the asset or liability (i.e.,
constant interest income or constant interest expense as a percentage of the carrying amount of the financial asset or financial liability).
Example