ARELLANO UNIVERSITY JOSE ABAD SANTOS CAMPUS MIDTERM EXAMINATION IN FINANCIAL ACCOUNTING 2 Professor Marv !

! M" Ce#e$ o% CPA NAME& INSTRUCTION& -.es( o!s" RATING& C'oose ('e #e((er ('a( )o!(a !s ('e *es( a!s+er for ea)' of ('e fo##o+ !,

1. Serial bonds are a. Bonds that give the bondholders the right to exchange their bonds for other securities b. Bonds that may be called in or redeemed by the issuing corporation prior to maturity date c. Bonds that have a series of maturity dates and hence, payable in installments d. Bonds that mature on a single date 2. If the entity fails to amortize the premium on its trading bond investment, the income is a. Overstated c. understated b. ot affected d. none of the choices !. "or #vailable for Sale bond investments, the unrealized gain is computed on the excess of a. "air value over original cost b. "air value over amortized cost c. Original cost over fair value d. #mortized cost over fair value $. %hich of the follo&ing terms best describes property held to earn rentals or for capital appreciation' a. "reehold property c. O&ner(occupied property b. )easehold property d. Investment property *. +nder ,#S $-, &hich of the follo&ing best describes O&ner(occupied property' a. ,roperty held for sale in the ordinary course of business b. ,roperty held for use in the production of goods and for administrative purposes c. ,roperty held to earn rentals d. ,roperty held for long term capital appreciation .. /ransaction costs incurred in ac0uiring bond investment are expensed immediately for a. /rading securities c. #vailable for sale securities b. 1eld to maturities securities d. none of the above 2. +nder the cost model, an investment property is carried on each balance sheet date at a. "air value c. either at fair value or boo3 value b. #mortized 4ost d. 4ost less #ccumulated 5epreciation 6. %hich of the follo&ing &ould not be reported as an investment property' a. Building o&ned by the entity and leased out under one or more operating leases b. )and held for long(term capital appreciation c. )and held for currently undetermined future use d. Building used in the production of goods in the ordinary course of business 7. %hich of the follo&ing refers to effective rate a. Stated rate c. 4oupon rate b. 4ontract rate d. 8ield rate 1-. If o&ner(occupied property is transferred to investment property that is to be carried at fair value, the difference bet&een the carrying amount of the property and its fair value shall be treated as a. 9evaluation Surplus: Impairment loss c. +nrealized gain:loss in income statement b. o effect d. change in accounting estimate 11. /he investor;s interest income for a period &ould be highest if the bond is purchased at a. 5iscount c. ,remium b. ,ar d. "ace <alue 12. /he term ="air value through profit or loss> may refer to a. /rading securities c. #vailable for Sale Securities b. 1eld to maturity securities d. Investment property 1?,age

1!. Investments that may be classified as current assets at initial recognition a. /rading securities only c. 1eld to maturities securities b. /rading securities and #"S d. /rading securities, #"S, 1/@ 1$. /hese are investment carried at fair value on balance sheet date, &ith any unrealized gain or loss included as component of income a. #vailable for sale securities c. trading securities b. 1eld to maturity securities d. #ll of the above 1*. Investment in bonds classified as 1eld to @aturities securities are generally carried at
a. b. c. d. "air <alue, &ith any unrealized gain:loss included as component of income "air <alue, &ith any unrealized gain:loss included as component of e0uity #mortized cost, &ith any premium or discount amortized using straight line method #mortized cost, &ith any premium or discount amortized using effective interest method

1.. +nder ,#S !7, it is any contract that gives rise to a financial asset of one entity and a financial liability or e0uity of another entity. a. egotiable Instrument c. "inancial Instrument b. @usical Instrument d. 1ybrid Instrument 12. ,#S $- re0uires that investment property be accounted for using the a. 4ost or "air <alue @odel c. "air <alue @odel b. 4ost @odel only d. one of the choices 16. /ransaction costs directly attributable to the ac0uisition of a financial asset do not include a. "ees and commissions to bro3ers c. "inancing and administrative costs b. )evies by regulatory agencies d. /ransfer taxes and duties 17. #ccrued interest on bonds that are purchased bet&een interest dates a. Is ignored by both the seller and the buyer b. Increases the amount a buyer must pay to ac0uire the bonds c. Is recorded as a loss on the sale of the bonds d. 5ecreases the amount a buyer must pay to ac0uire the bonds 2-. /he contractual agreement bet&een an investor and the bond issuer is contained in a formal document 3no&n as a. 4ontract of debt c. bond certificate b. Bond indenture d. Bond agreement 21. #vailable for sale investment are securities a. 4onsidered as a derivative instrument b. ,urchased &ith the intent of selling in the near future or very soon to generate a profit from short term fluctuation in price or dealer;s margin c. ,urchased and held indefinitely and &ill be available to be sold &hen the need for li0uid fund arises d. #ll of the above 22. It is defined as land or building or part of building held by an o&ner or finance lessee to earn rentals or for capital appreciation or both. a. 9eal property c. Investment property b. @ining ,roperty d. O&ner(occupied property 2!. If a *(year bond matures on October 1, 2-1! and interest is payable semiannually, the interest dates are a. #pril 1 and October 1 c. @ay 1 and ovember 1 b. Aanuary 1 and Auly 1 d. ot determinable 2$. %hen the entity uses the cost model, transfers bet&een investment property, o&ner(occupied property and inventory shall be accounted at a. "air value c. Original cost b. #ssessed value d. 4arrying amount 2*. 4ash set aside in the anticipation of future ac0uisition of additional property because of expanded or increase volume of operations is called a. Insurance fund c. ,lant expansion fund b. Bond sin3ing fund d. 4ontingency fund 2?,age

2.. /o compute the price to pay for a bond, &hat present value concept is used' a. ,resent value of 1 concept only b. ,resent value of an ordinary annuity of 1 concept only c. Both b & c d. either a nor b 22. /ransfer from investment property to o&ner(occupied property is appropriate a. %hen there is change in use b. Based on the entity;s discretion c. Only &hen the entity adopts the fair value model d. /he entity can never transfer the property into another classification once it is classified as investment. 26. Bonds usually sell at a premium a. %hen the mar3et rate of interest is greater than the stated rate of interest on the bonds b. %hen the stated rate of interest on the bonds is greater than the mar3et of interest c. %hen the price of the bonds is greater than their maturity value d. one of the above 27. Investment in bonds classified as 1eld to @aturities securities are generally carried at
a. b. c. d. "air <alue, &ith any unrealized gain:loss included as component of income "air <alue, &ith any unrealized gain:loss included as component of e0uity #mortized cost, &ith any premium or discount amortized using straight line method #mortized cost, &ith any premium or discount amortized using effective interest method

!-. #ccrued interest on bonds that are purchased bet&een interest dates a. Is ignored by both the seller and the buyer b. Increases the amount a buyer must pay to ac0uire the bonds c. Is recorded as a loss on the sale of the bonds d. 5ecreases the amount a buyer must pay to ac0uire the bonds !1. YOLANDA CORPORATION has investment property located at /acloban, )eyte &ith a carrying value of ,h,1.2@ under the fair value model. Its mar3et value at the balance sheet date is ,h,2.6@. #s of reporting date, 8O)# 5# should recognize a. ,h,$--,--- unrealized gain in Balance Sheet under Shareholders; e0uity section b. ,h,$--,--- unrealized gain in Statement of 4omprehensive Income c. ,h,$--,--- revaluation surplus in Statement of 4omprehensive Income d. o recognition for the increase !2. ALAM / COMPANY ac0uired an investment property &ith an installment price of ,h,2,$--,--- and a cash price of ,h,1@. /he ac0uisition of the property re0uires a do&n payment of 2-B and a non( interest bearing note payable at the end five years. /he prevailing mar3et rate of interest for similar instrument is 12B. ,resent value factors of ordinary annuity C 12B for five years and ,< of 1 at the end of *th year are !..-* and -.*.2, respectively. /he company incurred transaction cost amounting to ,h,*-,--- for the property. %hat is the cost of ac0uiring the property' a. ,h,1,1!6,.$b. ,h,2,$--,--c. ,h,1,71$,!2d. ,h,1,-*-,--!!. DBased on the above problemE #ssuming the cash price is undeterminable, the amount of investment property to be recorded is a. ,h,1,1!6,.$b. ,h,2,$--,--c. ,h,1,71$,!2d. ,h,1,-*-,--!$. On Auly 1, 2-1!, C0OPPER COMPANY purchased as a long(term investment ,*@ face amount, 6B bonds of SMO1ER CO" "O9 ,$,.1*,--- to yield 1-B per year. /he bond pays interest semiannually on Aanuary 1 and Auly 1. On 5ecember !1, 2-1!, &hat amount should be reported as interest receivable' a. 16$,.-b. 2--,--c. 2!-,2*d. 2*-,--!*. On Aanuary 1, 2-1!, BEC0AY COMPANY purchased ten(year bonds &ith a face value of ,1@ and a stated interest rate of 6B per year payable semiannually Auly 1 and Aanuary 1. /he bonds &ere ac0uired to yield 1-B. ,resent value factors are as follo&sF ,resent value of 1 for 1- periods C 1-B .!6. ,resent value of 1 for 2- periods C *B .!22 ,resent value of an ordinary annuity of 1 for 1- periods C 1-B ..1$* ,resent value of an ordinary annuity of 1 for 2- periods C *B 12.$.2 !?,age

%hat is the purchase price of the bonds' a. 1,12$,.2b. 1,1--,---

c. 1,---,---

d. 62*,!6-

!.. MADALILANG INC" ventured into construction of a condominium in Spratly Island &hich is rated as the largest state(of(the(art structure. /he entity;s board of directors decided that instead of selling the condominium, the entity &ould hold this property for purposes of earning rentals by letting out space to business executives in the area. /he construction of the condominium &as completed and the property &as placed in the service on Aanuary 1, 2-1!. /he cost of the construction &as ,h,*-@. the useful life of the condominium is 2* years and its residual value is ,h,*@. an independent valuation expert provided the follo&ing fair value at each subse0uent measurement datesF 2-1! **@ 2-1$ *!@ 2-1* .-@ /he amount that should be reported as depreciation and accumulated depreciation of investment property for and as of 2-1* under cost model, respectively is:are a. 1.6@G 1.6@ b. 1.6@G *.$@ c. 1.6@G -@ d. -@G 1.6@ !2. DBased on the above problemE Supposing the investment property &as sold at Aanuary *, 2-1. for ,h,.-@. /he amount of gain:loss from arising from sale transaction under cost model and fair value model respectively is a. 1-@ gainG 2@ gain b. -@ G 2@ gain c. 1*.$@ gainG -@ d. 1*.$@ gainG 2@ gain !6. 2ORO CORP" purchased bonds at a discount of ,hp1--,---. Subse0uently, HO9O sold these bonds at a premium of ,h,1$-,---. 5uring the period that Horo held this long(term investment, amortization of the discount amounted to ,h,2-,---. %hat amount should be reported as gain on sale of bonds' a. 12-,--c. 2$-,--b. 22-,--d. 2.-,--!7. 0A0A0A CO" purchased an investment property from 0E0E0E INC" on Aanuary 1, 2-11 for ,h,2,2--,---. /he property had a useful life of $- years and on 5ecember !1, 2-1! had a fair value of ,h,!@. On 5ecember !1, 2-1!, the management intends to use such property as o&ner(occupied property Dfair value at the time of transfer is ,h,!@E. /he entity used the fair value model to account for the investment property. %hat is the gain or loss to be recognized for the year ended 5ecember !1, 2-1! regarding the disposal of the property' a. 7.*,--- gain b. 6--,---gain c. 1--,--- loss d. one of the above $-. LUFFY CORPORATION% on Auly 1, 2-1!, paid ,1,176,--- of 1-B, 2-(year bond &ith a face amount of ,1@. Interest is paid on 5ecember !1 and Aune !-. /he bonds &ere purchased to yield 6B. /he effective interest method is used to recognize interest income from this long(term investment. %hat is the carrying amount of the investment in bonds on 5ecember !1, 2-1!' a. ,1,2-2,7-c. 1,176,--b. 1,17*,72d. 1,17!,-*$1. LAGOT NA CORP., a real estate entity, has a building &ith a carrying amount of ,h,2-@ on 5ecember !1, 2-1!. /he building is used as offices of the entity;s administrative staff. On 5ecember !1, 2-1!, the entity intended to rent out the building to independent third parties. /he staff &ill be moved to a ne& building purchased early in 2-1!. On 5ecember !1, 2-1!, the original building had a fair value of ,h,!*@. On the same date, the entity also had land that &as held I the ordinary course of business. /he land had carrying amount of ,h,1-@ and a fair value of ,h,1*@ on 5ecember !1, 2-1!. On such date, the entity decided to hold the land for capital appreciation. /he accounting policy is to carry all investment property at fair value. On 5ecember !1, 2-1!, &hat amount should be recognized in revaluation surplus and gain:loss, respectively' a. *@ and 1*@ b. 1*@ and *@ $?,age

c. 1*@ and d. - and 1*@ $2. On October 1, 2-1!, NAMI COMPANY purchased ,2@ face value 12B bonds for 76 plus accrued interest and bro3erage fee. Interest is paid semiannually on Aanuary 1 and Auly 1. Bro3erage fee for this transaction &as ,h,*-, ---. #t &hat amount should this ac0uisition of bonds be recorded' a. 1,7.-,--c. 2,-1-,--b. 2,-2-,--d. 2,-2-,--$!. On Aanuary 1, 2-1!, PAPA BEER CO" purchased srial bonds &ith face value of ,!@ and stated 12B interest payable annually every 5ecember !1. /he bonds are to be held as a financial asset at amortized cost &ith a 1-B effective yield. /he bonds mature at an annual installment of ,1@ every 5ecember !1. /he rounded present value of 1 at 1-B forF One period -.71 /&o periods -.6! /hree periods -.2* %hat is the present value of the serial bonds on Aanuary 1, 2-1!' a. !,1-.,6-b. !,-.-,--c. !,-$*,--d. !,1$7,$-$$. C0IC0AY INCORPORATED purchased ,*@ of bond at par. /he entity has elected the fair value model for this investment. #t year(end, the entity has received annual interest of ,2--,--- and the fair value of the bonds &a ,$,2-*,---. %hat amount should be reported for the bond investment as total income or loss in the income statement' a. 2--,--- income b. 27*,--- loss c. $7*,--- income d. 7*,--- loss $*. PIN1 0ORSE CORPORATION and its subsidiaries o&n the follo&ing properties that are accounted for in accordance &ith ,#S $-F )and held by ,I I 1O9SJ for undetermined use ,h, *,---,--# vacant building o&ned by 1O9SJ and to be leased out under an operating lease ,roperty held by a subsidiary of ,I I 1O9SJ, a real estate firm, in the ordinary course of business ,roperty held by ,I I 1O9SJ for use in production Building o&ned by subsidiary of ,I I 1O9SJ and for &hich the subsidiary provides security and maintenance to the lessees )and leased by ,I I 1O9SJ to a subsidiary under an operating lease ,roperty under construction for use as investment property )and held for future factory site @achinery leased out by ,I I 1O9SJ to unrelated party under an operating lease ,h, !,---,--2,---,--$,---,---

1,*--,--2,*--,--.,---,--!,*--,--1,---,--26,*--,---

%hat is the total investment property that should be reported in the consolidated statement of financial position of the parent and its subsidiaries' a. ,h,12@ c. ,h,1*.*@ b. ,h,1-.*@ d. ,h,7.*@ For Problem 46-50 J#S8 )# K 4O. had the follo&ing transactions in bond investment held as =trading> for 2-1!G @arch 1 ,urchased 2,---, ,1,---, 12B bonds of 1#95 4ompany C 7! excluding accrued interest. /ransaction costs amounted ,2*,---. Interest is payable on "ebruary 1 and #ugust 1. ,urchased $,---, ,1,---, 12B bonds of @J58O )# K 4orporation at 7* plus accrued interest. Interest is payable @arch 1 and September 1. Sold 1,--- of the @J58O )# K bonds at 1-* excluding accrued interest. *?,age

#pril 1 October 1

5ecember 1

Sold all of the 1#95 bonds at 1-- plus accrued interest.

5ecember !1 /he mar3et value of the @J58O )# K bonds is 7-. So#ve ('e fo##o+ !,& $.. /he amount of gain on sale of bonds for the year 2-1! $2. /he balance of trading bond investment as of 5ecember !1, 2-1! $6. /he amount of interest income during the year 2-1! $7. /he initial cost of 1#95 4ompany bonds to be reported in the Balance Sheet *-. et income or loss for the year 2-1!

BONUS /UESTION 345PTS6 Def !e ('e fo##o+ !,& 46 INVESTMENTS 26 BONDS 76 INVESTMENT PROPERTY (Jnd(

The great difference between those who achieve and those who fail is concentration. All things are possible for those who believe. -Mark 9;23

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