Saint Paul School of Business and Law

Campetic Road, Palo, Leyte

Accountancy Department
ACTREV 2

INVESTMENTS jprocabo, CPA

INVESTMENTS
- assets held for accretion of wealth through distribution (ex. Interest, royalties,
dividends and rentals).
- assets held for capital appreciation or for other benefits to the investing entity such
as those obtained through trading relationship.

Reasons for holding investment:

1. Accretion of wealth
2. Capital appreciation
3. Ownership control
4. Meeting business requirements
5. Protection

Financial Instruments
- any contract that gives rise to a financial asset of one entity and a financial liability
or an equity instrument of another entity.
- encompasses a financial asset, a financial liability and an equity instrument.

Financial asset:
Any asset that is:
1. Cash
2. A contractual right to receive cash or another financial asset from another entity.
3. A contractual right to exchange financial instrument with another entity under
conditions that are potentially FAVORABLE.
4. An equity instrument of another entity.

Financial liability
Any liability that is a contractual obligation:
1. To deliver cash or other financial asset to another entity.
2. To exchange financial instruments with another entity under conditions that are
potentially UNFAVORABLE.

Equity security
- encompasses any instrument representing ownership shares and right, warrants or
options to acquire or dispose of ownership shares at a fixed or determinable price.

CLASSIFICATION OF INVESTMENTS
A. Investment in equity securities
B. Investment in debt securities
C. Investment property
D. Other investments

INVESTMENT IN EQUITY SECURITIES

- represents ownership interest in an equity (ex. Ordinary share or preference
share) or the right to acquire ownership interest (ex. Share options, share
warrants and etc.).

Note: This term does not encompass callable or redeemable preference share,
treasury share and convertible bonds.

1. Small investments
2. Investment in subsidiary
3. Investment in associate
SMALL INVESTMENTS
- are investments in the investee’s stock without controlling interest or significant
influence.

1. Investment to Profit or Loss

- also known as Trading Security.
- acquired principally for the purpose of generating a profit from short-term
fluctuations in price or dealer’s margin.
- generally marketable (with readily determinable market value).

Measurement:
a. Initial Recognition
- measured at FAIR VALUE.
- transaction cost incurred is considered as outright expense.

b. Subsequent Recognition
- measured at FAIR VALUE.
- changes in fair value subsequent to acquisition are reported in the profit
or loss of the period of such change.

Reclassification of Investment to Profit or Loss

- transfer in and out of this category is not allowed by the standards.

2. Investment to OCI or Equity

- also known as Available for Sale Security.

Measurement:
1. Initial recognition
a. Marketable
- measured at FAIR VALUE plus TRANSACTION COST.

b. Non-marketable
- measured at FAIR VALUE plus TRANSACTION COST.

2. Subsequent recognition
a. Marketable
- measured at FAIR VALUE or IMPAIRED VALUE (if there’s objective
evidence of impairment).
- any change(increase or decrease) is reported in equity.

b. Non-marketable
- measured at HISTORICAL COST or BOOK/CARRYING VALUE.
- if securities are impaired, it is reported at IMPAIRED VALUE.

Impairment of Available for sale – Equity

- The cumulative loss that has been recognized directly in equity must
be removed from equity and recognized in profit or loss. This includes
any decline in fair value already recognized in equity plus the
impairment loss.

Acquisition of investment
a. Dividends-on
- if acquired or sold between the date of declaration and date of record.
- the cost of acquiring the instruments includes the amount paid for the
instruments plus the amount paid for the dividends.

b. Ex-dividend
- if acquired or sold between the date of record and date of payment.
- the cost of acquiring the instruments include only the amount paid for the
instrument.
Accounting for Dividends on Equity Instruments
1. Cash dividend
- recognized as income at the date of declaration.
- measured at Face Value.

2. Property dividend
- recognized as income at the date of declaration.
- measured at Fair Value of the property.

3. Share dividend
- not recognized as income.
- memo entry only is made to acknowledge the receipt of new shares.
a. Small Dividends
- if dividend is less than 20%.
- recorded at Fair Value.

b. Large Dividends
- if dividend is 20% or above.
- recorded at Par value.

4. Shares in lieu of cash dividends

- recognized as income.
- measured at fair value of the shares.

5. Cash in lieu of share dividends

- not recognized as dividend income.
- the cash received is the proceeds of the as if sale of shares.

Accounting for share rights

a. Upon receipt
- the carrying value of the equity instrument is allocated using the percentage of
their separate market values over the combined market values of the equity and
the share rights.

1. Rights-on
- means that the equity instrument is currently traded with the right to
acquire additional shares.
- the market value of the equity instrument already includes the market
value of the share rights.

2. Ex-rights
- means that the equity instruments are separately traded.
- the market value of the equity instruments is separate from the market
value of the share rights.

b. Upon exercise
- the cost assigned to the new shares acquired will be debited to a separate
investment in equity account (trading or available for sale).
- the cost assigned should include the amount paid in acquiring new shares plus
the cost assigned to the rights being exercised.

c. Upon expiration
- if the share rights were not exercised and had they expired, the cost assigned to
an expired share rights should be charged to Loss on Share Rights.

INVESTMENT IN EQUITY & INVESTMENT IN ASSOCIATE

Classification of Investment in Equity Securities

1. Investment in Subsidiary
2. Investment in Associate
3. Small Investments
INVESTMENT IN SUBSIDIARY
- When the ownership interest is more than 50%.
- The entity has Control over the other entity.
- Accounted under Cost or Purchase Method.

INVESTMENT IN ASSOCIATE
- When the ownership interest is 20% to 50%.
- The entity has Significant Influence over the other entity.
- Accounted under Equity Method.

Associate
- is an entity, including an un-incorporated entity such as a partnership, over which
the investor has significant influence and that is neither a subsidiary nor an
interest in a joint venture.

Measurement
Equity Method
- a method of accounting whereby the investment is initially recorded at cost and
adjusted thereafter for post-acquisition change in the investor’s share of net assets
of the investee.
- The profit or loss of the investor includes the investor’s share of the profit or loss
of the investee adjusted for the effect of any fair value differences recognized on
acquisition of the associate.

1. Initial Recognition
- measured at historical cost (The fair value plus transaction cost incurred).
2. Subsequent Recognition
- the cost and carrying value of the equity securities is increased or decreased to
recognize the investor’s share of the profit or loss of the investee after the date of
acquisition.

INVESTMENT IN DEBT INSTRUMENTS

- represent creditor’s claim with fixed amount and usually some interest obligation
(ex. Government securities, corporate bonds, convertible bonds, commercial
paper, etc.).

Classification of Debt Securities

1. Trading Securities
2. Available for Sale Securities
3. Held to Maturity Securities

INVESTMENT TO PROFIT OR LOSS (TRADING SECURITIES)

Measurement:
1. Initial Recognition
- measured at historical cost (fair value which is the transaction price).
- Any transaction cost incurred is recognized outright as an expense.

2. Subsequent Recognition
- remeasured at fair value.
- any increase or decrease in the value of the debt instrument is recognized in
profit or loss.
- not subject to amortization since they are sold within a very short period of
time.

INVESTMENT IN AVAILABLE FOR SALE SECURITIES

Measurement:
1. Initial Recognition
- measured at historical cost (fair value plus any transaction cost incurred).
 2. Subsequent Recognition
- remeasured at fair value.
- any increase or decrease in the value of the debt instrument is recognized
directly in equity.
- subject to amortization because they are generally held for a longer period of
time.

INVESTMENT IN HELD TO MATURITY SECURITIES

Held to maturity investments
- Non-derivative financial assets.
- With fixed or determinable payments and fixed maturity.
- The entity has the positive intention to hold them to maturity.

Measurement:
1. Initial Recognition
- measured at historical cost (fair value plus any transaction cost incurred).

2. Subsequent Recognition
- not remeasured but reported at amortized cost.
- increases or decreases as a result of market fluctuations are not recognized.
- if there is objective evidence of impairment the debt security should be
remeasured at its impaired value.

The Tainting Rules

When an entity during the current financial year has sold or reclassified more than an
insignificant amount of held to maturity investments before maturity, it is prohibited
from classifying any financial asset as held to maturity for a period of two years after
the occurrence of this event. Furthermore, all the entity’s held to maturity investments
must be reclassified into the available for sale category and measured at fair value. In
a sense a penalty is imposed for a change in management’s intention. When the
prohibition ends (at the end of the second year following the tainting), the portfolio
becomes cleansed and the entity is once more able to asset that it has the intent and
ability to hold debt instruments to maturity.

Change in the category of a debt instrument

1. AFS to HTM
- measured at amortized cost rather than at fair value.
- the amortized cost of the investment in available for sale on the date of transfer
will become the cost of the new category.

Note: The amortized cost is the expected net cash inflow based from holding the
investment till maturity discounted at the effective rate which is the rate at the
time the original investment was initially recognized.

2. HTM to AFS
- measured at fair value at the date of transfer rather than at amortized cost.
- the difference of the fair value and the amortized cost is recognized as unrealized
gain or loss to be reported in the statement of comprehensive income under the
category other comprehensive income.

INVESTMENT PROPERTY

Investment Property
- A property held by the owner or the lessee under a finance lease to earn rentals or
for capital appreciation or both.
- Can be land or building or both.
Measurement
1. Initial Recognition
- Initially recorded at cost (fair value plus directly attributable cost).
2. Subsequent Recognition
a. Cost Model
- measured at cost less accumulated depreciation less any accumulated
impairment losses.
- if cost model is followed, the fair value of the property should be
disclosed.

b. Fair Value Model

- the fair value policy requires the enterprise to revalue its investment
properties each year, any gain or loss being included in the net profit or
loss for the period.

Note: If an entity has previously measured an investment property at fair

value, it shall continue to measure the property at fair value until disposal ( or
until the property becomes owner-occupied property or the entity begins to
develop the property for subsequent sale in the ordinary course of business)
even if comparable market transactions become less frequent or market prices
become less readily available.

Transfer to or from Investment Property Classification (transfer under the fair value
model)
1. Investment Property to Property, Plant and Equipment
- it should be carried at fair value.
- the fair value at the date of transfer becomes the deemed cost for subsequent
accounting under PAS 16.

2. Investment Property to Inventory

- it should be carried at fair value.
- the fair value at the date of transfer becomes the deemed cost for subsequent
accounting under PAS 2.

3. Property, plant and equipment to Investment Property

- it should be carried at fair value up to the date of transfer.
- any gain or loss is accounted for as revaluation surplus or deficit in equity in
accordance with PAS 16.

4. Inventories to Investment Property

- it should be carried at fair value.
- any difference between the fair value and previous carrying amount at the date
of transfer is recognized in profit or loss.

5. Property, plant and equipment(self-constructed or developed) to Investment

Property
- when construction or development of a self-constructed property is complete it
should be transferred to investment property. Until this point the property is
accounted for under PAS 16.
- if the investment property is to be carried at fair value, any difference between
fair value and previous carrying amount at the date of transfer should be
recognized in profit or loss.

Transfer under the cost model

- When an entity has a policy of carrying the investment property at the cost model,
properties transferred in the same way and under the same circumstances as
described on the above transfers. However, such transfers do not change the
carrying amount of the property transferred, that is, no revaluation gains or loss
arise, nor they change the cost of the property for measurement or disclosure
purposes.
 FUND AND OTHER INVESTMENTS

Fund – is defined as cash and other assets set aside for a specific purpose either by reason
of the action of management or by virtue of a contract or legal requirement.
- may be in the form of cash, securities and other assets.

1. Current (current asset)

- includes petty cash fund, payroll fund, interest fund, dividend fund, and tax fund.
2. Non-current (long-term investment)
- includes sinking fund, preference share redemption fund, replacement fund, plant
expansion fund, contingency fund and insurance fund.

THEORIES:
1. Available for sale investment are securities
a. Considered as a derivative instrument
b. Purchased with 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. Purchased and held indefinitely and will be available to be sold when the need
for liquid funds arises
d. With fixed or determinable payments and fixed maturity that an enterprise has
the positive intent and ability to hold to maturity

2. The term ‘financial assets at fair value through profit or loss’ may refer to
a. Trading securities (TS)
b. Available for sale securities (AFS)
c. Held to maturity securities (HTM)
d. Investment in unaffiliated companies and associates

3. Equity securities may be classified as

a. TS only c. TS or AFS
b. AFS only d. TS, AFS or HTM

4. Debt securities may be classified as

a. HTM only c. AFS or HTM
b. TS or HTM d. TS, AFS or HTM

5. Trading securities are classified as

a. Current assets c. Current or noncurrent assets
b. Noncurrent assets d. Current or noncurrent liabilities

6. Investment(s) that may be classified as CURRENT at initial recognition.

a. TS only c. TS and AFS
b. AFS only d. TS, AFS and HTM

7. Investment(s) that may be classified as NON-CURRENT at initial recognition.

a. TS and AFS c. TS and HTM
b. AFS and HTM d. TS, AFS and HTM

8. Transaction costs incurred are expensed in acquiring this type of investment

securities.
a. TS only c. HTM only
b. AFS only d. TS and AFS

9. Subsequent to acquisition, these securities are generally reported at FAIR

VALUE.
a. TS and AFS c. TS and HTM
b. AFS and HTM d. TS, AFS and HTM
10. Unrealized gains or losses on TS are generally presented on the face of the
a. Income statement
b. Statement of cash flows
c. Statement of financial position
d. Statement of changes in equity

11. Unrealized gains or losses on AFS are included and presented in the
a. Liability section of the balance sheet
b. Equity section of the balance sheet
c. Income statement
d. Statement of cash flows

12. Held-to-maturity securities are generally carried subsequent to acquisition at

a. Amortized cost (straight line method)
b. Amortized cost (scientific method)
c. Fair value less costs to sell
d. net realizable value

13. Unrealized gains or losses on HTM are

a. Recognized in the income statement
b. Recognized in asset section of the balance sheet
c. Recognized in equity section of the balance sheet
d. Not recognized

14. Impairment loss may be recognized for all of the following, except
a. Loans and receivables c. Available-for-sale securities
b. Trading securities d. Held-to-maturity securities

15. Cash dividends are recognized as income by the investor on the

a. Date of declaration c. Date of payment
b. Date of record d. Date of balance sheet

16. Property dividends are treated by the investor as a (an)

a. Return of investment
b. Non-accountable event
c. Income at the cost of the property
d. Income at the fair value of the property

17. Liquidating dividends are treated by the investor as a (an)

a. Return of investment
b. Non-accountable event
c. income at the cost of the property
d. Income at the fair value of the property

18. Shares received in lieu of cash dividend are treated as

a. Stock dividends
b. Income at par value of the shares received
c. Income at fair value of the shares received
d. Income at the cash dividend that would have been received

19. Cash received in lieu of share dividends is treated as

a. Income at the par value of the shares that would have been received
b. Income at the fair value of the shares and investment cost per share
c. If the stocks are received and later sold, with gain or loss on sale being
recognized
d. If the stocks are received and later sold, with gain or loss on sale not to be
recognized
20. Reverse stock splits
a. a. Increase the number of shares and investment cost per share
b. Decrease the number of shares and investment cost per share
c. Increase the number of shares but decrease the investment cost per share
d. Decrease the number of shares but increase the investment cost per share

21. An entity over which the investor exercises significant influence is called
a. Associate c. Subordinate
b. Affiliate d. Subsidiary

22. Under PAS 28, significance influence means

a. The holding of significant proportion of the share capital in another entity
b. The contractually agreed sharing of control over an economic entity
c. The power to participate in the financial and operating policy decisions of an
entity
d. The mutual sharing in the risks and benefits of a combined entity

23. What level of investment in voting stock would lead to the presumption that an
investor has an ability to exercise significant influence over an associate?
a. 20% or less c. More than 20%
b. 20% or more d. More than 50%

24. Under the equity method, cash dividends received by the investor from the
associate are recorded as
a. Dividend income
b. A deduction from the investment account
c. A deduction from the investor’s share of the associate’s profits
c. An addition to the investor’s share o f the associate’s profits

25. Under the equity method of accounting for investment in associates, the
investment account is
a. Increased by the share in the earnings of the associates but is not affected by the
share in the losses of the associates
b. Decreased by the share in the losses of the associates but is not affected by the
share in the earnings of the associates
c. Increased by the share in the earnings of the associates and decreased by the
share in the losses of the associates
d. Not affected by the share in the earnings or losses of the associates

26. An investor shall discontinue the use of equity method from the date it loses significant
influence over an associate and upon loss of significant influence, the remaining interests
shall be valued at
a. Original cost of the investment
b. Amortized cost uses effective interest method
c. Fair value, with the resulting remeasurement gain or loss included in profit or
loss
d. Fair value, with the resulting remeasurement gain or loss included in other
comprehensive income

27. 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.
28. These are investments in bonds carried at fair value on BS date, with any
unrealized gain or loss included as a component of income.
a. Trading securities c. Held to maturity securities
b. Available for sale securities d. None of the choices

29. If an entity fails to amortize the premium on its trading bond investment, the
income is
a. Overstated c. Not affected
b. Understated d. Either overstated or understated

30. These are investments in bonds carried at fair value on BS date, with any
unrealized gain or loss included as a component of equity.
a. Trading securities c. Held to maturity securities
b. Available for sale securities d. None of the choices

31. Investment in bonds classified as held to maturity (HTM) securities are generally
carried at
a. Fair value, with any unrealized gain or loss included as a component of income
b. Fair value, with any unrealized gain or loss included as a component of equity
c. Amortized cost, with any premium or discount amortized using straight-line
method
d. Amortized cost, with any premium or discount amortized using effective
interest method

32. For a debt security transferred from HTM to AFS, the difference between the
carrying amount of investment and fair value at the date of transfer is
a. Recognized as a component of income
b. Recognized as a component of equity
c. Recognized as a component of cash flow
d. Not recognized

33. For a debt security transferred from AFS to HTM, any previous unrealized gain or
loss recognized directly in equity is
a. Recognized in profit or loss immediately at the date of transfer
b. Included in equity and amortized to profit or loss ovee the remaining life of the held to
maturity using the straight line method.
c. Included in equity and amortized to profit or loss over the remaining life of the
held to maturity security using the effective interest method
d. Recognized as an adjustment of retained earnings.

34. A bond investment with interest payment dates on May 1 and November 1 is
purchased on August 1. The amount of (A) interest receivable and (B) interest
income on December 31 would be equal to
a. (A) 5 months (B) 8 months c. (A) 5 months (B) 5 months
b. (A) 2 months (B) 8 months d. (A) 2 months (B) 5 months

35. Which of the following refers to the effective rate rather than nominal rate of
interest?
a. Stated rate c. Coupon rate
b. Contract rate d. Yield rate

36. An entity made a year-end amortization for its only investment in bonds:

Dec. 31 Investment (Bonds) 100

Interest Income 100

The bond investment must have been purchased at

a. Par c. A discount
b. Face value d. A premium
37. Assuming the same journal entry in no. 14, one can conclude that
a. Effective rate is equal to the nominal rate
b. Effective rate is higher than the nominal rate
c. Effective rate is lower than the nominal rate
d. Effective rate is less than or equal to the nominal rate

38. The investor’s interest income for a period would be highest if the bond is
purchased at
a. A discount c. Par
b. A premium d. Face value

39. A bond investment with interest payment dates on February 1 and August 1 is
sold June 1, the cash received from the sale
a. Does not include the accrued interest
b. Includes accrued interest for two (2) months
c. Includes accrued interest for four (4) months
d. Includes accrued interest for seven (7) months

40. An independent trustee holds cash in the sinking fund account representing annual
deposits to the fund and the interest earned on those deposits. How should the
sinking fund be reported in the company’s balance sheet?
a. The cash in the sinking fund should appear as a current asset
b. Only the accumulated deposits should appear as a noncurrent asset
c. The entire balance in the sinking fund account should appear as a current asset
d. The entire balance in the sinking fund account should appear as a noncurrent
asset

41. If cash in a bond sinking fund is used to purchase investments, the sinking fund
a. Increases when investments are purchased
b. Decreases when investments are purchased
c. Increases by the revenue earned on investments
d. Is not affected by revenue earned on investments

41. Which of the following terms best describes property held to earn rentals or for
capital appreciation?
a. Freehold property
b. Leasehold property
c. Owner-occupied property
d. Investment property

43. Under PAS 40, which of the following best describes owner-occupied property?
a. Property held for sale in the ordinary course of business
b. Property held for use in the production of goods and for administrative purposes
c. Property held to earn rentals
d. Property held for capital appreciation

44. PAS 40 requires that investment property be accounted for using the
a. Cost model or fair value model
b. Cost model or revaluation model
c. Cost model or net realizable value model
d. Cost, fair value or net realizable value model

45. Under the cost model, an investment property is carried on each balance sheet date at
a. Fair value
b. Cost less accumulated depreciation
c. Cost less accumulated impairment losses
d. Cost less accumulated depreciation and impairment losses
 46. Under the fair value model, any unrealized gain or loss on investment property is
a. Not recognized
b. Recognized in the income statement
c. Recognized in the equity section n of the balance sheet as a general reserve
d. Recognized in the equity section of the balance sheet as a valuation reserve

47. In case of property held under an operating lease and classified as investment
property,
a. The entity has to account for the investment property under the cost model
only.
b. The entity has to use the fair value model only
c. The entity has the choice between the cost model and fair value model
d. The entity needs only to disclose the fair value and can use the cost model

48. Which of the following additional disclosures must be made when an entity
chooses the cost model as its accounting policy for investment property?
a. Fair value of the property
b. Present value of the property
c. Value in use of the property
d. Net realizable value of the property

49. A transfer from investment property carried at fair value to owner-occupied

property shall be accounted for at
a. Fair value, which becomes the deemed cost for subsequent accounting
b. Carrying amount
c. Historical cost
d. Present value of expected future cash flows

50. If owner-occupied property is transferred to investment property that is to be

carried at fair value, the difference between the carrying amount of the property
and its fair value shall be treated as
a. A change in estimate
b. A change in accounting policy
c. Unrealized gain in profit or loss
d. Revaluation of property, plant and equipment

PROBLEMS:

SMALL INVESTMENTS
1. Master Company acquired the following portfolio of trading securities during 2010 and
reported the following balances at December 31, 2010:
Security Cost December 31, 2010 Market Value
C 300,000 280,000
B 360,000 370,000
A 500,000 460,000

No sales occurred during 2010. All declines are considered to be temporary. What is the
carrying value of the securities on December 31, 2010 on Master’s statement of financial
position?
a. 1,110,000 c. 1,160,000
b. 1,150,000 d. 1,170,000

2. National Bank began business in February of 2009. During the year, National Bank purchased
the three-year trading securities listed below. In its December 31, 2009 balance sheet,
National Bank appropriately reported a P40,000 debit balance in its “Fair Value adjustment-
Trading Securities” account. There was no change during 2010 in the composition of National
Bank’s portfolio of trading securities. Pertinent data are as follows:
 Security Cost December 31, 2010 Market Value
C 1,200,000 1,260,000
B 900,000 950,000
A 1,600,000 1,620,000
Total 3,700,000 3,830,000

What amount of gain on these securities should be included in National Bank’s profit or loss
for the year ended December 31, 2010?
a. None c. 90,000
b. 40,000 d. 130,000

3. Gerald Company acquired available for sale securities during the year 2010 to be held as
current investments. An analysis of the current investments on December 31, 2010 showed
the following:
Securities Cost Market
P 1,500,000 1,400,000
I 2,200,000 2,300,000
C 3,000,000 2,900,000
U 3,800,000 4,000,000

Question 1: In Gerald’s December 31, 2010 statement of financial position, how much should
be reported as the carrying value of the securities?
a. 10,300,000 c. 10,500,000
b. 10,400,000 d. 10,600,000

Question 2: What amount of unrealized gain should be reported in Gerald’s December 31,
2010 profit or loss?
a. None c. 200,000
b. 100,000 d. 300,000

4. On January 1, 2010, May Company appropriately reported a debit balance of P125,000 in the
fair value adjustment account in conformity with the valuation of available for sale securities.
There was no change during 2010 in the composition of the portfolio of available for sale
investments.

Pertinent data on December 31, 2010 are as follows:

Securities Cost Market
C 1,500,000 1,625,000
P 1,250,000 1,000,000
A 2,250,000 1,750,000

Question 1: By what amount the AFS decreased during 2010?

a. None c. 625,000
b. 500,000 d. 750,000

Question 2: What amount of unrealized loss should May Company report in its December 31,
2010 shareholders’ equity related to its investment?
a. None c. 625,000
b. 500,000 d. 750,000

5. Allied Bank began business on January 2, 2010 and at December 31, 2010, Allied Bank had
the following portfolios of equity securities:

Trading AFS
Aggregate Cost 375,000 562,500
Aggregate market value 300,000 462,500

Question 1: None of the declines is judged to be other than temporary. Unrealized losses at
December 31, 2010 should be recorded with corresponding charges against-
 Income Shareholders’ Equity
a. -0- 175,000
b. 75,000 100,000
c. 100,000 75,000
d. 175,000 -0-

Question 2: Assume that on December 31, 2010 there is objective evidence of impairment on
the equity security, what amount of losses should be charged against income?
a. 25,000 c. 100,000
b. 75,000 d. 175,000

6. Grand Company has P60,000 ordinary shares of Brand Corporation as an investment in AFS.
These shares were acquired at fair market value, which was P80 per share on May 2, 2011.
On December 20, 2011, the market value of these shares is P90 per share. On December 22,
2011, Grand Company sold 42,000 shares of its investment in Brand Corporation for P85 per
share. Market value of Brand’s shares has yet to change; it remained at P90 per share.

Question 1: What amount of realized gain or loss should Grand Company recognize in selling
those shares?
a. None c. 300,000
b. 210,000 d. 420,000

Question 2: What amount of unrealized gain or loss should Grand Company derecognize in
selling those shares?
a. None c. 210,000
b. 180,000 d. 420,000

Question 3: What amount of unrealized gain or loss should Grand Company carry over to the
next measurement date?
a. None c. 210,000
b. 180,000 d. 420,000

7. On November 1, 2009, Grain Company invested P600,000 in equity securities representing

20,000 ordinary shares of Brain Company. The investment was classified as AFS since the
company does not intend to sell the security for a short-term profit. On December 31, 2009,
the investment has a market value of P580,000. On December 31, 2010, the market value of
the investment was P640,000. On January 15, 2011, Grain Company sold the investment for
P650,000.

What amount of realized gain should Grain Company recognize on the disposal of the AFS?
a. None c. 30,000
b. 20,000 d. 50,000

8. On January 2, 2010, Lotus Company purchased 8,000 shares of Pearl Co. at P100 per share
and classified as AFS. Brokerage fees of P24,000 and tax of P4,000 were paid on the same
date. A P5 dividend per share of Pearl had been declared on December 17, 2009 to be paid
on March 1, 2010 to shareholders of record on January 31, 2010. On July 31, 2010, Lotus
Company received a 10% share dividend.

Question 1: If fair market value of Pearl Company securities is not clearly determinable as of
December 31, what amount should be shown as the carrying value of the investment in its
December 31, 2010 statement of financial position?
a. 788,000 c. 824,000
b. 800,000 d. 828,000

Question 2: Assuming Lotus investment in Pearl Company has a total market value of
P900,000 as of December 31, 2010, what amount of unrealized gain before tax should be
shown in the statement of comprehensive income?
a. None c. 100,000
b. 72,000 d. 112,000
 9. On September 30, 2010, Pilgrims Company exchanged equipment for 2,500 AFS of Theme
Company’s ordinary share. On that date, the equipment had a carrying value of P250,000
and its fair value was not clearly determinable. The par value of Theme’s share was P80 per
share but its market value on September 30, 2010 is P90 per share.

Question 1: What is the cost of investment?

a. 225,000 c. 290,000
b. 250,000 d. 290,100

Question 2: What is the amount of gain or loss on the disposal of the equipment?
a. None c. 25,000 loss
b. 25,000 gain d. 40,000 gain

10. Threshold Company purchased 20,000 shares out of 200,000 shares outstanding of Power
Company’s ordinary shares on February 23, 2010 for P924,000. Threshold Company intends
to hold the instrument for an indefinite period of time. Threshold Company received a
P40,000 cash dividend on Power Company on July 1, 2010. Power declared a 10% share
dividend on December 1, 2010 to shareholders of record as of December 31, 2010. The
dividend was distributed on January 31, 2011. The market price of the share was P38 on
December 1, 2010, P40 on December 31, 2010 and P42 on January 31, 2011.

Question 1: What amount should Threshold record as dividend revenue for the year ended
December 31, 2010?
a. 40,000 c. 116,000
b. 88,000 d. 120,000

Question 2: What amount should Threshold Company report the investment in its 2010
balance sheet?
a. 800,000 c. 880,000
b. 836,000 d. 924,000

INVESTMENT IN EQUITY AND INVESTMENT IN ASSOCIATE

1. On January 1, 2009, Oval Company purchased 10% of the outstanding ordinary shares of Tin
Corporation for P800,000, when the fair value of Tin’s net assets was P4,000,000. Oval does
not have the ability to exercise significant influence over the operating and financial policies
of Tin. The following data concerning Tin are available for 2010:
December 31, December 31,
2009 2010
Net income 1,200,000 1,000,000
Dividends declared and paid 0 2,500,000

Question 1: In its income statement for the year ended December 31, 2010, how much
should Oval report from this investment?
a. None c. 220,000
b. 100,000 d. 250,000

Question 2: What is the carrying value of Oval’s investment in Tin as of December 31, 2010?
a. 770,000 c. 830,000
b. 800,000 d. 460,000

2. On January 2, 2010, Faith Corporation bought 30% of the outstanding ordinary shares of
Love Corporation for P2,580,000 cash. Faith accounts for this investment by equity method.
At the date of acquisition of the stock, Love’s net assets had a book and fair value of
P6,200,000. Love’s net income for the year ended December 31, 2010 was P1,800,000.
During 2010, Love declared and paid cash dividends of P200,000.

On December 31, 2010, how much should Faith carry its investment in Love?
a. 2,340,000 c. 3,024,000
b. 2,580,000 d. 3,060,000

3. In January 2010, Compact Corporation acquired 20% of the outstanding ordinary shares of
ABC Company for P2,457,600. This investment gave Compact Company the ability to
exercise significant influence over ABC. The book value of the acquired shares was
 P2,022,400. The excess of the cost over the book value was attributed to the building which
was undervalued on ABC’s balance sheet and that had a remaining useful life of ten years.

For the year ended December 31, 2010, ABC reported net of tax income of P504,000 and
paid cash dividends of P112,000 on its ordinary share. Income tax rate is 32%.

Question 1: By what amount ABC Company’s building was understated?

a. None c. 640,000
b. 435,000 d. 3,200,000

Question 2: What is the proper carrying value of Compact’s investment in ABC at December
31,
2010?
a. 2,457,600 c. 2,492,480
b. 2,472,000 d. 2,536,000

INVESTMENT IN DEBT INSTRUMENTS

1. On May 1, 2011, Graham Company purchased a short-term P2,000,000 face value, 9% debt
instruments for P1,860,000 including the accrued interest and classified it as an investment
to profit or loss security. The debt instruments mature on January 1, 2014 and pay interest
semi-annually on January 1 and July 1. On December 31, the fair market value of the
instruments is 98%. On March 2, 2012, Graham Company sold the trading security for
P1,980,000.

Question 1: What amount should Graham report for short-term debt securities on December
31, 2011?
a. 1,800,000 c. 1,960,000
b. 1,860,000 d. 1,980,000

Question 2: What amount of unrealized gain or loss should the company report in its 2011
statement of comprehensive income related to its investment in trading securities?
a. None c. 160,000
b. 120,000 d. 200,000

2. On October 1, 2011, Nile Company purchased a debt security having a face value of
P3,000,000 with an interest rate of 10% for P3,200,000 including the accrued interest. A
total of P50,000 was incurred and paid by Nile Company which is in relation to the acquisition
of the debt instrument. Nile Company intends to hold the instrument for an indefinite period
but not until maturity. The bonds mature on January 1, 2016, and pay interest semi-annually
on January 1 and July 1. On December 31, 2011, the bonds had a market value of
P3,400,000.

What amount should Parrot report for a short-term investment in debt securities?
a. 3,125,000 c. 3,200,000
b. 3,175,000 d. 3,250,000

3. Marker Company purchased a held to maturity instruments with a face value of P5,000,000
on January 2, 2011. The bonds will mature on January 2, 2016 and the nominal rate of
interest is 12%. Interest is payable annually every December 30. The market rate of interest
on this date is 10%.

How much did Marker pay in acquiring the instruments?

a. 5,247,610 c. 5,348,580
b. 5,326,006 d. 5,379,600

4. On January 1, 2011, Sun Company purchased the debt instruments of Silk Company with a
face value of P5,000,000 bearing an interest rate of 8% for P4,621,006 to yield 10% interest
per year. The bonds mature on January 1, 2016 and pay interest annually on December 30
but Sun Company does not intend to hold the instruments until maturity.

If the market value of the instruments as of December 31, 2012 is 96% of its face amount,
what amount of unrealized gain or loss should Sun Company report in its 2012 shareholders’
equity?
 a. None c. 48,582 unrealized gain
b. 26,559 unrealized gain d. 116,892 unrealized gain

INVESTMENT PROPERTY AND OTHER LONG-TERM INVESTMENTS

1. Company Q is a supplier of industrial products, in 2010, the company purchased a plot of
land on the outskirts of a major city. The land was originally acquired at a cost of
P15,000,000. The area has mainly low-cost public housing and very limited public transport
facilities. The national government has plans to develop the area as an industrial park in five
years time and land is expected to greatly appreciate in value if the government proceeds
with the plan. Company Q’s management has not decided what to do with the property. On
December 31, 2011, the property has a current fair value of P15,400,000

How should the company classify the property in its December 31, 2011 statement of
financial position?
a. As land at its historical cost of P15,000,000.
b. As land at its current fair value of P15,400,000.
c. As investment property at its current fair value of P15,400,000.
d. As inventory at the lower of cost of P15,000,000 or current fair value of P15,400,000.

2. Act Company acquired an investment property with an installment price of P2,400,000. The
acquisition of the property requires a down payment of 20% and a non-interest bearing note
payable at the end of each year for five years. The prevailing market rate of interest for
similar instrument is 12%. The present value factor of annuity of 12% for four periods is
3.605. Act Company incurred transaction costs amounting to P50,000 for the property.
What is the cost of acquiring the property?
a. 1,862,400 c. 2,400,000
b. 1,914,320 d. 2,450,000

3. On December 31, 2011, Dolphin’s investment in real property has a carrying value of
P3,600,000 under the fair value model, before considering market value adjustment.

If the fair market value at December 31, 2011 is P3,000,000, how much should be the gain
or loss on transfer if Dolphin Company would shift to cost model?
a. Gain of P600,000 reported as other comprehensive income.
b. Loss of P600,000 reported as other loss in the income statement.
c. Loss of P600,000 reported in equity as decrease in revaluation surplus.
d. Zero

4. On January 1, 2011, Jim Company acquired an investment property at a total costs of

P5,000,000. At December 31, 2011, the carrying value of the property in the company’s
books is P6,000,000.
On December 31, 2012, Jim Company decided to use the property and immediately
reclassified as plant asset (owner occupied property).

Question 1: What would be the initial cost of the plant asset if it has a fair value of
P6,500,000 at conversion date?
a. 5,000,000 c. 6,000,000
b. 5,500,000 d. 6,500,000

Question 2: What amount of revaluation surplus Jim Company would recognize at the time of
conversion?
a. None c. 1,000,000
b. 500,000 d. 1,500,000

5. On January 2, 2011, Mighty Company converted its occupied property to investment property
that is to be carried at fair value. The carrying value of the property in the company’s books
is P4,000,000.

Question 1: Assuming the fair value of the property on the date of transfer or conversion is
P3,800,000, Mighty Company should recognize
a. A impairment loss of P200,000 in the profit or loss.
b. A P200,000 deferred loss as an asset.
c. A P200,000 unrealized loss in the shareholders’ equity.
d. A P4,000,000 cost of investment property.
 Question 2: Assuming the fair value of the property on the date of transfer of conversion is
P4,400,000, Mighty Company should recognize
a. A P400,000 unrealized gain in the profit or loss.
b. A P400,000 revaluation surplus in the shareholders’ equity.
c. A P400,000 unrealized gain in the liability section.
d. A P400,000 direct credit to accumulated profits or loss.

6. In 2010, Tremor Company has an investment property with a carrying amount of

P40,000,000 is destroyed by fire. The building element of the property was carried at
P12,000,000. A claim was made for compensation to the company’s insurers, but has not
been agreed at the time the financial statements for 2010 are issued. In 2011, the claim is
agreed and the company receives P20,000,000 in compensation. Also, at the end of the year
2011 a replacement building is constructed at a cost of P16,000,000.

Question 1: What amount of impairment loss should Tremor Company recognize in its 2010
statement of comprehensive income?
a. None c. 16,000,000
b. 12,000,000 d. 40,000,000

Question 2: What amount of insurance claim should Tremor Company recognize in its 2010
statement of comprehensive income?
a. None c. 16,000,000
b. 12,000,000 d. 20,000,000

Question 3: What amount of insurance claim should Tremor Company recognize in its 2011
statement of comprehensive income?
a. None c. 16,000,000
b. 12,000,000 d. 20,000,000

Question 4: What is the carrying value of the investment property in Tremor Company’s
statement of financial position for the year ended December 31, 2011?
a. 16,000,000 c. 36,000,000
b. 28,000,000 d. 44,000,000

Question 5: Assuming the compensation of P20,000,000 become receivable during 2011, how
should the compensation and impairment loss be presented in the statement of
comprehensive income of 2010?
a. Report a revenue of P20,000,000.
b. Report an impairment loss of P12,000,000.
c. Report a net revenue of P8,000,000.
d. Report a revenue of P20,000,000 and impairment loss of P12,000,000 separately.

7. The following information relates to noncurrent investments that Dragon Company placed in
trust as required by underwriter of its bonds.
Bond sinking fund balance, January 1, 2011, P2,000,000; Additional investment during 2011,
P500,000; Interest revenue, P20,000; Administrative costs, P15,000; Carrying value of bonds
payable, P3,000,000.
What amount should Dragon Company report in its December 31, 2011 balance sheet related
to its noncurrent investment for bond sinking fund requirements?
a. 2,000,000 c. 2,505,000
b. 2,500,000 d. 3,000,000

8. On January 1, 2008, Chives Company purchased a P4,000,000 ordinary life insurance policy
on its president.
Additional data for the year 2011 are: Cash surrender value, January 1, P200,000; Cash
surrender value, December 31, P220,000; Annual insurance premium paid on January 1,
2011, P80,000; Dividend received on August 1, P10,000. Chives Company is the beneficiary
under the life insurance policy.
Chives should report life insurance expense for 2011 of
a. 50,000 c. 70,000
b. 60,000 d. 80,000
 It is not the critic who counts, nor the man who points out how the strong man stumbled,
or where the doer of deeds could have done them better. The credit belongs to the man
who is actually in the arena, whose face is marred by dust and sweat and blood; who
strives valiantly; who errs and comes short again and again; who knows great
enthusiasms, great devotions; who spends himself in a worthy cause; who, at the best,
knows in the end the triumph of high achievement, and who, at the worst, if he fails, at
least fails while daring greatly, so that his place shall never be with those timid souls who
know neither victory nor defeat.

It is not good for all our wishes to be filled; through sickness we recognize the value of
health; through evil, the value of good; through hunger, the value of food; through
exertion, the value of rest.

...Attitude to me is more important than facts. It is more important than the past, than
education, than money, than circumstances, than failures, than success, than what other
people think, say or do. It is more important than appearance, gift, or skill. It will make or
break a company...a church...a home.
The remarkable thing is we have a choice every day regarding the attitude we will
embrace for that day...I am convinced that life is 10% what happens to me and 90% how I
react to it. And so it is with you... we are in charge of our attitudes.

Everything happens for a reason. Nothing happens by chance or by means of good or bad
luck. Illness, injury, love, lost moments of true greatness and sheer stupidity all occur to
test the limits of your soul. Without these small tests, if they be events, illnesses or
relationships, life would be like a smoothly paved, straight, flat road to nowhere.

If someone hurts you, betrays you , or breaks you heart, forgive them. For they have
helped you learn about trust and the importance of being cautious to who you open your
heart to.

If someone loves you, love them back unconditionally, not only because they love you, but
because they are teaching you to love and opening your heart and eyes to things you
would have never seen or felt without them.

Make every day count. Appreciate every moment and take from it everything that you
possibly can, for you may never be able to experience it again.

Talk to people you have never talked to before, and actually listen. Hold your head up
because you have every right to. Tell yourself you are a great individual and believe in
yourself, for if you don't believe in yourself, no one else will believe in you either.

You can make of your life anything you wish. Create your own life and then go out and live
it.

There comes a time when you must stand alone.

You must feel confident enough within yourself to follow your own dreams.
You must be willing to make sacrifices.
You must be capable of changing and rearranging your priorities so that your final goal can
be achieved.
Sometimes, familiarity and comfort need to be challenged.
There are times when you must take a few extra chances and create your own realities.
Be strong enough to at least try to make your life better.
Be confident enough that you won't settle for a compromise just to get by.
Appreciate yourself by allowing yourself the opportunities to grow, develop, and find your
true sense of purpose in this life.
Don't stand in someone else's shadow when it's your sunlight that should lead the way.

God Bless You Always - jpr ☺