Theories (Chapter 22-25)

1. Which is not a purpose of investment?

a. For accretion of wealth or regular income through interest, dividends, royalties and
rentals
b. For ownership control as in the case of investments in subsidiaries and associates
c. For meeting business requirements as in the case of sinking fund, preference share
redemption fund, plant expansion fund and other noncurrent fund.
d. To identify the financial assets that can be measured at fair value

2. When should debt investments be measured at amortized cost?

a. When the business model is achieved both by collecting contractual cash flows and by
selling the financial asset and the contractual cash flows are solely payments of principal
and interest on the principal outstanding
b. When the business model is to collect contractual cash flows if the contractual cash flows
are solely payments of principal and interest.
c. When it is acquired principally for the purpose of selling or repurchasing it in the near
term
d. When it is derivative

3. When should Debt investment be measured at fair value through OCI?

a. When the business model is achieved both by collecting contractual cash flows and by
selling the financial asset and the contractual cash flows are solely payments of principal
and interest on the principal outstanding
b. When the business model is to collect contractual cash flows if the contractual cash flows
are solely payments of principal and interest.
c. When it is acquired principally for the purpose of selling or repurchasing it in the near
term
d. When it is derivative

4. Which of the following should not be measured at fair value through profit or loss?
a. Trading securities
b. All other investments in quoted entity instruments
c. Financial assets that are irrevocably designated on initial recognition as at fair value
through profit or loss
d. Investments in unquoted equity instruments

5. Which of the following should be measured at amortized cost?

a. Debt investments held for collection of contractual cash flows
b. Debt investments held for trading
c. Equity investments of 20% to 50%
d. Equity investments of more than 50%

6. Where should an entity recognize a loss allowance for expected credit losses?
a. Debt investment measured at fair value option
b. Debt investment measured at amortized cost
c. Debt investment measured at fair value through proft and loss
d. Debt investment measured at irrevocable designation

7. Which statement is not true when a debt investment at amortized cost is reclassified to
FVOCI?
a. The original effective rate is not adjusted
b. The difference between the previous carrying amount and fair value at reclassification
date is recognized in other comprehensive income
c. The fair value at reclassification becomes the new carrying amount
d. The debt investment is measured at fair value at reclassification date

8. Which statement is not true when a debt investment is reclassified at amortized cost
a. The original effective rate is not adjusted
b. The cumulative gain or loss previously recognized in OCI is removed from equity and
adjusted against the fair value at reclassification date.
c. The fair value at reclassification date becomes the new carrying amount
d. The difference between the previous carrying amount and fair value is recognized in
other comprehensive income

9. Liquidating dividends are

a. Return of invested capital, and therefore are not income.
b. Dividends in the form of property or noncash assets
c. Are in the form of the issuing entity's own shares
d. Dividends earned that is considered as income

10. What is a fair value?

a. Present value expected to arise from the continuing use of an asset
b. Value expected to be generated by the investee
c. The price that would be received to sell an asset or paid to transfer a liability in orderly
transaction between market participants at the measurement date
d. Value expected to arise from dividends to be received from the investment
11. Which is not true about significant influence
a. It is a matter of judgement
b. It is the power to participate in the financial and operating policy decisions of an entity
c. The loss of significant influence can occur with or without change in the absolute or
relative ownership interest
d. It could not occur as a result of contractual agreement

12. Which is not true about bond investments

a. It can be acquired at interest date
b. It can be acquired at between interest date
c. It can be acquire as current or noncurrent investment
d. It can be acquired at equity date

13. What is the reason for amortization of bond premium or discount?

a. To bring the carrying amount of the investment to face value on the date of maturity
b. To bring the carrying amount of the investment at fair value on the date of maturity
c. To bring the carrying amount of the investment at historical cost on the date of maturity
d. To bring the carrying amount of the investment at irrevocable designation on the date of
maturity

14. What are callable bonds?

a. Are those which may be called in or redeemed by the issuing entity prior to their date of
maturity
b. Are those which give the bondholders the right to exchange their bonds for share capital
of the issuing entity
c. Are those which have a series of maturity dates
d. Are those bonds that mature on a single date

15. What are serial bonds

a. Are those which may be called in or redeemed by the issuing entity prio to their date of
maturity
b. Are those which give the bondholders the right to exchange their bonds for share capital
of the issuing entity
c. Are those which have a series of maturity dates or those bonds which are payable in
installments
d. Are those bonds that mature on a single date
16. Which is true about straight line method?
a. No one use it
b. It provides for an equal amount of premium or discount amortization each accounting
period
c. It provides for a decreasing amount of amortization
d. It provides for an increasing amount of amortization

17. Which is not true about bond outstanding method?

a. No one use it
b. It provides for an equal amount of premium or discount amortization each accounting
period
c. It provides for a decreasing amount of amortization
d. It provides for an increasing amount of amortization

18. Which is true about effective interest method?

a. No one use it
b. It provides for an equal amount of premium or discount amortization each accounting
period
c. It provides for a decreasing amount of amortization
d. It provides for an increasing amount of amortization

19. How do you record a share in net income

a. Debit cash Credit investment in associate
b. Debit investment in associate credit investment income
c. Debit investment in associate credit revaluation surplus
d. Debit investment in associate credit net income

20. How do you record a share in dividend paid

a. Debit cash Credit investment in associate
b. Debit investment in associate credit investment income
c. Debit investment in associate credit revaluation surplus
d. Debit investment in associate credit net income
 Problems (Chapter 22-25)

1. On January 1, 2016, Chester Company purchased marketable equity securities to be held

as "trading" for P5,000,000. Chester Company also paid commission to the stock broker
in the amount of P200,000. No securities were sold during 2016. The market value of the
equities on Dec. 31, 2016 is P6,000,000.
What amount of unrealized gain on these securities should be reported in the 2016 statement?
a. 500,000 c. 2,000,000
b. 1,000,000 d. 6,000,000
Solution:
Market value of equities Dec. 31, 2016 P6,000,000
Less: Market value January 2016 P5,000,000
P1,000,000

2. On January 1, 2016, Mike's Company purchased marketable equity securities for

P10,000,000 to be held as "available for sale". The company also paid P500,000 in the
form of transaction costs. The equity securities had a market value of P9,000,000 on
December 31, 2016. No securities were sold during 2016
What amount of unrealized loss on these securities should be reported in the 2016 statement of
changes in equity
a. 1,500,000 c. 500,000
b. 1,000,000 d. 10,000,000

Solution:
Jan 1 2016 Market value of equity securities 10,000,000
Dec 31 2016 Market value of equity securities (9,000,000)
Total 1,000,000
Transaction costs 500,000
Unrealized loss on these securities 1,500,000
 3. On January 1, 2016, Thomas Company acquired a long term investment a 25% ordinary
share interest in Smith's Company. Thomas paid P12,500,000 for this investment when
the fair value of Smith's net assets was P50,000,000. Thomas can exercise significant
influence over Smith's operating and financial policies. For the year ended December 31,
2016, Smith reported net income of P5,000,000 and declared and paid cash dividends
P2,500,000. How much revenue from this investment should Thomas report for 2016.
a. 5,000,000 c. 12,500,000
b. 2,500,000 d. 1,250,000

Solution:
Thomas revenue from investment (5,000,000 x 25%) = 1,250,000

4. On January 1, 2016 Bud company purchased as trading investment a P3,000,000 face

value Dog company 10% bond for 2,700,000 plus accrued interest to yield 15%. The
bonds mature on January 1, 2020 and pay interest annually on December 31. On
December 31, 2016, the bonds had a market value of P2,800,000. On February 17, 2017,
Bud company sold the bonds for P2,750,000. In its December 31, 2016, balance sheet,
what amount should Bud report for investments in trading securities?
a. 3,000,000 c. P2,800,000
b. 2,700,000 d.P2,750,000
Solution:
December 31, 2016 bonds market value of P2,800,000

5. Information regarding Map Company's portfolio of available for sale securities is as

follows:
Aggregate cost – December 31, 2016 = 1,500,000
Unrealized gains – December 31, 2016 = 50,000
Unrealized losses – December 31 2016 = 270,000
Net realized gains during 2016 = 310,000
On January 21, 2017 Map Company reported an unrealized loss of P20,000 as a component of
shareholder's equity. In it's December 31, 2016 shareholder's equity section of the balance sheet,
Map company should report what amount of unrealized loss on these securities?
a. 220,000 c. 290,000
b. 270,000 d. 240,000
Solution:
Unrealized losses – December 31, 2016 270,000
Unrealized gain – December 31, 2016 (50,000)
Unrealized loss 220,000

6. The following data pertain to the equity investments held by Lays Company classified as
" available for sale"
Cost 2,000,000
Market Value:
December 31, 2015 1,500,000
December 31, 2016 2,100,000
What amount should be reported as unrealized gain in December 31, 2016 shareholders'
equity?
a. 500,000 c. 100,000
b. 600,000 d. 0

Solution:
Market value December 31, 2016 2,100,000
Cost 2,000,000
Unrealized gain in December 31, 2016 100,000

7. Closer Company acquired 40% of Unicorn company voting share capital for P5,000,000
on January 1, 2016. Closer's 40% interest in Unicorn gave Closer the ability to exercise
significant influence over Unicorn's operating and financial policies. During 2016,
Unicorn earned P1,000,000 and paid dividend of 700,000. Unicorn reported earnings of
P1,500,000 for the 6 months ended June 30, 2017 and P3,000,000 ended for the year
ended December 31, 2017. On June 1, 2017, Closer company sold half of it's stock in
Unicorn for 3,500,000 cash. Unicorn paid dividend of P1,000,000 on November 1, 2017.
Before income tax, what amount should Closer include in its 2016 income statement as a result
of investment?
a. 400,000 c. 600,000
 b. 500,000 d. 700,000

Solution:
Closer income as a result of investment (1,000,000 x 40%) = 400,000

8. Aluminum company ventured into construction of a condominium in Makati which is

rated as the largest state-of-the-art structure. The entity's board of directors decided that
instead of selling the condominium, the entity would hold this property for purposes of
earning rentals by letting out space to business executives in this area.
The construction of the condominium was completed and the property was placed in
service on Jan. 1, 2016. The cost of the construction was P100 million. The useful life of
the condominium is 30 years and it's residual value is P10 million. An independent
valuation expert provided the following fair value at each subsequent year-end.
December 31, 2016 105 million
December 31, 2017 100 million
December 31, 2018 110 million

Under the fair value model, Aluminum company should recognize gain from change in
fair value in 2016 at:
a. 10,000,000 c.5,000,000
b. 0 d.3,000,000

Solution:
December 31, 2018 110,000,000
December 31, 2016 105,000,000
Gain from change in fair value 5,000,000
9. Chester's Company purchased P30,000 of 5% bonds for investment purposes on May 1. The
bonds pay interest on February 1 and August 1. The amount of interest revenue accrued at
December 31 is
a. P1,500 c. P1,000
b. P1,375 d. P625

Solution:
interest revenue (30,000 x 5% x 5/12) = P625

10. Dog's Company issues 8% 20 year bond with a par value of P500,000. The current market
rate for the bonds is 8%
The amount of interest owed to the bondholders for each semi-annual interest payment is
a. P40,000 c. P20,000
b. P0 d.P600,000
Solution:
500,000 x 0.08 x 1/2 year = P20,000