INVESTMENT IN DEBT SECURITIES

QUALIFYING EXAM REVIEW

SAMPLE QUESTIONS

1. Investment in debt instruments are financial assets because they are

a. Cash equivalents.
b. Equity instruments of another entity.
c. Contractual rights to receive cash or another financial asset from another entity.
d. All of the above.

2. PFRS 9 requires entities to measure their financial assets based on

a. The contractual cash flow characteristics of the financial asset.
b. The company’s business model for managing is financial assets.
c. Both a and b.
d. Neither a nor b.

3. Which of the following may be classified as a financial asset at fair value through profit or loss?
a. A derivative
b. A non-derivative equity instrument
c. A non-derivative debt instrument
d. All of the above

4. Which of the following may be measured subsequently at amortized cost?

a. A derivative
b. A non-derivative equity instrument
c. A non-derivative debt instrument
d. None of the above

5. Under what circumstances under PFRS 9 can an entity classify financial assets that meet the
amortized cost criteria as at FVPL?
a. Where the instrument is held to maturity.
b. Where the business model approach is adopted.
c. Where the financial asset passes the contractual cash flow characteristics test.
d. If doing so eliminates or reduces an accounting mismatch.

6. Which of the following is correct regarding the classification of investment in debt instruments as
financial asset at fair value through OCI?
a. This classification is not allowed for investment in debt instruments.
b. An entity may make an irrevocable election to classify investment in a debt instrument that is
not ‘held for trading’ as such
c. In order to be classified as such, a debt instrument needs to both have simple principal and
interest cash flows and be held in a business model in which both holding and selling financial
assets are integral to meeting management’s objectives.
d. All of the above.

7. All financial assets are initially measured at fair value plus transaction costs, except
a. Fair value through profit and loss
b. Fair value through OCI
c. Amortized cost
d. None of the above

1
Use the following information for the next three questions.

On January 1, 2020, STRONG Company purchased debt instruments of WILL Company with a face value
of P5,000,000 bearing interest rate of 8% for P4,621,006 to yield 10% interest per year. The bonds
mature on January 1, 2024 and pay interest annually on December 30. On December 31, 2020 the fair
value of the investment is P4,838,014 which is based on the prevailing market rate of 9%.

8. If the investment is designated as trading/FVPL, what amount of unrealized gain or loss should the
company disclose in their December 31, 2020 profit or loss?
a. None
b. P26,559 unrealized gain
c. P154,907 unrealized gain
d. P217,008 unrealized gain

9. If the investment is designated as FVOCI, what amount of unrealized gain or loss should the company
disclose in their December 31, 2020 other comprehensive income?
a. None
b. P26,559 unrealized gain
c. P154,907 unrealized gain
d. P217,008 unrealized gain

10. If the investment is designated as amortized cost, at what amount should the investment be
reported in the company’s statement of financial position for the year ended December 31, 2020?
a. P4,621,006
b. P4,683,107
c. P4,751,418
d. P4,838,014

Use the following information for the next six questions.

On January 1, 2020, RESILIENCE Corporation purchased P2,000,000 10% bonds for P2,103,020 (including
broker’s commission of P40,000.) Interest is payable annually every December 31. The bonds mature on
December 31, 2022. The prevailing market rate for the bonds is 9% at December 31, 2020. Round PV
factors to four decimal places.

11. If the bonds are classified as FA@FVPL, the amount to be recognized as fair value adjustment loss in
its 2020 profit or loss is
a. P67,800
b. P52,360
c. P27,800
d. P12,360

12. If the bonds are classified as FA@AC, the amount to be reported on the entity’s December 31, 2020
statement of financial position is
a. P2,068,680
b. P2,071,260
c. P2,050,660
d. P2,035,220

13. Investment in debt instruments classified as FA@FVOCI recognizes which of the following in OCI?
a. Changes in fair value
b. Impairment gains and losses
c. Interest calculated using the effective interest method
d. All of the above

2
14. Which statement is correct if the bonds are classified as FA@FVOCI?
a. The amount to be recognized in 2020 profit or loss is P200,000.
b. The amount to be recognized in 2020 other comprehensive income P67,800.
c. The amount to be reported on the entity’s December 31, 2020 statement of financial position is
P2,071,260.
d. None of the above.

15. The amounts that are recognized in profit or loss are the same for which of the following?
a. FA@FVPL and FA@FVOCI
b. FA@FVPL and FA@AC
c. FA@AC and FA@FVOCI
d. None of the above

16. If the entity sold the investment on December 31, 2020 at fair value, the entity will report a
‘reclassification adjustment’ if the investment is classified as
a. FA@FVPL
b. FA@FVOCI
c. FA@AC
d. None of the above

17. On July 1, 2020, FAITH Corp. acquired P4,000,000 face value of HOPE Corporation bonds with a
nominal rate of interest of 4%. The bonds mature on July 1, 2025 and pay interest semi-annually each
July 1 and January 1, with the first interest rate due on January 1, 2021. The bonds are held for
collection. At the date of issuance the bonds had a market rate of interest of 6%. On December 31,
2020, the market value of the bonds was P3,700,000. The amount to be recognized in 2020 profit or
loss related to the bond investment is (Round PV factors to four decimal places.)
a. P109,764
b. P109,896
c. P219,529
d. P219,791

18. On January 1, 2020, WISDOM Company acquired the entire issue of COURAGE’s P3,000,000 12%
serial bonds. The bonds were purchased to yield 10%. Bonds of P1,000,000 mature at annual
intervals beginning December 31, 2020. Interest is payable annually on December 31. What is the
carrying amount of the investment in bonds on December 31, 2020?
a. P3,052,825
b. P2,052,825
c. P2,152,311
d. P1,910,351

19. On January 1, 2020, DETERMINATION Corporation purchased P2,000,000 10% bonds for P1,855,760
(including broker’s commission of P20,000). Determination Corp. classified the bonds as FA@AC. The
bonds were purchased to yield 12%. Interest is payable annually every December 31. The bonds
mature on December 31, 2024. On December 31, 2020 the bonds were selling at 99. How much is the
carrying amount of the investment in bonds on December 31, 2020?
a. P1,923,252
b. P1,923,068
c. P1,878,452
d. P1,980,000

3
Acquisition between Interest Dates

20. On February 1, 2020 FORTITUDE Company purchased 5-year bonds with face value of P2,000,000 and
stated interest of 12% per year payable annually every January 1. The bonds were acquired to yield
10%. How much was the total amount paid to purchase the bonds? Round PV factors to four decimal
places.
a. P2,151,592
b. P2,149,552
c. P2,126,751
d. P2,169,522

21. On May 1, 2020, GRATITUDE Company purchased a short-term P2,000,000 face value 9% debt
instruments for P1,860,000 including the accrued interest and designated as an investment to profit
or loss which is based on the business model of the entity to buy and sell portfolio of securities and
to make profit for short term movements in the market rate of interest. Gratitude Company incurred
and paid P10,000 transaction cost related to the acquisition of the instrument. The debt instruments
mature on January 1, 2023 and pay interest semi-annually on January 1 and July 1. On December 31,
the fair market value of the instruments is P1,940,000 and estimated cost to sell of P20,000. What
amount of gain or loss should Gratitude Company disclose in the profit or loss in the statement of
comprehensive income for the year ended December 31, 2020?
a. P60,000
b. P80,000
c. P120,000
d. P140,000

22. On October 1, 2020, PERSEVERANCE Company, with a business model of trading securities,
purchased a P2,000,000 face value 9% debt instrument with a remaining term of 2 years and three
months for P2,174,867. The prevailing market rate of interest at the time of acquisition was 8%.
Interest is being received every December 31. On December 31, the fair market value of the
instruments is P2,072,321 based on prevailing market rate of 7%. What amount of unrealized gain or
loss should Perseverance Company report in its December 31, 2020 profit or loss?
a. None
b. P32,454
c. P102,546
d. P135,000

Reclassification

23. Which statement is incorrect regarding reclassification of financial assets?

a. Reclassifications are only permitted on the change of an entity’s business model and are
expected to occur only infrequently.
b. An entity shall account for transfers between categories prospectively, at the beginning of the
period after the change in the business model.
c. An entity shall restate any previously recognized gain, loss (including impairment gains or losses)
or interest.
d. None of the above.

24. In accordance with PFRS 9, an entity may reclassify

a. Financial asset designated at FVPL
b. Investments in equity instruments designated at FVOCI
c. Derivatives
d. None of the above

4
25. Which statement is incorrect regarding reclassification of financial assets?
a. Reclassifications to FVTPL measurement category result to amounts recognized in profit or loss.
b. The effective interest rate is determined on the basis of the fair value of the asset at the
reclassification date when an entity reclassifies a financial asset out of FVPL category.
c. The effective interest rate is determined on the basis of the fair value of the asset at the
reclassification date when an entity reclassifies as financial asset out of FVPL measurement
category.
d. The effective interest rate and the measurement of expected credit losses are not adjusted as a
result of the reclassification from amortized cost measurement category to FVOCI and vice
versa.

Use the following information for the next three questions.

On January 2, 2020, LOVE Company invested in a 4-year 10% bond with a face value of P6,000,000 in
which interest is to be paid every December 31. The bonds has an effective interest rate of 9% and was
acquired for P6,194,383. Love Company has a portfolio of commercial loans that it holds to sell in the
short term. On December 31, 2020, the security has a fair value of P6,229,862 which is based on the
prevailing market rate of 8.5%.

26. Assume that during the year 2020 there was a change in the business model and cash flow
characteristics but they decided to make a reclassification on January 2, 2021 to Investment at fair
value through other comprehensive income. On December 31, 2021, the debt investment has a fair
value of P6,213,992 which is based on the prevailing rate of 8%. What amount should the debt
investments be reported in the December 31, 2021 statement of financial position?
a. P6,082,949
b. P6,159,400
c. P6,213,992
d. P6,229,862

27. In relation to the situation in question 26, assume that the investment were reclassified to
Investment at Amortized Cost, at what amount should the investment in debt security be valued on
December 31, 2022 statement of financial position?
a. P6,082,949
b. P6,159,400
c. P6,213,992
d. P6,229,862

28. Assume that on the date of acquisition the debt security was designated as Investment at Amortized
Cost, but the investment at amortized cost valuation was reclassified on January 1, 2021 as
Investment at Fair value through Profit or Loss, at what amount of gain or loss should the company
recognize on the date of transfer/reclassification?
a. None
b. P35,479
c. P77,984
d. P113,373

Use the following information for the next four questions.

On January 1, 2019, PURITY Corporation purchased P1,000,000 10% bonds classified as FA@AC. The
bonds were purchased to yield 12%. Interest is payable annually every December 31. The bonds mature
on December 31, 2023. On December 31, 2019, the bonds were selling at 99. On December 31, 2020,
PURITY sold P500,000 face value bonds at 101. The bonds were selling at 103 on December 31, 2021.

29. How much is the gain on sale of the investment in bonds in 2020?
a. P41,060
b. P29,010

5
 c. P35,387
d. P10,000

30. If the entity reclassified the bonds as FA@FVPL after the sale, how much should be recognized in
profit or loss at reclassification date?
a. P39,010
b. P29,010
c. P31,895
d. P0

31. If the entity reclassified the bonds as FA@FVOCI after the sale, how much should be reported as
separate component of equity at December 31, 2020?
a. P39,010
b. P29,010
c. P31,895
d. P0

32. If the entity reclassified the bonds as FA@FVOCI after the sale, how much should be reported as
separate component of equity at December 31, 2021?
a. P39,010
b. P29,010
c. P31,895
d. P0

Impairment

Use the following information for the next two questions.

On December 31, 2018, PATIENT Company invested in the 5-year bonds of KIND Corporation. The bonds
have a face value of P3,000,000 with 8% interest payable per year. Outer Company paid P2,772,552 to
acquire the instruments at the prevailing market rate of 10%. The debt security was classified as FA@AC.
During 2020, Kind Corporation’s business deteriorated due to political instability and faltering global
economy. After reviewing all available evidence at December 31, 2020, Patient Company determined
that it was probable that Kind Company will still be able to pay the annual interest on the original loan
but a reduced principal of P2,500,000 at maturity. As a result, Patient Company decided that the
investment in bonds was impaired, and that a loss should be recorded immediately. Round PV factors to
six decimal places.

33. What amount of impairment loss should Patient Company recognize on its debt instruments?
a. None
b. P375,656
c. P413,222
d. P454,545

34. Assume that on December 31, 2021, Kind Company’s financial condition had improved and informed
Patient Company to pay back P2,900,000 on maturity instead of the reduced amount of P2,500,000
in December 31, 2020, what amount of impairment recovery should Patient Company report in its
2021 profit or loss?
a. None
b. P247,934
c. P330,578
d. P363,636

6
Sale before maturity

Use the following information for the next two questions.

On April 1, 2020, GRACE Company purchased as a short-term investment a P2,000,000 face value 8%
bond for P1,820,000 including accrued interest and commission. The commission to acquire the bonds
was P10,000. The bonds are classified as held for trading. The bonds are dated January 1, 2020 and
mature on January 1, 2025, and pay interest semi-annually on January and July 1. On December 31,
2020, the bonds had a fair value of P1,840,000. On April 1, 2021, Grace sold the bonds for a total
consideration of P1,900,000.

35. What amount should Grace report as unrealized gain in its 2020 profit or loss?
a. P70,000
b. P30,000
c. P60,000
d. P0
36. How much is the gain from the sale of investment in debt securities on April 1, 2021?
a. P60,000
b. P90,000
c. P20,000
d. P130,000