INVESTMENT IN DEBT SECURITIES

1. Securities classified as financial asset measured at amortized cost are reported at

a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.

2. In accounting for investments in debt securities that are classified as held for trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.

3. According to PFRS 9 Financial Instruments, investments in debt securities that are classified at
amortized cost are generally recorded at
a. cost including accrued interest.
b. maturity value.
c. cost including brokerage and other fees.
d. fair value at initial recognition plus brokerage and other fees.

4. Pippen Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield
8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value
for
a. 10 periods and 10% from the present value of 1 table.
b. 10 periods and 8% from the present value of 1 table.
c. 20 periods and 5% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.

5. Solo Co. purchased ₱300,000 of bonds for ₱315,000. The securities are to be held until maturity to
collect the contractual cash flows. The entry to record the investment includes
a. a debit to Held-for-Trading Securities at ₱300,000.
b. a credit to Premium on Investments of ₱15,000.
c. a debit to Investment in bonds measured at amortized cost for ₱315,000.
d. none of these.

6. When an investment in a debt security measured at amortized cost is transferred to held for trading
security, the carrying amount assigned to the held for trading security should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer.
d. the higher of its original cost or its fair value at the date of the transfer.

7. When an investment in equity securities irrevocably elected on initial recognition to be subsequently

measured at FVOCI is transferred to held for trading because the company anticipates selling the stock
in the near future, the carrying amount assigned to the investment upon entering it in the trading
portfolio should be
a. its original cost.
 b. its fair value at the date of the transfer.
c. the higher of its original cost or its fair value at the date of the transfer.
d. None of these

8. According to PFRS 9 Financial Instruments, investments in debt securities classified under the
amortized cost measurement category should be recorded on the date of acquisition at
a. lower of cost or market.
b. market value.
c. fair value plus brokerage fees and other costs incident to the purchase.
d. face value.

9. Which of the following is correct about the effective interest method of amortization?
a. The effective interest method applied to investments in debt securities is different from that
applied to bonds payable.
b. The amortization of a discount decreases from period to period.
c. The amortization of a premium decreases from period to period.
d. The effective interest method produces a constant rate of return on the book value (carrying
amount) of the investment from period to period.

10. A debt security is purchased at a discount. The entity wants to classify the investment as a financial
asset measured at FVOCI. The entry to record the amortization of the discount includes a
a. debit to investment account.
b. debit to the discount account.
c. debit to Interest Revenue.
d. none of these.

On January 1, 20x1, Kevin Co. acquired 12%, P4,000,000 bonds for P 4,198,948. The principal is due on
December 31, 20x3 but interest is made annually starting December 31, 20x1. The effective interest rate
on the bonds is 10%.

11. How much is the interest income recognized in 20x1?

a. 419,895 c. 407,273
b. 413,884 d. 480,000

12. How much is the carrying amount of the investment on December 31, 20x1?
a. 4,198,948 c. 4,072,727
b. 4,138,843 d. 4,000,000

13. On April 1, 20x1, Ronald Ryan Co. acquired 12%, P4,000,000 bonds dated January 1, 20x1 at 98
including interest. The bonds mature on December 31, 20x3 but pays annual interest at each year-
end. How much is the initial carrying amount of the investment?
a. 3,920,000 b. 3,800,000 c. 4,000,000 d. 4,120,000
 14. On January 1, 20x1, Mitch Co. acquired 12%, P4,000,000 bonds at 98. Commission paid to brokers
amounted to P204,000. Principal is due on December 31, 20x4 but interest payments are made
annually starting December 31, 20x1.

The adjusted effective interest rate on the investment is closest to

a. 12% b. 11% c. 10.2650% d. indeterminable

Use the following information for the next three questions:

On January 1, 20x1, ABC Co. acquired 10%, ₱1,000,000 bonds for ₱827,135. The bonds mature on
December 31, 20x3 and pay annual interest every December 31. ABC Co. incurred transaction costs
₱80,000 on the acquisition. The effective interest rate adjusted for the effect of the transaction costs is
14%.

The bonds are to be held under a “hold to collect and sell” business model. Information on fair values is
as follows:

December 31, 20x1…………………………….98

December 31, 20x2……………………………102

December 31, 20x3……………………………100

15. How much is the carrying amount of the investment on December 31, 20x1?
a. 935,134 b. 1,002,000 c. 980,000 d. 965,443

16. How much is the unrealized gain (loss) recognized in other comprehensive income on December
31, 20x1?
a. 45,866 b. (45,866) c. (37,899) d. 0

17. How much is the interest income recognized in 20x2?

a. 126,999 c. 135,088

b. 130,779 d. 144,388

18. On December 29, 20x1, an entity commits itself to purchase a financial asset for ₱10,000, which
is its fair value on commitment date (trade date). Transaction costs are immaterial. On December
31, 20x1 and on January 4, 20x2 (settlement date) the fair values of the asset are ₱12,000 and
₱15,000, respectively. If the entity uses the settlement date accounting and that the investment
is classified as held for trading, how much is the carrying amount of the investment in the
December 31, 20x1 statement of financial position?
a. 10,000 c. 15,000
 b. 12,000 d. 0

19. On January 1, 20x1, Dagul Co. acquired 10%, ₱4,000,000 bonds for ₱3,807,853. The principal is
due on January 1, 20x4 but interest is due annually starting December 31, 20x1. The yield rate on
the bonds is 12%. On July, 1 20x1, Dagul Co. changed its business model. It was ascertained that
the investment in bonds at amortized cost should be reclassified to held for trading securities on
reclassification date. The bonds were quoted at 102, 103 and 104 on July 1, 20x1, December 31,
20x1 and January 1, 20x2, respectively. How much is the gain (loss) on reclassification on January
1, 20x2?
a. 243,676 c. 295,205

b. 255,205 d. 0

20. On March 31, 20x1, Budoy Co. received 10,000 stock rights from its investment in equity securities
to subscribe to new shares at ₱60 per share for every 4 rights held. Prior to issuance of stock
rights, the shares were selling at ₱80 per share. How much is the initial carrying amount of the
stock rights?
a. 20,000 c. 50,000
b. 40,000 d. cannot be determined

INVESTMENTS

True or False

1. According to PFRS 9 Financial instruments, investments in stocks are initially recorded at cost and all
commissions, taxes, and other fees are expensed as incurred.

2. Unrealized holding gains and losses on investments in held for trading securities are recognized in
profit or loss.

3. Unrealized gains and losses on investments equity securities measured at FVOCI are recognized on
the income statement.

4. A debit balance in the account Fair Adjustment-FVOCI implies a corresponding owners' equity account
with a credit balance of the same amount.

5. According to PFRS 9, the classification of financial assets for subsequent measurement purposes is
based on management's intentions.

6. The net reported balance in the “investment in equity securities – FVOCI” account is the original cost
plus a credit balance in the fair value adjustment account or minus a debit balance in the fair value
adjustment account.

7. When investments in held for trading securities are sold, the realized gain or loss is the difference in
the fair value since acquisition.
 8. Unrealized holding gains on investments measured at fair value through other comprehensive income
are recognized as direct increases to owners' equity, rather than through the statement of
comprehensive income.

9. Increases in the fair value of held for trading securities and investments in equity securities measured
at FVOCI cause the related fair value adjustment account to decrease.

10. Investments in held for trading securities may be classified as current or long-term.

Multiple Choice

11. Changes in fair value of securities are accumulated in the stockholders' equity section of the balance sheet
(as a separate component) for which type of securities?
a. Financial assets measured at amortized cost

b. FVOCI securities

c. Held for trading securities

d. Designated financial assets

12. Which category includes only debt securities?

a. Financial assets measured at amortized cost

b. FVPL assets

c. Held for trading securities

d. FVOCI

13. A correct valuation is

a. investment in equity securities at amortized cost.
b. held for trading securities at amortized cost.
c. debt securities, to be held until maturity to collect cash flows from principal and interests, at fair
value.
d. none of these.

14. Securities which could be classified as financial assets measured at amortized cost are
a. investment in stocks
b. warrants.
c. municipal bonds.
d. treasury stock.

15. Which of the following is not correct in regard to held for trading securities?
a. They are held to be sold in a short period of time.
b. Unrealized holding gains and losses are reported as part of profit or loss.
 c. Any discount or premium is not amortized.
d. All of these are correct.

16. A debit balance in the account Fair Value Adjustment--FVOCI Securities at the end of a year should be
interpreted as
a. the net unrealized holding gain for that year.

b. the net realized holding gain for that year.

c. the net unrealized holding gain to date.

d. the net realized holding gain to date.

17. A debit balance in the account Fair Value Adjustment-Held for Trading Securities at the end of a year
should be interpreted as
a. the net realized holding gain to date.

b. the net unrealized holding gain to date.

c. the net realized holding gain for that year.

d. the net unrealized holding gain for that year.

18. Unrealized holding gains or losses which are recognized in profit or loss are from securities classified as
a. amortized cost.
b. FVOCI.
c. held for trading.
d. designated and held for trading.

19. An unrealized holding gain on a company's FVOCI securities should be reflected in the current financial
statements as
a. an extraordinary item shown as a direct increase to retained earnings.
b. a current gain resulting from holding securities.
c. a note or parenthetical disclosure only.
d. other comprehensive income and included in the equity section of the balance sheet.

20. Changes in fair values of an investment measured at fair value through other comprehensive income
a. Must be recognized in net profit or loss.
b. Must be recognized directly in equity.
c. May be recognized in net profit or loss or directly in equity.
d. Must be recognized in other comprehensive income; the accumulated net fair value changes is
presented in equity

21. At initial recognition, an entity may make an irrevocable election to present in other comprehensive
income subsequent changes in the fair value of an investment in an equity instrument within the scope
of PFRS 9 that is not held for trading. In accounting for such financial instruments, all of the following is
true, except
 a. Amounts presented in other comprehensive income shall not be subsequently transferred to
profit or loss.
b. The entity may transfer any cumulative fair value gains or losses within equity.
c. Dividends on such investments are recognized in profit or loss unless the dividend clearly
represents a recovery of part of the cost of the investment.
d. Cumulative fair value gains or losses are transferred to profit or loss when the financial asset is
derecognized.

22. An entity sells its investment in FVPL during the year. The realized gain or loss on the sale is computed as
a. the difference between the sale price and the carrying amount of the investment as at the date
of sale
b. the difference between the sale price and the original acquisition cost of the investment.
c. the difference between the net proceeds received from the sale and the carrying amount of the
investment as at the date of sale
d. the difference between the net proceeds received from the sale and the carrying amount of the
investment as at the date of sale adjusted for any accumulated fair value gains or losses
recognized since the investment was acquired.

23. For which type of investments would unrealized increases and decreases be accumulated in an owners'
equity account?
a. Equity method securities

b. FVOCI securities

c. Held for Trading securities

d. Held-to-maturity securities

24. If the combined fair value of held for trading securities at the end of the year is less than the fair value of
the same portfolio of held for trading securities at the beginning of the year, the difference should be
accounted for by
a. reporting an unrealized loss in security investments in the stockholders' equity section of
the balance sheet.

b. reporting an unrealized loss in security investments in the income statement.

c. a footnote to the financial statements.

d. a debit to Investment in Held for Trading Securities.

25. Information regarding Stone Co.’s portfolio of FVOCI securities is as follows:

Aggregate cost as of 12/31/03 170,000

Unrealized gains as of 12/31/03 4,000

Unrealized losses as of 12/31/03 26,000

 Net realized gains during 2003 30,000

At December 31, 2002, Stone reported an unrealized loss of ₱1,500 in other comprehensive income to
reduce these securities to market. Under the accumulated other comprehensive income in stockholders’
equity section of its December 31, 2003 balance sheet, what amount should Stone report?

a. 26,000 c. 20,500

b. 22,000 d. 0

26. Caloy Co. bought 1,000 shares from Bayan Co. The shares have no active market, but an identical or similar
asset has an active market. The identical asset, however, has multiple markets. Caloy determines that the
identical asset has the following market values:
Market A Market B
Quoted price 500 600
Related transaction cost 25 150

How much is fair valuation of the investment?

a. 500,000 c. 450,000
b. 475,000 d. b or c

27. On January 1, 20x1, Allan Co. purchased P400,000 bonds for P392,000. The bonds mature on January 1,
20x5 and pay 12% annual interest beginning January 1, 20x2. Transaction costs are negligible. The bonds
were classified as held for trading securities. On December 31, 20x1, the bonds are selling at a yield rate
of 10%. How much is the unrealized gain (loss) recognized on December 31, 20x1?
a. 27,986
b. 31,298
c. 28,964
d. 27,896

28. On January 1, 20x1, Rizzi Co. purchased 12,000 shares of Andre, Inc. for P400,000. Commission paid to
broker amounted to P20,000. Management made an irrevocable choice to subsequently measure the
shares at fair value through other comprehensive income. On December 31, 20x1, the shares are quoted
at P40 per share. On January 3, 20x2, all of the shares were sold at P60 per share. Commission paid for
the sale amounted to P24,000. How much is the unrealized gain (loss) recognized in profit or loss on
December 31, 20x1?
a. (60,000)
b. 60,000
c. (80,000)
d. 0
 Use the following information for the next two questions:
Karen Co. purchased the following equity securities on January 1, 20x1 for a total amount of P360,000.
Cost
Alaska Co. preference shares P200,000
Valdez Co. ordinary shares 160,000
Totals P360,000

The shares did not qualify for recognition as held for trading, thus they were classified as investment in
equity securities measured at fair value through other comprehensive income.

On December 31, 20x1, the portfolio of Karen Co. comprised the following.
Fair value – 12/31/x1
Alaska Co. preference shares P240,000
Valdez Co. ordinary shares 60,000
Total P300,000

On December 31, 20x2, the portfolio of Karen Co. comprised the following:
Fair value – 12/31/x2
Alaska Co. preference shares P220,000
Valdez Co. ordinary shares 180,000
Total P400,000

On February 2, 20x3, all of the Alaska Co. preference shares were sold for P160,000 net of transaction
costs.

29. How much is the unrealized gain (loss) recognized in other comprehensive income on December 31, 20x1?
a. 60,000
b. (60,000)
c. 100,000
d. 0

30. How much is the unrealized gain (loss) accumulated in equity as of December 31, 20x2?
a. 40,000
b. (40,000)
c. 100,000
d. 0

INVESTMENT IN ASSOCIATES

1. PAS 28 generally applies when the level of ownership of another company is at what percentage?
a. Less than 20%
b. 20%-30%
 c. 20%-50%
d. More than 50%

2. When an investor uses fair value accounting to account for investments in common stock, cash
dividends received by the investor from the investee should normally be recorded as
a. a deduction from the investment account.
b. dividend revenue.
c. an addition to the investor's share of the investee's profit.
d. a deduction from the investor's share of the investee's profit.

3. Under the equity method in PAS 28, goodwill amortization

a. reduces the investment account.
b. increases the investment account.
c. reduces both investment income and the investment account.
d. is not recorded.

4. The equity method of accounting for an investment in the common stock of another company should
be used when the investment
a. is composed of common stock and it is the investor's intent to vote the common stock.
b. ensures a source of supply such as raw materials.
c. enables the investor to exercise significant influence over the investee.
d. gives the investor voting control over the investee.

5. When an investor uses the equity method to account for investments in common stock, the investment
account will be increased when the investor recognizes
a. a proportionate share of the net income of the investee.
b. a cash dividend received from the investee.
c. periodic amortization of the goodwill related to the purchase.
d. depreciation related to the excess of fair value over carrying amount of the investee's depreciable
assets at the date of purchase by the investor.

6. When an investor uses the equity method to account for investments in common stock, cash dividends
received by the investor from the investee should be recorded as
a. an increase in the investment account.
b. a deduction from the investment account.
c. dividend revenue.
d. a deduction from the investor's share of the investee's profits.

7. Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2004, Marin had net earnings of
₱300,000 and paid dividends of ₱30,000. Dane mistakenly recorded these transactions using the fair
value method rather than the equity method of accounting. What effect would this have on the
investment account, net income, and retained earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
 d. Understate, understate, understate

8. Under the equity method of accounting for investments, an investor recognizes its share of the
earnings in the period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.

9. When a company holds between 20% and 50% of the outstanding stock of an investee, which of the
following statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless circum-stances
indicate that it is unable to exercise "significant influence" over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise
"significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.

10. Byner Corporation accounts for its investment in the common stock of Yount Company under the
equity method. Byner Corporation should ordinarily record a cash dividend received from Yount as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.

Use the following information for the next nine questions:

The summarized balance sheets of Elston Company and Alley Company as of December 31, 2004 are as
follows:

Elston Company

Balance Sheet

December 31, 2004

Assets ₱800,000

Liabilities ₱100,000

Capital stock 400,000

Retained earnings 300,000

Total equities ₱800,000

Alley Company
 Balance Sheet

December 31, 2004

Assets ₱600,000

Liabilities ₱150,000

Capital stock 370,000

Retained earnings 80,000

Total equities ₱600,000

11. If Elston Company acquired a 20% interest in Alley Company on December 31, 2004 for ₱130,000 and
the fair value method of accounting for the investment were used, the amount of the debit to
Investment in Alley Company Stock would have been
a. 90,000.
b. 74,000.
c. 130,000.
d. 120,000.

12. If Elston Company acquired a 30% interest in Alley Company on December 31, 2004 for ₱150,000 and
the equity method of accounting for the investment were used, the amount of the debit to
Investment in Alley Company Stock would have been
a. 190,000.
b. 150,000.
c. 120,000.
d. 135,000.

13. If Elston Company acquired a 20% interest in Alley Company on December 31, 2003 for ₱90,000 and
during 2004 Alley Company had net income of ₱50,000 and paid a cash dividend of ₱20,000, applying
the fair value method would give a debit balance in the Investment in Alley Company Stock account
at the end of 2004 of
a. 74,000.
b. 90,000.
c. 100,000.
d. None of these

14. If Elston Company acquired a 30% interest in Alley Company on December 31, 2004 for ₱135,000 and
during 2005 Alley Company had net income of ₱50,000 and paid a cash dividend of ₱20,000, applying
the equity method would give a debit balance in the Investment in Alley Company Stock account at
the end of 2005 of
a. 135,000.
b. 144,000.
 c. 150,000.
d. 145,000.

15. Elston Co. acquires 30% interest in Alley Company on December 31, 2004. The carrying amount of
Alley’s net assets on December 31, 2004 approximates its fair value. If the acquisition did not result
to any implied goodwill, how much is the acquisition cost of the investment?
a. 135,000.
b. 144,000.
c. 150,000.
d. 145,000.

16. Elston Co. acquires 30% interest in Alley Company on December 31, 2004. The carrying amount of
Alley’s net assets on December 31, 2004 approximates its fair value. If the acquisition did not result
to any implied goodwill, how much is the acquisition cost of the investment?
a. 135,000.
b. 144,000.
c. 150,000.
d. 145,000.

17. Elston Co. acquired 25% interest in Alley Company many years ago. The acquisition did not result to
any goodwill. At the time of acquisition, the carrying amount of Alley’s net assets approximates its
fair value. There have been no impairment losses on the investment. Using equity method, how much
is the carrying amount of the investment on December 31, 2004?
a. 112,500.
b. 135,000.
c. 144,000.
d. Cannot be determined; given information is insufficient

18. Elston Co. acquired 25% interest in Alley Company many years ago. The acquisition did not result to
any goodwill. At the time of acquisition, the carrying amount of Alley’s net assets approximates its
fair value. There have been no impairment losses on the investment. Alley Company reported profit
of ₱200,000 and declared dividends of ₱40,000 in 2004. How much is the carrying amount of the
investment on December 31, 2003?
a. 72,500.
b. 98,500
c. 112,500.
d. Cannot be determined; given information is insufficient

19. Elston Co. acquired 25% interest in Alley Company many years ago. The acquisition did not result to
any goodwill. At the time of acquisition, the carrying amount of Alley’s net assets approximates its
fair value. There have been no impairment losses on the investment. The carrying amount of the
investment on January 1, 2004 is ₱98,500. Alley Company declared dividends of ₱40,000 in 2004.
How much is the profit Alley in 2004?
a. 200,000.
b. 24,000
c. 96,000.
 d. Cannot be determined; given information is insufficient

20. Karter Company purchased 200 of the 1,000 outstanding shares of Flynn Company's common stock
for ₱180,000 on January 2, 2004. During 2004, Flynn Company declared dividends of ₱30,000 and
reported earnings for the year of ₱120,000. If Karter Company uses the equity method of accounting
for its investment in Flynn Company, its Investment in Flynn Company account at December 31, 2004
should be
a. ₱174,000.
b. ₱180,000.
c. ₱198,000.
d. ₱204,000.