INVESTMENT PROPERTY AND OTHER NON-CURRENT FINANCIAL ASSETS **Included Investment related problems/questions Theories: 1. It is defined as property (land or building or part of building or both) by an owner or finance lessee to earn rentals or for capital appreciation or both. a. Investment property b. Owner-occupied property c. Mining property d. Rental property 2. Investment property includes all of the following except a. Land held for long-term capital appreciation b. Land held for currently undetermined use c. Building owned by the reporting entity or held by a finance lessee leased out under one or more operating leases. d. Property held for sale in the ordinary course of business or in the process of construction for such sale. e. 3. An owner-occupied property is held by an owner or finance lessee I. For use in the production of goods or services II. For administration purposes f. a. I only b. II only c. Both I and II d. Neither I and II e. 4. If an entity owns and manages a hotel, services provided to guests are significant component of the arrangement as a whole. In such case, the hotel is classified as a. Investment property b. Owner-occupied property c. Partly investment property and partly owner-occupied property d. Neither investment property nor owner-occupied property f. 5. Which of the following is an investment property? a. Property being constructed or developed on behalf of third parties. b. Property that is being constructed and developed as investment property. c. Property held for future development and subsequent use as owner-occupied property. d. Owner-occupied property awaiting disposal. g. 6. Which statement is correct if the property is partly investment and partly owner-occupied? I. If the investment and owner-occupied portions could be sold or leased out separately, the portions shall be accounted for separately as investment property and owner-occupied property. II. If the investment and owner-occupied portions could not be sold or leased out separately, the property is investment property if only an insignificant portion is held for manufacturing or administrative purposes. h. a. I only b. II only c. Both I and II d. Neither I and II e. 7. Which statement is correct concerning property leased to affiliate? I. II. From the perspective of the individual entity that owns it, the property leased to an affiliate is considered an investment property. From the perspective of the affiliates as a group and for purposes of consolidated financial statements, the property is treated as owner-occupied property. a. b. Both I and II c. Neither I and II d. I only e. II only f. 8. An investment property is recognized when I. It is probable that the future economic benefits that are associated with the investment property will flow in the entity. II. The cost of investment property can be measured reliably. a. b. Both I and II c. Neither I and II d. I only e. II only f. 9. Which of the statement is incorrect concerning initial measurement of an investment property? a. The investment property shall be measured initially at fair value. b. The cost of the purchased investment property includes its purchase price and any directly attributable expenditure. c. The initial cost of a property interest held under a lease and classified as an investment property shall be the lower of the fair value of the property and the present value of the minimum lease payments. d. If payment for an investment property is deferred, its cost is the cash price equivalent. e. 10. Directly attributable expenditures related to investment property include a. Professional fees for legal services, property transfer taxes and other transaction costs. b. Start up costs. c. Initial operating losses incurred before the investment property achieves the planned level occupancy. d. Abnormal amounts of wasted material, labor and other resources incurred constructing or developing the property. e. 11. Subsequent to initial recognition, the investment property shall be measured at a. Fair value b. Cost less any accumulated depreciation and any accumulated impairment losses c. Revalued amount d. Either fair value or cost less any accumulated depreciation and any accumulated impairment losses e. 12. What is the best evidence of fair cvalue of an investment property? a. Current price in an active market for similar property in the same location and condition b. Current price in an active market for property of different nature, condition and location adjusted to reflect those differences. c. Recent price of similar property in less active market. d. Discounted cash flow projection based on reliable estimate of future cash flows. e. 13. Which statement is incorrect in determining the fair value of an investment property? a. An entity shall determine the fair value of investment property by deducting transaction cost that may be incurred upon disposal. b. The fair value of investment property shall reflect market conditions at the end of the reporting period. c. If an office is leased on a furnished basis, the fair value of the office generally includes the fair value of the furniture because the rental income relates to the furniture office d. The fair value of the investment property excludes prepaid or accrued operating lease income. e. 14. Which statement is correct if there is inability to determine the fair value of an investment property reliably? I. PAS 40 mandates that the entity shall measure such investment property using the cost model until the disposal of the investment property. II. The residual value of such investment property shall be assumed zero under such exceptional circumstance only. a. b. I only c. II only d. Both I and II e. Neither I and II f. 15. When the entity uses the cost model, transfer between investment property, owner-occupied property and inventory shall be accounted for at a. Fair value b. Carrying amount c. Cost d. Assessed value e. 16. 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. Fair value less cost to sell e. 17. 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 a. Included in profit or loss b. Included in retained earnings c. Included in equity d. Accounted for as revaluation of property, plant, and equipment e. 18. If an inventory is transferred to investment property that is to be carried at fair value, the remeasurement to fair value is a. Included in profit or loss b. Included in equity c. Included in retained earnings d. Accounted for as revaluation of inventory e. 19. When an investment property under construction is completed and to be carried at fair value, the difference between the carrying amount and fair value shall be a. Included in profit or loss b. Included in retained earnings c. Included in other comprehensive income 20. 21. 22. 23. 24. 25. 26. 27. d. Accounted for as revaluation of property, plant and equipment e. Gain or loss from disposal of investment property shall be determined as the difference between the a. Net disposal proceeds and carrying amount of the asset and shall be recognized in profit or loss. b. Net disposal proceeds and carrying amount of the asset and shall be recognized in equity. c. Net disposal proceeds and carrying amount of the asset and shall be recognized in retained earnings. d. Net disposal proceeds and fair value of the asset and shall be recognized in profit or loss. e. A gain arising from a change in the fair value of an investment property for which an entity has opted to use the fair value model is recognized in a. Profit or loss b. General reserve in shareholders’ equity c. Valuation reserve in the shareholders’ equity d. Retained profits e. An investment property shall be measured initially at a. Cost b. Cost less accumulated impairment loss c. Depreciation cost less accumulated impairment losses d. Fair value less accumulated impairment losses e. 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 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 e. Transfer from investment property to property, plant and equipment is appropriate a. When there is change of use. b. Based on the entity’s discretion. c. Only when the entity adopts the fair value model. d. The entity can never transfer property into another classification once it is classified as investment. e. An investment property is derecognized when a. It is disposed to a third party. b. It is permanently withdrawn from use. c. No future economic benefits are expected from its disposal. d. In all of the above cases. e. Which of the following statements best describes owner-occupied property? a. Property held for sale in the ordinary course of business b. Property held for use in the production and supply of goods or services and property held for administrative purposes c. Property held to earn rentals d. Property held for capital appreciation e. 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 e. 28. Which of the following additional disclosures must be made when an entity chooses the cost model as its accounting policy for investment property? a. The fair value of the property b. The present value of the property c. The value in use of the property d. The net realizable value of the property e. 29. PAS 40 gives a choice between two different models as the accounting policy to be used in relation to investment property. Which of the following disclosures shall be made when the fair value model has been adopted? a. Depreciation method used b. The amount of impairment loss recognized c. Useful life or depreciation rate used d. Net gains or losses from fair value adjustments e. 30. The following properties fall under the definition of investment property, except? a. Land held for long-term capital appreciation b. Property occupied by an employee paying market rent c. Land held for a currently undetermined use d. A building owned by an entity and leased out under an operating lease e. (Source: Theory or Accounts 2010 edition; Conrado T Valix, BSC, LLB / Christian Aris M. Valix, BSME, BSA) f. 31. Which of the following is not a debt security? a. b. c. d. Convertible bonds Commercial paper Loans receivable All of these are debt securities. a. 32. A correct valuation is a. b. c. d. Available-for-sale at amortized cost. Held-to-maturity at amortized cost. Held-to-maturity at fair value. None of these. a. 33. Securities which could be classified as held-to-maturity are a. Redeemable preferred stock. c. Municipal bonds. b. Warrants. d. Treasury stock. 34. 35. Unrealized holding gains or losses which are recognized in income are from securities classified as a. Held-to-maturity. b. Available-for-sale. c. Trading. d. None of these. e. 36. When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must a. Make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date. b. Notify the issuer and request that a special payment be made for the appropriate portion of the interest period. c. Make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date. d. Do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period. f. 37. Debt securities that are accounted for at amortized cost, not fair value, are a. b. c. d. Held-to-maturity debt securities. Trading debt securities. Available-for-sale debt securities. Never-sell debt securities. e. 38. Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are a. b. c. d. Held-to-maturity debt securities. Trading debt securities. Available-for-sale debt securities. Never-sell debt securities. f. 39. Use of the effective-interest method in amortizing bond premiums and discounts results in a. A greater amount of interest income over the life of the bond issue than would result from use of the straight-line method. b. At varying amount being recorded as interest income from period to period. c. A variable rate of return on the book value of the investment. d. A smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method. g. 40. Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are a. b. c. d. h. i. Available-for-sale securities where a company has holdings of less than 20%. Trading securities where a company has holdings of less than 20%. Securities where a company has holdings of between 20% and 50%. Securities where a company has holdings of more than 50%. 41. A requirement for a security to be classified as held-to-maturity is a. Ability to hold the security to maturity. b. Positive intent. e. 42. Held-to-maturity securities are reported at a. b. c. d. c. The security must be a debt security. d. All of these are required. Acquisition cost. Acquisition cost plus amortization of a discount. Acquisition cost plus amortization of a premium. Fair value. f. 43. Watt Co. purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes a. b. c. d. A debit to Held-to-Maturity Securities at $300,000. A credit to Premium on Investments of $15,000. A debit to Held-to-Maturity Securities at $315,000. None of these. g. 44. Which of the following is not correct in regard to trading securities? a. b. c. d. They are held with the intention of selling them in a short period of time. Unrealized holding gains and losses are reported as part of net income. Any discount or premium is not amortized. All of these are correct. h. 45. In accounting for investments in debt securities that are classified as trading securities, a. b. c. d. A discount is reported separately. A premium is reported separately. Any discount or premium is not amortized. None of these. i. 46. Investments in debt securities are generally recorded at a. b. c. d. Cost including accrued interest. Maturity value. Cost including brokerage and other fees. Maturity value with a separate discount or premium account. j. 47. Jordan 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. b. c. d. k. l. 10 periods and 10% from the present value of 1 table. 10 periods and 8% from the present value of 1 table. 20 periods and 5% from the present value of 1 table. 20 periods and 4% from the present value of 1 table. 48. Investments in debt securities should be recorded on the date of acquisition at a. b. c. d. lower of cost or market. market value. market value plus brokerage fees and other costs incident to the purchase. face value plus brokerage fees and other costs incident to the purchase. m. 49. An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a a. b. c. d. Debit to Available-for-Sale Securities. Debit to the discount account. Debit to Interest Revenue. None of these. n. 50. APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt security, the a. Effective-interest method of allocation must be used. b. Straight-line method of allocation must be used. c. Effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained. d. par value method must be used and therefore no allocation is necessary. o. 51. 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. Amortization of a discount decreases from period to period. c. Amortization of a premium decreases from period to period. d. The effective-interest method produces a constant rate of return on the book value of the investment from period to period. p. 52. When investments in debt securities are purchased between interest payment dates, preferably the a. b. c. d. Securities account should include accrued interest. Accrued interest is debited to Interest Expense. Accrued interest is debited to Interest Revenue. Accrued interest is debited to Interest Receivable. q. 53. Which of the following is not generally correct about recording a sale of a debt security before maturity date? a. Accrued interest will be received by the seller even though it is not an interest payment date. b. An entry must be made to amortize a discount to the date of sale. c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities. d. A gain or loss on the sale is not extraordinary. r. s. 54. When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment a. b. c. d. By using the equity method. By using the fair value method. By using the effective interest method. By consolidation. t. 55. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? a. b. c. d. u. Fair Value Method Equity Method No Effect Decrease Increase Decrease No Effect No Effect Decrease No Effect v. 56. An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as a. b. c. d. w. Fair Value Method Income A reduction of the investment Income A reduction of the investment Equity Method Income A reduction of the investment A reduction of the investment Income x. 57. 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. y. 58. If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the a. b. c. d. Cost method. Fair value method. Divesture method. Equity method. z. 59. Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as a. b. c. d. A reduction of the carrying value of the investment. Additional paid-in capital. An addition to the carrying value of the investment. Dividend income. aa. 60. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. b. c. d. Investor sells the investment. Investee declares a dividend. Investee pays a dividend. Earnings are reported by the investee in its financial statements. ab. 61. Judd, Inc. owns 35% of Cosby Corporation. During the calendar year 2010, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd 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. b. c. d. Understate, overstate, overstate Overstate, understate, understate Overstate, overstate, overstate Understate, understate, understate ac. 62. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2011 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2011? I. $3,000,000 II. $3,040,000 III. $3,120,000 a. b. c. d. I, II, or III. I or II only. II only. II or III only. ad. 63. The fair value option allows a company to a. Value its own liabilities at fair value. b. Record income when the fair value of its bonds increases. c. Report most financial instruments at fair value by recording gains and losses as a separate component of stockholders’ equity. d. All of the above are true of the fair value option. ae. 64. Impairments are a. Based on discounted cash flows for securities. b. Recognized as a realized loss if the impairment is judged to be temporary. c. Based on fair value for available-for-sale investments and on negotiated values for heldto-maturity investments. d. Evaluated at each reporting date for every investment. af. 65. A reclassification adjustment is reported in the a. b. c. d. ag. Income statement as an Other Revenue or Expense. Stockholders’ equity section of the balance sheet. Statement of comprehensive income as other comprehensive income. Statement of stockholders’ equity. 66. When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be a. b. c. d. Its original cost. Its fair value at the date of the transfer. The lower of its original cost or its fair value at the date of the transfer. The higher of its original cost or its fair value at the date of the transfer. ah. 67. When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be a. b. c. d. Its original cost. Its fair value at the date of the transfer. The higher of its original cost or its fair value at the date of the transfer. The lower of its original cost or its fair value at the date of the transfer. ai. 68. A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described? a. b. c. d. Transfer from trading to available-for-sale Transfer from available-for-sale to trading Transfer from held-to-maturity to available-for-sale Transfer from available-for-sale to held-to-maturity aj. 69. “Gains trading” or “cherry picking” involves a. moving securities whose value has decreased since acquisition from available-for-sale to held-to-maturity in order to avoid reporting losses. b. reporting investment securities at fair value but liabilities at amortized cost. c. selling securities whose value has increased since acquisition while holding those whose value has decreased since acquisition. d. All of the above are considered methods of “gains trading” or “cherry picking.” ak. 70. Transfers between categories a. Result in companies omitting recognition of fair value in the year of the transfer. b. Are accounted for at fair value for all transfers. c. Are considered unrealized and unrecognized if transferred out of held-to-maturity into trading. d. Will always result in an impact on net income. al. 71. Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called a. b. c. d. Arbitrageurs. Gamblers. Hedgers. Speculators. am. 72. All of the following statements regarding accounting for derivatives are correct except that a. b. c. d. They should be recognized in the financial statements as assets and liabilities. They should be reported at fair value. Gains and losses resulting from speculation should be deferred. Gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge. an. 73. All of the following are characteristics of a derivative financial instrument except the instrument a. b. c. d. Have one or more underlings and an identified payment provision. Requires a large investment at the inception of the contract. Requires or permits net settlement. All of these are characteristics. ao. 74. Which of the following are considered equity securities? ap. I. Convertible debt. aq. II. Redeemable preferred stock. ar. III. Call or put options. a. b. c. d. I and II only. I and III only. II only. III only. as. 75. The accounting for fair value hedges records the derivative at its a. amortized cost. b. carrying value. c. fair value. d. historical cost. at. 76. Gains or losses on cash flow hedges are a. b. c. d. Ignored completely. Recorded in equity, as part of other comprehensive income. Reported directly in net income. Reported directly in retained earnings. au. 77. An option to convert a convertible bond into shares of common stock is a(n) a. b. c. d. Embedded derivative. Host security. Hybrid security. Fair value hedge. av. 78. All of the following are requirements for disclosures related to financial instruments except a. Disclosing the fair value and related carrying value of the instruments. b. Distinguishing between financial instruments held or issued for purposes other than trading. c. Combining or netting the fair value of separate financial instruments. d. Displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges. aw. 79. A variable-interest entity has a. Insufficient equity investment at risk. b. Stockholders who have decision-making rights. c. Stockholders who absorb the losses or receive the benefits of a normal stockholder. d. All of the above are characteristics of a variable-interest entity. ax. 80. Under U.S. GAAP, which of the following models may be used to determine if an investment is consolidated? ay. Risk-and-reward model a. b. c. d. Yes No No Yes Voting-interest approach No Yes No Yes az. ba. (Source: Test bank for Intermediate Accounting, Thirteenth Edition: Dr. M. D. Chase ) bb. bc. bd. Problems: 1. In January 2008, Cameron Company established a sinking fund in connection with its issue of bonds due in 2012. A bank was appointed as independent trustee of the fund. On December 31, 2008, the trustee held P364, 000 cash in the sinking fund account representing P300, 000 in annual deposits to the fund, and P64, 000 of interest earned on those deposits. How should the sinking fund be reported in Cameron’s statement of financial position at December 31, 2008? (PHILCPA Adapted) be. a. b. c. d. No part of the sinking fund should appear in Cameron’s statement of financial position. P64,000 should appear as a current asset P364,000 should appear as a current asset P364,000 should appear as a noncurrent asset bf. bg. Solution 1 Answer d bh. The annual deposits to the fund and the interest earned on those deposits should form part of the sinking fund to be classified as noncurrent asset. bi. 2. The following information relates to noncurrent investments to Fall Company placed in trust as required by the underwriter of its bonds: bj. bk. Bond sinking fund balance, January 1, 2008 4,500,000 bl. 2008 additional investment 900,000 bm. Dividends on investments 150,000 bn. Interest revenue 300,000 bo. Administration costs 50,000 bp. Carrying amount of bonds payable 8,000,000 bq. br. What amount should Fall report on December 31, 2008 related to its noncurrent investment for bond sinking fund requirements? (AICPA Adapted) bs. a. 5,850,000 c. 5,750,000 b. 5,800,000 d. 5,400,000 e. f. Solution 2 Answer b g. Sinking fund balance – 1/1/2008 4,500,000 h. Add: 2008 additional investment 900,000 i. Dividends on investment 150,000 j. Interest revenue 300,000 1,350,000 k. Total 5,850,000 l. Less: Administration costs 50,000 m. Sinking fund balance – 12/31/2008 5,800,000 n. o. 3. On March 15, 2008, Ashe Company adopted a plan to accumulate P5, 000,000 by September 1, 2012. Ashe plans to make four equal annual deposits to a fund that will earn interest at 10% compounded annually. Ashe made the first deposit on September 1, 2008. Future value factors are as follows: p. q. r. s. t. u. v. a. b. w. x. y. z. aa. Future value of 1 at 10% for 4 periods Future value of an ordinary annuity of 1 at 10% for 4 periods Future value of an annuity of 1 in advance at 10% for 4 periods 1.46 4.64 5.11 Ashe should make four annual deposits (rounded) of: (AICPA Adapted) 1,250,000 1,077,500 Solution 3 Answer c Annual deposit (5,000,000/5.11) c. d. 978,500 730,000 978,500 (rounded) The annual deposit is computed by dividing the amount of the fund to be accumulated b the future value factor. In this case, the future value factor of an annuity in advance is used because the annual deposit is made at the beginning of each year of the four-year period. ab. ac. 4. On January 1, 2008, Beal Company adopted a plan to accumulate funds for a new plant building to be erected beginning July 1, 2013, at an estimated cost of P6,000,000. Beal intends to make five equal annual deposits in a fund that will earn interest at 8% compounded annually. The first deposit is made on July 1, 2008. Present value and future value factors are as follows: ad. ae. Present value of 1 at 8% for 5 periods 0.68 af. Present value of 1 at 7% for 6 periods 0.63 ag. Future value of an ordinary annuity of 1 at 7% for 5 periods 5.87 ah. Future value of an annuity of 1 in advance at 7% for 5 periods 6.34 ai. aj. Beal should make five annual deposits (rounded) of ak. a. 1,022,150 c. 946,400 b. 816,000 d. 756,000 e. f. g. Solution 4 Answer c h. Annual deposit (6,000,000/6.34) 946,400 (rounded) i. j. Again, the annual deposit is made at the beginning of each year of the five-year period. Thus, the future value of an annuity of 1 in advance is used. k. 5. On January 1, 2008, Mandaue Company adopted a plan to accumulate P5,000,000 by January 1, 2013. Mandaue plans to make 5 equal annual deposits that will earn interest at 9% compounded annually. Mandaue made the first deposit on December 31, 2008. The future value of an ordinary annuity of 1 at 9% for 5 periods is 5.98, and the 6.52. What amount must be deposited annually at the compound interest to accumulate the desired amount of P5,000,000. a. b. e. f. g. h. i. j. 766,871 836,120 Solution 19-5 Answer b Annual deposit (5,000,000/5.98) c. 664,894 d. 609,756 836,120 The future value of an ordinary annuity of 1 is used because the annual deposit is made at the end of each year of the 5-year period. k. l. 6. Cebu Company made an investment of P5,000,000 at 10% per annum compounded annually for 6 years. What is the amount of the investment on the date of maturity? Round off future value factor to two decimal places. a. 8,850,000 c. 9,750,000 b. 8,050,000 d. 5,500,000 e. f. g. Solution 6 Answer a h. i. Principal amount 5,000,000 j. Multiply by future value of 1 for 6 periods at 10% 1.77 k. l. Future value at maturity 8,850,000 m. n. 7. Mactan Company made investment for 5 years at 12% per annum compounded semiannually to equal P7,160,000 on the date of maturity. What amount must be deposited now at the compound interest to provide the desired sum? Round off future value factor to two decimal places. a. b. e. f. g. h. i. j. k. 4,000,000 4,068,180 Solution 7 Answer a Future value at maturity Divide by future value of 1 for 10 periods at 6% Initial investment c. 4,236,680 d. 3,768,420 7,160,000 1.79 4,000,000 The annual interest of 12% is compounded semiannually for 5 years. Therefore, there are 10 interest periods at 6%. l. m. 8. Ball Company purchased a P1, 000,000 ordinary life insurance policy on its president. The policy year and Ball’s accounting year coincide. Additional data are available for the year ended December 31, 2008: n. o. Cash surrender value, January 1 43,500 p. Cash surrender value, December 31 54,000 q. Annual advance premium paid January 1 20,000 r. Dividend received July 1 3,000 s. t. Ball Company is the beneficiary under the life insurance policy. u. How much should Ball report as life insurance expense for 2008? v. a. 6,500 c. 17,000 b. 9,500 d. 20,000 e. f. Solution 8 Answer a g. Annual premium paid 20,000 h. Less: Increase in cash surrender value i. (54,000 – 43,500) 10,500 j. Dividend received 3,000 13,500 k. Life insurance expense 6,500 l. m. The dividend received is not considered an income but a reduction of life insurance expense. n. o. 9. Chain Company purchased a P1,000,000 life insurance policy on its president, of which Chain is the beneficiary. Information regarding the policy for the year ended December 31, 2008 follows: p. q. Cash surrender value, January 1 87,000 r. Cash surrender value, December 31 108,000 s. Annual advance premium paid January 1 40,000 t. u. During 2008, dividend of P6,000 was applied to increase the cash surrender value of the policy. What amount should Chain report as life insurance expense for 2008? v. a. 40,000 c. 19,000 b. 25,000 d. 13,000 10. 11. 12. 13. 14. 15. 16. 17. Solution 9 Answer c Premium paid Less: Increase in cash surrender value (108,000 – 87,000) Life insurance expense 40,000 21,000 19,000 The dividend of P6,000 is not deducted anymore because it is already part of the increase in cash surrender value. 18. 19. Slovenia Company insured the life of its president for P2, 000,000, the company being the beneficiary of an ordinary life insurance policy. The annual premium is P80, 000 and the policy is dated January 1, 2005. The cash surrender values are: 20. 21. December 31, 2007 15,000 22. December 31, 2008 19,000 23. 24. The company follows the calendar year as its fiscal period. The president dies on October 1, 2008 and the policy is settled on December 31, 2008. 25. Slovenia Company should report gain on life insurance settlement in its 2008 income statement at 26. a. 1,962,000 c. 1,961,000 b. 2,000,000 d. 1,981,000 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. Solution 10 - Answer a Cash surrender value – 12/31/2007 Increase in CSV from January 1 to October 1, 2008 (4,000 x 9/12) Cash surrender value – October 1, 2008 Face of policy Case surrender value Unexpired premium (80,000 x 3/12) 15,000 3,000 18,000 2,000,000 ( 18,000) ( 20,000) 37. 38. Gain on life insurance settlement 39. 1,962,000 40. Slovenia Company should report life insurance expense for 2008 at 41. a. 80,000 c. 77,000 b. 60,000 d. 57,000 42. 43. 44. 45. 46. 47. 48. 49. Solution 11 Answer d Annual premium paid on 1/1/2008 Unexpired premium on 10/1/2008 Increase in CSV from January 1 to October 1, 2008 Life insurance expense for 2008 80,000 (20,000) ( 3,000) 57,000 50. Galore 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 the area. 51. 52. The construction of the condominium was completed and the property was placed in service on January 1, 2008. The cost of the construction was P50 million. The useful life of the condominium is 25 years and its residual value is P5 million. And independent valuation expert provided the following fair value at each subsequent year-end: 53. 54. December 31, 2008 55 million 55. December 31, 2009 53 million 56. December 31, 2010 60 million 57. 58. Under the cost model, Galore Company should report depreciation of investment property for 2008 at a. 1,800,000 c. 2,200,000 b. 2,000,000 d. 0 e. f. Solution 12 Answer a g. Cost of investment property 50,000,000 h. Residual value (5,000,000) i. Depreciable amount 45,000,000 j. k. Annual depreciation (45,000,000/25) 1,800,000 l. 59. Under the fair value model, Galore Company should recognize gain from change in fair value in 2008 at a. 5,000,000 b. 3,000,000 c. 7,000,000 d. 0 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. Solution 13 Answer a Fair value – 12/31/2008 Cost – 1/1/2008 55,000,000 50,000,000 Gain from change in fair value in 2008 5,000,000 The entry to recognize the gain on December 31, 2008 is: Investment property Gain from change in fair value 5,000,000 Fair value – 12/31/2009 Carrying value – 12/31/2008 Loss from change in fair value in 2009 5,000,000 53,000,000 55,000,000 ( 2,000,000) The entry to recognize the loss on December 31, 2009 is: Loss from change in fair value 2,000,000 Investment property Fair value – 12/31/2010 Carrying value – 12/31/2009 2,000,000 60,000,000 53,000,000 Gain from change in fair value in 2010 7,000,000 The entry to recognize the gain on December 31, 2010 is: Investment property 7,000,000 Gain from change in fair value 7,000,000 Note that if the investment property is accounted for under the fair value model, no depreciation is recognized. 90. 91. 14. Eragon Company and its subsidiaries own the following properties that are accounted for in accordance with international accounting standards: 92. 93. Land held by Eragon for undetermined use 5,000,000 94. A vacant building owned by Eragon and to be 95. Leased out under an operating lease 3,000,000 96. Property held by a subsidiary of Eragon, a real 97. Estate firm, in the ordinary course of business 2,000,000 98. Property held by Eragon for use in production 4,000,000 99. Building owned by a subsidiary of Eragon and 100. for which the subsidiary provides security 101. and maintenance services to the lessees 1,500,000 102. Land leased by Eragon to a subsidiary under an 103. operating lease 2,500,000 104. Property under construction for use as investment 6,000,000 105. Land held for future factory site 3,500,000 106. Machinery leased out by Eragon to an unrelated 107. party under an operating lease 1,000,000 108. 109. What is the total investment property that should be sown in the consolidated statement of financial position of the parent and its subsidiaries? a. 12,000,000 b. 15,500,000 e. f. g. h. i. j. k. l. m. n. o. p. q. r. s. t. c. 10,500,000 d. 9,500,000 Solution 14 Answer d Land for the undetermined use Vacant building to be leased out under an operating lease Building owned and for which the subsidiary provides Security and maintenance services to the lesses Total investment property 5,000,000 3,000,000 1,500,000 9,500,000 The property held by a subsidiary in the ordinary course of business is included in inventory. The property held for use in production is owner-occupied property and therefore part of property, plant, and equipment. The land leased by the parent to the subsidiary under an operating lease is owner-occupied property for purposes of consolidated financial statements. However, from the perspective of separate financial statements of the parent, the land is an investment property. u. v. The property under construction for use as investment property is considered owner-occupied property until the completion of the construction. Upon completion, the building becomes investment property. w. The land held for future factory site is owner-occupied property and therefore included in property, plant and supplement. x. y. The machinery leased out to an unrelated part is owner-occupied property because investment property includes only land and building and not movable property, like machinery. z. 15. The following accounts appear on the adjusted trial balance of Grand Company on December 31, 2008: aa. ab. Petty cash fund 10,000 ac. Payroll fund 100,000 ad. Sinking fund cash 500,000 ae. Sinking fund securities 1,000,000 af. Accrued interest receivable – sinking fund securities 50,000 ag. Plant expansion fund 600,000 ah. Cash surrender value 150,000 ai. Land held for capital appreciation 3,000,000 aj. Advances to subsidiary 200,000 ak. Investment in joint venture 2,000,000 al. am. How much should be reported as noncurrent investments on December 31, 2008? an. a. 7,500,000 b. 4,500,000 c. 7,450,000 d. 2,300,000 e. f. Solution 19-13 Answer a g. h. All accounts are noncurrent investments except the petty cash fund and payroll fund. i. j. (Source: Practical Accounting 1 2009 edition; Conrado T Valix, BSC, LLB)