Chapter 36
Financial asset at fair value
Measurement-FVPL and FVOCI
Cost
Unrealized loss-2016
Market value- December 31, 2016
Problem 1
On January 1, 2016, Alexis Company purchased
marketable equity securities to be held as “trading” for
5,000,000. The entity also paid transaction cost
amounting to 200,000.
The securities had a market value of 5,500,000 on
December 31, 2016 and the transaction cost that would
be incurred on sale is estimated at 100,000. No securities
were sold during 2016.
What amount of unrealized gain or loss on these
securities should be reported in the 2016 income
statement?
a. 500,000 gain
b. 500,000 loss
c. 300,000 gain
d. 400,000 gain
Answer: a
Fair value
5,500,000
Acquisition cost –Trading
5,000,000
Unrealized gain
including in profit and loss
500,000
Problem 3
During 2016, Latvia Company purchased trading
securities with the following cost and market value on
December 31, 2016:
Security
Cost
Market Value
A-1,000 shares
200,000
300,000
B-10,000 shares
1,700,000
1,600,000
C-20,000 shares
3,100,000
2,900,000
The entity sold 10,000 shares of security B on January
15, 2017 for 150 per share.
1. What amount of unrealized gain or loss should be
reported in the income statement for 2016?
a. 200,000 loss
b. 200,000 gain
c. 300,000 loss
d. 300,000 gain
2. What amount should be reported as loss on sale of
trading investment in 2017?
a. 200,000 gain
b. 200,000 loss
c. 100,000 gain
d. 100,000 loss
Problem 2
During 2016, Garr Company purchased marketable
equity securities as a trading investment. For the year
ended December 31, 2016, the entity recognized
unrealized loss of 230,000.
There were no security transactions during 2017. The
entity provided the following information on December
31, 2017:
Security
Cost
Market Value
A
2,450,000
2,300,000
B
1,800,000
1,820,000
In the 2017 income statement, what amount should be
reported as unrealized gain or loss?
a. Unrealized gain of 100,000
b. Unrealized loss of 100,000
c. Unrealized loss of 130,000
d. Unrealized gain of 130,000
Answer: A
Market value-December 31, 2017
Carrying amount 2016
Unrealized gain in 2017
4,120,000
4,020,000
100,000
Answer 1- A
Total market value- December 2016
Total cost- December 2016
Unrealized loss in 2016
Answer 2- D
Sale price (10,000 x 150)
Carrying amount of B shares
Loss on sale of trading investment
4,250,000
230,000
4,020,000
4,800,000
5,000,000
200,000
1,500,000
1,600,000
100,000
Problem 4
Carmela Company acquired non trading equity
instrument for 4,000,000 on March 31, 2016. The equity
instrument is classified as financial asset at fair value
through other comprehensive income.
The transaction cost incurred amounted to 700,000.
On December 31, 2016, the fair value of the instrument
was 5,500,000 and the transaction cost that would be
incurred on the sale of the investment is estimated at
600,000.
What amount of gain should be recognized in other
comprehensive income for the year ended December 31,
2016?
a. 200,000
b. 900,000
c. 800,000
d. 0
Answer 1- A
Total cost
Unrealized loss in 2016
Market value-12/31/16
3,700,000
(100,000)
3,600,000
Answer: C
Fair value- December 2016
Acquisition cost
Unrealized gain- OCI
5,500,000
4,700,000
800,000
Acquisition cost
Transaction cost
Total acquisition cost
4,000,000
700,000
4,700,000
Answer 2- B
Market value- December 31, 2017
Market value- December 31, 2016
Unrealized loss 2017
Unrealized loss-December 31, 2016
Cumulative unrealized loss-2017
3,300,000
3,600,000
(300,000)
(100,000)
(400,000)
Answer 3-C
Market value-12/31/17
Original acquisition cost
Cumulative unrealized loss
3,300,000
3,700,000
(400,000)
Problem 5
On December 31, 2016, Fay Company appropriately
reported a 100,000 unrealized loss. There was no change
during 2017 in the composition of the portfolio of nontrading equity securities held at fair value through other
comprehensive income.
Security
A
B
C
Cost
1,200,000
900,000
1,600,000
3,700,000
Market value 2017
1,300,000
500,000
1,500,000
3,300,000
1. What is the market value of the investment on
December 31, 2016?
a. 3,600,000
b. 3,700,000
c. 3,500,000
d. 3,800,000
2. What amount of loss on these securities should be
included in the statement of comprehensive income fot
the year ended December 31, 2017 as component of
other comprehensive income?
a. 400,000
b. 300,000
c. 100,000
d. 0
3. What cumulative amount of loss on these securities
should be reported in the statement of changes in equity
for the year ended December 31, 2017 as component of
other comprehensive income?
a. 100,000
b. 200,000
c. 400,000
d. 0
Problem 6
Benquet Company began operations on January1, 2016.
The following information pertains to the December 31,
2016 portfolio of equity securities:
Trading
Non-trading
Aggregate cost
4,000,000
6,000,000
Aggregate market value 3,700,000
5,500,000
Aggregate lower cost 3,500,000
5,300,000
The market declines are judged to be other than
temporary. The non-trading securities are designated at
fair value through other comprehensive income.
What amount should be reported as total loss on these
securities in the income statement for 2016?
a. 800,000
b. 500,000
c. 300,000
d. 0
Answer: C
Trading
Aggregate market value 3,700,000
Cost
4,000,000
Unrealized loss
(300,000)
Non-trading
5,500,000
6,000,000
(500,000)
Problem 7
Judicious Company acquired an entity investment a
number of years ago for 3,000,000 and classified it as
fair value through other comprehensive income.
On December 31, 2016, the cumulative loss recognized
in other comprehensive income was 400,000 and the
carrying amount of the investment was 2,600,000.
On December 31, 2017 the issuer of the equity
investment was in severe financial difficulty and the fair
value of the equity investment had fallen to 1,200,000.
What cumulative amount of unrealized loss should be
reported as component of other comprehensive income
in the statement of changes in equity for the year ended
December 31, 2017?
a. 1,400,000
b. 1,800,000
c. 1,000,000
d. 0
Answer: B
Market value (2017)
Historical cost
Cumulative unrealized loss
1,200,000
3,000,000
(1,800,000)
Problem 8
On January 1, 2016, Lebanon Company purchased
equity securities to be held at fair value through other
comprehensive income. On December 31, 2016, the cost
and market value were:
Cost
Market
Security X
2,000,000
2,400,000
Security Y
3,000,000
3,500,000
Security Z
5,000,000
4,900,000
On July 1, 2017, the entity sold Security X for
2,500,000.
What amount should be recognized directly in retained
earnings as a result of the sale of financial asset in 2017?
a. 500,000
b. 100,000
c. 400,000
d. 0
Answer: A
Sale price- Security X
2,500,000
Historical cost- Security X
2,000,000
Cumulative credit to retained earnings
(500,000)
Problem 9
On January 1, 2016, Caraga Company purchased equity
securities to be held as financial assets measured at fair
value through other comprehensive income.
Security R
Security S
Security T
Cost
3,000,000
4,000,000
5,000,000
Market-12/31/16 Market-12/31/17
3,200,000
3,500,000
3,700,000
4,600,000
4,700,000
On January 31, 2017, the entity sold security R for
3,500,000.
1. What amount should be recognized directly in
retained earnings?
a. 500,000
b. 300,000
c. 200,000
d. 0
2. What cumulative unrealized gain or loss on the
remaining financial assets should be reported in the
statement of changes in equity on 2017?
a. 600,000 gain
b. 600,000 loss
c. 300,000 gain
d. 300,000 loss
Answer 1: A
Sale price-Security R
Historical cost- Security R
Cumulative credit to retained earnings
3,500,000
3,000,000
(500,000)
Answer 2: B
Market value Security S-12/31/17
Market value Security T- 12/31/17
Total market value
Historical cost S and T
Cumulative unrealized loss-12/31/17
3,700,000
4,700,000
8,400,000
9,000,000
(600,000)
Problem 10
At the beginning of the current year, Remington
Company acquired 200,000 ordinary shares of Universal
Company for 9,000,000.
At the time of purchase, Universal Company had
outstanding 800,000 shares with carrying amount of
36,000,000.
The following events took place during the current year:
Universal Company reported net income of 1,800,000 fo
the current year.
Remington Company received from Universal Company
a dividend of 0.75 per ordinary share.
The market value of Universal Company share had
temporarily declined to 40.
Remington Company has elected irrevocably to
measure the investment at fair value through other
comprehensive income.
What is the carrying amount of the investment at year
end?
a. 9,000,000
b. 8,000,000
c. 9,300,000
d. 9,450,000
Answer: B
Market value at year end (200,000x40)
Acquisition cost
Unrealized loss on financial asset-OCI
8,000,000
9,000,000
(1,000,000)
Problem 11
Neal Company held the following financial assets as
trading investments on December 31, 2016:
Cost
100,000 shares of Company A
non-redeemable preference
share capital, par value 75
775,000
7,000 shares of Company B
preference share capital, par value 100,
subject to mandatory redemption
by the issue at par on
December 31, 2017
690,000
1,465,000
Market value
825,000
625,000
1, 450,000
On December 31, 2016, what is the total carrying amount of
the investments?
a. 1,400,000
b. 1,450,000
c. 1,465,000
d. 1,475,000
Answer: B
The nonredeemable preference share is an equity security.
The non-redeemable preference share is a debt security
whether debt or equity security, financial assets held for
trading are measured at fair value through profit or loss.
Problem 12
Trinidad Company provided the following portfolio of equity
investments measured at fair value through other
comprehensive income;
Aggregate cost- December 31, 2016
1,700,000
Unrealized gain- December 31, 2016
40,000
Unrealized loss- December 31, 2016
260,000
Net realized gain during 2016
300,000
On January 1, 2016, the entity reported an unrealized loss of
15,000 as a component of other comprehensive income.
In the 2016 statement of changes in equity, what cumulative
amount should be reported as unrealized loss on these
securities?
a. 260,000
b. 220,000
c. 205,000
d. 0
Answer: B
Unrealized loss
Unrealized gain
Cumulative net realized loss- 2016
Unrealized loss- January 1, 2016
Increase in unrealized loss
260,000
40,000
220,000
15,000
205,000
Problem 13
Gil Company provided the following information on
December 31, 2016 regarding equity investment:
Non-current assets:
Financial asset-FVOCI
3,700,000
Shareholder’s equity:
Unrealized loss- OCI
(300,000)
The entity paid transaction cost of 100,000 related to the
acquisition of the investment.
The entity elected to measure the equity investment at fair
value through other comprehensive income.
What was the historical cost of the financial asset?
a. 3,700,000
b. 3,400,000
c. 3,900,000
d. 4,000,000
Answer: D
Historical cost (3,700,000+300,000)
4,000,000
Problem 14
On July 1, 2016, Bellirose Company purchased 1,000,000 face
value 8% bonds for 910,000 plus accrued interest to yield
10%. The bonds mature on January 1, 2021, pay interest
annually on January 1, and are classified as trading securities.
On December 31, 2016, the bonds had a market value of
945,000. On February 15, 2017, the entity sold the bonds for
920,000.
On December 31, 2016, what amount should be reported for
trading securities?
a. 910,000
b. 920,000
c. 945,000
d. 950,000
Answer: C
Financial asset held for trading- FVPL
945,000
Chapter 37
Investment inequity Securities
Dividend, share split and stock right
Problem 1
On January 1, 2016, ABC Company purchased 40,000 shares
at 100 per share to be held for trading. Brokerage fees
amounted to 120,000.
A 5-peso dividend per share had been declared on December
15, 2015 to be paid on March 31, 2016 to shareholders of
record on January 31, 2016. No other transactions occurred in
2016 affecting the investment.
What is the initial measurement of the investment?
a. 4,120,000
b. 4,000,000
c. 3,920,000
d. 3,800,000
Answer: D
Purchase price (40,000x100)
Less: Purchased dividend (40,000x5)
Cost of investment
4,000,000
200,000
3,800,000
Problem 2
On January 1, 2016, Adam Company purchased as a long term
investment unlisted 100,000 ordinary shares of Mill Company
for 40 a share. On December 28, 2016, Adam Company sold
80,000 shares of Mill Company for 50 a share.
For the year ended December 31, 2016, what amount should
be reported as gain on disposal of long term investment?
a. 200,000
b. 900,000
c. 800,000
d. 400,000
Answer: C
Sale price (80,000x50)
Cost of investment (80,000x40)
Gain on disposal of investment
4,000,000
(3,200,000)
800,000
Problem 3
Cobb Company purchased 10,000 shares representing 2%
ownership of Roe Company on February 15, 2016. Cobb
Company received a stock dividend of 2,000 shares on March
31, 2016, when the carrying amount per share was 350 and the
market value per share was 400.
Roe Company paid a cash dividend of 15 per share on
September 15, 2016.
In the income statement for the year ended October 31, 2016,
what amount should be reported as dividend income?
a. 980,000
b. 880,000
c. 180,000
d. 150,000
Answer: C
Original shares
Stock dividend
Total shares
Dividend Income (12,000x15)
10,000
2,000
12,000
180,000
Problem 4
During 2016, Lawan Company bought the shares of Burwood
Company as follows:
June 1
December 1
20,000 shares at 100
30,000 shares at 120
2,000,000
3,600,000
5,600,000
Transactions for 2017
January 10
Received a cash dividend at 10 per share
January 20
Received 20% stock dividend
December 10
Sold 30,000 shares at 125 per share
If the FIFO approach is used, what is the gain on sale of the
shares?
a. 1,150,000
b. 950,000
c. 150,000
d. 550,000
Answer:A
FIFO approach
Original shares
Stock dividend-20%
Total shares
Sale price (30,000x125)
Cost of shares sold:
From June 1 (24,000 shares)
From December 1 (6,000 shares)
Gain on sale
June 1
20,000
4,000
24,000
Dec 1
30,000
6,000
36,000
3,750,000
2,000,000
600,000 2,600,000
1,150,000
Problem 5
Wood Company own 20,000 shares of Arlo Company’s
200,000 shares of P100 par, 6% cumulative, non-participating
preference share capital and 10,000 shares representing 2%
ownership of Arlo’s ordinary share capital.
During 2016, Arlo declared and paid preference dividends of
2,400,000. No dividends had been declared or paid during
2015.
In addition, Wood received a 5% stock dividend on ordinary
share from Arlo when the quoted market price of Arlo’s
ordinary share was 10.
What amount should be reported as dividend income for
2016?
a. 120,000
b. 125,000
c. 240,000
d. 245,000
Answer: C
Dividend income on preference share
(20,000/200,000=10%x2,400,000)
Answer: D
Cash dividend from Amal
(6,000/300,000=2% interest)
240,000
Problem 6
Day Company received dividends from share investments
during the year ended December 31, 2016 as follows:
 A stock dividend of 4,000 shares from Parr Company on
July 31, 2016, when the market price of Parr’s share was
20. Day owns less than 1% of Parr’s share capital.
 A cash dividend of 150,000 from Lark Company in which
Day owns a 25% interest. A majority of Lark’s directors
are also directors of Day.
What amount of dividend revenue should be reported in 2016?
a. 230,000
b. 150,000
c. 80,000
d. 0
Answer: D
The stock dividend from Parr Company is not an income.
Problem 7
Wray Company provided the following data for 2016:
 On September 1, Wray received a 50,000 cash dividend
from Seco Company in which Wray owns a 30% interest.
 On October 1, Wray received a 60,000 liquidating
dividend from King Company. Wray owns a 5% interest
in King.
 Wray owns a 2% interest in Bow Company which
declared a 2,000,000 cash dividend on November 15,
2016 payable on January 15, 2017.
What amount should be reported as dividend income for
2016?
a. 600,000
b. 560,000
c. 100,000
d. 40,000
Answer: D
Cash dividend from Bow Company (2%x 2,000,000)
40,000
Problem 8
During 2016, Neil Company held 30,000 shares of Brock
Company’s 100,000 outstanding shares and 6,000 shares of
Amal Company’s 300,000 shares. During the year, Neil
Company received P300,000 cash dividend from Brock,
15,000 cash dividend and 3% stock dividend from Amal. The
closing of Amal share is 150.
What amount should be reported as dividend revenue for
2016?
a. 342,000
b. 315,000
c. 442,000
d. 15,000
15,000
Problem 8
On March 1, 2016, Evan Company purchased 10,000 ordinary
shares at 80 per share. On September 30, 2016, Evan received
10,000 stock rights to purchase an additional 10,000 shares at
90 per share.
The stock rights had an expiration date on February 1, 2017.
On September 30, 2016, the share had a market value P95 and
the stock right had a market value of P5.
What amount should be reported on September 30, 2016 for
investment in stock rights?
a. 150,000
b. 100,000
c. 50,000
d. 60,000
Answer: C
Initial measurement at fair value
(10,000 rights x 5)
50,000
Problem 10
Rice Company owned 30,000 ordinary shares of Wood
Company acquired on July 31, 2016, at total cost of 1,100,000.
On December 1, 2016, Rice received 30,000 stock rights from
Wood. Each right entitles the holder to acquire one share at
45.
The market price of Wood’s share on this date was P50 and
the market price of each right was P10. Rice sold the rights on
December 31, 2016 for 450, 000 less a 10,000 commission.
What amount should be reported as gain from the sale of
rights?
a. 150,000
b. 140,000
c. 250,000
d. 240,000
Answer: B
Net sale price (450,000-10,000)
Initial cost of rights sold (30,000 x 10)
Gain on sale of rights
440,000
(300,000)
140,000
Problem 11
Adam Company owned 50,000 ordinary shares of Bland
Company. These 50,000 shares were purchased by Adam for
P120 per share.
On August 30, 2016, Bland distributed 50,000 stock rights to
Adam. Adam was entitled to buy one new share of Bland
Company for P90 cash and two of these rights.
On August 30, 2016, each share had a market value of P130
and each right had a market value of P20.
What total cost should be recorded for the new shares that are
acquired by exercising the rights?
a. 2,250,000
b. 3,250,000
c. 3,050,000
d. 5,500,000
Answer: B
Initial cost of rights (50,000x20)
Cash paid for new shares (25,000x90)
Total cost of new shares
1,000,000
2,250,000
3,250,000
Problem 12
Excelsia Company issued rights to subscribe to its stock, the
ownership of 4 shares entitling the shareholders to subscribe
for 1 share at P100. Jealina Company owns 50,000 shares of
Excelsia Company with total cost of 5,000,000. The share is
quoted right on at 125.
What is the cost of the new investment if all of the stock rights
are exercised by the investor?
a. 1,500,000
b. 1,250,000
c. 1,562,500
d. 1,450,000
Answer: A
Theoretical value of right (125-100/4+1)
Initial cost of rights (50,000 x 5)
Cash paid for new shares (50,000/4=12,500x100)
Cost of new investment
5.00
250,000
1,250,000
1,500,000
Problem 13
On January 1, 2016, Mylene Company purchased 50,000
shares of another entity for 3,600,000. On October 1, 2016, the
entity received 50,000 stock rights from the investee. Each
right entitled the shareholder to acquire one share for P85.
The market price of the investee’s share was P100
immediately before the rights were issued and P90
immediately after the rights were issued.
On December 1, 2016, the entity exercised all stock rights. On
December 31, 2016, the entity sold 25,000 shares at P90 per
share. The stock rights are not accounted for separately. The
FIFO approach is used.
What is the gain on sale of investment that should be
recognized in 2016?
a. 450,000
b. 700,000
c. 287,500
d. 125,000
Answer: A
FIFO Approach
Sale price (25,000x90)
Cost of shares sold
(25,000/50,000 x 3,600,000)
Gain on sale
2,250,000
1,800,000
450,000
Problem 14
2014
Jan. 1 Christopher Company purchased 20,000 shares of
Bay Company, P100 par, at P110 per share.
March 1 Bay Company issued rights to Christopher Company,
each permitting the purchase of ¼ share at par. No
entry was made. The bid price of the share was 140
and there was no quoted price for the rights.
April 1 Christopher Company paid for the new shares
charging the payment to the investment.
Since Christopher Company felt that it had been
assessed by Bay Company, the dividends received
from Bay Company in 2014 and 2015 were credited
to the investment account until the debit for payment
of the new share was fully offset.
Dec. 31 Christopher Company received annual dividend of
250,000 from Bay Company.
2015
Dec. 31 Christopher Company received annual dividend of
250,000 from Bay Company.
2016
Jan 1
Christopher Company received 50% stock dividend
from Bay Company.
On same date, the shares received as stock dividend
were sold at 160 per share and the proceeds were
credited to income.
Dec 31 The shares of Bay Company were split 2 for 1.
Christopher Company found that each new share was
worth P5 more than P110 paid for the original shares.
Accordingly, Christopher Company debited the
investment account with the additional shares
received at P110 per share and credited income.
2017
June 30 Christopher Company sold one-half of the investment
at P92 per share and credited the proceeds to the
investment account
1. What is the balance of the investment on December 31,
2017 as it was kept by Christopher Company?
a. 3,150,000
b. 2,650,000
c. 2,200,000
d. 4,950,000
2. Using the average method, what is the correct balance of the
investment on December 31, 2017?
a. 2,200,000
b. 1,800,000
c. 900,000
d. 0
3. What is the net adjustment to retained earnings on
December 31, 2017?
a. 3, 650,000 debit
b. 3, 150,000 debit
c. 3, 650,000 credit
d. 3, 150,000 credit
4. What amount of gain on sale of investment should be
reported in 2017?
a. 1,400,000
b. 1,100,000
c. 2,500,000
d. 1,900,000
Answer 1: B
Shares
20,000
5,000
25,000
(25,000)
25,000
Cost
2,200,000
500,000
(250,000)
(250,000)
2,750,000
(2,300,000)
2,650,000
Shares
20,000
5,000
12,500
37,500
Cost
2,200,000
500,000
2,700,000
Balance
12/31/16 (2 for 1 split)
Balance
6/30/17 (25,000/50,000x 1,800,000)
(12,500)
25,000
25,000
50,000
(25,000)
(900,000)
1,800,000
1,800,000
(900,000)
Balance December 31, 2017
25,000
900,000
1/1/14 (20,000x110)
2/1/14 (5,000x100)
12/31/14 (dividend received)
12/31/15 (dividend received)
12/31/16 (25,000x110)
6/30/17 (25,000x92)
Investment account per book
Answer 2: C
1/1/14 (20,000x110)
4/1/14 (5,000x100)
12/31/14 dividend received
Balance
1/1/2016 (12,500/37,500x 2,700,000)
Answer 3: B
Credit adjustment
Debit adjustment
Debit adjustment
Net debit adjustment
Answer 4: A
Sale price (25,000 x 92)
Cost of shares sold (25,000/50,000x1,800,000)
Gain on sale of investment
500,000
(900,000)
(2,750,000)
(3,150,000)
2,300,000
(900,000)
1, 400,000
Chapter 38
Investment in Associate
BASIC PROBLEMS
Problem 1
On January 1, 2016, Saxe Company purchased 20% of Lex
Company’s ordinary shares outstanding for 6,000,000. The
acquisition cost is equal to the carrying amount of the net
assets acquired.
During 2016, the investee reported net income of 7,000,000
and paid cash dividend of 4,000,000.
What is the balance in the investment in associate on
December 31, 2016?
a. 5,200,000
b. 6,000,000
c. 6,600,000
d. 7,400,000
Answer: C
Acquisition cost
6,000,000
Add: Share in net income (20% x 7,000,000) 1,400,000
Total
7,400,000
Less: share in cash dividend (20% x 4,000,000) 800,000
Carrying amount
6,600,000
Problem 2
In January 2016, Farley Company acquired 20% of the
outstanding ordinary shares of Davis Company for 8,000,000.
This investment gave Farley the ability to exercise significant
influence over Davis. The carrying amount of the acquired
shares was 6,000,000.
The excess of cost over carrying amount was attributed to the
depreciable asset which was undervalued on Davi’s statement
of financial position and which had a remaining useful life of
ten years.
For the year ended December 31, 2016, the investee reported
net income of 1,800,000 and paid cash dividends of 400,000
and thereafter issued 5% stock dividend.
What is the carrying amount of the investment in associate on
December 31, 2016?
a. 7,720,000
b. 7,800,000
c. 8,000,000
d. 8,080,000
Answer: D
Original cost
Share in net income (20% x 1,800,000)
Share in cash dividends (20% x400,000)
Amortization of excess of cost- 12/31/16
Carrying amount of investment -12/31/16
8,000,000
360,000
(80,000)
(200,000)
8,080,000
Acquisition cost
Carrying amount of interest required
8,000,000
(6,000,000)
Excess of cost over carrying amount
2,000,000
Problem 3
On January 1, 2016, Well Company purchased 10% of Rea
Company’s outstanding ordinary shares for 4,000,000.
Well Company is the largest single shareholders in Rea and
Well’s officers are a majority of Rea’s board of directors.
The investee reported net income of 5,000,000 for 2016 and
paid dividends of 1,500,000.
On December 31, 2016, what amount should be reported as
investment in Rea Company?
a. 4,500,000
b. 4,350,000
c. 4,000,000
d. 3,850,000
Answer: B
Acquisition, January 1
Add: Share in net income (10% x 5,000,000)
Total
Less: Share in cash dividends (10% x 1,500,000)
Carrying amount of investment, 12/31
4,000,000
500,000
4,500,000
150,000
4,350,000
Problem 4
On January 1, 2016, Dyer Company acquired as long-term
investment a 20% ordinary share interest in Eason Company.
Dyer paid 7,000,000 for this investment when the fair value of
Eason’s net assets was 35,000,000. For the year ended
December 31, 2016, the investee reported net income of
4,000,000 and declared and paid cash dividends of 1,600,000.
What amount of revenue from the investment should be
reported for 2016?
a. 1,120,000
b. 480,000
c. 800,000
d. 320,000
Answer: C
Share in net income (20% x 4,000,000)
800,000
Problem 5
On July 1, 2016, Diamond Company paid 1,000,000 for
100,000 outstanding shares which represent 40% of Ashley
Company. At that date, the net assets of Ashley totaled
2,500,000 and the fair values of all Ashley’s identifiable assets
and liabilities were equal to their carrying amount.
Ashley reported net income of 500,000 for 2016of which
300,000 was for the six months ended December 31, 2016.
Ashley paid cash dividends of 250,000 on September 30,
2016.
What amount of income should be reported from the
investment in Ashley?
a. 200,000
b. 100,000
c. 120,000
d. 80,000
Answer: C
Share in net income from July 1 to December 31, 2016
(300,000x40%)
120,000
Problem 6
On July 1, 2016, Denver Company purchased 30,000 shares of
the Eagle Company’s 100,000 outstanding ordinary shares for
P200 per share. On December 15, 2016, the investee paid
400,000 in dividends to the ordinary shareholders.
The investee’s net income for the year ended December 31,
2016 was 1,200,000, earned evenly throughout the year.
What amount of income from the investment should be
reported in 2016?
a. 360,000
b. 180,000
c. 120,000
d. 60,000
Answer: D
Share in net income from July 1 to December 31, 2016
(1,200,000 x 6/12 x 30%)
180,000
Interest acquired (30,000/100,000)
3%
Problem 7
On April 1, 2016, Ben Company purchased 40% of the
outstanding ordinary shares of Clarke Company for
10,000,000. On that date Clarke’s net assets were 20,000,000
and Ben cannot attribute the excess of the cost of its
investment in Clarke over its equity in Clarke’s net asset to
any particular factor. The investee’s net income for 2016 is
5,000,000.
What is the maximum amount which could be included in
2016 income before tax to reflect the equity in net income of
investee?
a. 1,400,000
b. 1,500,000
c. 2,000,000
d. 1,850,000
Answer: B
Share in net income from April 1 to December 31, 2016
(5,000,000 x 9/12 x 40%)
1,500,000
Acquisition cost
Carrying amount of net assets acquired
40% x 20,000,000
Good will not amortized
10,000,000
(8,000,000)
2,000,000
Problem 8
On January 1, 2016, Ronald Company purchased 40% of the
outstanding ordinary shares of New Company, paying
6,400,000 when the carrying amount of the net assets of New
Company equalled 12,500,000.
The difference was attributed to equipment which had a
carrying amount of 3,000,000 and a fair market value of
5,000,000 and to building which had a carrying amount of
2,500,000 and a fair market value of 4,000,000.
The remaining useful life of the equipment and building was 4
years and 12 years, respectively.
During 2016, New Company reported net income of 5,000,000
and paid dividends of 2,500,000.
What amount should be reported as investment income for
2016?
a. 2,000,000
b. 1,000,000
c. 1,800,000
d. 1,750,000
Answer: d
Acquisition cost
Net assets acquired (40%x 12,500,000)
Excess of cost
6,400,000
(5,000,000)
1,400,000
Excess of attributable to equipment (40%x2M)
Excess of attributable to building (40% x 1.5M)
Share in net income (40% x 5,000,000)
Amortization excess:
Equipment
(800,000/4)
Building
(600,000/12)
Investment income
800,000
600,000
1,400,000
2,000,000
(200,000)
(50,000)
1,750,000
Problem 9
At the beginning of the current year, Kean Company
purchased 30% interest in Pod Company for 2,500,000.
On this date Pod’s shareholder’s equity was 5,000,000. The
carrying amounts of Pod’s identifiable assets approximated the
fair values, except for land whose fair value exceeded the
carrying amount by 2,000,000.
The investee reported net income of 1,000,000 and paid no
dividends during the current year.
What amount should be reported as investment in associate at
year-end?
a. 2,100,000
b. 2,200,000
c. 2,800,000
d. 2,760,000
Answer: C
Acquisition cost
2,500,000
Carrying amount of net assets acquired
30% x 5,000,000
(1,500,000)
Excess of cost over carrying amount
1,000,000
Amount attributable to undervaluation of land
30% x 2,000,000
Good will not amortized
Acquisition cost, January 1
Share in net income (30% x 1,000,000)
Carrying amount of investment
(600,000)
400,000
2,500,000
300,000
2,800,000
Problem 10
At the beginning of the current year, Sage Company bought
40% of Eve Company’s outstanding ordinary shares for
4,000,000.
The carrying amount of Eve’s net assets at the purchase date
totaled 9,000,000.
Fair values and carrying amounts were the same for all items
except for plant and inventory, for which fair values exceeded
their carrying amounts by 900,000 and 100,000, respectively.
The plant has an 18-year life. All inventories were sold during
the current year.
During the current year, the investee reported net income of
1,200,000 and paid 200,000 cash dividend.
What amount should be reported as investment income for the
current year?
a. 480,000
b. 420,000
c. 360,000
d. 320,000
Answer: B
Acquisition cost
Net assets acquired (40%x9M)
Excess of cost over carrying amount
4,000,000
(3,600,000)
400,000
The excess of cost is identified as follows:
Understatement of plant 40%x900,000
Understatement of inventory 40%x100,000
Total excess of cost
360,000
40,000
400,000
Share in net income (40%x1,200,000)
480,000
Less: Amortization of excess of cost:
Depreciation of plant (360,000/18) 20,000
Inventory totally sold
40,000 60,000
Investment income
420,000
Problem 11
On January 1, 2016, Anne Company purchased 20% of the
outstanding ordinary shares of Dune Company for 4,000,000
of which 1,000,000 was paid in cash and 3,000,000 is payable
which 12% annual interest on December 31, 2016. Dune’s
shareholder’s equity on January 1, 2016 was 13,000,000.
Anne also paid 500,000 to business broker who helped find a
suitable business and negotiated the purchase.
At the time of acquisition, the fair values of Dune’s
identifiable assets and liabilities were equal to their carrying
amounts except for an office building which had a fair value in
excess of carrying amount of 2,000,000 and an estimated life
of 10 years.
During 2016, Dune Company reported net income of
5,000,000 and paid dividend of 2,000,000.
What amount of income should be reported for 2016 as a
result of the investment?
a. 810,000
b. 620,000
c. 960,000
d. 885,000
Answer: C
Acquisition cost (4M+500,000)
4,500,000
Carrying amount of net assets acquired
(20% x 13,000,000)
(2,600,000)
Excess of cost
1,900,000
Excess of attributable to building (20%x2M) (400,000)
Excess of attributable to goodwill-not amortized 1,500,000
Share in net income (20% x 5M)
Amortization of excess of cost:
Attributable to building (400,000/10)
Investment income
1,000,000
(40,000)
960,000
Problem 12
At the beginning of current year, Occidental Company
purchased 40% of the outstanding ordinary shares of Manapla
Company for 3,500,000 when the net assets of Manapla
amounted to 7,000,000.
At acquisition date, the carrying amounts of the identifiable
assets and liabilities of Manapla were equal to the fair value,
except for fair value for which the fair value was 1,500,000
greater than the carrying amount and the inventory whose fair
value was 500,000 greater than the cost.
The equipment has a remaining life of 4 years and the
inventory was all sold during the current year.
Manapla Company reported net income of 4,000,000 and paid
no dividends during the current year.
What is the maximum amount of the equity in earnings of the
investee?
a. 1,350,000
b. 1,250,000
c. 1,600,000
d. 1,700,000
Answer: A
Cost
Carrying amount of interest acquired
40% x 7,000,000
Excess of cost over carrying amount
Excess applicable to inventory 40%x1.5M
Excess applicable to inventory 40%x500K
Excess of fair value over cost
3,500,000
(2,800,000)
700,000
(600,000)
(200,000)
(100,000)
Share in net income (40%x4M)
Excess of fair value over cost
Excess of cost over carrying amount:
Equipment (600,000/4)
Inventory – all sold
Investment income
1,600,000
100,000
(150,000)
(200,000)
1,350,000
Problem 13
At the beginning of current year, Bing Company purchased
30,000 shares of Latt Company’s 200,000 outstanding
ordinary shares for 6,000,000. On that date, the carrying
amount of the acquired shares on Latt’s books was 4,000,000.
Bing attributed the excess of cost over the carrying amount to
patent. The patent has a remaining useful life of 10 years.
During the current year, Bing’s officers gained a majority on
Latt’s board of directors.
Latt Company reported earnings of 5,000,000 for the current
year and declared and paid dividend of 3,000,000 at year end.
What is the carrying amount of the investment in associate at
year end?
a. 6,000,000
b. 6,100,000
c. 6,300,000
d. 6,750,000
Answer: B
Acquisition cost
Carrying amount of net assets acquired
Excess of cost applicable to patent
6,000,000
(4,000,000)
2,000,000
Acquisition cost
Share in net income (5Mx15%)
Share in cash dividend (3Mx15%)
Amortization of patent (2M/10)
Carrying amount of investment
6,000,000
750,000
(450,000)
(200,000)
6,100,000
Interest acquired (30,000/200,000)
15%
Problem 14
On July 1, 2016, Miller Company purchased 25% of Wall’s
Company’s outstanding ordinary shares and no good will
resulted from the purchase.
Miller appropriately carried this investment at equity and the
balance in Miller’s investment account was 1,900,000 on
December 31, 2016.
Wall Company reported net income of 1,200,000 for the year
ended December 31, 2016, and paid dividend totalling
480,000 on December 31, 2016.
How much did Miller pay for the 25% interest in Wall?
a. 1,720,000
b. 2,020,000
c. 1,870,000
d. 2,170,000
Answer: C
Acquisition cost, July 1 (SQUEEZE)
Add: Share in net income in 7/1 to 12/31
(1,200,000x6/12x25%)
Total
Less: share in cash dividend 25% x 480K
Investment balance, Dec 31
1,870,000
150,000
2,020,000
(120,000)
1,900,000
Problem 15
At the beginning of the current year, Cyber Company bought
30% of the outstanding ordinary shares of Free Company for
5,000,000 cash. Cyber Company accounts for this investment
by the equity method.
At the date of the acquisition, Free Company’s net assets had
carrying amount of 12,000,000.
Depreciable assets with an average remaining life of five years
have a current market value that is 2,500,000 in excess of their
carrying amount.
The remaining difference between the purchase price and the
carrying amount of the underlying equity cannot be attributed
to any identifiable tangible or intangible asset. Accordingly,
the remaining difference is allocated to good will.
Free Company reported net income of 4,000,000 and paid cash
dividends of 1,000,000 during the current year.
What is the carrying amount of the investment in associate at
year end?
a. 5,000,000
b. 5,900,000
c. 5,750,000
d. 5,400,000
Answer: C
Acquisition cost
Net assets acquired (30%x12M)
Excess of cost over carrying amount
Excess attributable to depreciable assets
30% x 2,500,000
Excess attributable to good will
Acquisition cost
Share in net income (30% x 4M)
Share in cash dividends (30% x 1M)
Amortization of depreciable assets (750K/10)
Carrying amount of investment
What is the equity in earnings of the investee for 2016?
a. 420,000
b. 480,000
c. 484,000
d. 400,000
Answer: D
Net income
Preference dividend
Net income to ordinary shares
600,000
(100,000)
500,000
Share in net income-ordinary shares
(80% x 500,000)
400,000
Problem 17
At the beginning of the current year, Alpha Company acquired
40% of the outstanding ordinary shares of an investee for
6,500,000. The carrying amount of the net assets of the
investee equalled 12,500,000. Any excess of cost over
carrying amount is attributable to goodwill.
The investee reported net loss of 4,000,000 and paid dividends
of 2,500,000.
What is the carrying amount of the investment at year end?
a. 6,500,000
b. 3,900,000
c. 4,900,000
d. 5,500,000
Answer: B
Acquisition cost
Share in net loss 40% x 4,000,000
Share in cash dividend 40%x2.5M
Carrying amount-12/31/16
6,500,000
(1,600,000)
(1,000,000)
3,900,000
5,000,000
(3,600,000)
1,400,000
(750,000)
650,000
5,000,000
1,200,000
(300,000)
(150,000)
5,750,000
Problem 16
Moss Company owned 20% of Dubro Company’s preference
share capital and 80% of the ordinary share capital on
December 31, 2016. The investee reported net income 600,000
for the year ended December 31, 2016.
10% cumulative preference share capital
1,000,000
Ordinary share capital
7,000,000
CHAPTER 40
Financial Asset at Amortized Cost
Problem 1
On July 1, 2016, Cody Company paid 1,198,000 of 10%, 20
year bonds with a face amount of 1,000,000. Interest is paid on
June 30 and December 31.
The bonds were purchased to yield 8%. The effective interest
method is used to recognize interest income from long term
investments.
What is the carrying amount of the investment in bonds on
December 31, 2016?
a. 1,207,900
b. 1,198,000
c. 1,195,920
d. 1.193,050
Answer 2: A
Answer: C
Date
Interest Interest Premium Carrying amount
Received Income amortization
7/1/16
12/31/16 50,000 47,920 2,080
1,198,000
1,195,920
Amortization of discount from 7/1-12/31
Interest income 906,000 x 10% x 6/12
Interest received 1M x 8% x 6/12
Carrying amount 12/31/16
Interest received=1Mx10% x 6/12
=50,000
Interest income= 1,198,000x 8% x 6/12
=47,920
Problem 2
On January 1, 2016, Purl Company purchased as a long term
investment 5,000,000 face value of Shaw Company’s 8% bonds for
4,562,000. The bonds were purchased to yield 10% interest.
The bonds mature on January 1, 2021 and pay interest annually on
December 31. The interest method of amortization is used.
1. What is the interest income for 2017?
a. 456,200
b. 461,820
c. 400,000
d. 369,456
Answer 1: B
Answer 2: A
Carrying amount-1/1/16
Amortization of discount for 2016
Interest income (456,200 x 10%)
Interest received (5,000,000x8%)
Carrying amount-12/31/16
Amortization of discount for 2017
Interest income (4,618,200 x 10%)
Interest received (5,000,000x8%)
Carrying amount-12/31/17
4,562,000
456,200
400,000
461,820
400,000
56,200
4,618,200
61,820
4,680,020
Problem 3
On July 1, 2016, York Company purchased as a long term investment
1,000,000 of Park Company’s 8% bonds for 946,000 including
accrued interest of 40,000. The bonds were purchased to yield 10%
interest.
The bonds matured on January 1, 2022, and pay interest annually on
January 1. York Company used the effective interest method of
amortization.
1. what is the interest income for 2016?
a. 80,000
b. 90,600
c. 45,300
d. 40,000
2. On December 31, 2016, what is the carrying amount of the
investment in bonds?
a. 911,300
b. 916,600
c. 953,300
d. 960,600
Answer 1: C
Purchase price
Accrued interest
Cost of investment
946,000
(40,000)
906,000
45,300
40,000 5,300
911,300
Problem 4
On January 1, 2016, Portugal Company purchased bonds with
face value of 8,000,000 for 7,679,000 as a long term
investment. The stated rate on the bonds is 10% but the bonds
acquired to yield 12%.
The bonds mature at the rate of 2,000,000 annually ever
December 31 and the interest is payable only also every
December 31. The entity used the effective interest metjod of
amortizing discount.
1. What is the interest income for 2016?
a. 800,000
b. 921,480
c. 960,000
d. 767,900
2. What is the carrying amount of the investment in bonds on
December 31, 2016?
a. 5,759,250
b. 7,759,250
c. 7,800,480
d. 5,800,480
Answer 1: B
Interest income 7,679,000 x 12%
Interest received 8,000,000 x 10%
Discount on amortization
921,480
800,000
121,480
Answer 2: D
Cost
Discount on amortization
Annual instalment
Carrying amount
7,679,000
121,480
(2,000,000)
5,800,480
Problem 5
On July 1, 2016, East Company purchased as a long term
investment 5,000,000 face amount, 8% bonds of Rand
Company for 4,615,000 to yield 10% per year. The bonds pay
interest semi-annually on January 1 and July 1.
On December 31, 2016, what amount should be reported as
interest receivable?
a. 184,600
b. 200,000
c. 230,750
d. 250,000
Answer: B
Interest receivable from July 1-Dec 31
5,000,000 x 8% x 6/12
200,000
Problem 6
On July 1, 2016, Pell Company purchased Green Company ten
year, 8% bonds with a face amount of 5,000,000 for
4,200,000.
The bonds mature on June 30, 2026 and pay interest semiannually June 30 and December 31.
Using the interest method, the entity record bond discount
amortization of 18,000 for the six months ended December 31,
2016.
What amount should be reported as interest income for 2016?
a. 168,000
b. 182,000
c. 200,000
d. 218,000
Answer: d
Interest received from 7/1-12/31
5M x 8% x 6/12
200,000
Bond discount amortization for six months 18,000
Interest income for 2016
218,000
Problem 7
On January 1, 2016, Gilberto Company purchased 9% bonds
with a face amount of 4,000,000 for 3,756,000 to yield 10%.
The bonds are dated January 1, 2016, mature on December 31,
2025 and pay interest annually on December 31. The interest
method of amortizing bond discount is used.
1. What amount should be reported as interest revenue for
2016?
a. 338,040
b. 360,000
c. 375,600
d. 400,000
2. What amount should be reported as interest revenue for
2017?
a. 400,000
b. 375,600
c. 360,000
d. 377,160
Answer 1: C
Answer 2: D
Carrying amount- 1/1/16
3,756,000
Discount amortization for 2016:
Interest income 10% x 3,756,000 375,600
Interest received 9% x 4,000,000 360,000
15,600
Carrying amount- 12/31/16
3,771,600
Discount amortization for 2017:
Interest income 10% x 3,771,600 377,600
Interest received
360,000
17,160
Carrying amount- 12/31/17
3,788,760
Problem 8
Jent Company purchased bonds at a discount of 100,000.
Subsequently, Jent sold these bonds at a premium of 140,000.
During the period that Jent hold this long term investment,
amortization of the discount amounted to 20,000.
What amount should be reported as gain on the sale of bonds?
a. 120,000
b. 220,000
c. 240,000
d. 260,000
Answer: B
Premium on sale of bonds
Unamortized discount 100,000-20,000
Gain on sale of bonds
140,000
80,000
220,000
Problem 9
On October 1, 2016, Danica Company purchased 2,000,000
face value of 12% bonds for 98 plus accrued interest and
brokerage fee. Interest is paid semi-annually on January 1 and
July 1. Brokerage fee for this transaction is 50,000.
At what amount should this acquisition of bonds be recorded?
a. 1,960,000
b. 2,010,000
c. 2,020,000
d. 2,070,000
Answer: B
Purchase price 2,000,000 x 98%
Brokerage fee
Total acquisition cost
1,960,000
50,000
2,010,000
CHAPTER 41
MARKET PRICE FOR BONDS
Problem 1
On January 1, 2016, Tagbilaran Company purchased bonds
with face amount of 2,000,000. The bonds are dated January 1,
2016 and mature on January 1, 2020.
The interest on the bonds is 10% payable semi-annually every
June 30 and December 31. The prevailing market rate of
interest on the bonds is 12%.
The present value of 1 at 6% for 8 periods is .63 and the
present value of an ordinary annuity of 1 at 6% for 8 periods is
6.21.
What is the present value of the bonds on January 1, 2016?
a. 1,881,000
b. 1,888,000
c. 1,360,000
d. 1,480,000
Answer: A
PV of principal (2M x .63)
PV of semi-annual interest payments
100,000 x 6.21
Present value or market price of bonds
Semi-annual interest payments
2,000,000 x 10% x 6/12
1,260,000
621,000
1,881,000
100,000
Problem 2
On January 1, 2016, Arabian Company purchased serial bonds
with face amount of 3,000,000 and stated 12% interest payable
annually every December 31.
The bonds are to be held as financial asset at amortized cost
with a 10% effective yield.
The bonds mature at an annual instalment of 1,000,000 every
December 31. The present value of 1 at 10% for:
1 period
0.91
2 periods
0.83
3 periods
0.75
What is the present value of the serial bonds on January 1,
2016?
a. 3,106,800
b. 3,060,000
c. 3,045,000
d. 3,149,000
Answer: A
Principal payment
1,000,000
Interest payment 3M x 12%
360,000
Total payment on 12/31/16
1,360,000
Principal payment
Interest payment 2M x 12%
Total payment on 12/31/17
1,000,000
240,000
1,240,000
Principal payment
Interest payment 1M x 12%
Total payment on 12/31/18
1,000,000
120,000
1,120,000
12/31/16 payment 1,360,000 x .91
12/31/17 payment 1,240,000 x .83
12/31/18 payment 1,120,000 x .75
Total present value on 1/1/16
1,237,600
1,029,200
840,000
3,106,800
CHAPTER 42
BOND INVESTMENT-FVOCI
Problem 1
On January 1, 2016, Queen Company purchased bonds with
face amount of 5,000,000 for 4,760,000 including transaction
cost of 160,000. The business model is to collect contractual
cash flows and to sell the financial asset.
The bonds mature on December 31, 2018 and pay 10%
interest annually on December 31 with a 12% effective yield.
The bonds are quoted at 102 on December 31, 2016 and 105
on December 31, 2017. The bonds are sold on June 30, 2018
plus accrued interest.
1. What amount of unrealized gain should be reported as
component of other comprehensive income for 2016?
a. 268,800
b. 100,000
c. 340,000
d. 0
2. What amount of unrealized gain should be reported as
component of other comprehensive income for 2017?
a. 339,056
b. 221,200
c. 70,256
d. 0
3. What amount should be recognized as gain on sale of the
bond investment on June 30, 2018?
a. 544,528
b. 794,528
c. 250,000
d. 589,056
Answer 1: A
Date
interest interest discount
Receive income amortization
carrying amount
1/1/16
12/31/16 500,000 571,200 71,200
12/31/17 500,000 579,744 79,744
12/31/18 500,000 589,056 89,056
4,760,000
4,831,200
4,910,944
5,000,000
Market value-12/31/16 5M x 102%
Carrying amount- 12/31/16
Unrealized gain-OCI for 2016
5,100,000
4,831,200
268,800
Answer 2: C
Market value 12/31/17
5M x 105%
Investment balance- 12/31/17
5,100,000+ 79,744
Increase in unrealized gain in 2017
Answer 3: A
Sale price
Cumulative unrealized gain- OCI
Total
Carrying amount per table- 6/30/18
4,910,944+44,528
Gain on sale of financial asset
Amortization of discount 1/1 to 6/30
89,056 x 6/12
5,250,000
5,179,744
70,256
5,500,000
339,056
5,839,056
4,955,472
544,528
44,528
Problem 2
On January 1, 2016, Michelle Company purchased bonds with
face amount of 5,000,000. The entity paid 4,600,000 plus
transaction cost of 142,000.
The bonds mature on December 31, 2018 and pay 6% interest
annually on December 31of each year with 8% effective yield.
The bonds are quoted at 105 on December 31, 2016 and 110
on December 31, 2017.
The business model in managing the financial asset is to
collect contractual cash flows that are solely payments of
principal and interest and also to sell the bonds in the open
market.
1. What amount of unrealized gain should be reported as
component of other comprehensive income for 2016?
a. 250,000
b. 400,000
c. 428,640
d. 0
2. What cumulative amount of unrealized gain should be
reported as component of other comprehensive income in the
statement of changes in equity for 2017?
a. 500,000
b. 592,931
c. 164,291
d. 0
3. What is the interest income for 2017?
a. 300,000
b. 379,360
c. 385,709
d. 392,931
Answer 1: C
Date
interest interest discount
Receive income amortization
carrying amount
1/1/16
12/31/16 300,000 379,360 79,360
12/31/17 300,000 385,709 85,709
12/31/18 300,000 392,931 92,931
4,742,000
4,821,360
4,907,069
5,000,000
Market value-12/31/16 5M x 105%
Carrying amount- 12/31/16
Unrealized gain- 12/31/16 2016
5,250,000
4,821,360
428,640
Answer 2: B
Market value-12/31/17
(5M x 110%)
Carrying amount per table-12/31/17
Cumulative unrealized gain-12/31/17
Unrealized gain-12/31/16
Increase in unrealized gain in 2017
5,500,000
(4,907,069)
592,931
428,640
164,291
Answer 3: C
Interest income for 2017 (8% x 4,821,360) 385,709
Problem 3
On January 1, 2016, Dumaguete Company purchased bonds
with face amount of 4,000,000 for 4,206,000.
The business model in managing the financial asset is to
collect contractual cash flows that are solely payments of
principal and interest and also to sell the bonds in the open
market.
The bonds mature on December 31, 2018 and pay 10%
interest annually on December 31 each year with 8% effective
yield.
The bonds are quoted at 95 on December 31, 2016 and 90 on
December 31, 2017.
1. What amount of unrealized loss should be reported as
component of other comprehensive income in 2016?
a. 342,480
b. 406,000
c. 469,520
d. 0
2. What amount of unrealized loss should be reported as
component of other comprehensive income in 2017?
a. 473,878
b. 131,398
c. 200,000
d. 0
3. What amount of cumulative unrealized loss should be
reported in the statement of changes in equity for 2017?
a. 406,000
b. 606,000
c. 473,878
d. 0
4. What is the carrying amount of the bond investment to be
reported on December 31, 2017?
a. 4,206,000
b. 3,600,000
c. 3,800,000
d. 4,673,878
Answer 1: A
Date
interest interest discount
Receive income amortization
carrying amount
1/1/16
12/31/16 400,000 336,480 63,520
12/31/17 400,000 331,398 68,602
12/31/18 400,000 326,122 73,878
4,206,000
4,142,480
4,073,878
54000,000
Market value-12/31/16
Carrying amount- 12/31/16
Unrealized gain- 12/31/16 2016
3,800,000
Answer 2: B
Market value-12/31/17
(4M x 90%)
Carrying amount per table-12/31/17
Cumulative unrealized gain-12/31/17
4,142,480
342,480
3,600,000
(4,073,878)
(473,878)
Unrealized loss-12/31/16
Increase in unrealized gain in 2017
Answer 3: C
Answer 4: B (4M x 90%)
(342,480)
(131,398)
473,878
3,600,000
Problem 4
Love Company purchased 5,000,000 of 8%, 5-year bonds on
January 1, 2016 with interest payable on July 1 and January 1.
The bonds were purchased for 5,208,000 at an effective
interest rate of 7%.
The business model for this investment is to collect
contractual cash flows and sell the bonds in the open market.
On December 31, 2016, the bonds were quoted at 106.
1. What amount of interest income should be reported for
2016?
a. 400,000
b. 200,000
c. 364,560
d. 363,940
2. What amount should be recognized in OCI in the statement
of comprehensive income for 2016?
a. 300,000
b. 125,440
c. 128,060
d. 92,000
3. If the entity elected the fair value option, what total amount
of income should be recognized for 2016?
a. 400,000
b. 492,000
c. 208,000
d. 300,000
Acquisition cost
Gain from change in fair value
5,208,000
92,000
Problem 5
On January 1, 2016, Reign Company purchased 12% bonds with face
amount of 5,000,000 for 5,380,000. The bonds provide an effective
yield of 10%. The bonds are dated January 1, 2015, mature on
January 1, 2021 and pay interest annually on December 31, 2016.
The entity has elected the fair value option for the bond investment.
What total income should be reported for 2016?
a. 1,220,000
b. 1,120,000
c. 1,138,000
d. 600,000
Answer: A
Market vvalue-12/31/16 (5Mx120)
Carrying amount – 1//1/16
Gain from change in fair value
Interest income (5M x 12%)
Total income
6,000,000
5,380,000
620,000
600,000
1,220,000
Answer 2: C
FV- 12/31/16 (5M x 106%)
Carrying amount per book- 12/31/16
Unrealized gain OCI
5,300,000
(5,171,940)
128,060
Problem 6
On January 1, 2016, Gleyka Company purchased 12% bonds with
face amount of 5,000,000 for 5,500,000 including transaction cost of
100,000. The bonds provide an effective yield of 10%.
The bonds are dated January 1, 2016 and pay interest annually on
December 31 of each year.
The bonds are quoted at 115 on December 31, 2016. The entity has
irrevocably elected to use the fair value option.
1. What amount of gain from change in fair value should be reported
for 2016?
a. 750,000
b. 250,000
c. 350,000
d. 0
2. What amount of interest income should be reported for 2016?
a. 600,000
b. 550,000
c. 660,000
d. 540,000
3. What is the carrying amount of the bond investment on December
31, 2016?
a. 5,750,000
b. 5,400,000
c. 5,500,000
d. 5,450,000
4. What total amount of income from the investments should be
reported in the income statement for 2016?
a. 540,000
b. 950,000
c. 890,000
d. 900,000
Answer 3: B
Interest income (5M x 8%)
Gain from change in fair value
Total income
400,000
92,000
492,000
Answer 1: C
Purchase price
Transaction cost
Adjusted cost
5,500,000
(100,000)
5,400,000
Market value
5,300,000
Market value (5M x 115%)
5,750,000
Answer 1: D
Date
interest interest discount
Receive income amortization
Jan 1
12/31/16 200,000 182,280
12/31/17 200,000 181,660
17,720
18,340
Interest income 1/1 to 6/30
7% x 5,208,000 x 1//2
Interest income 7/1 to 12/31
7% x 5,190,280 x ½
Total interest income for 2016
carrying amount
5,208,000
5,190,280
5,171,940
182,280
181,660
363,940
Adjusted cost
Gain from change in fair value
5,400,000
350,000
Answer 2: A
Interest income 12% x 5,000,000
600,000
Answer 3: A
Carrying amount equal to market value at year end
Answer 4: B
Gain from change in fair value
Interest income
Total income from investment
5,750,000
350,000
600,000
950,000
CHAPTER 43
INVESTMENT PROPERTY
Problem 1
Galore Company ventured into construction of condominium in
Makati which is rated as the largest state of the art structure.
The 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.
The construction of the condominium was completed and the
property was placed in service in January 1, 2016.
The cost of the construction was 50,000. The useful life of the
condominium is 25 years and the residual value is 5,000,000.
An independent valuation expert provided the following fair value at
each subsequent year end:
December 31, 2016
55,000,000
December 31, 2017
53,000,000
December 31, 2018
60,000,000
1. Under the cost model, what amount should be reported as
depreciation of investment property for 2016?
a. 1,800,000
b. 2,000,000
c. 2,200,000
d. 0
2. Under the fair value model, what amount should be recognized as
gain from change in fair value in 2016?
a. 5,000,000
b. 3,000,000
c. 7,000,000
Answer 1: A
Cost of investment property
Residual value
Depreciable amount
50,000,000
(5,000,000)
45,000,000
Annual depreciation 45,000,000/25
1,800,000
Answer 2: A
Fair value- 12/31/16
Cost- 1/1/16
Gain from change in fair value in 2016
55,000,000
50,000,000
5,000,000
Problem 2
Eragon Company and its subsidiaries own the following properties at
year end:
Land held by Eragon for undetermined use
5,000,000
A vacant building owned by Eragon and to be
leased out under an operating lease
Property held by a subsidiary of Eragon, a real
estate firm, in the ordinary course of business
Property held by Eragon for use in production
Building owned by a subsidiary of Eragon and for which
the subsidiary provides security and maintenance
service to the lessees
Land leased by Eragon to a subsidiary under an
operating lease
Property under construction for the use as
investment property
Land held for future factory site
Machinery leased out by Eragon to an unrelated party
under an operating lease
3,000,000
2,000,000
4,000,000
1,500,000
2,500,000
6,000,000
3,500,000
1,000,000
1. What is the total investment property that should be reported in the
consolidated statement of financial position of the parent and its
subsidiaries?
a. 12,500,000
b. 15,500,000
c. 10,500,000
d. 9,500,000
2. What total amount should be considered as owner-occupied
property and included in property, plant and equipment in the
consolidated statement of financial position?
a. 11,000,000
b. 13,000,000
c. 10,500,000
d. 8,500,000
Answer 1: B
Land held by Eragon for undetermined use
5,000,000
A vacant building owned by Eragon and to be
leased out under an operating lease
3,000,000
Building owned by a subsidiary of Eragon and for which
the subsidiary provides security and maintenance
service to the lessees
1,500,000
Property under construction for the use as
investment property
6,000,000
Total investment property
15,500,000
Answer 2: A
Property held by Eragon for use in production
Land leased by Eragon to a subsidiary under an
operating lease
Land held for future factory site
Machinery leased out by Eragon to an unrelated party
under an operating lease
Total PPE
4,000,000
2,500,000
3,500,000
1,000,000
11,000,000
Problem 3
Bona Company purchased an investment property on January 1, 2014
for 2,200,000. The property had a useful life of 40 years and on
December 31, 2016 had a fair value of 3,000,000.
On December 31, 2016, the property was sold for net proceeds of
2,900,000. The entity used the cost model to account for the
investment property.
1. What is the carrying amount of the investment property on
December 31, 2016?
a. 2,200,000
b. 2,035,000
c. 2,145,000
d. 2,090,000
2. What is the gain or loss to be recognize for the year ended
December 31, 2016 regarding the disposal of the property?
a. 865,000 gain
b. 810,000 gain
c. 100,000 loss
d. 700,000 gain
Answer 1: B
Cost- 1/1/14
Accumulated depreciation 2.2M/40 x 3
Carrying amount- 12/31/16
Answer 2: A
Sale price
Carrying amount- 12/31/16
Gain on disposal of property
2,200,000
(165,000)
2,035,000
2,900,000
2,035,000
865,000
Problem 4
Dayanara Company owned three properties which are classified as
investment property.
Initial Cost
FV-12/31/16 FV-12/31/17
Property 1
2,700,000
3,200,000
3,500,000
Property 2
3,450,000
3,050,000
2,850,000
Property 3
3,300,000
3,850,000
3,600,000
Each property was acquired three years ago with a useful life of 25
years. The accounting policy is to use the fair value model for
investment property.
What is the gain or loss to be recognized for the year ended
December 31, 2017?
a. 189,000 loss
b. 150,000 gain
c. 300,000 gain
d. 450,000 loss
Mikka Company acquired a building on January 1, 2016 for
9,000,000. At that date, the building had a useful life of 30 years.
On December 31, 2016, the fair value of the building was 9,600,000
and on December 31, 2017, the fair value was 9,900,000.
The building was classified as an investment property and accounted
for under the cost model.
1. What is the depreciation of the investment property and accounted
for 2016?
a. 300,000
b. 320,000
c. 330,000
d. 0
2. What is the carrying amount of the investment property on
December 31, 2017?
a. 8,400,000
b. 9,000,000
c. 9,900,000
d. 9,570,000
Answer 1: A
Depreciation for 2016 9,000,000/30
Answer 2: A
Cost- 1/1/16
Accumulated depreciation 9M/30 x 2
Carrying amounts- 12/31/17
300,000
9,000,000
(600,000)
8,400,000
Problem 6
On January 1, 2014, Crosswind Company owned an investment
property which had an original cost of 5,800,000 and useful life of 40
years.
On December 31, 2016, the fair value was 6,000,000 and on
December 31, 2017, the fair value was 5,900,000.
1. Under the fair value model, what is the expense to be recognize for
the year ended December 31, 2017?
a. 147,500
b. 100,000
c. 200,000
d. 0
2. Under the cost model, what is the expense to be recognized for the
year ended December 31, 2017?
a. 145,000
b. 150,000
c. 147,500
d. 0
Answer 1: B
Fair value model
Fair value- 12/31/17
Fair value- 12/31/16
Loss from change in fair value
5,900,000
6,000,000
(100,000)
Answer 2: A
Cost model
Depreciation expense for 2017 (5,800,000/40)
145,000
Answer: B
FV-12/31/16 FV-12/31/17 Gain (loss)
Property 1
3,200,000
3,500,000
300,000
Property 2
3,050,000
2,850,000
(200,000)
Property 3
3,850,000
3,600,000
(250,000)
Net loss from change in fair value
(150,000)
Problem 5
d. 0
Problem 7
Paradise Company’s accounting policy with respect to investment
property is to measure the property at fair value at the end of each
reporting period.
One investment property was measured at 8,000,000 on December
31, 2016.
The property had been acquired on January 1, 2016 for a total of
7,600,000, made up of 6,900,000 paid to the vendor, 300,000 paid to
the local authority as a property transfer tax and 400,000 paid to
professional advisers.
The useful life of the property is 40 years.
What is the amount of gain to be recognized in profit or loss for the
year ended December 31, 2016 in respect of the investment property?
a. 400,000
b. 700,000
c. 800,000
d. 590,000
Answer: A
FV
Acquisition cost
Gain from change in fair value
8,000,000
7,600,000
400,000
Payment to vendor
Property transfer tax
Payment to professional advisers
Total acquisition cost
6,900,000
300,000
400,000
7,600,000
Problem 8
Rhino Company, a real estate entity, had a building with a carrying
amount of 20,000,000 on December 31, 2016. The building was used
as offices of the entity’s administrative staff.
On December 31, 2016, the entity intended to rent out the building to
independent third parties. The staff will be moved to a new building
purchased early in 2016.
On December 31, 2016, the original building had a fair value of
35,000,000.
On December 31, 2016, the entity also had land that was held for sale
in the ordinary course of business.
The land had a carrying amount of 10,000,000 and fair value of
15,000,000 on December 31, 2016.
On such date, the entity decided to hold the land for capital
appreciation.
The accounting policy is to carry all investment property at fair value.
1. On December 31, 2016, what amount should be recognized in
revaluation surplus as a result of transfer of the building to
investment property?
a. 20,000,000
b. 35,000,000
c. 15,000,000
d. 0
2. On December 31, 2016, what amount should be recognized in
profit or loss as a result of transfer of the land to investment property?
a. 15,000,000
b. 10,000,000
c. 5,000,000
Answer 1: C
FV of building- 12/31/16
Carrying amount of building- 12/31/16
Revaluation surplus
35,000,000
(20,000,000)
15,000,000
Answer 2: C
FV of land- 12/31/16
Carrying amount of land- 12/31/16
Gain on reclassification
15,000,000
(10,000,000)
5,000,000
CHAPTER 44
FUND AND OTHER INVESTMENTS
Problem 1
Fall Company provided the following information in relation to a
bond sinking fund that was placed in trust as required by the
underwriter:
Bond dinking fund, 1/1/16
4,500,000
Additional investment in 2016
900,000
Dividends on investments
150,000
Interest revenue
300,000
Administration costs
50,000
Carrying amount of bonds payable
8,000,000
What is the carrying amount of the bond sinking fund on December
31, 2016?
a. 5,850,000
b. 5,800,000
c. 5,750,000
d. 5,400,000
Answer: B
Sinking fund- 1/1/16
Add: Additional investment in 2016
Dividends on investment
Interest revenue
Total
Less: Administration costs
Sinking fund- 12/31/16
4,500,000
900,000
150,000
300,000 1,350,000
5,850,000
(50,000)
5,800,000
Problem 2
In January 2016, Cameron Company established a sinking fund in
connection with an issue of bonds due in 2018. A bank was appointed
as independent trustee of the fund. On December 31, 2016, the trustee
held 365,000 cash in the sinking fund account representing 300,000
in annual deposits to the fund, and 65,000 of interest earned on thoe
deposits.
How should the sinking fund be reported on December 31, 2016?
a. No part of the sinking fund should appear in Cameron’s statement
of financial position
b. 65,000 should appear as a current asset
c. 365,000 should appear as a current asset
d. 365,000 should appear as a non-current asset
Answer: D
Problem 3
On March 15, 2016, Ashe Company adopted a plan to accumulate
5,000,000 by September 1, 2020. The entity plans to make four equal
annual deposits to a fund that will learn interest at 10% compounded
annually. The entity made the first deposit on September 1, 2016.
FV of 1 at 10% for 4 periods
1.46
FV of an ordinary annuity of 1 at 10% for 4 periods
4.64
FV of an annuity of 1 in advance at 10% for 4 periods
5.11
What is the annual deposit to the fund?
a. 1,250,000
b. 1,077,500
c. 978,500
d. 730,000
Answer: C
5,000,000/5.11
987,500
Problem 4
On January 1, 2016, Beal Company adopted a plan to accumulate
funds for a new plant building to be erected beginning July 1, 2021,
at an estimated cost of 6,000,000.
The entity 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, 2016.
Present value of 1 at 8% for 5 periods
.68
Present value of 1 at 8% for 6 periods
.63
Future value of an ordinary annuity of 1 at 8% for 5 periods
5.87
Future value of an annuity of 1 in advance at 8% for 5 periods 6.34
What is the annual deposit to the fund?
a. 1,022,150
b. 816,000
c. 946,400
d. 756,000
Answer: C
Annual deposit 6M/6.34
946,400
Problem 5
On January 1, 2016, Mandaue Company adopted a plan to
accumulate 5,000,000 by January 1, 2021.
The entity plans to make 5 equal deposits that will earn interest at 9%
compounded annually.
The entity made the first deposits on December 31, 2016.
The future value of an ordinary annuity of 1 at 9% for 5 periods is
5.98 and the future value of an annuity due of 1 at 9% for 5 periods is
6.52.
What amount must be deposited annually at the compound interest to
accumulate the desired amount?
a. 766,871
b. 836,120
c. 664,894
d. 609,756
Answer: B
Annual deposit 5M/5.98
836,120
Problem 6
Cebu Company made an investment of 5,000,000 at 10% per annum
compounded annually for 6 years. Round off future value factor to
two decimal places.
What is the amount of the investment on the date of maturity?
a. 8,850,000
b. 8,050,000
c. 9,750,000
d. 5,500,000
Answer: A
Principal amount
Multiply by FV of 1 for 6 periods at 10%
Future value at maturity
5,000,000
1.77
8,850,000
Problem 7
On January 1, 2016, Duripan Company invested 1,000,000 in 5 year
certificate of deposit at 8% interest.
The market interest rate at maturity is 10%. The entity does not elect
the fair value option in reporting financial asset.
Future amount of 1 at 5% for 5 periods
1.469
Future amount of 1 at 10% for 5 periods
1.611
Future amount of an ordinary annuity of 1 at 8% for 5 periods 5.867
Future amount of an annuity of 1 in advance at 10% for 5 periods 6.105
What is the maturity value of the certificate of deposit?
a. 5,867,000
b. 1,611,000
c. 1,469,000
d. 6,105,000
Answer: C
Investment in certificate of deposit
Multiply by future amount of 1 at 8% for 5 periods
Maturity value
1M
1.469
1,469,000
Problem 8
Mactan Company made investment for 5 years at 12% per annum
compounded semi-annually to equal 7,160,000 on the date of
maturity. Round off future value factor to two decimal places.
What amount must be deposited now at the compound interest to
provide the desired sum?
a. 4,000,000
b. 4,068,000
c. 4,236,680
d. 3,768,420
Answer: A
Future value at maturity
7,160,000
Divide by future value of 1 for 10 periods at 6% 1.79
Initial investment
4,000,000
Problem 9
Ball Company purchased a 1,000,000 ordinary life insurance policy
on its president. Ball Company is the beneficiary under the life
insurance policy. The policy year and the entity’s accounting year
coincide:
The entity provided the following data for the year ended December
31, 2016:
Cash surrender value, January1
43,500
Cash surrender value, December 31
54,000
Annual advance premium paid January 1
20,000
Dividend received July 1
3,000
What amount should be reported as life insurance expense for 2016?
a. 17,000
b. 20,000
c. 6,500
d. 9,500
Problem 11
Slovenia Company insured the life of its president for 2,000,000, the
entity being the beneficiary of an ordinary life insurance policy. The
annual premium is 80,000 and the policy is dated January 1, 2013.
The cash surrender values are 15,000 on December 31, 2015 and te
19,000 on December 31, 2016.
1. What is the gain on life insurance settlement?
a. 1,962,000
b. 2,000,000
c. 1,961,000
d. 1,981,000
2. What is the life insurance expense for 2016?
a. 80,000
b. 60,000
c. 77,000
d. 57,000
Answer: C
Annual premium paid
Less: Increase in cash surrender value 10,500
Dividend received
3,000
Life insurance expense
Answer 1: A
Cash surrender value-12/31/15
CSV from 1/1 to 10/1/16 4,000 x 9/12
Cash surrender value- 101/16
15,000
3,000
18,000
Face of policy
Cash surrender value
Unexpired premium (80k x 3/12)
Gain on life insurance settlement
2,000,000
(18,000)
(20,000)
1,962,000
Answer 2: D
Annual premium paid on Jan 1, 2016
Unexpired premium on 10/1/16
Increase in CSV from 1/1 to 10/1
Life insurance expense for 2016
80,000
(20,000)
(3,000)
57,000
Cash surrender value- 12/31
Cash surrender value- 1/1
Increase in cash surrender value
20,000
13,500
6,500
54,000
43,500
10,500
Problem 10
Chain Company purchased a 1,000,000 life insurance policy on its
president, of which Chain Company is the beneficiary.
The entity provided the following information regarding the policy
for the year ended December 31, 2016:
Cash surrender value, 1/1
87,000
Cash surrender value, 12/31
108,000
Annual advance premium paid Jan 1
40,000
During 2016, dividend of 6,000 was applied to increase the cash
surrender value of the policy.
What amount should be reported as life insurance expense for 2016?
a. 40,000
b. 25,000
c. 19,000
d. 13,000
Answer: C
Premium paid
Less: Increase in cash surrender value
Life insurance expense
40,000
21,000
19,000
Cash surrender value Dec. 31
Cash surrender value Jan 1
Increase in cash surrender value
108,000
87,000
21,000
Problem 12
Grand Company reported the following accounts at the end of the
reporting period:
Petty cash fund
10,000
Payroll fund
100,000
Sinking fund cash
500,000
Sinking fund securities
1,000,000
Accrued interest receivable- sinking fund securities 50,000
Plant expansion fund
600,000
Cash surrender value
150,000
Investment property
3,000,000
Advances to subsidiary
200,000
Investment in associate
2,000,000
What total amount should be reported as non-current investments at
the end of the reporting period?
a. 7,500,000
b. 4,500,000
c. 7,450,000
d. 2,300,000
Answer: A
Sinking fund cash
Sinking fund securities
500,000
1,000,000
Accrued interest receivable- sinking fund securities 50,000
Plant expansion fund
600,000
Cash surrender value
150,000
Investment property
3,000,000
Advances to subsidiary
200,000
Investment in associate
2,000,000
Total non-current investments
7,500,000
CHAPTER 39
INVESTMENT IN ASSOCIATE
COMPREHENSIVE PROBLEMS
On January 1, 2016, Marissa Company acquired 25% of the
outstanding shares of an investee at a total cost of 7,000,000. At the
time, the carrying amount of net assets of the investee totalled
24,000,000.
The investee owned equipment with 5-year remaing life with a fair
value of 2,000,000 more than the carrying amount. The investee
owned land with a fair value of 1,000,000 more than the carrying
amount.
The investee earned net income of 5,000,000 evenly during the
current year. The investee declared and paid cash dividend of
3,000,000 to shareholders at year end. The fair value of the
investment at year end is 7,500,000.
1. What is the goodwill arising from the investment in associate?
a. 750,000
b. 500,000
c. 250,000
d. 0
2. What is the investment income for 2016?
a. 1,250,000
b. 1,150,000
c. 900,000
d. 650,000
3. What is the carrying amount of the investment on December 31,
2016?
a. 7,400,000
b. 7,500,000
c. 7,000,000
d. 8,150,000
Answer 1: C
Acquisition cost
Carrying amount of net assets acquired
25% x 24,000,000
Excess cost
Attributable to equipment 25% x 2M
Attributable to the land 25% x 1M
Good will
7,000,000
6,000,000
1,000,000
(500,000)
(250,000)
250,000
Answer 2: B
Share in net income 25% x 5M
1,250,000
Amortization of excess attributable to equipment
500,000/5
(100,000)
Investment income
1,150,000
Answer 3: A
Acquisition cost
Share in net income
Share in cash dividend
7,000,000
1,250,000
(750,000)
Amortization of excess attributable to equipment
500,000/5
(100,000)
Carrying amount- 12/31/16
7,400,000
Problem 2
Problem 2
Pare Company purchased 10% of Tot Company’s 100,000
outstanding ordinary shares on January 1, 2016 for 500,000.
On December 31, 2016, Pare purchased an additional 20,000 shares
of Tot for 1,500,000. Tot had not issued any additional shares during
2016.
The investee reported earnings of 3,000,000 for 2016.
The fair value of the 10% interest is 900,000 on December 31, 2016.
What is the carrying amount of the investment in associate on
December 31, 2016?
a. 2,300,000
b. 2,000,000
c. 2,400,000
d. 2,900,000
Answer: C
FV of 10% interest
Cost of 12/31 20,000/100,000= 20%
Carrying amount- 12/31/16
900,000
1,500,000
2,400,000
Problem 3
On January 1, 2016, Forensic Company acquired a 10% interest in an
investee for 3,000,000. The investment was accounted for using the
cost method.
On January 1, 2017, the entity acquired a further 15% interest in the
investee for 6,750,000.
On such date, the carrying amount of the net assets of the investee
was 36,000,000 and the fair value of the 10% interest was 4,500,000.
The fair value of the net assets of the investee is equal to carrying
amount except for equipment whose fair value exceeds the carrying
amount except for an equipment whose fair value exceeds carrying
amount by 4,000,000. The equipment has a remaining life of 5 years.
The investee reported net income of 8,000,000 for 2017 and paid
dividend 5,000,000 on December 31, 2017.
1. What is the gain on re-measurement to equity to be recognized for
2017?
a. 1,500,000
b. 4,500,000
c. 2,250,000
d. 0
2. What is the goodwill arising from the acquisition on January 1,
2017?
a. 2,250,000
b. 1,250,000
c. 1,350,000
d. 350,000
3. What is the carrying amount of the investment of the investment in
associate on December 31, 2017?
a. 11,250,000
b. 11,800,000
c. 12,000,000
d. 14,300,000
Answer: A
FV of 10% interest
4,500,000
Carrying amount of 10% interest
Gain on re-measurement to equity
3,000,000
1,500,000
Answer 2: B
FV of 10% interest
Cost of additional 15% interest
Total cost of investment
FV of net assets acquired 25% of 36,000,000
Excess of cost
Excess attributable to equipment 25% x 4M
Goodwill
4,500,000
6,750,000
11,250,000
9,000,000
2,250,000
1,000,000
1,250,000
Answer 3: B
Total cost of investment- 1/1/17
Share in net income 25% x 8M
Share in cash dividend 25% x 5M
Amortization of excess (1M/5)
Carrying amount- 12/31/17
11,250,000
2,000,000
(1,250,000)
(200,000)
11,800,000
Problem 4
On January 1, 2016, Mega Company acquired 10% of the outstanding
ordinary shares of Penny Company for 4,000,000. The investment
was appropriately accounted for under the cost method.
On January 1, 2017, Mega gained the ability to exercise significant
influence over financial and operating control of Penny by acquiring
an additional 20% of Penny’s outstanding ordinary shares for
10,000,000.
The fair value Penny’s net assets equalled carrying amount. The fair
value of the 10% interest on January 1, 2017 was 6,000,000.
For the years ended December 31, 2016 and 2017, the investee
reported the following:
2016
2017
Dividend paid
2,000,000
3,000,000
Net income
6,000,000
6,500,000
1. What is the investment income in 2016?
a. 200,000
b. 400,000
c. 600,000
d. 300,000
2. What is the investment income in 2017?
a. 1,300,000
b. 1,950,000
c. 1,000,000
d. 1,900,000
3. What is the carrying amount of the investment in associate on
December 31, 2017?
a. 16,000,000
b. 17,050,000
c. 15,050,000
d. 16,700,000
Answer 1: A
Interest income for 2016 equal to the dividend received in 2016
10% x 2,000,000
200,000
Answer 2: B
Investment income for 2017
30% x 6,500,000
1,950,000
Answer 3: B
Fair value of 10% interest
6,000,000
Cost of 20% interest
10,000,000
Total cost of investment- 1/1/17
16,000,000
Share in net income for 2017 (30% x 6,500,000) 1,950,000
Share in cash dividend for 2017 (30% x 3M)
(900,000)
Carrying amount- 12/31/17
17,050,000
Problem 5
Seiko Company had 100,000 ordinary shares outstanding. Hlobe
Company acquired 30,000 shares of Seiko for 120 per share in 2014
representing 30% interest.
Change in retained earnings for Seiko for 2016 and 2017 are as
follows:
Retained earnings (deficit) 1/1/16
(500,000)
Net income for 2016
700,000
Retained earnings, 12/31/16
200,000
Net income for 2017
800,000
Cash dividend paid on 12/31/17
(400,000)
Retained earnings, December 31, 2017
600,000
What is the carrying amount of the investment in associate on
December 31, 2017?
a. 3,600,000
b. 3,930,000
c. 3,780,000
d. 4,080,000
Answer: C
Acquisition cost
Share in retained earnings- 12/31/17
30% x 600,000
Carrying amount of investment- 12/31/17
3,600,000
180,000
3,780,000
Problem 6
Chur Company acquired a 40% interest in Flim Company for
1,700,000 on January 1, 2016. The shareholder’s equity of Flim
Company on January 1 and December 31, 2016 is presented below.
January 1
December 31
Share capital
3,000,000
3,000,000
Revaluation surplus
1,300,000
Retained earnings
1,000,000
1,500.000
On January 1, 2016, all identifiable assets and liabilities of Flim
Company were recorded at fair value. Flim Company reported profit
of 7,000,000 after income tax expense of 300,000 and paid dividend
of 200,000 to shareholders during the current year.
The revaluation surplus is the result of the revaluation of land
recognized by Flim Company on December 31, 2016. Additionally,
depreciation is provided by Flim Company on the diminishing
balance method whereas Chur Company used the straight line. Had
Flim Company used the straight line, the accumulated depreciation
would be increased by 200,000.
What is the carrying amount of the investment in associate on
December 31, 2016?
a. 2,420,000
b. 1,700,000
c. 1,900,000
d. 2,320,000
Answer: A
Acquisition cot
Net assets acquired (40% x 4M)
Goodwill- not amortized
1,700,000
1,600,000
100,000
Acquisition cost
Net income 40% x 700,000
Cash dividend 40% x 200,000
Revaluation surplus 40% x 1,300,000
Carrying amount of investment- 12/31/16
1,700,000
280,000
(80,000)
520,000
2,420,000
Problem 7
Aye Company acquired 30% of the issued share capital of Bee
Company for 1,000,000 on January 1, 2016. The accumulated profit
of Bee Company on this date totalled 2,000,000. The entities
prepared their financial statements on December 31 of each year.
The abbreviated statement of financial position of Bee Company on
December 31, 2017 is as follows:
Sundry net assets
6,000,000
Share capital, 10 par
1,000,000
Share premium
2,000,000
Retained earnings
3,000,000
The fair value of the net assets of Bee Company at the date of
acquisition was 5,000,000.
The recoverable amount of the net assets of Bee Company is
7,000,000 on December 31, 2017.
What is the carrying amount of the investment in associate on
December 31, 2017?
a. 1,800,000
b. 2,100,000
c. 1,500,000
d. 1,000,000
Answer: A
Investment in associate 30% x 6,000,000
1,800,000
Problem 8
Grant Company acquired 30% of South Company’s voting share
capital for 2,000,000 on January 1, 2016. Grant’s 30% interest in
South gave Grant the ability to exercise significant influence over
South’s operating and financial policies. During 2016, South earned
800,000 and paid dividend of 500,000. South reported earnings of
1,000,000 for the six months ended June 30, 2017, and 2,000,000 for
the year ended December 31, 2017. On July 1, 2017, Grant sold half
of the investment in South for 1,500,000 cash. South paid dividend of
600,000 on October 1, 2017.
The fair value of the retained investment is 1,600,000 on July 1, 2017
and 1,800,000 on December 31, 2017. The retained investment is to
be held as financial asset at fair value through profit or loss.
1. Before income tax, what amount should be included in the 2016
income statement as a result of the investment?
a. 150,000
b. 240,000
c. 500,000
d. 800,000
2. On December 31, 2016, what is the carrying amount of the
investment in associate?
a. 2,000,000
b. 2,090,000
c. 2,240,000
d. 2,300,000
3. In the income statement for 2017, what amount should be reported
as gain from sale of investment?
a. 245,000
b. 305,000
c. 350,000
d. 455,000
4. In the income statement for 2017, what amount should be reported
as gain from re-measurement of the retained investment?
a. 605,000
b. 405,000
c. 710,000
d. 910,000
Answer 1: B
Share in 2016 net income 30% x 800,000
240,000
Answer 2: B
Acquisition cost, 1/1/16
Add: Share in 2016 net income
Total
Les: Share in 2016 dividend 30% x 500,000
Carrying amount of investment, 12/31/16
2,000,000
240,000
2,240,000
150,000
2,090,000
Answer 3: B
Carrying amount of investment, 12/31/16
Add: Share in net 1/1 to 6/30/17
30% x 1,000,000
Carrying amount of investment 1/30/17
2,090,000
300,000
2,390,000
Sale price
Cost of investments sold
Gain from sale of investment
1,500,000
(1,195,000)
305,000
Answer 4: B
Fair value- 1/1/17
Carrying amount of retained investment
Gain from re-measurement
1,600,000
1,195,000
405,000
FV – 12/31/17
FV -7/1/17
Unrealized gain on financial asset
1,800,000
1,600,000
200,000
Problem 9
On January 1, 2016, Marie Company purchased 40% of the
outstanding ordinary shares of Lester Company paying 2,560,000
when the carrying amount of the net assets of Lester equalled
5,000,000.
The difference was attributed to equipment which had carrying
amount of 1,200,000 and a fair value of 2,000,000 and to building
with a carrying amount of 1,000,000 and a fair value of 1,600,000.
The remaining useful life of the equipment and building was 4 years
and 12 years respectively.
During 2016, Lester Company reported net income of 1,600,000 and
paid dividends of 1,000,000.
1. What is the excess of acquisition cost over carrying amount?
a. 560,000
b. 320,000
c. 240,000
d. 0
2. What is the investment income for 2016?
a. 640,000
b. 540,000
c. 560,000
d. 500,000
3. What is the carrying amount of the investment in associate on
December 31, 2016?
a. 2,250,000
b. 2,700,000
c. 2,800,000
d. 3,050,000
Answer 1: A
Acquisition cost
Net assets acquired 40% x 5,000,000
Excess of cost over carrying amount
Attributable to equipment 40% x 800,000
Attributable to building 40% x 600,000
Answer 2: B
Share in net income 40% x 1,600,000
Amortization of excess:
Equipment 320,000/4
Building 240,000/12
Investment income
Answer 3: C
Acquisition cost
Investment income
Share in cash dividend 40% x 1,000,000
Carrying amount- 12/31/16
2,560,000
2,000,000
560,000
320,000
240,000
560,000
A
1. Depending on the business model for managing financial assets, an
entity shall classify financial assets subsequent to initial recognition
at
a. Fair value through profit and loss
b. Amortized cost
c. Fair value through comprehensive income
d. All of these are used in measuring financial asset
Answer: D
2. How does the standard distinguish between the measurement
methods to be used?
a. By reviewing the business model and the risks and rewards of the
transaction.
b. By reviewing the business model and the contractual cash flow
characteristics of the instrument.
c. By reviewing the realizability and the contractual cash flow
characteristics of the instrument.
d. By reviewing the realizability of the instrument and risks and
rewards of ownership
Answer: B
640,000
(80,000)
(20,000)
540,000
2,560,000
540,000
(400,000)
2,700,000
Problem 10
On January 1, 2013, Bart Company acquired as a long term
investment for 7,000,000, a 40% interest in Hall Company when the
fair value of Hall’s net assets was 17,500,000. Hall Company
reported the following net losses:
2013
5,000,000
2014
7,000,000
2015
8,000,000
2016
4,000,000
On January 1, 2015, Bart Company made cash advances of 2,000,000
to Hall Company. On December 31, 2016, it is not expected that Bart
Company will provide further financial support for Hall Company.
What amount should be reported as loss from investment for 2016?
a. 1,600,000
b. 4,000,000
c. 1,000,000
d. 600,000
Answer: C
Original cost
Cash advances
Total investment
Net loss from 2013 to 2015 40% x 20M
Carrying amount of investment
THEORIES
FINANCIAL ASSET AT FAIR VALUE
7,000,000
2,000,000
9,000,000
(8,000,000)
1,000,000
3. Which of the following is not a characteristic of financial asset
held for trading?
a. It is acquired principally for the purpose of selling or repurchasing
it in the near term.
b. On initial recognition, it is part of a portfolio of financial assets
that are managed together and for which there is evidence of a recent
actual pattern of short term profit taking.
c. It is derivative that it is not designated as an effective hedging
instrument.
d. It is derivative that it is designated as an effective hedging
instrument
Answer: D
4. If all of the following financial assets shall be measured at fair
value through profit or loss, except
a. Financial assets held for trading
b. Financial assets designated on initial recognition as at fair value
through profit or loss
c. Investments in quoted equity instruments
d. Financial assets at amortized cost
Answer: D
5. A debt investment shall be measured at subsequently at amortized
cost
a. By irrevocable election
b. When the debt investment is manage and evaluated on a document
risk-management strategy.
c. When the debt investment is held for trading
d. When the business model is to collect contractual cash flows that
are solely payments of principal and interest.
Answer: D
6. The irrevocable election to present subsequent changes in fair
value in other comprehensive income is applicable only to
a. Investment in equity instrument that is not held for trading.
b. Investment in equity instrument that is held for trading.
c. Financial asset measured at amortized cost.
d. Financial asset measured at fair value.
Answer: A
7. A debt investment shall be measured at fair value through other
comprehensive income
a. When the debt investment is held for trading.
b. When the debt investment is not held for trading.
c. By irrevocable designation
d. When the business model is to collect contractual cash flows that
are solely payments of principal and interest and also to sell the
financial asset.
Answer: D
2
1. Under the IFRS, the presumption is that equity investments are
a. Held for trading
b. Held to profit from price changes
c. Held for trading and held to profit from price changes
d. Held as financial assets at fair value through other comprehensive
income
Answer: C
2. Equity investments irrevocably accounted for at fair value through
other comprehensive income
a. Non-trading investments where an entity has holdings o less than
20%.
b. Trading investments where an entity has holdings of less than 20%.
c. Investments where an entity has holdings if between 20% and 50%.
d. Investments where an entity has holdings of more than 50%.
Answer: A
3. Entities are required to measure financial asset based on all of the
following except
a. The business model for managing financial asset.
b. Whether the financial asset is a debt or an equity investment
c. The contractual cash flow characteristics of the financial asset.
d. All of the choices are required.
Answer: B
4. Debt investment that meet the business model and contractual cash
flow tests are reported at
a. Net realizable value
b. Fair value
c. Amortized cost
d. The lower of amortized cost and fair value
Answer: C
5. Debt investments not held for collection are reported at
a. Amortized cost
b. Fair value
c. The lower of amortized cost and fair value
d. Net realizable value
Answer: B
6. What financial assets are assessed for impairment?
a. Equity investments at FVPL
b. Equity investments at FVOCI
c. Debt investments at FVPL
d. Debt investments at amortized cost and debt investments at FVOCI
Answer: D
7. Impairments of debt investments are
a. Based on discounted contractual cash flows
b. Recognized as component of other comprehensive income
c. Based on fair value for non-trading investment and on negotiated
value for held for collection investments
d. Evaluated at each reporting date for every held for collection
investment
Answer: D
8. An impairment loss is the excess of the carrying amount of the
investment over the
a. Expected cash flows
b. Present value of the expected cash flows
c. Contractual cash flows
d. Present value of the contractual cash flows
Answer: B
3
1. Reclassification of investments between categories are accounted
for
a. Prospectively, at the end of the period after the change in the
business model
b. Prospectively, at the beginning of the period after the change in the
business model
c. Retrospectively, at the end of the period after the change in the
business model
d. Retrospectively, at the beginning of the period after the change in
the business model
Answer: B
2. Transfers of investments between categories
a. Result in omitting recognition of fair value in the year of the
transfer
b. Are accounted for at fair value for all transfers
c. Are not recognized if investments are transferred from held for
collection to fair value
d. Should always affect net income
Answer: B
3. When a debt investment at amortized cost is reclassified to FVPL,
the difference between the previous carrying amount and fair value at
reclassification date is
a. Recognized in profit and loss
b. Not recognized
c. Recognized in other comprehensive income
d. Included in retained earnings
Answer: A
4. When a debt investment at FVPL is reclassified to amortized cost,
what is the new carrying amount at amortized cost?
a. Fair value at reclassification date
b. Face amount of the debt investment
c. Present value of the contractual cash flows
d. Original carrying amount of the debt investment
Answer: A
5. Which statement is true when a debt investment at amortized cost
is reclassified to FVOCI?
a. The debt investment is measured at fair value at reclassification
date.
b. The difference between the previous carrying amount and fair
value at reclassification date is recognized in other comprehensive
income.
c. The original effective rate is not adjusted.
d. All of these statements are true.
Answer: D
6. Which statement is true when a debt investment at FVOCI is
reclassified at amortized cost?
a. The fair value at reclassification date becomes the new carrying
amount.
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 original effective rate is not adjusted.
d. All of these statements are true.
Answer: D
7. When a financial asset at FVPL is reclassified to FVOCI, the new
carrying amount is equal to
a. Fair value at reclassification date
b. Original carrying amount
c. Present value of contractual cash flow
d. Present value of contractual cash flow representing principal
Answer: A
8. Which statement is true when a financial asset at FVOCI is
reclassified to FVPL?
a. The financial asset continues to be measured at fair value.
b. The fair value at reclassification date becomes the new carrying
amount
c. The cumulative gain or loss previously recognized in OCI is
reclassified to profit or loss.
d. All of these statements are true.
Answer: D
a. The price of the asset should be adjusted for transaction cost
b. The fair value of the asset should be adjusted for cost of disposal
c. The fair value is based upon an entry price to purchase the asset.
d. The price should be adjusted for cost to transport the asset to the
principal market
Answer: D
4. Which of the following would meet the qualifications as market
participants?
a. A liquidation market in which sellers are compelled to sell.
b. A subsidiary of the reporting unit interested in purchasing assets
similar to those being valued.
c. An independent entity that is knowledgeable about the asset
d. A broker or dealer that wishes to establish new market for the
asset.
Answer: C
5. Which of the following is an assumption used in fair value
measurement?
a. The asset must be in use.
b. The asset must be considered in exchange.
c. The most conservative estimate must be used.
d. The asset is in the highest and best use.
Answer: D
6. The fair value at initial recognition is
a. The price to acquire the asset
b. The price paid to acquire the asset less transaction cost.
c. The price paid to transfer or sell the asset.
d. The carrying amount of the asset acquired.
Answer: A
7. Which of the following is not a valuation technique used in fair
value measurement?
a. Income approach
b. Residual value approach
c. Market approach
d. Cost approach
Answer: B
4
1. Fair value of an asset should be based upon
a. The replacement cost of an asset
b. The price that would be received to sell the asset at the
measurement date.
c. The original cost of the asset plus an adjustment for obsolescence.
d. The price that would be paid to acquire cost.
Answer: B
8. Valuation techniques for fair value that include the Black-Scholes
formula, a binomial model, or discounted cash flow are examples of
which valuation technique?
a. Income approach
b. Market approach
c. Cost approach
d. Exit value approach
Answer: A
2. Which of the following describes a principal market for
establishing fair value of an asset?
a. The market value that has the greatest volume and level of activity
for the asset
b. Any broker or dealer market that buys or sells the asset
c. The most observable market in which the price of the asset is
minimized.
d. The market in which the amount received would be maximized.
Answer: A
9. The market approach for measuring fair value requires which of
the following?
a. Present value of future cash flows
b. Prices and other relevant information of transactions from identical
or comparable assets
c. The price to replace the service capacity of the asset
d. The weighted average of the present value of future cash flows
Answer: B
3. Which statement is true for measuring an asset at fair value?
10. Which of the following would be considered Level 2 input for fair
value measurement?
a. Quoted market price on a stock exchange for an identical asset
b. Quoted market price available from a business broker for a similar
asset
c. Historical performance and return on the investment
d. All of these would be considered Level 2 input for fair value
measurement
Answer: B
5
1. It is the date on which the stock and transfer book of the entity is
closed for registration. Only those shareholders registered as of this
date are entitled to receive dividends.
a. Date of declaration
b. Date of record
c. Date of payment
d. Date of mailing the dividend check
Answer: B
2. At which of the following dates has the shareholder theoretically
realized income from dividend?
a. The date the dividend is declared
b. The date of record
c. The date of the dividend check is mailed by the entity
d. The date the dividend check is received by the shareholder
Answer: A
3. Property dividends are recorded
a. As dividend income at carrying amount of the property
b. As dividend income at fair value of the property
c. As return of investment and therefore credited to investment
account
d. By means of memorandum only
Answer: B
4. Liquidating dividends are credited to
a. Income
b. Retained Earnings
c. Investment account
d. Share capital
Answer: C
5. What is the effect of stock dividend of the same class?
a. Increase in investment account and increase in cost per share
b. Decrease in investment account and decrease in cost per share
c. No effect on investment account but decrease in cost per share
d. No effect on investment account but increase in cost per share
Answer: C
6. When stock dividends of different class are received
a. No formal entry is made but only a memorandum
b. Cash is debited and dividend income is credited
c. A new investment account is debited and the original investment
income account is credited
d. A new investment account is debited and the original investment
account is credited
Answer: D
7. Share received in lieu of cash dividend are recorded as
a. Income at fair value of the shares received
b. Income at par value of the shares received
c. Income at cash dividend that would have been received
d. Stock dividends
Answer: A
8. Cash received in lieu of stock dividends is accounted for as
a. Dividend income
b. Return of investment
c. Partly dividend income and partly return of investment
d. If the stock dividends are received and subsequently sold at the
cash received and gain or loss is recognized.
Answer: D
9. What is the effect of share split up?
a. Increase in number of shares and increase in cost per share
b. Decrease in number of shares and decrease in cost per share
c. Increase in number of shares and decrease in cost per share
d. Decrease in number of shares and increase in cost per share
Answer: C
10. An investor owns 10% of the ordinary shares of an investee
throughout the year. The investee has no preference shares
outstanding. What is the right of the investor?
a. To be paid 10% of the investee’s net income in cash each year
b. To receive dividend equal to 10% of the par value each year
c. To receive dividend equal to 10% of the total dividend paid by the
investee for the year to shareholders
d. To keep investee from issuing any additional shares unless the
investor is willing to buy 10% of the newly issued shares
Answer: C
INVESTMENT IN ASSOCIATE
1. It is an entity over which the investor has significant influence.
a. Associate
b. Investee
c. Venture capital organization
d. Mutual fund
Answer: A
2. Which statement best describes “significant influence”?
a. The holding of significant proportion of the share capital in another
entity
b. The contractually agreed sharing of control over an economic
entity.
c. The power to participate in the financial and operating policy
decisions of an entity
d. The mutual sharing in the risks and benefits of combined entity
Answer: C
3. In which of the following statement is true concerning significant
influence?
a. If an investor holds, directly or indirectly, less than 20% of the
voting power of the investee it is presumed that the investor does not
have significant influence, unless such influence can be clearly
demonstrated.
b. If an investor holds, directly or indirectly, 20% or more of the
voting power of the investee, it is presumed that the investor does not
have significant influence unless it can be clearly demonstrated that
this is not the case.
c. A substantial or majority ownership by another investor does not
necessarily preclude an investor from having significant influence.
d. All of these statements are true about significant influence.
Answer: D
4. When an entity holds between 20% and 50% of the voting power
of an investee, which of the following statements is true?
a. The investor must use the equity method.
b. the investor should use the equity method unless circumstances
indicate that it is unable to exercise significant influence over the
investee.
c. The investor must use the fair value method unless it can be clearly
demonstrated that the investor has significant influence over the
investee.
d. The investor must use the fair value method.
Answer: B
5. Which of the following statement is incorrect concerning the
equity method?
a. The investment is initially recorded at cost
b. The investment in associate is increased or decreased by the
investor’s share of the profit or loss of the investee after the date of
acquisition.
c. The investor’s share of the profit or loss of the investee is
recognized in the investor’s profit or loss.
d. Distributions received from the investee are accounted for as
dividend income
Answer: D
6. Goodwill arising from an investment in associate is
a. Included in the carrying amount of the investment and amortized
over the useful life.
b. Included in the amount of the carrying amount of the investment an
not amortized
c. Charged to retained earnings
d. Charged to expense immediately
Answer: B
7. If an associate has outstanding cumulative preference shares held
by outside interests, the investor computes share of profit or loss
a. After adjusting for preference dividends which were actually paid
during the year.
b. Without regard for preference dividends
c. After adjusting for preference dividends only when declared
d. After adjusting for preference dividends, whether or not the
dividend has been declared
Answer: D
8. An investor shall discontinue the use of the equity method when
a. The investor ceases to have significant influence over an associate
b. The associate operates under severe long term restrictions
c. The investor ceases to have control over an associate
d. The business activities of the investor and associate are dissimilar
Answer: A
9. When an investment ceases to be an associate and is accounted for
in accordance with IFRS 9, the fair value of the investment at the date
when it ceases to be an associate
a. Is regarded as its cost on initial recognition as financial asset
b. Is regarded as its fair value on initial recognition as financial asset
c. Is regarded as its fair value on initial recognition as financial
liability
d. Is regarded as its amortized cost on initial recognition as an
investment
Answer: B
10. On the loss of significant influence, the investor shall recognize in
profit or loss any difference between
a. The initial carrying amount of the retained investments, any
proceeds from disposing of the part interest and the carrying amount
of the investment at the date when significant influence is loss
b. The fair value of any retained investment and the carrying amount
of the investment at the date significant influence is loss
c. Any proceeds from disposing of the part interest and the carrying
amount of the investment at the date significant influence is lost.
d. The fair value of any retained investment, any proceeds from
disposing of the part interest and the carrying amount of the
investment at the date significant influence is lost.
Answer: D
2
1. The equity method is not required when the associate has been
acquired and held with a view of disposal within what time period?
a. six months from the end of the reporting period
b. Twelve months from the end of the reporting period
c. Twelve months from the date of acquisition as held for sale
d. In the near future
Answer: C
2. How is the impairment test carried out for an investment?
a. The goodwill is impairment tested individually
b. The entire carrying amount of the investment is tested for
impairment by comparing the recoverable amount with carrying
amount
c. The carrying amount of the investment shall be compared with fair
value
d. The recoverable amounts of all investment in associates shall be
assessed together
Answer: B
3. The excess of the investor’s share of the net fair value of the
associate’s net assets over the cost of investment is
a. Included in other comprehensive income
b. Credited to retained earnings
c. Recognized as income in the determination of the investor’s share
of the associate’s profit or loss
d. A deferred gain
Answer: C
4. What should happen when the financial statements of an associate
are not prepared as of the same date as the financial statements of the
investor?
a. The associate shall prepare financial statements at the same date as
that of the investor
b. The financial statements of the associate prepared up to a different
date would be used
c. Any major transactions during the time gap of the financial
statements shall be accounted for
d. As long as the gap is not greater than three months, there is no
problem.
Answer: A
3
1. After the date of acquisition, the investment account using the
equity method would
a. Not be affected by the share of the earnings or losses of the
investee
b. Not be affected by the share of the earnings of the investee but be
decreased by the share of the losses of the investee
c. Be increased by the share of the earnings of the investee but not be
affected by the share of the losses of the investee
d. Be increase by the share of the earnings of the investee and
decreased by the share of the losses of the investee
Answer: D
2. 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
Answer: D
3. When an investor uses the equity method to account for investment
in ordinary shares, the investment account is increased when the
investor recognizes
a. A proportionate interest in the net income of the investee
b. A cash dividend received from investee
c. Periodic amortization of the goodwill related to the purchase
d. Depreciation related to the excess of market value over carrying
amount of the investee’s depreciable assets at the date of purchase by
investor
Answer: A
4. When an investor uses the equity method to account for investment
in ordinary shares, cash dividends received by the investor from the
investee shall be recorded as
a. Dividend income
b. A deduction from the investor’s share of the investee’s profits
c. A deduction from the investment account
d. A deduction from the shareholder’s equity account; dividends to
shareholders
Answer: C
5. An investor uses the equity method to account for investment in
ordinary shares. The purchase price implies a fair value of the
investee’s depreciable assets in excess of the investee’s net asset
carrying amount. The investor’s amortization of the excess
a. Decrease the investment account
b. Decrease the goodwill account
c. Increases the investment revenue account
d. Does not affect the investment account
Answer: A
6. An investor uses the equity method to account for the purchase of
another entity’s ordinary shares. On the date of acquisition, the fair
value of the investee’s inventory and land exceeded their carrying
amount. How do these excess of fair value over carrying amount
affect the investor’s equity in earnings of the investee for the current
year?
a.
b.
c.
d.
Answer: B
Investor excess
decrease
Decrease
Increase
Increase
Land excess
Decrease
No effect
Increase
No effect
7. When an investor purchases sufficient ordinary shares to gain
significant influence over the investee, what is the proper accounting
treatment of any excess of cost over the carrying amount of the net
assets acquired?
a. The excess remains in the investment account until it sold
b. The excess is immediately expensed in the period in which the
investment is made
c. The excess is amortized over the time period that is reasonable in
the light of the underlying cause of the excess
d. The excess is charged to retained earnings at the time the investor
resells the investment
Answer: C
8. An investor uses the equity method of accounting for 30%
ownership in an investee. At year end, the investor has a receivable
from the investee. How should the receivable be reported in the
investor’s financial statements for the current year?
a. None of the receivable should be reported but the entire receivable
should be offset against investee’s payable to the investor
b. Seventy percent of the receivable should be separately reported
with the balance offset against 30% of investee’s payable to the
investor
c. The total receivable should be disclosed separately
d. The total receivable should be included as part of the investment in
associate, without separate disclosure
Answer: C
4
1. When an investor uses the cost method to account for investment
in ordinary shares, cash dividends received by the investor from the
investee should be recorded as
a. Dividend income
b. An addition to the investor’s share of the investee’s profit
c. A deduction from the investor’s share of the investee’s profit
d. A deduction from the investment account
Answer: A
2. An investor uses the cost method to account for investment in
ordinary shares. Dividends received in excess of the investor’s share
of investee’s earnings subsequent to the date of investment
a. Increase other comprehensive income
b. Decrease the investment account
c. Increase the investment account
d. Increase in the dividend revenue
Answer: D
3. On January 1 of the current year, an entity purchased 10% of
another entity’s ordinary shares. The entity purchased additional
shares bringing the ownership up to 40% of the investee’s ordinary
shares outstanding on August 1 of the current year. During October
of the current year, the investee declared and paid cash dividend on
all of the outstanding ordinary shares. How much income from the
investment should be reported for the year?
a. 10% of investee’s income from January 1 to July 31, plus 40% of
investment’s income from August 1 to December 31
b. 40% of investment’s income from August 1 to December 31 only
c. 40% of investment’s income for the current year
d. Amount equal to dividends received from investee
Answer: B
Answer: C
INVESTMENT IN BONDS
3. The interest income for the year ended would be higher if the bond
was purchased at
a. Quoted price
b. Face amount
c. A discount
d. A premium
Answer: C
1
1. Trading bond investments are reported at
a. Amortized cost
b. Face amount
c. Fair value
d. Maturity
Answer: C
4. The interest income for the year would be lower if a bond is
purchased at
a. Quoted price
b. Face amount
c. A discount
d. A premium
Answer: D
2. Which of the following statements is correct in regard to trading
bond investments?
a. Trading bond investments are held with the intention of selling
them in a short period of time.
b. Unrealized gains and losses are reported as part of net income
c. Any discount or premium is not amortized
d. All of these statements are correct
Answer: D
3
1. The actual interest earned by the bondholder is
a. Effective rate
b. Yield rate
c. Market rate
d. Effective rate, yield rate or market rate
Answer: D
3. Bond investments at amortized cost are
a. Held for collection
b. Not held for collection
c. Either held for collection or not held for collection depending on
market strategy
d. Current investments
Answer: A
4. Amortized cost is the initial recognition amount of the bond
investments minus
a. Repayments and net of any reduction for uncollectibility
b. Cumulative amortization and net of any reduction for
uncollectibility
c. Repayments plus or minus cumulative amortization and net of any
reduction for uncollectibility
d. Repayments plus or minus cumulative amortization
Answer: C
2
1. Accrued interest on bonds that are purchased between interest
dates
a. Is ignored by both the seller and the buyer
b. Increases the amount a buyer must pay
c. Is recorded as a loss on the sale of the bonds
d. Decreases the amount a buyer must pay
Answer: B
2. When an investor purchased a bond between interest dates at a
premium, the cash paid to the seller is
a. The same as the face amount of the bond
b. The same as the face amount of the bond plus accrued interest
c. More than the face amount of the bond
d. Less than the face amount of the bond
2. The interest rate written on the face of the bond is known as
a. Nominal rate
b. Coupon rate
c. Stated rate
d. Nominal rate, coupon rate or stated rate
Answer: D
3. To compute the price to pay for a bond, what present value concept
is used?
a. The present value of 1
b. The present value of ordinary annuity of 1
c. The present value of 1 and the present value of ordinary annuity of
1
d. The future value of 1
Answer: C
4. Bonds usually sell at a discount when investors are willing to
invest in bonds
a. At the stated interest rate
b. At rate lower than the stated interest rate
c. At rate higher than the stated interest rate
d. Because a capital gain is expected.
Answer: C
5. Bonds usually sell at a premium
a. When market rate is greater than the stated rate
b. When the stated rate is greater than the market rate
c. When the price of the bonds is greater than the maturity amount
d. In none of these cases
Answer: B
6. The effective interest rate method of amortizing discount provides
for
a. Increasing amortization and increasing interest income
b. Increasing amortization and decreasing interest income
c. Decreasing amortization and increasing interest income
d. Decreasing amortization and decreasing interest income
Answer: A
7. The effective interest method of amortizing premium provides for
a. Increasing amortization and increasing interest income
b. Increasing amortization and decreasing interest income
c. Decreasing amortization and decreasing interest income
d. Decreasing amortization and increasing interest income
Answer: B
8. When the interest payment dates of a bond are May 1 and
November 1, and a bond is purchased on June 1, the amount of cash
paid by the investor would be
a. Decreased by accrued interest from June1 to November 1
b. Decreased by accrued interest from May 1 to June 1
c. Increased by accrued interest from June 1 to November 1
d. Increased by accrued interest from May 1 to June 1
Answer: D
4
1. Which of the following statements are true about interest method?
a. The interest method does not use a constant rate of interest
b. Amortization of discount decreases from period to period
c. Amortization of premium decreases from period to period
d. The interest method applies the effective interest rate to the
beginning carrying amount
Answer: D
2. The fair value option
a. Must be applied to all debt instruments
b. May be selected as a valuation method at any time
c. Reports all gains and losses in income
d. All of the choices are correct
Answer: C
3. The fair value option allows an entity to
a. Record income when the fair value increases
b. Measure bond investments at fair value in some years
c. Report most financial instruments at fair value
d. All of these statements are correct
Answer: A
4. Under what condition can an entity classify financial asset that
meets the amortized cost criteria as at fair value through profit or
loss?
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
Answer: D
INVESTMENT PROPERTY
1
1. Which of the following statements best describes investment
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 or for capital appreciation
d. Property held for capital appreciation
Answer: C
2. An owner occupied property held by an owner
a. For use in the production of goods and services
b. For administrative purposes
c. For sale in the ordinary course of business
d. For use in the production of goods and services and for
administrative purposes
Answer: D
3. 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 an operating lease
d. Property held for sale in the ordinary course of business
Answer: D
4. 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 owneroccupied property
d. Owner occupied property awaiting disposal
Answer: B
5. Which of the following statements is true 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.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
Answer: C
6. If an entity owns and manages a hotel, services provided to guests
are significant component of the arrangement as a whole. In such
aces, the hotel is classified as
a. Investment property
b. Owner-occupied property
c. Partly investment property and partly occupied property
d. Neither investment property nor owner occupied property
Answer: B
7. Directly attributable expenditures related to investment property
include
a. Professional fees for legal services, property transfer taxes and
other transaction cost
b. Start-up costs
c. Initial operating losses incurred before the investment property
achieves the plan level of occupancy
d. Abnormal amount of wasted material, labor and other resources
incurred in constructing or developing the property
Answer: A
a. Changes in the fair value are reported in profit or loss in the
current period
b. Changes in fair value are reported as an extraordinary gain
c. Changes in the fair value are reported in other comprehensive
income for the period.
d. Changes in fair value are reported as deferred revenue for the
period
Answer: A
8. Which of the following statements is true concerning property
leased to an affiliate?
3. If the entity uses the fair value model for investment property,
which of the following statements is true?
a. The entity should value the property at cost less accumulated
depreciation and impairment
b. The entity should report the increase in fair value in other
comprehensive income for the period
c. The entity depreciates the equipment using normal depreciation
method.
d. The entity does not record depreciation on the investment property
Answer: D
I. From the perspective of the individual entity that owns it, the
property leased to an affiliate is considered an investment property.
II. 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. Both I and II
b. Neither I nor II
c. I only
d. II only
Answer: A
9, An investment property is recognized when
I. It is probable that the future economic benefits that are associated
with the investment property will flow to the entity
II. The cost of the investment property can be measured reliably
a. Both I and II
b. Neither I nor II
c. I only
d. II only
Answer: A
10. Which of the following statements is incorrect in determining the
fair value of an investment property?
a. An entity’s 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 furnished office.
d. The fair value of investment property excludes prepaid or accrued
operating lease income.
Answer: A
2
1. Subsequent to initial recognition, the investment property shall be
measured using
a. Fair value model or revaluation model
b. Fair value through profit or loss model
c. Cost model or fair value model
d. Cost model or revaluation model
Answer: C
2. If the entity uses the fair value model for the investment property,
which of the following statements is true?
4. Transfer from investment property to property, plant and
equipment are appropriate
a. When there is change of use
b. Based on the discretion of management
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 property
Answer: A
5. 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
Answer: B
6. A transfer from investment property carried at fair value to owner
occupied 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 of disposal
Answer: A
7. 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 the fair value shall be
a. Included in profit or loss
b. Included in retained earnings
c. Included in equity
d. Accounted for as revaluation property, plant and equipment
Answer: D
8. If an inventory is transferred to investment property that is to be
carried at fair value, the re-measurement 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
Answer: A