1. Caloy Co. bought 1,000 shares from Bayan Co.

The shares have no active market, but an identical

or similar asset has an active market. The identical asset, however, has multiple markets. Caloy
determines that the identical asset has the following market values:
Market A Market B
Quoted price 500 600
Related transaction cost 25 150

How much is fair valuation of the investment?

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

2. On January 1, 20x1, Allan Co. purchased ₱400,000 bonds for ₱392,000. The bonds mature on
January 1, 20x5 and pay 12% annual interest beginning January 1, 20x2. Transaction costs are
negligible. The bonds were classified as held for trading securities. On December 31, 20x1, the
bonds are selling at a yield rate of 10%. How much is the unrealized gain (loss) recognized on
December 31, 20x1?
a. 27,986
b. 31,298
c. 28,964
d. 33,359

3. On January 1, 20x1, Rizzi Co. purchased 12,000 shares of Andre, Inc. for ₱400,000. Commission
paid to broker amounted to ₱20,000. Management made an irrevocable choice to subsequently
measure the shares at fair value through other comprehensive income. On December 31, 20x1, the
shares were quoted at ₱40 per share. On January 3, 20x2, all of the shares were sold at ₱60 per
share. Commission paid on the sale amounted to ₱24,000. How much is the unrealized gain (loss)
recognized in profit or loss on December 31, 20x1?
a. (60,000)
b. 60,000
c. (80,000)
d. 0

Use the following information for the next two questions:

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

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

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

5. How much is the carrying amount of the investment on December 31, 20x1?
a. 4,198,948 c. 4,072,727
b. 4,138,843 d. 4,000,000
6. On April 1, 20x1, Ronald Ryan Co. acquired 12%, P4,000,000 bonds dated January 1, 20x1 at 98
including interest. The bonds mature on December 31, 20x3 but pays annual interest at each year-
end. How much is the initial carrying amount of the investment?
a. 3,920,000 b. 3,800,000 c. 4,000,000 d. 4,120,000

7. On January 1, 20x1, Mitch Co. acquired 12%, P4,000,000 bonds at 98. Commission paid to brokers
amounted to P204,000. Principal is due on December 31, 20x4 but interest payments are made
annually starting December 31, 20x1.

The adjusted effective interest rate on the investment is closest to

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

Use the following information for the next three questions:

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

The bonds are to be held under a “hold to collect and sell” business model. Information on fair values
is as follows:
December 31, 20x1…………………………….98
December 31, 20x2……………………………102
December 31, 20x3……………………………100

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

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

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

a. 126,999 c. 135,088
b. 130,779 d. 144,388

Use the following information for the next two questions:

Karen Co. purchased the following equity securities on January 1, 20x1 for a total amount of ₱360,000.
Cost
Alaska Co. preference shares ₱200,000
Valdez Co. ordinary shares 160,000
Totals ₱360,000

The shares did not qualify for recognition as held for trading. Accordingly, they were classified as
investment in equity securities measured at fair value through other comprehensive income.
On December 31, 20x1, the portfolio of Karen Co. comprised the following.
Fair value – 12/31/x1
Alaska Co. preference shares ₱240,000
Valdez Co. ordinary shares 60,000
Total ₱300,000

On December 31, 20x2, the portfolio of Karen Co. comprised the following:
Fair value – 12/31/x2
Alaska Co. preference shares ₱220,000
Valdez Co. ordinary shares 180,000
Total ₱400,000

On February 2, 20x3, all of the Alaska Co. preference shares were sold for ₱160,000 net of transaction
costs.

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

12. How much is the cumulative unrealized gain (loss) that is presented as a separate component in
equity as of December 31, 20x2?
a. 40,000
b. (40,000)
c. 100,000
d. 0

13. Changes in fair value of this type of securities are accumulated as a separate component in the
stockholders' equity section of the balance sheet.
a. Financial assets measured at amortized cost
b. FVOCI securities
c. Held for trading securities
d. Designated financial assets

14. Which category includes only debt securities?

a. Financial assets measured at amortized cost
b. FVPL assets
c. Held for trading securities
d. FVOCI (election)

15. A correct valuation is

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

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

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

18. A debit balance in the “Fair Value Adjustment - FVOCI Securities” account at the end of a year
should be interpreted as
a. the net unrealized holding gain for that year.
b. the net realized holding gain for that year.
c. the net unrealized holding gain to date.
d. the net realized holding gain to date.

19. A debit balance in the “Fair Value Adjustment - Held for Trading Securities” account at the end
of a year should be interpreted as
a. the net realized holding gain to date.
b. the net unrealized holding gain to date.
c. the net realized holding gain for that year.
d. the net unrealized holding gain for that year.

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

21. An unrealized holding gain on a company's FVOCI securities should be reflected in the current
financial statements as
a. an extraordinary item shown as a direct increase to retained earnings.
b. a current gain resulting from holding securities.
c. a note or parenthetical disclosure only.
d. other comprehensive income and included in the equity section of the balance sheet.
22. Changes in fair value of an investment measured at fair value through other comprehensive
income
a. must be recognized in profit or loss.
b. must be recognized directly in equity.
c. may be recognized in profit or loss or directly in equity.
d. must be recognized in other comprehensive income and accumulated in a separate equity
account.

23. At initial recognition, an entity may make an irrevocable election to present in other
comprehensive income subsequent changes in the fair value of an investment in equity securities
within the scope of PFRS 9 that is not held for trading. In accounting for such financial instruments,
all of the following are true except
a. amounts presented in other comprehensive income are not be subsequently transferred to
profit or loss.
b. the entity may transfer any cumulative fair value gains or losses within equity.
c. dividends received on the investments are recognized in profit or loss.
d. cumulative fair value gains or losses are transferred to profit or loss when the financial asset
is derecognized.

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

25. For which type of investments would unrealized fair value gains and losses be accumulated in an
equity account?
a. Equity method securities
b. FVOCI securities
c. Held for Trading securities
d. Held-to-maturity securities

26. If the combined fair value of held for trading securities at the end of the year is less than the fair
value of the same portfolio of held for trading securities at the beginning of the year, the difference
should be accounted for by
a. reporting an unrealized loss in security investments in the stockholders' equity section of
the balance sheet.
b. reporting an unrealized loss in security investments in profit or loss.
c. a footnote to the financial statements.
 d. a debit to Investment in Held for Trading Securities.

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

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

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

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

30. The equity method of accounting should be used when an investment

a. is composed of ordinary shares and it is the investor's intent to vote the ordinary shares.
b. ensures a source of supply such as raw materials.
c. enables the investor to exercise significant influence over the investee.
d. gives the investor voting control over the investee.

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

32. When an investor uses the equity method, cash dividends received from the investee are
recorded as
a. an increase in the investment account.
b. a deduction from the investment account.
c. dividend revenue.
d. a deduction from the investor's share of the investee's profits.
 33. Dane, Inc. owns 35% of Marin Corporation. During the calendar year 2004, Marin had net
earnings of ₱300,000 and paid dividends of ₱30,000. Dane mistakenly recorded these transactions
using the fair value method rather than the equity method of accounting. Dane recognized ₱20,000
gain on the change in fair value of the investment during the year. What effect would this have on
the investment account, net income, and retained earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate

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

35. When a company holds between 20% and 50% of the outstanding stock of an investee, which
of the following statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless 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 clearly demonstrate the ability to
exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.

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

37. Securities classified as financial asset measured at amortized cost are reported at
a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.

38. In accounting for investments in debt securities that are classified as held for trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.
 38. According to PFRS 9 Financial Instruments, investments in debt securities that are classified at
amortized cost are initially measured at
a. cost including accrued interest.
b. maturity value.
c. cost including brokerage and other fees.
d. fair value plus brokerage and other fees.

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

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

QUIZ 1: TRUE OR FALSE

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

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

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

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

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

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

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

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

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