Equity Investments 2019

LECTURE NOTES APPLICATION

What is an EQUITY INVESTMENT?
Problem 1: At the beginning of current year, Sam Company purchased marketable equity
Money invested in a company by purchasing its shares on a stock exchange with the purpose securities to be held as trading for P10,000,000, incurring broker’s fees and commissions
of earning returns on such investment. (Ex. Shares of stock) amounting to P400,000. The securities had a market value of P11,000,000 at year-end and
the estimated cost to dispose the security amounted to P200,000. No securities were sold
When to RECOGNIZE? during the current year.
An entity shall recognize a financial asset (in this case, the equity investment) when, and
only when the entity becomes a party to the contractual provisions of the instrument. a. What amount of unrealized gain or loss on these securities should be reported on
the comprehensive income statement for the current year?
What is the CLASSIFICATION?
b. Assuming the same facts, except that the securities do not qualify as held for
Ownership Less than 20% 20%-50% More than 50% trading, and the entity irrevocably elected the securities as at fair value through
other comprehensive income, what amount of unrealized gain or loss on these
It is presumed that the securities should be reported on the comprehensive income statement for the
It is presumed that the investor has It is presumed the the
Presumption
investor does not have
significant influence over the investee investor has control over
current year?
significant influence over
company. the investee company.
the investee company.
a.
FV - end 11,000,000
Classification Equity investments @ FV: Investment in associates or joint venture Investment in subsidiaries CA - beg. 10,000,000
FA @ FVPL UG (P/L) 1,000,000
FA @ FVOCI

*PFRS 9 - Initially and subsequently, E.I.@FVPL shall be measured at FV.

Presentation Current / Noncurrent Noncurrent Noncurrent

b.
Standard PFRS 9 IAS 28 PFRS 10 FV - end 11,000,000
CA - beg. 10,400,000
Let’s FOCUS on EQUITY INVESTMENTS @ FV: UG (OCI) 600,000
Initial Subsequent Changes
Purpose Classification *PFRS 9 - Initially, E.I.@FVPL shall be measured at FV+TC.
measurement measurement in FV
Trading FA @ FVPL FV FV P/L Subsequently, E.I.@FVPL shall be measured at FV.

Day 1 Irrevocable
Non-trading
election either:
FA @ FVPL FV FV P/L
FA @ FVOCI FV + TC FV OCI

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Problem 2: Benguet Company began operations at the beginning of current year. The 2018 2019 Cumulative UG/(UL)
following information pertains to the portfolio of equity securities at year-end: FV 7,300,000 6,600,000
Trading Nontrading CA 7,400,000 7,300,000
Aggregate cost 4,000,000 6,000,000 UG/(UL) for the year - 100,000 - 700,000 - 800,000
Aggregate market value 3,700,000 5,500,000
Aggregate lower of cost or market value applied to each security 3,500,000 5,300,000 FV - 2019 6,600,000
Initial measurement 7,400,000
The nontrading securities are designated at fair value through other comprehensive income. Cumulative UG/(UL) - 800,000

What amount should be reported as total loss on these securities in the income statement *Actually, the cumulative gain/loss is the difference between the FV and IM.
for the current year?

Trading Nontrading Problem 4: Robert Company reported the following accounts in the statement of financial
Aggregate market value 3,700,000 5,500,000 position on January 1, 2019:
Aggregate cost 4,000,000 6,000,000 Noncurrent assets
Unrealized loss - 300,000 - 500,000 Financial asset FVOCI 4,000,000
P/L OCI Market adjustment for unrealized loss - 500,000
CI Market value 3,500,000

*PFRS 9 - there is no impairment loss when equity instruments are measured at FV. Hence, Other comprehensive income
the third row is ignored. Unrealized loss - 500,000

An analysis of the investment portfolio revealed the following on December 31, 2019.
Problem 3: On December 31, 2018, Chandler Company, reported a P100,000 unrealized
loss. There was no change during 2019 in the composition of the portfolio of nontrading Cost Market
equity securities held at fair value through other comprehensive income. XYZ ordinary share 1,000,000 1,200,000
ABC ordinary share 2,500,000 2,000,000
Market value
Security Cost RST preference share 500,000 200,000
December 31, 2019
4,000,000 3,400,000
A 2,400,000 2,600,000
B 1,800,000 1,000,000
On July 1, 2020, the ABC ordinary share was sold for 2,100,000.
C 3,200,000 3,000,000
On December 31, 2020, the remaining investments have the following market value:
a. What is the market value of the investment on December 31, 2018?
XYZ ordinary share 1,000,000
b. What amount of loss on these securities should be included in the statement of RST preference share 150,000
comprehensive income for the year ended December 31, 2019 as component of
other comprehensive income? What amount should be recognized directly in retained earnings as a result of the sale of
the financial asset in 2020? P600,000 debit
c. What cumulative amount of loss on these securities should be reported in the
statement of changes in equity for the year ended December 31, 2019 as component *Under the Application guidance of PFRS 9, the cumulative gain or loss recognized in OCI
of other comprehensive income?
may be transferred within equity, but not reclassified to P/L under any circumstance.

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Problem 5: ALPHA Company carries the following marketable equity securities on its books LECTURE NOTES
at December 31, 2019 and 2020. All securities were purchased during 2020.
Investments in associates
Fair value through profit or loss:
An associate is an entity over which the investor has significant influence.
Cost Fair value
12/31/2019 12/31/2020
Significant influence is the power to participate in the financial and operating policy decisions
A Company P 750,000 P 390,000 P 600,000
of the investee but is not control or joint control over those policies.
B Company 390,000 600,000 600,000
C Company 1,050,000 900,000 750,000
Identification of Associates
Total P2,190,000 P1,890,000 P1,950,000
A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate
Fair value through OCI: significant influence unless it can be clearly demonstrated otherwise. If the holding is less
Cost Fair value than 20%, the investor will be presumed not to have significant influence unless such
12/31/2019 12/31/2020 influence can be clearly demonstrated.
X Company P6,150,000 P5,400,000 P5,400,000
Y Company 1,500,000 1,800,000 2,100,000 The existence of significant influence by an investor is usually evidenced in one or more of
Total P7,650,000 P7,200,000 P7,500,000 the following ways:
• representation on the board of directors or equivalent governing body of the investee;
Required: • participation in the policy-making process;
a. The net amount to be recognized in 2020 comprehensive income is • material transactions between the investor and the investee;
b. The net unrealized gain/loss at December 31, 2020 in accumulated other
• interchange of managerial personnel; or
comprehensive income in shareholders' equity is
• provision of essential technical information.

Potential voting rights are a factor to be considered in deciding whether significant influence
1 exists.
Fair Value through P&L:
Accounting for Associates
Fair value -2013 1,890,000
Fair value -2014 1,950,000 60,000 An investment in an associate shall be accounted for using the equity method except when:
(a) the investment is classified as held for sale in accordance with PFRS 5;
Fair Value through OCI:
(b) the exception in paragraph 4(a) of PFRS 10, allowing a parent that also has an
Fair value -2013 7,200,000 investment in an associate not to present consolidated financial statements, applies; or
Fair value -2014 7,500,000 300,000 (c) all of the following apply:
Total amount to be recognized in 2014 comprehensive income 360,000 (i) the investor is a wholly-owned subsidiary, or is a partially-owned subsidiary of
another entity and its other owners, including those not otherwise entitled to vote,
have been informed about, and do not object to, the investor not applying the equity
2 method;
Fair Value through OCI: (ii) the investor’s debt or equity instruments are not traded in a public market (a
domestic or foreign stock exchange or an over-the-counter market, including local
Cost 7,650,000
and regional markets);
Fair value -2014 7,500,000 (iii) the investor did not file, nor is it in the process of filing, its financial statements with
Net unrealized loss at December 31, 2014 in the accumulated OCI in SHE 150,000 a securities commission or other regulatory organization, for the purpose of issuing
any class of instruments in a public market; and

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(iv) the ultimate or any intermediate parent of the investor produces consolidated
financial statements available for public use that comply with PFRS.
Applying the Equity Method of Accounting
The equity method is a method of accounting whereby the investment is initially recognized
at cost and adjusted thereafter for the post acquisition change in the investor’s share of net
assets of the investee. The profit or loss of the investor includes the investor's share of the
profit or loss of the investee.
Distributions and other adjustments to carrying amount. Distributions received from the
investee reduce the carrying amount of the investment. Adjustments to the carrying
amount may also be necessary for changes in the investor’s proportionate interest in the
investee arising from changes in the investee’s other comprehensive income (for example,
revaluations and foreign exchange translation differences). The investor’s share of those
changes is recognized in other comprehensive income of the investor.
Potential voting rights. Although potential voting rights are considered in deciding whether
significant influence exists, the investor's share of profit or loss of the investee and of
changes in the investee's equity is determined on the basis of present ownership interests.
It should not reflect the possible exercise or conversion of potential voting rights.
Implicit goodwill and fair value adjustments. On acquisition of the investment any difference
between the cost of the investment and the investor’s share of the net fair value of the
associate’s identifiable assets, liabilities and contingent liabilities is accounted for in
accordance with PFRS 3 Business Combinations. Therefore:
(a) goodwill relating to an associate is included in the carrying amount of the investment.
However, amortization of that goodwill is not permitted and is therefore not included in
the determination of the investor’s share of the associate’s profits or losses.
(b) any excess of the investor’s share of the net fair value of the associate’s identifiable
assets, liabilities and contingent liabilities over the cost of the investment is excluded
from the carrying amount of the investment and is instead included as income in the
determination of the investor’s share of the associate’s profit or loss in the period in
which the investment is acquired.
Appropriate adjustments to the investor’s share of the associate’s profits or losses after
acquisition are also made to account, for example, for depreciation of the depreciable assets
based on their fair values at the acquisition date. Similarly, appropriate adjustments to the
investor’s share of the associate’s profits or losses after acquisition are made for impairment
losses recognized by the associate, such as for goodwill or property, plant and equipment.
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Equity Investments 2019
Transactions with associates. If an associate is accounted for using the equity method,
unrealized profits and losses resulting from upstream (associate to investor) and
downstream (investor to associate) transactions should be eliminated to the extent of the
investor's interest in the associate.
Date of associate's financial statements. In applying the equity method, the investor should
use the financial statements of the associate as of the same date as the financial statements
of the investor unless it is impracticable to do so. If it impracticable, the most recent
available financial statements of the associate should be used, with adjustments made for
the effects of any significant transactions or events occurring between the accounting period
ends. However, the difference between the reporting date of the associate and that of the
investor cannot be longer than three months.
Associate's accounting policies. If the associate uses accounting policies that differ from
those of the investor, the associate's financial statements should be adjusted to reflect the
investor's accounting policies for the purpose of applying the equity method.
Losses in excess of investment. If an investor's share of losses of an associate equals or
exceeds its "interest in the associate", the investor discontinues recognizing its share of
further losses. The "interest in an associate" is the carrying amount of the investment in
the associate under the equity method together with any long-term interests that, in
substance, form part of the investor's net investment in the associate. After the investor's
interest is reduced to zero, additional losses are recognized by a provision (liability) only to
the extent that the investor has incurred legal or constructive obligations or made payments
on behalf of the associate. If the associate subsequently reports profits, the investor
resumes recognizing its share of those profits only after its share of the profits equals the
share of losses not recognized.
Investing in an Associate in Stages
The accounting for this is not covered in PAS 28. However, since many of the procedures
appropriate for the application of the equity method are similar to the consolidation
procedures described in PFRS 10 and the concepts underlying the procedures used in
accounting for the acquisition of a subsidiary are also adopted in accounting for the
acquisition of an investment in an associate, PFRS 3 is used as reference.
In a business combination achieved in stages, the acquirer shall remeasure its previously
held equity interest in the acquiree at its acquisition-date fair value and recognize the
resulting gain or loss, if any, in profit or loss. In prior reporting periods, the acquirer may
have recognized changes in the value of its equity interest in the acquiree in other
comprehensive income (for example, because the investment was classified as available for
sale). If so, the amount that was recognized in other comprehensive income shall be
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recognized on the same basis as would be required if the acquirer had disposed directly of E.I.@FV 4.75M = 25k ord. shares*190 per share
the previously held equity interest. *Ownership presumption is rebuttable. In this case, although Etcha Co. owns 25% of Pwera,
the latter does not have significant influence since it does not participate in the financial and
Ownership presumption rebutted operating policy decisions of the investee.
Problem 6: On January 2, 2019, Tuao Company purchased 10% of Abulug Company’s
outstanding ordinary shares for P20,000,000. Tuao is the largest single shareholder in Investment in associate
Abulug and Tuao’s officers are majority of Abulug’s board of directors. Abulug reported
profit of P10,000,000 and paid dividend of P4,000,000. Investment - Apr. 1, 2019 4,500,000 25k*180
SINI - 2019 480,000 (2.4M-480K)*25%
What should be the balance in Tuao’s investment in Abulug Company at the end of 2019? Dividends - 30,000 120K*25%
Investment - Dec. 31, 2019 4,950,000
Investment, beg. 20,000,000
SINI - 2019 1,000,000 10M*10% Excess of cost over CA of NIA
Dividends dec. - 400,000 4M*10% Problem 8: At the beginning of current year, Phoebe Company purchased 40% of the
Investment, end. 20,600,000 outstanding ordinary shares of Monica Company, paying P6,960,000 when the carrying
amount of the net assets of Monica Company equaled P12,500,000. The difference was
*Ownership presumption is rebuttable. In this case, although Tuao Co. owns only 10% of attributed to the following:
ordinary shares, the latter still has significant influence because Tuao is the largest single
shareholder and they have representation in the BOD. Asset Carrying amount Fair value
Equipment 3,000,000 5,000,000
Ownership presumption rebutted Building 2,500,000 4,000,000
Problem 7: On April 1, 2019, Etcha Co. purchased 25,000 ordinary shares of Pwera Co. at Land 2,800,000 3,500,000
P180 per share which reflected book value as of that date. At the time of the purchase, Inventory 1,000,000 1,200,000
Pwera had 100,000 ordinary shares outstanding. The shares are intended as a long term
investment. The first quarter statement ending March 31, 2019 of Pwera recorded profit of The remaining useful life of the equipment and building was 4 years and 12 years,
P480,000. For the year ended December 31, 2019, Pwera reported profit of P2,400,000. respectively. The inventory was sold during the year. During the current year, Monica
Pwera paid Etcha dividends of P60,000 on June 1, 2019 and again P60,000 on December Company reported net income of P5,000,000 and paid property dividend of P2,500,000.
31, 2019. The shares of Pwera are selling at P190 per share on December 31, 2019. a. What amount should be reported as investment income for the current year?

Etcha is entitled to appoint two directors to the board, which consists of eight members. b. What is the carrying amount of the investment in associate at year-end?
The remaining of the voting rights are held by two other companies, each of which is entitled
to appoint three directors. The board makes decisions on the basis of simple majority. Cost of investment 6,960,000 SINI, unadj. 2,000,000
Because board meetings are often held at very short notice, Etcha does not always have Book value of NIA 5,000,000 Addt'l dep'n - 200,000
representation on the board. Often the suggestions of the representative of Etcha are Excess 1,960,000 Addt'l amort. - 50,000
ignored, and the decisions of the board seem to take little notice of any representations Allocation: Addt'l COGS - 80,000
made by the director from Etcha Corp. Equipment 800,000 SINI, adj. 1,670,000
Building 600,000
Based on the above information, the carrying amount of the investment in Pwera Co. as of Land 280,000 Cost of investment 6,960,000
December 31, 2019 should be
Inventory 80,000 SINI, adj. 1,670,000
Goodwill 200,000 Prop. Div. - 1,000,000
CA, end. 7,630,000

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Excess of FV over Cost Treatment of OCI items

Problem 9: Allapacan Company bought 20% of Amulung Corporation’s ordinary shares on Problem 11: Chu Company acquired a 40% interest in Wawa Company for P1,700,000 on
January 1, 2019 for P20,000,000. Carrying amount of Amulung’s net assets at purchase January 1, 2019. The shareholders' equity of Wawa Company on January 1 and December
date totaled P60,000,000. Fair value and carrying amounts were the same for all items 31, 2019 is presented below:
except for plant and inventory, for which fair values exceed their carrying amounts by
January 1 December 31
P15,000,000 and P5,000,000 respectively. The plant has a 5-year life. All inventory was
Share capital 3,000,000 3,000,000
sold during 2019. Goodwill, if any, has an indefinite life. During 2019, Amulung reported
Revaluation surplus - 1,300,000
profit of P40,000,000 and paid a P15,000,000 cash dividend.
Retained earnings 1,000,000 1,500,000
a. What amount should Allapacan report as investment income for 2019?
b. Using the same information, except that the purchase price is only P15 million, what On January 1, 2019, all the identifiable assets and liabilities of Wawa Company were
amount should Allapacan report as investment income for 2019? recorded at fair value. Wawa Company reported profit of P650,000, after income tax
expense of P350,000 and paid dividends of P150,000 to shareholders during the current
Cost of investment 20,000,000 SINI, unadj. 8,000,000 year.
BV of NIA 12,000,000 Addt'l dep'n - 600,000
The revaluation surplus is the result of the revaluation of land recognized by Wawa Company
Excess 8,000,000 Addt'l COGS - 1,000,000
on December 31, 2019. Additionally, depreciation is provided by Wawa Company on the
Allocation SINI, adj. 6,400,000 diminishing balance method whereas Chu Company uses the straight-line. Had Wawa
Plant 3,000,000 Company used the straight line, the accumulated depreciation would be increased by
Inventory 1,000,000 P200,000. The tax rate is 35%. Chu Company should report its investment in associate on
Goodwill 4,000,000 December 31, 2019 at P2,420,000

Cost of investment 15,000,000 SINI, unadj. 8,000,000 Investment - Jan. 1 1,700,000

BV of NIA 12,000,000 Addt'l dep'n - 600,000 SINI - 2019 260,000 260K*40%
Excess 3,000,000 Addt'l COGS - 1,000,000 SIOCI - 2019 520,000 1.3M*40%
Allocation Gain 1,000,000 Div. declared - 60,000 150K*40%
Plant 3,000,000 SINI, adj. 7,400,000 Inv. - Dec. 31 2,420,000

Inventory 1,000,000 *No need to adjust for the difference in depreciation method because both entities have
Gain from purchase - 1,000,000 chosen a method that best reflects the flow of benefits as the assets are consumed.

Workback problem
Problem 10: On July 1, 2019, Mark Company purchased 25% of Rachel Company’s
outstanding ordinary shares and no goodwill resulted from the purchase. Mark carried this
investment at equity and the balance in Mark’s investment account was P1,900,000 on
December 31, 2019. Rachel Company reported net income of P1,200,000 for the year ended
December 31, 2019, and paid cash dividend totaling P480,000 on December 31, 2019.

How much did Mark pay for the 25% interest in Rachel? P1,870,000

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Intercompany transactions Investment - Jan. 1, 2019 5,000,000

Problem 12: Ross Company acquired 40% interest in an associate, Phoebe Company, for SINI - 2019 692,000
P5,000,000 on January 1, 2019. Alta Company reported the following net income and cash SINI - 2020 748,000
dividend for 2019 and 2020: Dividends - 2019 - 320,000 800K*40%
2019 2020 Dividends - 2020 - 400,000 1M*40%
Net income 2,000,000 3,000,000 Investment - Dec. 31, 2020 5,720,000
Dividend paid 800,000 1,000,000
*Downstream transactions – PAS 28 states that the unrealized profit from such transactions
The following transactions occurred between Ross and Phoebe Company: must be eliminated.
*Upstream transactions – No clear guidance from PAS 28. But following equity method
January 1, 2019 – Phoebe Company sold an equipment costing P500,000 to Ross Company (where the investor and investee is viewed as one entity), whether DS or US, the unrealized
for P800,000. The latter applied a 10% straight line depreciation. profit must be eliminated.

July 1, 2020 – Phoebe Company sold an equipment with carrying amount of P500,000 for
P900,000 to Ross Company. The remaining life of the equipment is 5 years.
December 1, 2020 – Phoebe Company sold an inventory costing P2,000,000 to Ross
Company for P2,800,000. It remained unsold in 2019.
a. What is the investment income for 2019?
b. What is the investment income for 2020?
c. What is the carrying amount of the investment in associate on December 31, 2020?
Ordinary with preference shares
Problem 13: Goop Company owns 25% of the ordinary shares of Poog Company. All
throughout 2019, Poog Company has 8% preference shares with total par value of
P10,000,000. Poog declared P700,000 dividends on its preference shares. GHI reported
profit of P3,000,000 during 2019.
How much is Goop Company’s share in the profit of the associate?
a. Assuming the preference shares are cumulative. P550,000
b. Assuming the preference shares are non-cumulative. P575,000

Unadj. NI - 2019 2,000,000 Investment in associate achieved in stages

Problem 14: On January 1, 2019, Brown Company acquired a 10% interest in Black
Unrealized profit on equipment - 300,000
Company for P3,000,000 designated as a financial asset at fair value through other
Realized profit on equipment 30,000 300k*10%
comprehensive income. On December 31, 2019, the interest had a fair value of P4,500,000.
Adj. NI. - 2019 1,730,000
On January 1, 2020, the entity acquired a further 15% interest in Black for P6,750,000. On
Share 40%
such date, the carrying amount of the net assets of Black was P36,000,000. The fair value
SINI - 2019 692,000 of the net assets of Black is equal to its carrying amount except for an equipment whose
fair value exceeds carrying amount by P4,000,000. The equipment has a remaining life of 5
Unadj. NI - 2020 3,000,000 years. Black reported net income of P8,000,000 for 2020 and paid cash dividend of
Realized profit on equipment 30,000 P5,000,000 on December 31, 2020.
Unrealized profit on equipment - 400,000
Realized profit on equipment 40,000 400K/5years*6/12 a. What amount of gain on remeasurement to equity should be recognized for 2020?
Unrealized profit on inventory - 800,000 NIL
Adj. NI - 2020 1,870,000
Share 40% b. What is the goodwill arising from the acquisition on January 1, 2020?
SINI - 2020 748,000
c. What is the carrying amount of the investment in associate on December 31, 2020?

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FV of 10% interest 4,500,000 FV - July 1, 2019 1,600,000

FV of 15% interest 6,750,000 CA on July 1, 2019 1,195,000
Cost of 25% investment 11,250,000 Unrealized gain (P/L) 405,000
BV of NIA 9,000,000 36M*25%
Excess of cost 2,250,000 Dividend income - Oct. 1, 2019 150,000 1M*15%
Attributable to equipment 1,000,000 4M*25%
Goodwill 1,250,000 FV - Dec. 31, 2019 2,000,000
FV - July 1, 2019 1,600,000
Cost of 25% investment 11,250,000 UG (P/L) 400,000
SINI - 2020 2,000,000 8M*25%
Addt'l dep'n - 200,000 1M/5years Total income 1,560,000
Dividend - 2020 - 1,250,000 5M*25%
Investment - Dec. 31, 2020 11,800,000 *PAS 28 provides that after loss of significant influence, the retained investment shall be
remeasured at fair value.
*PFRS 3 (Bus. Combination) provides that in a business combination achieved in stages, the
investor shall remeasure previously held equity interest at fair value. Investee with heavy losses
Problem 16: On July 1, 2015, Cleopatra Corporation acquired 25% of the shares of Marcus,
Inc. for P1,000,000. At that date, the equity of Marcus was P4,000,000, with all the
Investment in associate to Financial asset at Fair value identifiable assets and liabilities being measured at amounts equal to fair value. The table
Problem 15: Fire Company acquired 30% of Water Company’s voting share capital for below shows the profits and losses made by Marcus during 2015 to 2019:
P2,000,000 on January 1, 2018. During 2018, Water earned P800,000 and paid dividend of Year Profit (Loss)
P500,000. Water reported earnings of P1,000,000 for the 6 months ended June 30, 2019 2015 P 200,000
and P2,000,000 for the year ended December 31, 2019. On July 1, 2019, Fire sold half of 2016 (2,000,000)
the investment in Water for P1,500,000. Water paid dividend of P1,000,000 on October 1, 2017 (2,500,000)
2019. The fair value of the retained investment is P1,600,000 on July 1, 2019 and 2018 160,000
P2,000,000 on December 31, 2019. The retained investment is to be held for trading 2019 300,000
purposes.
What is the carrying amount of the investment in Marcus, Inc. as of December 31, 2019?
What total amount of income should be reported in 2019? P15,000

SINI - June 30, 2019 300,000 1M*30%

Sales price - July 1, 2019 1,500,000

CA of July 1, 2019:
Investment, Jan. 1, 2018 2,000,000
SINI - 2018 240,000 800K*30%
Cash div. - 2018 - 150,000 500K*30%
SINI - June 30, 2019 300,000
2,390,000
Sold half 50% 1,195,000
Gain on sale 305,000

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THEORIES
1. A financial instrument is any contract that gives rise to
a. A financial asset
b. A financial liability
c. A financial asset of one entity and a financial liability of another entity
d. A financial asset of one entity and a financial liability or equity instrument
of another entity
2. What is the principle for recognition of a financial asset?
a. A financial asset is recognized when it is probable that future economic
benefits will flow to the entity.
b. A financial asset is recognized when the entity obtains control of the
instrument.
c. A financial asset is recognized when the entity obtains the risk and rewards
of ownership of the financial asset.
d. A financial asset is recognized when the entity becomes a party to the
contractual provisions of the instrument.
3. The following are classification of financial assets under PFRS 9, except
a. Financial asset at fair value through profit or loss
b. Financial asset at fair value through other comprehensive income
c. Financial asset at amortized cost
d. Investment in associate
4. 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 risk and rewards of
ownership.
5. 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.
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6. 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.
d. The price that would be paid to acquire the asset.
7. Which of the following would be considered a 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.
Fair value hierarchy
1. Level 1 – the quoted prices in an active market for identical assets.
2. Level 2 – the quoted prices for similar assets in an active market and quoted prices
for identical or similar assets in a market that is not active.
3. Level 3 – the unobservable input for the asset usually developed by the entity using
the best available information from the entity’s own data.
An example is the financial forecast of net cash inflows from the asset.
8. Significant influence is the power over the investee or the power to govern the
financial and operating policies of an entity so as to obtain benefits from the
activities.
Control is the power to participate in the financial and operating policy decisions of
the investee but not control or joint control over those policies.
The presumption on influence based on the level of ownership of the investor is
conclusive.
a. True, False, True
b. False, True, False
c. True, True, False
d. False, False, False
9. Which 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.
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10. 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 the preference dividends only when declared.
d. After adjusting for the preference dividends, whether or not the dividends
have been declared.
11. The equity method is not required when the associate has been acquired and held
with a view to disposal within what time period?
a. Six months from the end of reporting period
b. Twelve months from the end of reporting period
c. Twelve months from date of classification as held for sale
d. In the near future
12. The excess of the investor’s share of the net fair value of the associate’s net assets
over the cost of the 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. Deferred gain
14. An investor uses the equity method of accounting for a 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.
15. 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

13. 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 excesses of fair value over
carrying amount affect the investor’s equity in earnings of the investee for the
current year?
Inventory excess Land excess
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect

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