FAR EASTERN UNIVERSITY – MANILA

FAR-THEORIES Review Ÿ Batch 2023 Ÿ February 6, 2023

FINANCIAL ACCOUNTING & REPORTING - THEORIES G. Macariola

TFAR-2304: INVESTMENT IN EQUITY SECURITIES

1. An instrument representing ownership shares and the right to acquire ownership

shares such as ordinary share and preference share is
a. Debt security
b. Marketable security
c. Equity security
d. Shareholders’ equity

2. Which among the following is NOT a purpose for holding investment in stocks?
a. For accruing income through dividends
b. For controlling another enterprise
c. For accruing income through in increase in value
d. For accruing income through regular interest

3. Kingdom of Lucis Incorporated acquired equity securities for non-trading purposes.

In the books of Lucis, the equity securities are designated as:
a. Equity Investments – FVPL
b. Equity Investments – FVOCI
c. Irrevocable choice of either Equity Investments – FVPL or Equity Investments – FVOCI
d. Investments in Associate

4. Equity securities may be classified as

a. FVPL only c. FVPL or FVOCI
b. FVOCI only d. FVPL, FVOCI or IAC

5. Investments in equity securities that provide neither control nor significant

influence over the investee are measured at the end of the reporting period at
a. Fair value
b. Cost
c. Carrying value using equity method
d. Fair value less cost to sell

6. Under which type of investment classification is transaction cost of acquisition

taken to profit or profit or loss?
a. Financial assets at fair value through profit or loss.
b. Financial assets at fair value through other comprehensive income.
c. Financial assets at amortized cost.
d. Investment in associate.

7. Equity securities acquired for trading shall be measured at

a. Cost, being the purchase price.
b. Fair value, with change in fair value taken to profit or loss.
c. Fair value, with change in fair value taken to other comprehensive income.
d. Cost, being the purchase price plus transaction costs.

8. Cash dividends are recognized as income by the investor on the

a. Date of declaration c. Date of payment
b. Date of record d. Date of balance sheet

9. What is the effect of a stock split known as ‘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.

Page 1 of 3
 10.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 dividend income is credited
d. A new investment account is debited and the original investment account is credited

11.Unrealized gains or losses which are recognized in the Statement of Comprehensive

Income are from securities classified as
a. FVPL only
b. FVPL and FVOCI
c. FVOCI and Investment in Associate
d. FVOCI only

12.Under IFRS 9, the cumulative balance of equity as a result of measuring equity

investments at fair value through other comprehensive income.
a. Shall be reversed to profit or loss at the date the security is sold.
b. Shall be reversed to profit or loss when there is objective evidence of impairment.
c. Shall not be reversed to profit or loss but may be transferred to another equity account.
d. Shall not be reversed to profit or loss and shall not be transferred to another equity
account.

13.For an investment in equity securities classified as FVOCI, unrealized loss taken to

equity is:
a. The excess of fair value over the original cost
b. The excess of fair value over the amortized cost
c. The excess of original cost over the fair value
d. The excess of amortized cost over the fair value

14.It is an entity, including unincorporated entity such as a partnership over which

investor has significant influence and that is neither a subsidiary nor an interest in
joint venture
a. Associate
b. Investee
c. Venture capital organization
d. Mutual fund

15.Which of the following statements best describes the term “significant influence”?
a. The holding of a 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 a combined entity.

16.Which of the following does not describe the equity method of accounting for equity
investment?
a. It is based on economic relationship between an investor and an investee (i.e., investor
and investee are viewed as a single economic unit).
b. Investment is initially carried at cost and is subsequently increased by the net income of
investee but is not affected by the investee’s net loss.
c. When investee declares dividends, the investor recognizes the same as somewhat a
return of investment.
d. It is used when investor holds, directly or indirectly, exactly 20% up to exactly 50% of
the voting stock of the investee. This gives rise to the presumption of existence of
significant influence.

17.An entity has 25% investment in ordinary share and 10% investment in preference
share over the investee. Which of the following is true?
a. Both investments should be classified as Investment in Associate
b. The 25% interest may be classified as Investment at fair value and 10% may be classified
as Investment at Amortized cost
c. Both investments may be classified as Investment at fair value
d. The 10% may be classified as Investment in Associate and 25% may be classified as
Investment at fair value

Page 2 of 3
 18.Under the equity method of accounting for investments, an investor recognizes its
share of the profit in the period in which the
a. Investor sells the investment.
b. Investee declares a dividend.
c. Investee pays dividend.
d. Profit is reported by the investee in its financial statements.

19.When an investor uses the equity method to account for investment in associate,
the investment account will be increased when the investor recognizes
a. A proportionate interest in the profit of the investee.
b. A cash dividend received from the investee.
c. Impairment of the goodwill related to the purchase.
d. Depreciation related to the excess of market value over the carrying amount of the
investee’s depreciable assets at the date of purchase by the investor.

20.Which of the following is not a component of other comprehensive income?

a. Unrealized gains/losses on trading securities
b. Gains/losses on Foreign currency translation of FS of a foreign operation
c. Changes in revaluation surplus
d. Actuarial gains/losses on remeasurement of defined benefit obligation under a defined
benefit plan

21.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 carrying amount of the investment and not amortized.
c. Excluded from carrying amount of the investment but charged to retained earnings.
d. Excluded from carrying amount of the investment but charged to expense immediately.

22.An investor uses the equity method to account for investment in associate. The
purchase price implies a fair value of the investee’s depreciable assets in excess of
the investee’s net asset carrying values. The investee’s amortization of the excess
a. Decreases the investment account.
b. Decreases the goodwill account.
c. Increases the investment income account.
d. Does not affect the carrying amount of the investment.

23.When the investor discontinues the use of the equity method because significant
influence is lost, the investment in associate retained by the investor shall be
measured
a. Fair value
b. Carrying amount
c. Amortized cost
d. Original cost

24.In case of an investment in associate reclassified to fair value through OCI due to
loss of significant influence, the gain/loss from cessation that is unrealized shall
a. Be reported in profit or loss
b. Be reported in OCI
c. Be directly reported in retained earnings
d. Not be accounted for

25.If an associate has a preference share, the proper way of computing the share in
net income of an associate would be
a. Deduct pref. dividend whether declared or not if non-cumulative
b. Deduct pref. dividend when declared only if cumulative
c. Deduct pref. dividend whether declared or not if cumulative
d. Deduct pref. and ordinary dividend whether declared or not if cumulative

“Remember… No matter how much it hurts right now, one day you’ll back
and realize, it made you stronger “

Page 3 of 3