Mindanao State University

College of Business Administration and Accountancy

Department of Accountancy
Marawi City

ACT112 – Intermediate Accounting I

First Midterm Quiz
Investment in Financial Asset at Fair Value (Equity Securities) and Investment in Associate

QUESTIONNAIRE

Name: Score:
Instructor: Norhanimah M. Mangondato Date: May 25, 2022

Part I. Theories (1 Point Each)

Instruction: Select the answer that best relates to the statement being described. Write your
answers in the Google Form link provided.

1. During the period, an entity acquires an investment. The entity has a “hold to collect and
sell” business model. The investment should be classified as
a. investment measured at fair value through other comprehensive income.
b. investment measured at amortized cost.
c. investment measured at fair value through profit or loss.
d. any of these.

2. Which of the following is measured at fair value with fair value changes recognized in
profit or loss?
a. Held to maturity investments
b. Financial assets designated at FVPL
c. FVOCI
d. All of these

3. If an entity’s business model’s objective is to hold investments in order to collect

contractual cash flows that are solely payments for principal and interests, then
investments should be classified as
a. subsequently measured at fair value through other comprehensive income.
b. subsequently measured at amortized cost.
c. subsequently measured at fair value through profit or loss.
d. any of these.

4. An investment in equity securities is accounted for as investment in associate if

a. the investment represents 20% or more ownership interest over the investee.
b. the fair value of the equity securities cannot be determined on a continuing basis.
c. the investment provides the investor significant influence over the investee.
d. the entity’s management elects to do so.

5. Which statement is true concerning subsequent measurement of financial asset at fair

value?
I. The financial asset shall be measured at fair value if the business model is not to
collect contractual cash flows on specified dates and the contractual cash flows
are not solely payments of principal and interest.
II. An entity may irrevocably designate a financial asset as measured at measured
at fair value through profit or loss even if the financial asset satisfies the amortized
cost.

Page 1 of 11
 a. I only
b. II only
c. Both the I and II
d. Neither I nor II

6. Investments in equity instruments that do not have a quoted price in an active market
and whose fair value cannot be reliably determined are subsequently measured at
a. Cost
b. Amortized cost using the straight line method
c. Amortized cost using the effective interest method
d. Fair value

7. What is the best evidence of fair value of a financial instrument?

a. Its cost, including transaction costs directly attributable to the purchase origination or
issuance of the financial instrument.
b. Its estimated value determined using discounted cash flow technique, option pricing
model or other valuation technique.
c. Its quoted price, if an active market exists for the financial instrument.
d. The present value of the contractual cash flows less impairment.

8. Which of the following cannot be considered a financial asset?

a. Cash
b. A contractual right to receive cash or another financial asset from another entity
c. A contractual right to exchange financial instruments with another entity under
conditions that are potentially unfavorable
d. An equity instrument of another entity

9. Transaction costs include

a. Fees and commission paid to agent, levies by regulatory authorities, transfer taxes and
duties.
b. Debt premiums or discounts.
c. Financing costs.
d. Internal administrative costs.

10. 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.

11. All of the following are characteristics of financial assets classified as held to maturity,
except
a. They have fixed or determinable payments and a fixed maturity.
b. The holder can recover substantially all of its investment unless there has been credit
deterioration.
c. They are quoted in an active market.
d. The holder has demonstrated a positive intention and ability to hold them to maturity.

12. If as a result of a change in intention or ability, it is no longer appropriate to classify an

investment as held to maturity, it shall be reclassified as
a. Available for sale and remeasured at fair value and the difference between fair value
and the carrying amount shall be accounted for as a component of other
comprehensive income.
Page 2 of 11
 b. Available for sale and remeasured at fair value and the difference between fair value
and the carrying amount shall be accounted for as a component of profit or loss
c. Trading and remeasured at fair value and the difference between the fair value and
the carrying amount shall be included in profit or loss.
d. Nonmarketable investment and its carrying amount is the initial cost.

13. If in the rare circumstances that a reliable measure of fair value is no longer available, it
becomes appropriate to carry a financial asset without a fixed maturity at cost, the fair
value carrying amount of the financial asset becomes the new cost basis and any
previous gain or loss that has been recognized in other comprehensive income shall
a. Remain in in other comprehensive income until the financial asset is sold or otherwise
disposed of.
b. Be recognized in earnings immediately.
c. Included in retained earnings.
d. Be amortized over a reasonable period to profit or loss.

14. At the beginning of the current year, an entity purchased equity securities in another
entity with the intention of holding this investment over a long term. What is the most
appropriate classification of this equity investment?
a. At fair value through profit or loss
b. Available for sale
c. Held to maturity
d. Amortized cost

15. Which of the following statements best describe 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 decision of an entity.
d. The mutual sharing in the risks and benefits of a combined entity.

16. An investor shall discontinue the use of the equity method from the date
I. The investor ceases to have significant influence over an associate.
II. The associate operates under severe long-term restrictions that significantly impair
the ability to transfer funds to the investor.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

17. How is goodwill arising on the acquisition of an associate dealt with in the financial
statement?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss.
d. Goodwill is not recognized separately within the carrying amount of the investment.

18. An investor uses the equity method to account for an investment in ordinary shares. After
the date of acquisition, the investment account of the investor would
a. Not be affected by its share of the earnings or losses of investee.
b. Not be affected by its share of the earnings of the investee, but be decreased by its
share of the losses of the investee.
c. Be increased by its share of the earnings of the investee, but not be its share of the
earnings of the investee.
d. Be increased by its share of the earnings of the investee, and decreased by its share
of the losses of the investee.
Page 3 of 11
19. 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. Increase the investment revenue account.
d. Does not affect the investment account.

20. An investor uses the equity method to account for its 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 reported 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

21. When an investor uses 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

22. 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
at
a. Fair value.
b. Carrying amount.
c. Amortized cost.
d. Original cost.

23. 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-exhange.
c. The most conservative estimate must be used.
d. The asset is in its highest and best use.

24. Under PFRS 9, which of the following is not a category of financial assets?
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. Financial assets held for sale

25. Which statement is true concerning recognition of unrealized gains and losses on
financial assets?
I. Unrealized gains and losses on financial assets held for trading shall be included in
profit or loss.
II. Unrealized gains and losses on financial assets measured at amortized cost shall
be included as component of other comprehensive income.

Page 4 of 11
 a. I only
b. II only
c. Both the I and II
d. Neither I nor II

26. When a investor uses equity method to account for investment in ordinary shares, cash
dividend received by the investor from the investee shall be recorded a
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 shareholders’ equity account, dividends to shareholder.

27. At the time beginning of the current year, an investor acquired 30% of the ordinary shares
of another entity. In the current year, the investee has net earnings which exceeded
dividends paid. The investor mistakenly recorded these transactions using cost method
instead of equity method of accounting. What effect would this have on investment
account, net earnings and retained earnings, respectively?
a. Overstate, overstate, overstate
b. Overstate, understate, understate
c. Understate, overstate, understate
d. Understate, understate, understate

28. An entity acquired equity shares representing a small percentage of the issued ordinary
shares of another entity. The investee's shares are listed on a stock exchange. Which of
the following categories could this investment in equity shares be classified?
a. Held to maturity
b. Available for sale
c. At fair value through profit or loss
d. Either as available for sale or at fair value through profit or loss

29. Which of the following describe a principal market for establishing g a fair value of an
asset?
a. The market that has the greatest volume and the 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.

30. 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 dividend
d. Earnings are reported by the investee in its financial statements.

Page 5 of 11
Part II. Problems (3 Points Each)
Instruction: Write the letter of your answers in the Google Form provided. In addition, you
are required to show your corresponding solution for each problem in a separate sheet of
paper. Said Solution Sheet need not be encoded, just take pictures of the same, attach in
the assigned quiz in your google classroom, and submit on time.

At the beginning of the current year, Geralt Company purchased 40% of the outstanding
ordinary shares of Ciri Company, paying P6,400,000 when the carrying amount of the net
assets of Ciri Company equaled P8,500,000.

The difference was attributed to equipment which had a carrying amount of P3,000,000
and a fair market value of P7,500,000 and to building which had a carrying amount of
P2,500,000 and a fair value of P5,500,000. The remaining useful life of the equipment and
building was 4 years and 12 years, respectively.

During the current year, Ciri Company reported net income of P5,875,000 and paid cash
dividend of P2,000,000.

31. What is the excess of cost over the carrying amount of net assets acquired?
a. 5,000,000
b. 1,400,000
c. 3,000,000
d. 0

32. What amount should be reported as investment income for the current year?
a. 2,000,000
b. 1,000,000
c. 1,800,000
d. 1,750,000

33. What is the carrying amount of the investment in associate at year-end?

a. 7,200,000
b. 8,150,000
c. 7,150,000
d. 7,400,000

Latte issued rights to subscribe to its stock, the ownership of 4 shares entitling the
shareholders to subscribe for 1 share at P105. Arwin Company owns 50,000 shares of Latte
Company with total cost of P5,000,000. The share is quoted right-on at 125.

34. 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. 1,562,000
d. 1,450,000

On January 1, 2021, Dion Co. purchased 20,000 out of the 100,000 total outstanding shares
of Roxana, Inc. for 4,000,000. Jeremy’s assets and liabilities approximate their fair values. In
2021, Roxana, Inc. reported profit of 12,000,000 and declared and paid cash dividends of
800,000. In 2022, Roxana reported loss of 8,000,000, declared and issued 10% stock
dividends, and reported gain on property revaluation of 2,000,000 and loss on exchange
differences on translation of foreign operations of 400,000.

Page 6 of 11
35. How much are the amounts reported in Dion Co.’s 2021 statement of profit or loss and
statement of financial position for the investment in associate?
a. 2,400,000; 6,240,000
b. 160,000; 4,000,000
c. 2,240,000; 6,240,000
d. 0; 6,400,000

36. How much are the amounts reported in Dion Co.’s 2022 (1) statement of profit or loss and
(2) statement of financial position for the investment in associate?
a. (1,280,000); 4,960,000
b. (1,600,000); 4,960,000
c. (1,280,000); 4,000,000
d. 0; 4,960,000

On January 1, 2021, ABC Co. purchased 1,000 shares of XYZ, Inc. for 250,000. Commission
paid to broker amounted to 10,000. The equity securities were designated by management
to be measured at fair value through profit or loss. On December 31, 2021, the shares are
quoted at 200 per share. It was estimated that transaction cost of 20 per share will be
incurred if the shares were sold on that date.

37. How much is the unrealized gain (loss) on change in fair value recognized in the 2021
profit or loss?
a. (70,000)
b. (50,000)
c. (40,000)
d. 60,000

38. On January 3, 2022, all the shares were sold at 300 per share. Commission paid for the
sale amounted to 60,000. How much is the realized gain (loss) from the sale?
a. 60,000
b. (10,000)
c. 40,000
d. (40,000)

Raf Company acquired 20,000 shares of Knoxx Company on January 1, 2019 at P120 per
share. Knoxx Company had 80,000 shares outstanding with a carrying amount of P8,000,000.
The difference between the carrying amount and fair value of Knoxx Company on January
1, 2019 is attributable to a broadcast license which is an intangible asset.

Knoxx Company recorded earnings of P3,760,000 and P3,900,000 for 2019 and 2020,
respectively, and paid per-share dividend of P16 in 2019 and P20 in 2020. Raf Company has
a 20-year straight line amortization policy for the broadcast license.

39. What amount should be reported as investment income for 2019?

a. 900,000
b. 880,000
c. 320,000
d. 920,000

40. What amount should be reported as investment income for 2020?

a. 975,000
b. 995,000
c. 955,000
d. 935,000

Page 7 of 11
41. What is the carrying amount of the investment in associate on December 31, 2020?
a. 3,515,000
b. 2,400,000
c. 3,555,000
d. 4,275,000

Little Mina Co. owns 20% of Daniel, Inc.’s ordinary shares. Daniel also has outstanding
cumulative 6% preference shares of 8,000,000, none of which is held by Little Mina. Dividends
are in arrears for three years as of year-end. Daniel reported year-end profit of 4,000,000
and declared no dividends.

42. How much is Little Mina Co.’s share in the profit of the associate?
a. 704,000
b. 800,000
c. 512,000
d. 770,000

Ruby and Izek Company provided the following portfolio of equity investments measured
at fair value through other comprehensive income:
Aggregate cost – December 3, 2019 1,700,000
Unrealized gain – December 31, 2019 40,000
Unrealized loss – December 31, 2019 260,000
Net realized gain during 2019 300,000

On January 1, 2019, the entity reported an unrealized loss of P15,000 as a component of

other comprehensive income.

43. In the 2019 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

On Jan. 1, 2021, Third Co. purchased 10,000 shares of Fourth, Inc. for 1,000,000. Third Co.
paid broker’s commission of 15,000 on the acquisition. Third Co. made an irrevocable
choice to subsequently measure the shares at fair value through other comprehensive
income. The quoted prices per share on Dec. 31, 2021 and Dec. 31, 2022 were 90 and 108,
respectively. On Jan. 3, 2023, Third Co. sold all the shares at 105 per share. Third Co. paid
broker’s commission of 16,000 on the sale.

44. How much is the unrealized gain (loss) recognized in Third Co.’s 2021 profit or loss?
a. 115,000
b. (115,000)
c. (85,000)
d. 0

45. How much is the unrealized gain (loss) recognized in Three Co.’s 2022 other
comprehensive income?
a. 180,000
b. b. 65,000
c. c. (115,000)
d. d. 0

46. How much is the cumulative gain (loss) transferred to retained earnings on Jan. 3, 2023?
Page 8 of 11
 a. 19,000
b. 34,000
c. (19,000)
d. (34,000)

Beau Company received dividends from share investments during the current year:
o A share dividend of 4,000 shares from Portia Company when the market price of
Portia’s share was P20. Beau Company owns less than 1% of Portia’s share capital.
o A cash dividend of P150,000 from Logan Company in which Beau Company owns a
25% interest. A majority of Logan’s directors are also directors of Beau Company.

47. What amount of dividend revenue should be reported for the current year?
a. 230,000
b. 150,000
c. 80,000
d. 0

On January 1, 2021, Cassia Co. acquired 10,000 shares representing a 10% interest in Zester,
Inc.’s 100,000 outstanding shares for 3,200,000. In 2021, Zester reported profit of 20,000,000
and declared and paid dividends of 4,000,000. The investment was initially classified as
investment in held for trading securities. The fair value of the shares on December 31, 2021
was 340 per share.

On July 1, 2022, Cassia Co. acquired additional 15,000 shares of Zester, Inc. at 280 per share
(the fair value on this date), resulting to an increase in its ownership interest to 25%. The
transaction did not give rise to any goodwill or negative goodwill. In 2022, Zester reported
profit of 24,000,000, of which 16,000,000 were earned in the second half of the year. In
addition, Zester declared and paid dividends of 4,000,000 on December 31, 2022. The Zester
shares were quoted at 360 per share on December 31, 2022.

48. How much is the total amount recognized in profit or loss in 2022 in relation to the
investment?
a. 3,000,000
b. 3,400,000
c. 4,000,000
d. 4,600,000

49. How much is the carrying amount of the investment on Dec. 31, 2022?
a. 12,400,000
b. 10,000,000
c. 10,000,000
d. 12,400,000

Samantha Company acquired a 40% interest in Carmela Company for P1,700,000 on

January 1, 2019. The shareholders’ equity of Carmela Company 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, 2019, all the identifiable assets and liabilities of Carmela Company were
recorded at fair value. Carmela Company reported profit of P700,000, after income tax
expense of P300,000 and paid dividend of P200,000 to shareholders during the current year.

Page 9 of 11
The revaluation surplus is the result of the revaluation of land recognized by Camela
Company on December 31, 2019. Additionally, depreciation is provided by Carmela
Company using straight line method whereas Samantha Company used the diminishing
balance method. Had Carmela Company used the diminishing balance method, the
accumulated depreciation would be decreased by P200,000.

50. What is the carrying amount of the investment in associate on December 31, 2019?
a. 2,420,000
b. 1,700,000
c. 1,900,000
d. 2,320,000

Ryla Co. owns 40% of Roscoe, Inc.’s ordinary shares. On July 1, 2022, Ryla Co. sells half of its
investment in Roscoe shares for 800,000. The adjusted balances of the related accounts
immediately before the sale are as follows:
Investment in associate 2,400,000
Cumulative share in Roscoe’s revaluation gains 1,000,000

Ryla retains significant influence over Roscoe after the sale.

51. How much of the cumulative share in Roscoe’s revaluation gains is derecognized on July
1, 2022?
a. 1,000,000
b. 500,000
c. 250,000
d. 0

During 2019, Hendrix Company brought the shares of Pierre Company.

June 1 20,000 shares @ P100 2,000,000
December 1 30,000 shares @ P120 3,600,000
5,600,000
Transactions for 2020:
January 10 Received 20% share dividend
July 20 Received cash dividend of P5 per share
December 10 Sold 30,000 shares at P115 per share

52. What amount should be reported as dividend income for 2020?

a. 600,000
b. 500,000
c. 400,000
d. 300,000

53. What is the gain on sale of shares under FIFO approach?

a. 1,150,000
b. 950,000
c. 850,000
d. 550,000

54. What is the gain on sale of shares under average approach?

a. 650,000
b. 950,000
c. 500,000
d. 600,000

Page 10 of 11
Cayena Company owns 20,000 shares of Raphael Company’s 200,000 shares of P100 par,
6% cumulative, nonparticipating preference share capital and 10,000 shares representing
2% ownership of Raphael’s ordinary share capital.

During 2019, Raphael Company declared and paid preference dividends of P2,450,000. No
dividends had been declared or paid during 2018.

In addition, Cayena Company received a 5% share dividend on ordinary share from

Raphael Company when the quoted market price of Raphael’s ordinary share was P10.

55. What amount should be reported as dividend income for 2019?

a. 120,000
b. 125,000
c. 240,000
d. 245,000

Page 11 of 11