MOCK EXAM (4th) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y.

21-22

THEORY: (1-10, TF ; 11-30, MC)

1. IAS 28 addresses investment of 20%-50% in debt capital of an investee company.

2. An entity which occupies an insignificant portion of the building and leases out the rest through
operating lease shall classify the said building as investment property.

3. Under IFRS 9, only debt securities can be classified as financial assets held at amortized cost.

4. A reclassification of the carrying value of the investment in associate account to a financial asset
account happens when there is derecognition of investment up to a certain level, i.e., minimum of
25% holdings is lost.

5. A building owned by a parent entity which was being leased to its subsidiary shall be presented as
an investment property in the consolidated financial statements.

6. The contractual cash flows test refers to the SPPI test.

7. An entity, which elected to use the cost model in valuing its investment property, is no longer
required to disclose the fair value of the said asset.

8. Undervaluation of inventory causes an increase in the investment income account for purposes of
determination of the total investment income for a certain period.

9. Unrealized gains on financial assets carried at FVOCI are reported as component of the separate
statement of profit or loss.

10. Dividends received on financial assets at FVOCI decrease the investment account.

11. Which of the following is recognized in profit or loss if the equity investment is designated as a
financial asset at fair value through other comprehensive income?
a. Changes in fair value
b. Impairment loss
c. Transaction costs to sell
d. None of these

12. Which of the following is incorrect?

a. Investments classified as long-term are reclassified as short-term investments only if it is
the intention of the management to dispose of them in the short term.
b. If an investor company does not have significant influence in another company, it must use
either the fair value method or the cost method to account for that investment in equity
securities.
c. If an investor company has a controlling interest in another company, it must use either the
cost method or the equity method to account for that investment in equity securities.
d. The cost method is sometimes applied to investments in equity securities.

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MOCK EXAM (4th) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

13. If an associate has outstanding cumulative preferred stock, the investor computes its share in the
associate’s profits or losses
a. After adjusting for preferred dividends which were actually paid during the year
b. After adjusting for preferred dividends whether or not the dividends have been declared
c. After adjusting for preferred dividends only when declared
d. Without regard for preferred dividends

14. Which of the following transactions result to a reduction in the carrying amount of the investment
in associate account?
a. Share in losses of an associate experiencing heavy losses. Investment in associate account
is already at the minimum amount.
b. Step acquisition of a subsidiary from 15% to 40% to 51%
c. Share dividends
d. Amortization of overvaluation of a fixed asset account in relation to a purchase of
investment in associate

15. If under the equity method, an investor’s share of losses of an associate equals or exceeds the
carrying amount of an investment, which of the following is an incorrect accounting treatment?
a. If the associate subsequently reports profits, the investor resumes its share of profits
without regard to the share of net losses not previously recognized.
b. The investment is reported at nil value.
c. The investor ordinarily discontinues its share of further losses.
d. Additional losses are provided to the extent the investor has incurred obligations or made
payments on behalf of the associate to satisfy obligations of the associate that the investor
has guaranteed or otherwise committed

16. When the equity method is used to account for investments in associate, which of the following
affects the investor’s reported investment income?
a. Cash dividends from an investee
b. Depreciation of equipment
c. Amortization of excess of cost over fair value attributable to goodwill
d. Share in losses of an investee

17. On 1 January 2019, Investor Company acquired an interest that gives significant influence over
Investee Company. On that date, Investor measured the purchased goodwill at P150,000. The
goodwill should:
a. Be separately recorded in the books of Investor Company
b. Be separately recorded in the books of Investee Company
c. Not be recorded separately in any financial statements
d. Be separately recorded in the consolidated FS of Investor Company

18. Alpha Ltd. owns 25% of the shares and voting rights in Beta Co. In accordance with IAS 28, Alpha
a. Will need to have board representation in Beta to ensure it has significant influence over
Beta
b. Will need to have appointed the majority of the board members in Beta to ensure it has
significant influence over Beta

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c. Is presumed to have significant influence over Beta because it has greater than 20% of the
share capital of the company
d. Is presumed to have significant influence over Beta as it holds more than 20% of the voting
power in that company, unless it can be proven otherwise

19. Which of the following is not an example of an investment property?

a. Land held for undetermined future use
b. Property leased to another entity under finance lease
c. Property leased to another entity under operating lease
d. Property being constructed for future use as an investment property

20. Which of the following is incorrect if the enterprise provides ancillary services to the occupants of
a property held by the enterprise?
a. The appropriateness of classification as investment property is determined by the
significance of the services provided
b. If the services provided are relatively insignificant component of the arrangement as a whole
(for instance, the building owner supplies security and maintenance services to the lessees),
then the enterprise may treat the property as investment property
c. Where the services provided are more significant (such as in the case of an owner-managed
hotel), the property should be classified as owner-occupied
d. None of the above

21. If a company uses the fair value model to value investment property, changes in the fair value of
the asset are least likely to affect:
a. Net income
b. Net operating income
c. Other comprehensive income
d. Net profit margin

22. Subsequent to initial recognition, the investment property shall be measured at

a. Fair value
b. Cost less any accumulated depreciation and any accumulated impairment losses
c. Revalued amount
d. Either fair value or cost less any accumulated depreciation and any accumulated impairment
losses

23. Under IAS 40, investment property is defined as

a. Property held to earn rentals or for capital appreciation
b. Property held for sale in the ordinary course of business
c. Identifiable nonmonetary assets without physical substance
d. Property held for use in the production and supply of goods or services and property held
for administration purposes

24. Which of the following describes a principal market for establishing fair value of an asset?
a. The market 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

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d. The market in which the amount received would be maximized

25. Cash, equity instrument of another entity, or contractual right to receive cash or another financial
asset from another entity.
a. Financial asset
b. Financial instrument
c. Equity instrument
d. Financial liability

26. An entity has several investments in equity securities that are purchased and held principally for
the purpose of generating gains on resale in the short term. How would this financial asset be
measured under IFRS 9?
a. Amortized cost
b. Historical cost
c. Fair value through OCI
d. Fair value through profit or loss

27. For assets carried at amortized cost, when calculating the impairment loss, the impairment loss
measured is the ________ the _________ and the _________.
a. sum of, current fair value, anticipated fair value
b. difference between, carrying value, present value of estimated future cash flows
c. sum of, carrying value, present value of estimated future cash flows
d. d. difference between, current fair value, anticipated fair value

28. In which of the following scenarios should transaction costs not be capitalized?
a. Debt instruments carried at fair value through OCI
b. Equity instruments carried at amortized cost
c. Debt instruments carried at amortized cost
d. Equity instruments carried at fair value through OCI

29. Investments in debt securities should be recorded on the date of acquisition at

a. Lower of cost or market
b. Market value
c. Market value plus brokerage fees and other costs incident to the purchase
d. Market value less brokerage fees and other costs incident to the purchase

30. A debt instrument with no ready market is exchanged for a property whose fair value is currently
indeterminable. When such a transaction takes place:
a. The present value of the debt instrument must be approximated using an imputed interest
rate
b. It should not be recorded on the books of either party until the fair value of the property
becomes evident
c. The directors of both entities involved in the transaction should negotiate a value to be
assigned to the property
d. The board of directors of the entity receiving the property should estimate a value for the
property that will serve as a basis for the transaction

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MOCK EXAM (4th) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

PROBLEM-SOLVING

1. On December 28, 2021, Cruz Company commits itself to purchase a financial asset to be classified
as FA at AC for P1,000,000 its fair value on commitment (trade) date. This security has a fair value
of P1,002,000 and P1,005,000 on December 31, 2021 (Cruz's financial year-end), and January 5,
2022 (settlement date), respectively. If Cruz applies the settlement date accounting method to
account for regular-way purchases of its securities, the financial asset should be recognized on
January 5, 2022 at
a. 1,000,000 b. 1,002,000 c. 1,005,000 d. 0

2. During 2021, Juaquin Co. pays an insurance premium of P45,000 on a life insurance policy covering
the president. The cash surrender value of the policy will increase from P170,000 to P180,200
during 2021. The entity received dividends of P1O,500 from the insurance company during 2021.
The president died half-way through 2021. The policy indicates that the cash surrender value is
P175,600 at that date and 50% of the premium is refunded. The life insurance expense for the year
2021 is
a. P24,300 b. P9,000 c. P12,300 d. P6,400

3. Joseline Corporation's properties included the following items:

• Land held for undetermined future use, P5,000,000.
• A vacant building to be leased out under an operating lease, P20,000,000.
• Property held for sale in the ordinary course of its business, P30,000,000
• Property acquired exclusively with a view to subsequent disposal in the near future,
P4,000,000
• Property occupied by employees paying market rent, P3,000,000
• Property occupied by employees paying below market rent, P1,000,000
• Property held for administrative purposes, P10,000,000
• A hotel owned and managed, P50,000,000
• A building being leased out to a subsidiary, P8,000,000
• A building, which cannot be sold or leased out separately, used in the production of goods
• and around 2% of the area being leased out to canteen operators, P2,000,000
• Property that is being constructed for use as an investment property, P7,000,000

How much should be reported as investment properties in Joseline Corporation's separate financial
statements?
a. 43,000,000 b. 38,000,000 c. 35,000,000 d. 40,000,000

4. On Jan. 1, 2021, an entity purchased a debt instrument at its face value of P1,000,000. The
contractual term is ten years with an annual coupon of 6%. On Dec. 31, 2021, the fair value of the
instrument decreases to P955,000. 12-month expected credit losses as determined under the
impairment model are P25,000.

Which statement is correct?

a. If the debt instrument is classified as FA at FVTPL, net amount to be recognized in 2021
profit or loss is P35,000.
b. If the debt instrument is classified as FA at FVTOCI, the amount to be recognized in 2021
other comprehensive income is P45,000.

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MOCK EXAM (4th) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

c. If the debt instrument is classified as FA at AC, the amount to be reported on the entity's
Dec. 31, 2021 statement of financial position is P975,000.
d. None of these.

5. On January 1, 2021, JLA Corporation paid P2,592,000 for 40,000 shares of XYZ, Inc. ordinary
shares. The book value of XYZ's net assets was P6,400,000 on the date of acquisition. On the same
date, the fair value of XYZ's depreciable assets, with an average remaining useful life of 8 years,
exceeded their book value by P640,000. The remainder of the excess of the cost of the investment
over the book value of net assets purchased was attributed to an unidentifiable asset.

The investment represents 30% interest in the net assets of XYZ, Inc. and gave JLA Corp. the ability
to exercise significant influence over XYZ. JLA Corp. received dividends of P6 per share on
December 4, 2021, and XYZ reported net income of P1,280,000 for the year ended December 31,
2021. The market value of XYZ's shares on December 31, 2021 was P64 per share with cost to sell
at a minimal amount.

What amount of the investment is attributable to goodwill?

a. 480,000 b. 192,000 c. 672,000 d. 288,000

6. Refer to #5. What amount of investment income should be reported in JLA Corporation’s income
statement for the year ended December 31, 2021?
a. 240,000 b. 360,000 c. 216,000 d. 384,000

7. Refer to #5. Assuming that JLA Corp had no significant influence over XYZ despite of the
proportionate ownership, what net amount in relation to the investment should be reported in JLA’s
income statement for the year ended December 31, 2021?
a. 240,000 b. 180,000 c. 60,000 d. 208,000

8. Refer to #5. Assuming that JLA Corp had no significant influence over XYZ despite of the
proportionate ownership, what is the carrying value of the investment at December 31, 2021?
a. 2,592,000 b. 2,712,000 c. 2,560,000 d. 2,472,000

9. On December 31, 2020, DJO Company's statement of financial position showed the following
balances to its securities account:

Cost Market
Financial Asset at Fair Value Through Profit or Loss
10,000 shares of ABC stock 1,500,000 1,525,000
8,000 shares of DEF stock 1,100,000 1,056,500

Financial Asset at Fair Value Through Other Comprehensive Income

10,000 shares Of JKL shares 1,180,000 1,260,000
20,000 shares MNO shares 980,000 1,100,000

During 2021, the following transactions took place:

• 3/1 Purchased 3,000 additional shares for ABC stocks for P459,000 classified as
investment at fair value through profit or loss.

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MOCK EXAM (4th) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

• 4/15 Sold 4,000 shares of DEF stocks for P138 per share.
• 5/4 Sold 4,000 shares of JKL stocks for P124 per share.
• 9/1 Purchased 400 of PQR's 5 year, 12%, P1,000 bonds at 93 plus accrued interest. The
bonds are dated January 1, 2011 and pay interest annually every January 1. The bonds was
designated as investment at fair value through profit or loss.

The market values of stocks and bonds on December 31, 2021 are as follows:
ABC stock 153.20
DEF stock 137.00
JKL stocks 110.50
MNO stocks 44.00
PQR bonds 98.00 (quoted price

The investment in PQR bonds will be initially recorded at an amount of

a. 404,000 b. 372,000 c. 432,000 d. 420,000

10. Refer to #9. How much is the realized gain or loss on the sale of DEF stocks?
a. 2,000 b. 23,750 c. (23,750) d. 0

11. Refer to #9. How much is the realized gain or loss on the sale of JKL stocks?
a. 24,000 b. (24,000) c. 8,000 d. 0

12. Refer to #9. How much is the unrealized holding loss to be reported in the 2021 SFP?
a. 121,000 b. 125,000 c. 129,000 d. 145,000

13. Refer to #9. What is the carrying value of the investments at FVOCI on December 31, 2021?
a. 1,543,000 b. 1,935,000 c. 1,856,000 d. 1,688,000

14. Violet Company’s investment portfolio contains the following securities on December 31, 2017?
Security Shares Cost Market Value Classified as
Oslo Co. ordinary 150,000 P 6,000,000 P 5,700,000 Trading
Grand, Inc. preference 60,000 2,400,000 2,580,000 Trading
Sunday Co. ordinary (30% 600,000 68,400,000 67,800,000 Investment in
ownership) Associate
Jack Co. ordinary 750,000 4,050,000 3,000,000 Available-for-
sale

Violet Company’s investments had the following market values at December 31, 2018?
Oslo Co. ordinary P 6,120,000
Grand, Inc. preference 2,580,000
Sunday Co. ordinary 66,900,000
Jack Co. ordinary 3,400,000

The valuation entry required on Trading Securities at December 31, 2017, assuming that the
securities were acquired in 2017 and none of the indicated declines in market value are considered
other than temporary, will involve
a. 120,000 debit to Unrealized Holding Loss (Profit and Loss)

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MOCK EXAM (4th) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

b. 120,000 debit to Unrealized Holding Loss (Equity)

c. 120,000 credit to Unrealized Holding Gain (Profit and Loss)
d. No adjustment

15. Refer to #14. The valuation entry required on Available for sale securities at December 31, 2017,
assuming that the securities were acquired in 2016 and none of the indicated declines in market
value are considered other than temporary, will involve
a. 1,050,000 debit to Unrealized Holding Loss on Available for sale (Equity)
b. 1,050,000 debit to Unrealized Holding Loss on Available for sale (Profit and Loss)
c. 1,050,000 credit to Unrealized Holding Gain on Available for sale (Equity)
d. No adjustment needed

16. Refer to #14. The valuation entry required on Investment in Associates required at December 31,
2017, assuming that the indicated decline in value is temporary, will involve
a. No adjustment
b. A 600,000 debit to Unrealized Holding Loss (Equity)
c. A 600,000 debit to Unrealized Holding Loss (Profit and Loss)
d. A 600,000 debit to Unrealized Holding Gain (Equity)

17. Refer to #14. Assume that the investment categories remain the same and that all declines in 2017
and 2018 are temporary except for the 2017 decline in Jack Co.’s ordinary shares. The valuation
entry required at December 31, 2018 on Trading Securities will involve
a. No adjustment
b. A credit to Unrealized Holding Gain (Equity) of P420,000
c. A credit to Unrealized Holding Gain (Profit and Loss) of P420,000
d. A debit to Unrealized Holding Loss (Profit and Loos) of P420,000

18. Refer to #14. Assume that the investment categories remain the same and that all declines in 2017
and 2018 are temporary except for the 2017 decline in Jack Co.’s ordinary shares. The valuation
entry required at December 31, 2018 on Available for Sale Securities will involve
a. A credit of P400,000 to Unrealized Holding Gain (Equity)
b. A credit of P400,000 to Unrealized Holding Gain (Profit and Loss)
c. A debit of P400,000 to Unrealized Holding Loss (Equity)
d. No adjustment

19. At December 31, 2018, balance sheet of D Corporation reported the following as investments in
available-for-sale marketable equity securities (long-term):
Investments in long-term marketable securities at cost 300,000
Less: Allowance to reduce equity security to market (28,000)
272,000

At December 31, 2019, the market valuation of the portfolio was 298,000. What should D
Corporation report on its 2018 Income Statement as a result of the increase in the market value of
the investments in 2018?
a. Realized gain of P2,000
b. Unrealized gain of P2,000
c. Realized gain of P26,000

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MOCK EXAM (4th) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

d. Unrealized gain of P26,000

20. Jose Suarez owns shares (OCI) of Valdes Bros. Inc. purchased as follows:
2015 – 100 shares for P2,500
2016 – 150 shares for P4,500

In 2017, a 20% share dividend was received. Needing cash, Suarez sold all his share dividends at
P25 per share and credited the proceeds to Investment Income account. Using the FIFO method,
the adjusting entry on the books of Suarez should be (Books still open for 2017):
a. No adjustment
b. Investment Income 1,041.50
Gain on Sale of OCI Securities 1,041.50
c. Investment Income 1,166.67
Gain on Sale of OCI Securities 1,166.67
d. Investment Income 1,041.50
Investment in OCI Securities 1,041.50

PROBLEM

The Riverrun Company engaged your services to examine its financial statements for the year ended
December 31, 2018. You identified from the trial balance that its debt investment, consisting solely of ANC
8% 5-year Bonds had a balance of P925,250, representing its acquisition cost of P1,084,250 of the
P1,000,000 face value bonds, due on December 31, 2022, and net of P159,000 proceeds from sale of
investments. Interest is collectible every December 31. Riverrun recorded the interest collected amounting
to P80,000 as a credit to Interest Revenue. On December 31, after receiving the periodic interest, Riverrun
sold P150,000 of the bonds to generate enough funds for settlement of its maturing obligation. The selling
price of P159,000 represents the fair value of the P150,000 bond investments sold.

Because the entity holds these bonds in a portfolio of securities held for collection and also for sale in
response to financing requirements, the enterprise elected to designate the debt investments as at fair
value through OCI. You have calculated an effective interest rate on these investments at 6%.

Required:

• Balance of items to be reported in FS:

o Debt Investments at FVOCI
o Unrealized Loss (Equity) on Debt Investments at FVOCI
o Interest Revenue

(Sources: RPCPA/AICPA/Various test banks/Various review centers’ materials)