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FINANCIAL ACCOUNTING AND REPORTING

INVESTMENTS
PAS 32 FINANCIAL INSTRUMENTS - PRESENTATION

1. These are assets not directly identified in operating activities of a company and occupy only an auxiliary
relationship to the central revenue-producing activities of the company.
a. Current assets c. Property and equipment
b. Investments d. Intangibles

2. A financial instrument is any contract that gives rise to

a. A financial asset only
b. A financial liability only
c. A financial asset of one entity and a financial liability of another entity only
d. A financial asset of one entity and a financial liability or equity instrument of another entity

3. At what amount is a financial asset or financial liability measured on initial recognition?

a. The consideration paid or received for the financial asset or financial liability.
b. Acquisition cost
c. Fair value
d. Zero

4. A financial asset is any asset that is (choose the incorrect one)

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

5. Financial assets include all of the following, except

a. Cash in bank
b. Trade accounts and notes receivable
c. Loans receivable
d. Inventories, property, plant and equipment, intangible assets and prepaid expenses

6. A financial liability is any liability that is a contractual obligation

I. To deliver cash or another financial asset to another entity.
II. To exchange financial assets or financial liabilities with another entity under conditions that is
potentially favorable to the entity.
a. I only c. Both I and II
b. II only d. Neither I nor II

7. Financial liabilities include all of the following, except

a. Trade accounts and notes payable
b. Bonds payable
c. Loans payable
d. Income taxes payable and deferred revenue
8. Which of the following type of instrument is best described as a contract that evidences a residual
interest in the assets of an entity after deducting the liabilities?
a. Financial liability
b. Guarantee
c. Equity
d. Financial asset
9. Which of the following is not classified as a financial instrument?
a. Convertible bond
b. Foreign currency contract
c. Warranty provision
d. Loan receivable

10. An entity has preference shares in issue that are redeemable mandatorily on December 31, 2019. How
should the preference shares be presented on December 31, 2016?
a. Noncurrent liability
b. Current liability
c. Equity
d. Reserves

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11. Equity security

a. Encompasses any instrument representing ownership shares and the right to acquire ownership
shares.
b. Is a security that represents a creditor relationship with the entity.
c. Is the residual interest in the entity.
d. Includes redeemable preferred stock, treasury stock and convertible bonds.

PFRS 9 FINANCIAL INSTRUMENTS

12. Depending on the business model for managing financial assets, an entity shall classify financial assets
subsequent to initial recognition at
a. Fair value
b. Amortized cost
c. Either fair value or amortized cost
d. Neither fair value nor amortized cost

13. A financial asset is classified as held for trading if

a. It is acquired principally for the purpose of selling or repurchasing it in the near term.
b. On initial recognition, it is part of a portfolio of identified financial assets that are managed together
and for which there is evidence of a recent actual pattern of short-term profit taking.
c. It is a derivative except for a derivative that is a financial guarantee or a designated and an effective
hedging instrument.
d. All of these

14. Transaction costs include

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

15. Which of the following is not correct in regard to trading investments?

a. Trading investments are held with the intention of selling them in a short period of time.
b. Unrealized holding gains and losses are reported as part of net income.
c. Any discount or premium is not amortized.
d. All of these are correct.

16. An entity may make an irrevocable election to present in other comprehensive income changes in fair
value of
a. An investment in equity instrument that is held for trading.
b. An investment in equity instrument that is not held for trading
c. A financial asset measured at amortized cost
d. A financial asset measured at fair value through profit or loss.

17. A financial asset shall be measured subsequently at amortized cost when

I. The business model of the entity is to hold the financial asset in order to collect contractual cash
flows on specified dates.
II. The contractual cash flows are solely payments of principal and interest on the principal amount
outstanding.
a. I only
b. II only
c. Neither I nor II
d. Both I and II

18. Amortized cost is the initial recognition amount of the investment minus
a. Repayments and net of any reduction for uncollectibility.
b. Cumulative amortization and net of any reduction for uncollectibility.
c. Repayments plus or minus cumulative amortization and net of any reduction for uncollectibility.
d. Repayments plus or minus cumulative amortization.

19. Which statement is correct about the effective interest method of amortization?
a. The effective-interest method applied to debt investments is different from that applied to bonds
payable.
b. Amortization of discount decreases from period to period.
c. Amortization of premium decreases from period to period.
d. The effective interest method applies the effective interest rate to the beginning carrying amount for
each interest period.

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20. Under the fair value option for debt instruments, an entity may
a. Irrevocably designate a financial asset as measured at fair value through profit or loss even if the
amortized cost measurement is satisfied.
b. Irrevocably designate a financial asset as measured at fair value through other comprehensive
income.
c. Revocably designate a financial asset as measured at fair value through profit or loss even if the
amortized cost measurement is satisfied
d. Designate all instruments as measured at fair value through profit or loss

21. The fair value option for debt instrument financial assets allows an entity to
a. Record income when the fair value of investment increases.
b. Measure debt investments at fair value in some years but not other years.
c. Report most financial instruments at fair value by recording gains and losses as a separate
component of shareholders’ equity.
d. All of these are true of the fair value option.

22. Equity investments acquired by an entity which are accounted for by recognizing unrealized holding
gains or losses as component of other comprehensive income are
a. Nontrading where an entity has holdings of less than 20%.
b. Trading investments where an entity has holdings of less than 20%.
c Investments where an entity has holdings of between 20% and 50%.
d. Investments where an entity has holdings of more than 50%.

23. An impairment loss is the difference between the carrying amount of investment plus accrued interest
and the
a. Expected cash flows
b. Present value of the expected cash flows using historical effective interest rate
c. Contractual cash flows
d. Present value of the contractual cash flows using historical effective interest rate

24. Entities account for transfers of investments between categories

a. Prospectively, at the end of the period after the change in the business model.
b. Prospectively, at the beginning of the period after the change in the business model.
c. Retroactively, at the end of the period after the change in the business model.
d. Retroactively, at the beginning of the period after the change in the business model.

25. Transfers between categories

a. Result in entities omitting recognition of fair value in the year of the transfer.
b. Are accounted for at fair value for all transfers.
c. Are considered unrealized and unrecognized if transferred out of held for collection into fair value.
d. Will always result in an impact on net income.

26. When a debt investment at amortized cost is reclassified to FVPL, the difference between the previous
carrying amount and fair value at reclassification date is
a. Ignored
b. Included as an adjustment in retained earnings
c. Recognized in profit or loss
d. Recognized in other comprehensive income

27. When a debt investment at FVOCI is reclassified to amortized cost, the entity will
a. Remeasure the financial asset to original cost.
b. The effective rate used for amortization shall be the effective rate at the date of reclassification.
c. The cumulative gain or loss previously recognized in OCI is removed from equity and adjusted
against the fair value at the reclassification date.
d. The cumulative gain or loss previously recognized in OCI is removed from equity and transferred to
profit and loss.

28. When a debt investment at FVOCI is reclassified to FVPL, an entity will

a. Remeasure the investment to the original cost and eliminate the cumulative unrealized gain or loss in
OCI.
b. Transfer the cumulative unrealized gain or loss to retained earnings
c. The cumulative gain or loss previously recognized in OCI is reclassified to profit or loss.
d. The effective rate at the date of reclassification shall be the basis for interest income to be
recognized in subsequent periods.

29. The characteristics of a derivative include which of the following?

a. The value changes in response to the change in a specified underlying.
b. It requires no initial investment or an initial small investment.
c. It is settled at a future date.
d. All of these
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30. An example of a notional amount is

a. Number of barrels of oil
b. Interest rate
c. Currency swap
d. Share prices
31. What is the uncertainty that the party on the other side of an agreement will abide by the terms of the
agreement?
a. Price risk
b. Credit risk
c. Interest rate risk
d. Exchange rate risk

32. A contract traded on an exchange that allows an entity to buy a specified commodity or a financial
security at a specified price on a specified date is
a. Interest rate swap
b. Forward contract
c. Futures contract
d. Option

33. A contract giving the owner the right but not the obligation to buy or sell an asset at a specified price
any time during a specified period in the future is
a. Interest rate swap
b. Forward contract
c. Futures contract
d. Option

34. If the price of the underlying is greater than the strike or exercise price, the call option is
a. At the money
b. In the money
c. On the money
d. Out of the money

39. Derivatives are measured at

a. Cost
b. Fair value
c. Fair value less cost to sell
d. Amortized cost

36. Which of the following statements best describes the information that should be disclosed related to
derivative contracts?
a. Fair value
b. Notional amount only
c. Both fair value and notional amount
d. Neither fair value nor the notional amount

37. Which of the following terms best describes a component of a hybrid instrument?
a. Financial asset at fair value through other comprehensive income
b. An embedded derivative
c. A held for collection investment
d. A financial asset held for trading

38. An embedded derivative shall be “bifurcated” from the host contract when all of the following conditions
are satisfied, except
a. The economic characteristics and risks of the host contract and the embedded derivative are not
closely related.
b. A separate instrument with the same terms as the embedded feature would meet the definition of a
derivative
c. The host contract is measured at fair value through other comprehensive income.
d. The host contract is measured at fair value through profit or loss.

39. All of the following statements regarding accounting for derivatives are correct, except
a. The derivatives should be recognized as assets and liabilities.
b. The derivatives should be reported at fair value.
c. Gains and losses resulting from speculation should be deferred.
d. Gains and losses resulting from hedge transactions are reported in different ways, depending upon
the type of hedge.

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40. Gains or losses on cash flow hedges are

a. Ignored completely.
b. Recorded in equity, as part of other comprehensive income.
c. Reported directly in net income.
d. Reported directly in retained earnings.

PAS 28 – INVESTMENTS IN ASSOCIATES

41. Significant influence is the power

I. To participate in the financial and operating policy decisions of the investee but not control over
those policies
II. To govern the financial and operating policies of an entity so as to obtain benefits from its activities.
a. I only c. Both I and II
b. II only d. Neither I nor II

42. Which of the following is incorrect concerning the equity method?

a. The investment in associate 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 not recognized in the investor’s profit or
loss.
d. Distributions received from the investee reduce the carrying amount of the investment.

44. How is goodwill arising on the acquisition of an associate dealt with in the financial statements?
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 therefore it is not amortized nor is it tested for impairment.

45. 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 the determination of the investor’s share of the associate’s profit or loss in the period in
which the investment is acquired.
b. Credited to retained earnings directly.
c. Credited to equity and amortized over the useful life.
d. A deferred gain.

46. If an investor’s share of losses of an associate equals or exceeds its interest in the associate the investor
should not do which of the following?
a. The investor shall continue recognizing its share of further losses.
b. The investment is reduced to zero.
c. Additional losses are provided only to the extent that the investor has incurred legal or constructive
obligations or made payments in behalf of the associate.
d. If the associate subsequently reports profits, the investor resumes recognizing its share of losses
only after its share of the profits equals the share of the losses not recognized previously.

47. When an investor uses the equity 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. A deduction from the investor’s share of the investee’s earnings
c. A deduction from investment account
d. A deduction from goodwill

48. 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
values. The investor’s amortization of the excess
a. Decreases the investment account
b. Decreases the goodwill account
c. Increases the investment revenue account
d. Does not affect the investment account

49. When an entity reduces its interest in an investment in equity securities accounted for by the equity
method and changes in to the fair value method. What is the initial measurement of the investment for
purposes of subsequent changes in market value?
a. Carrying amount at the date of change
b. Original cost
c. Market value at the date of change
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d. Market value at the date of acquisition

PAS 40 – INVESTMENT PROPERTY

50. An investment property is defined as

I. Property (land or building or part of building, or both) held by an owner or by the lessee under a
finance lease to earn rentals or for capital appreciation.
II. Property held by an owner or by the lessee under a finance lease for use in the production or for
administrative purposes.
a. I only c. Both I and II
b. II only d. Neither I nor II

51. Investment property includes all of the following, except

a. Land held for long-term capital appreciation.
b. Land for a currently undetermined use.
c. Building owned by the entity or held under a finance lease and leased out under one or more
operating leases.
d. Property held for sale in the ordinary course of business or in the process of construction or
development for such sale.

52. An investment property is recognized when

I. It is probable that the future economic benefits that are associated with the investment property will
flow to the entity.
II. The cost of the investment property can be measured reliably.
a. Both I and II c. I only
b. Neither I nor II d. II only

53. An investment property shall be measured initially at

a. Revalued amount. c. Depreciable amount
b. Cost less accumulated depreciation d. Cost

54. The cost of a purchased investment property comprises its purchase price and
a. Start up costs
b. Operating losses incurred before the investment property achieves the planned level of occupancy.
c. Abnormal amounts of wasted material, labor or other resources incurred in constructing or
developing the property
d. Directly attributable expenditures, for example, professional fees for legal services, transfer taxes
and other transaction costs.

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

I. Fair value
II. Cost less accumulated depreciation and any accumulated impairment losses
a. Both I and II c. I only
b. Neither I nor II d. II only

56. Which statement is incorrect concerning investment property?

a. If the property comprises a portion that is held to earn rentals and another portion that is held for use
in production of goods and these portions could not be sold separately, the property is an investment
property only if an insignificant portion is held for use in production of goods.
b. When the owner of an office building provides security and maintenance services to the lessees, the
office building is an investment property because the ancillary services are insignificant.
c. An owner-managed hotel is an investment property rather than owner-occupied property because
the services provided to the guests are significant.
d. If a property is leased by a subsidiary to another subsidiary, the property is investment property in
the individual financial statements of the subsidiary that owns it but owner-occupied property in the
consolidated financial statements of the group.
57. A gain arising from a change in the fair value of an investment property for which an entity has opted to
use the fair value model is recognized in
a. Net profit or loss for the year.
b. General reserve in the shareholders’ equity.
c. Valuation reserve in the shareholders’ equity.
d. Retained profits.

58. Transfers from investment property to property, plant and equipment are appropriate
a. When there is change of use.
b. Based on the entity’s discretion.
c. Only when the entity adopts the fair value model.

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d. The entity can never transfer property into another classification on the balance sheet once it is
classified as investment.

59. When the entity uses the cost model, transfers between investment property, owner-occupied property
and inventory shall be made at
a. Fair value c. Cost
b. Carrying amount d. Assessed value

60. A transfer from investment property carried at fair value to owner-occupied property shall be accounted
for at
a. Fair value, which becomes the deemed cost for subsequent accounting
b. Carrying amount
c. Historical cost
d. Fair value less cost to sell.

61. If owner-occupied property is transferred to investment property that is to be carried at fair value, the
difference between the carrying amount of the property and its fair value shall be
a. Included in profit or loss
b. Included in retained earnings
c. Accounted for as revaluation of property, plant and equipment.
d. Included in equity

62. If an inventory is transferred to investment property that is to be carried at fair value, the remeasurement
to fair value is
a. Included in profit or loss
b. Included in equity
c. Included in retained earnings
d. Accounted for as revaluation of inventory.

63. When a property under construction is completed and transferred to investment property that is to be
carried at fair value, the difference between the carrying amount and its fair value shall be
a. Recognized in profit or loss
b. Recognized in retained earnings
c. Recognized in equity
d. Accounted for as revaluation of property, plant and equipment.

64. An investment property is derecognized when

a. It is disposed to a third party.
b. It is permanently withdrawn from use.
c. No future economic benefits are expected from its disposal.
d. In all of the above cases.

65. Any gain or loss from the disposal of the investment property shall be determined as
a. The difference between the total disposal proceeds and the carrying amount of the asset and shall
be recognized in equity.
b. The difference between the net disposal proceeds and the carrying amount of the asset and shall be
recognized in profit or loss.
c. The difference between the total disposal proceeds and the cost of the asset and shall be
recognized in equity.
d. The difference between the net disposal proceeds and the cost of the asset and shall be recognized
in profit or loss.

OTHER INVESTMENTS

66. Investments in long term funds shall be carried at the

a. Amount of cash
b. Amount of cash plus cost of securities and other assets in the fund.
c. Amount of securities and other assets in the fund.
d. Amount of cash plus the cost of securities adjusted for any discount or premium amortization and
other assets in the fund.
67. Cash surrender value is classified as
a. Noncurrent asset
b. Property, plant and equipment
c. Current asset
d. Intangible asset

68. An increase in the cash surrender value of a life insurance policy owned by an enterprise would be
recorded by

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a. Decreasing annual insurance expense

b. Increasing investment income
c. Recording a memorandum entry only
d. Decreasing deferred charge

69. The following in was extracted from the December 31, 2017 statement of financial position of Gail
Company:
Noncurrent assets:
Financial assets at fair value through other comprehensive income 2,000,000
Shareholders’ equity:
Unrealized loss on financial assets at fair value (200,000)
The financial assets were acquired in 2016 while incurring direct transaction cost of P100,000. What
was the historical cost of the financial assets at fair value?
a. 2,200,000
b. 2,100,000
c. 1,800,000
d. 1,900,000

70. Information at the end of 2017 regarding Hendrix Company’s nontrading financial assets measured at
fair value through other comprehensive income is as follows:
Aggregate cost 5,000,000
Unrealized gains 900,000
Unrealized losses 200,000
Net realized gains during 2017 500,000
On January 1, 2017 Hendrix reported an unrealized gain of P100,000 as a component of shareholders’
equity. In its December 31, 2017 shareholders’ equity section of the statement of financial position,
Hendrix Company should report what amount of unrealized gain on these securities?
a. 700,000
b. 800,000
c. 600,000
d. 900,000
71. On January 1, 2016, Faye Company purchased bonds with face value of P5,000,000 for P6,000,000.
The bonds were acquired for the purpose of selling in the short-term in order to realize fair value
changes. On December 31, 2017, the entity changed the business model in managing the bonds from
realizing short-term gains to collecting cash flows that are solely payments of principal and interest. On
such date, the fair value of the bonds is P5,700,000. What is the initial carrying amount of the investment
in bonds measured at amortized cost on January 1, 2018?
a. 5,000,000
b. 6,000,000
c. 5,700,000
d. 5,500,000
72. On July 1, 2017, Honey Company purchased as trading investment a P2,000,000 face value 10% bond
for P2,100,000 plus accrued interest of P100,000 and transaction costs of P100,000. The bond
investment is classified as a “financial asset at fair value through profit or loss”. The bond pays interest
annually on January 1. On December 31, 2017, the bond investment has a market value of P1,800,000.
On February 15, 2018, Honey Company sold the bond investment for P2,300,000. In its 2017 statement
of comprehensive income, what amount should Honey report as unrealized loss?
a. 400,000
b. 500,000
c. 200,000
d. 300,000
73. On January 1, 2017, Cabot Company purchased 12% bonds with face value of P5,000,000 for
P5,500,000 including transaction cost of P100,000. The bonds provide an effective yield of 10%. The
bonds are dated January 1, 2017 and mature on January 1, 2019. Interest is paid annually on
December 31 of each year. The bonds are quoted at 115 on December 31, 2017. The company has
irrevocably elected to use the fair value option for the bond investment. What is the net amount of
income that will be reported for this investment in the 2017 statement of comprehensive income?
a. 850,000
b. 750,000
c. 950,000
d. 890,000
74. On January 1, 2017, Jerry Company purchased as a long-term investment P10,000,000 face amount,
8% bonds of San Miguel Corporation for P9,230,000 to yield 10% per year. The bonds pay interest

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semiannually on June 30 and December 31. What is the carrying amount of the bond investment in its
December 31, 2017 statement of financial position?
a. 9,488,000
b. 9,353,000
c. 9,356,000
d. 9,307,000
75. On December 31, 2017, Straight Company purchased as a long-term investment P10,000,000 face
amount, 10% bonds of Peace Corporation to yield 8% per year. The bonds mature on December 31,
2022 and pay interest semiannually on June 30 and December 31. The relevant present value factors
are as follows:

Present value of 1 at 4% for 10 periods 0.6756

Present value for an ordinary annuity at 4% for 10 periods 8.11
Present value of 1 at 5% for 10 periods 0.6139
Present value for an ordinary annuity at 5% for 10 periods 7.72

What is the carrying amount of this investment on December 31, 2017?

a. 10,811,000
b. 10,648,800
c. 10,673,000
d. 9,128,000

76. On January 1, 2017, Hoper Company purchased serial bonds with face value of P3,000,000 and stated
12% interest payable annually every December 31. The bonds are to be held to maturity with a 10%
effective yield. The bonds mature at an annual installment of P1,000,000 every December 31. The
rounded present value of 1 at 10% for:
One period 0.91
Two periods 0.83
Three periods 0.75
What is the carrying amount of the serial bonds on January 1, 2017?
a. 2,057,480
b. 3,106,800
c. 2,179,616
d. 3,057,480

77. On January 1, 2017, Hilda Company purchased bonds with face value of P2,000,000 for P1,900,500
including transaction costs of P100,500 to be held as at FVOCI. The bonds mature on December 31,
2019 and pay interest of 8% annually every December 31 with a 10% effective yield. On December 31,
2017, the bonds are quoted at 105.

1. What amount of unrealized gain on these bonds should be reported on the 2017 statement of
changes in equity?
a. 169,450
b. 199,500
c. 300,000
d. 179,500

2. What is the unrealized gain on the financial assets to be reported in the 2018 statement of
comprehensive income if the fair value of the bonds is 120?
a. 199,500
b. 499,500
c. 436,395
d. 269,945

78. On January 1, 2017, Hermes Company purchased P2,000,000 face value bonds of Stephen Company to
held as financial assets at FVOCI for P2,126,800 including transaction cost of P60,000 at an effective
rate of 10%. These bonds have a nominal rate of 12%, pay interest annually every December 31. The
entire issue will be redeemed on its maturity, which is December 31, 2019. Stephen’s debt securities are
actively traded in the bond market and available market prices on December 31, 2017 and December 31,
2018 are P2,300,000 and P2,500,000, respectively. What is the unrealized gain or loss to be recognized
in Hermes’ statement of changes in owner’s equity for 2018?
a. 430,572
b. 373,200
c. 235,850
d. 200,000
79. On January 1, 2017, Isabel Company purchased 15% of Hailey Company’s outstanding ordinary shares
for P5,000,000. Isabel Company is the largest single shareholder in Hailey and Isabel’s officers are

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majority of Hailey’s board of directors. Hailey reported net income of P4,000,000 and paid dividends
of P1,000,000. What should Isabel Company report as investment in Hailey Company?
a. 5,000,000
b. 5,600,000
c. 5,450,000
d. 4,700,000
80. On July 1, 2017 Ingrid Company acquired 25% of the outstanding ordinary shares of Noble Company for
P10,000,000. The book value of the acquired shares was P9,000,000. The excess of cost over book
value was attributable to an identifiable intangible asset which was undervalued on Noble’s statement of
financial position and a remaining life of five years. For the year ended December 31, 2017, Noble
reported net income of P5,000,000 and paid cash dividends of P1,000,000 on its ordinary shares and
thereafter issued 10% stock dividend. What is the proper carrying value of investment in associate at
December 31, 2017?
a. 10,275,000
b. 10,000,000
c. 10,500,000
d. 11,250,000

81. On January 1, 2017, Inga Company purchased 40% of the outstanding ordinary shares of Farah
Company paying P3,000,000 when the book value of the net assets of Farah equaled P5,000,000. The
difference was attributed to equipment, which had a book value of P1,500,000 and a fair market value of
P3,000,000, and to building, with a book value of P1,000,000 and a fair market value of P2,000,000. The
remaining useful life of the equipment and building was 5 years and 10 years, respectively. During 2017,
Farah reported net income of P2,000,000 and paid dividends of P1,500,000. What is the net investment
income to be recognized by Inga in 2017?
a. 800,000
b. 960,000
c. 640,000
d. 680,000

82. On January 1, 2017, Justine Company purchased 40% of the ordinary shares of Paula Company for
P3,500,000 when the net assets of Paula amounted to P7,000,000. At acquisition date, the carrying
amounts of the identifiable assets and liabilities of Paula were equal to their fair value, except for
equipment for which the fair value was P1,500,000 greater than its carrying amount and inventory whose
fair value was P500,000 greater than its cost. The equipment has a remaining life of 4 years and the
inventory was all sold during 2017. Paula Company reported net income of P4,000,000 for 2017 and
paid no dividends during 2017. The maximum amount which could be included in Justine’s 2017 income
before tax to reflect Justine’s equity in earnings of Paula Company should be
a. 1,350,000
b. 1,250,000
c. 1,600,000
d. 1,700,000

83. Maine Company has estimated that it would approximately use 80,000 units of raw materials in its
manufacturing operations to meet the demand for the Christmas season. On August 1, 2016, Maine
Company purchased a call option from a bank to buy 80,000 units of raw materials on December 1, 2016
at a price of P100 per unit. The company paid P70,000 for the call option. Maine Company designated
the call option as a cash flow hedge against price fluctuation for its December purchase. The market
price of the raw material on December 1, 2016 is P90 per unit and P105 on December 31, 2016.

1. What amount of purchases was recorded on December 1, 2016?

a. 8,000,000
b. 7,200,000
c. 7,300,000
d. 7,270,000

2. What is the amount of settlement that was made between Maine and the bank on December 1,
2016?
a. 400,000
b. 800,000
c. 70,000
d. 0
84. In January 1, 2010 Cameron Company established a sinking fund with its issue of bonds due in 2013. A
bank was appointed as an independent trustee of the fund. On December 31, 2016, the trustee held
P364,000 cash in the sinking fund account representing P300,000 in annual deposits to the fund and
P64,000 of interest earned on those deposits. How should the sinking fund be reported in Cameron’s
balance sheet at December 31, 2016?
a. No part of the sinking fund should appear in Cameron’s balance sheet
b. P64,000 should appear as a current asset
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c. P364,000 should appear as a current asset

d. P364,000 should appear as a noncurrent asset

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