DEPARTMENT OF ACCOUNTING EDUCATION

Pre-Rev(Financial Asset at Fair Value)

2nd Term, 1st Semester, SY: 2018-2019
August 29, 2018

Definition of investments MCQ-Theory

Investments are assets held by an entity for the
accretion of wealth through distribution such as 1. It is any contract that gives rise to both a financial
interest, royalties, dividends and rentals, for capital asset of one entity and a financial liability or an equity
appreciation or for other benefits to the investing instrument of another entity.
entity such as those obtained through trading a. Financial instrument
relationships. b. Equity instrument
c. Debt instrument
Financial instruments d. Derivative instrument
PAS 32 defines a financial instrument as any 2. A financial asset is any asset that is (choose the
contract that gives rise to a financial asset of one incorrect one)
entity and a financial liability or an equity a. Cash
instrument of another entity. b. A contractual right to receive cash or
another financial asset from another entity
Financial assets at fair value c. A contractual right to exchange financial
instruments with another entity under
1. Financial assets held for trading or popularly known conditions that are potentially unfavorable.
as “trading securities”. d. An equity instrument of another entity
2. Financial assets that are designated on initial 3. A financial liability is any liability that is a contractual
recognition as at fair value through profit or loss. obligation
3. All other investments in quoted equity instruments. I. To deliver cash or other financial asset to
another entity.
Initial measurement of financial assets II. To exchange financial instruments with
An entity shall measure a financial asset at fair value plus in another entity under conditions that are
the case of financial asset not at fair value through profit or potentially unfavorable.
loss, transaction costs that are directly attributable to the a. I only
acquisition of the financial asset. However if the F.A. is held b. II only
for trading or if the FA-FVPL, transaction cost are expense c. Both I and II
outright. d. Neither I nor II
4. It is any contract that evidences residual interest in
Subsequent Measurement the assets of an entity after deducting all of its
PFRS 9, paragraph 4.1 provides that after initial recognition, liabilities.
an entity shall measure a financial asset either at fair value a. Equity instrument
or amortized cost. b. Debt instrument
c. Loan receivable
Category Initial Subsequent Changes in FV d. Financial asset
FA@FVTPL FV FV P/L 5. Financial assets include all of the following, except
FA@FVTOCI FV+TC FV OCI (Equity) a. Prepaid expenses
b. Cash in bank
The business model for managing financial assets may be: c. Trade accounts receivable
1. To hold investments in order to realize fair value changes d. Loans receivable
(FV) 6. Financial Liabilities include all of the following,
2. To hold investments in order to collect contractual cash except
flows (AC) a. Trade accounts payable
b. Notes payable
Reclassification c. Bonds payable
 The entity shall reclassify financial assets only when d. Income taxes payable
it changes its business model for managing the 7. Equity instruments include all of the following, except
financial assets. a. Ordinary shares
 Apply prospectively. b. Preference shares
c. Warrants or options that allow the holder to
Reclassification from fair value to amortized cost purchase a fixed number of ordinary shares
 The fair value at the reclassification date of the issuing entity in exchange for a fixed
becomes the new carrying amount of the financial amount of cash or another financial asset.
asset at amortized cost. d. Corporate bonds and other debt instruments
 Reclassification date will be the beginning of the next issued by the entity
accounting period. 8. A preference share provides for mandatory
redemption on a specific date or at the option of the
Reclassification from amortized cost to fair value holder is.
 When an entity reclassifies a financial asset at a. A financial asset
amortized costs to financial asset at fair value, b. A financial liability
the fair value is determined at reclassification c. An equity instrument
date. The difference between the previous d. Neither a financial liability nor an equity
carrying amount and fair value is recognized in instrument
P/L as “Gain on reclassification of financial 9. An entity has preference shares in issue. The
asset” preference shares are redeemable after 5 years.
How will the preference shares and the related
preference dividend be presented in the financial
statements of the current year?
 Preference Shares Preference dividend
a. Non Current liability Deducted from equity
b. Equity Deducted from equity
c. Equity Finance cost
d. Non Current liability Finance cost
10. Which of the following is not a financial instrument?
a. Cash deposited in bank
b. Gold bullion deposited in bank
c. A perpetual debt instrument, meaning no
maturity date, that pays interest annually
extending into the indefinite future
d. Ordinary share capital issued by the entity
11. 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
12. 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 though profit or
loss
c. Investments in quoted equity instruments
d. Financial assets at amortized cost
13. Transaction costs include
a. Fees and commission paid to agent, levies
by regulatory authorities, transfer taxes and
duties.
b. Debt premiums or discounts
c. Finance costs
d. Internal administrative costs
14. If the financial asset is held for trading or if the
financial asset is measured at fair value through
profit or loss, transaction costs directly attributable to
the acquisition shall be
a. Capitalized as cost of the financial asset
b. Expensed immediately when incurred
c. Deferred and amortized over a reasonable
period
d. Included as component of other
comprehensive income
15. 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
16. Under PFRS9, 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. Either I or II
d. Neither I nor II
17. Which statement is correct concerning
reclassification of financial assets?
I. When an entity reclassifies a financial asset
at fair value to financial asset at amortized
cost, the fair value at the reclassification
date becomes the new carrying amount of
the financial asset at amortized cost.
II. When an entity reclassifies a financial asset
at amortized cost to financial asset at fair
value, the fair value is determined at the
reclassification date, and the difference
between the previous carrying amount and
the fair value is included in profit or loss.
a. I only
b. II only
c. Both I and II
d. Neither I or I
What is the “reclassification date” for the purpose of
18.
reclassifying financial assets?
a. End of the current reporting period
b. First day of the next reporting period
following the change in business model.
c. Date when management decided to change
the business model for managing financial
assets.
d. No definition of reclassification date as this
would depend on the judgment of
management.
19.
At the beginning of the current year, an entity
purchased equity shares of another entity not for the
purpose of selling and repurchasing but to held as
long-term investment. The most appropriate
classification of this equity investment is
a. Financial asset at fair value through profit or
loss
b. Financial asset held for trading
c. Financial asset at fair value through other
comprehensive income
d. Amortized cost
20.
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 and are acquired principally for the
purpose of selling or repurchasing them in the near
term. Which of the following categories could this
investment in equity shares be classified
a. Financial assets at amortized cost
b. Financial assets at fair value through other
comprehensive income
c. Financial assets at fair value through profit
or loss
d. Financial assets held for trading
21.
The entity purchased government bonds. The
entity’s business model in managing financial assets
is to collect contractual cash flows that are solely
payments of principal and interest on the principal
amount outstanding. Which of the following is the
most appropriate classification for the investment in
bonds?
a. Held for trading
b. At fair value though profit or loss
c. At amortized cost
d. At fair value though other comprehensive
income
MCQ – Problem Solving
1. Racer Company purchased marketable equity
securities during 2017 to be held as “trading”. An
analysis of the current investments on December 31,
2017 showed the following:
Cost Market
A Company ordinary share 1,000,000.00 800,000.00
B Company ordinary share 1,500,000.00 1,800,000.00
C Company preference share 2,000,000.00 1.700,000.00
D Company preference share 2,500,000.00 2,600,000.00
What is the measurement of the financial assets held
for trading on December 31, 2017?
a. 6,900,000.00
b. 6,800,000.00
c. 7,000,000.00
d. 6,500,000.00
 What gain should be recognized in other
2. During 2017, Rock Company made various comprehensive income for the year ended
investments in trading securities. In December 31, December 31, 2017?
2017, the investments had the following cost and a. 200,000
market value: b. 900,000
Cost Market c. 800,000
Man Company ordinary share 1,000,000.00 900,000.00
Kemo Company ordinary share 900,000.00 1,100,000.00
d. 0
Penn Company preference share 1,100,000.00 800,000.00
What amount should be included as unrealizable 7. Priscila Company acquired an equity investment a
loss in the income statement for 2011? number of years ago for P3,000,000 and classified it
as at fair value through other comprehensive
a. 200,000.00 income. In December 31, 2016, the cumulative loss
b. 400,000.00 recognized in other comprehensive income was
c. 300,000.00 P400,000 and the carrying amount of the investment
d. 0 was P2,600,000.
On December 31, 2017, the issuer of the equity
3. Raiza Company acquired a financial asset at its instrument was in severe financial difficulty and the
market value of P3,200,000. Broker fees of fair value of the equity investment had fallen to
P200,000 were incurred in relation to the purchase. P1,200,000.
What amount should be recognized in profit or loss
At what amount should the financial asset initially be for the year ended December 31, 2017?
recognized respectively if it is classified as at fair a. 1,400,000
value though profit or loss, or as at fair value through b. 1,800,000
other comprehensive income? c. 1,000,000
a. 3,400,000 and 3,200,000 d. 0
b. 3,200,000 and 3,200,000
c. 3,200,000 and 3,400,000 8. On January 1, 2017, Remington Company acquired
d. 3,400,000 and 3,400,000 200,000 ordinary shares of Universal Company for
P9,000,000. At the time of purchase, Universal
4. On January 1, 2017, Alexis Company purchased Company had outstanding 800,000 shares with a
marketable equity securities to be held as “trading” book value of P36,000,000. On December 31, 2017,
for P5,000,000. The entity also paid commission, the following events took place:
taxes and other transaction costs amounting to  Universal Company reported net income of
P200,000. The securities had a market value of P1,800,000 for 2017
P5,500,000 on December 31, 2017. No securities  Remington Company received from
were sold during 2017. Universal Company a dividend of P0.75 per
What amount of unrealized gain or loss on these ordinary share.
securities should be reported in the 2017 income  The market value of Universal Company
statement? share had declined to P40.
a. 500,000 unrealized gain
b. 500,000 unrealized loss The investment in Universal Company is classified
c. 300,000 unrealized gain as at fair value through other comprehensive
d. 300,000 unrealized loss income.
What is the carrying amount of the investment on
5. During 2016, Ray Company purchased marketable December 31, 2017.
equity securities for P1,850,000 to be held as trading
investments. In 2016, Ray Company appropriately a. 9,000,000
recorded an unrealized loss of P200,000 in its b. 8,000,000
income statement. There was no change during c. 9,300,000
2017 in the composition of the portfolio of trading d. 9,450,000
securities. Pertinent data on December 31, 2017 are
as follows: 9. Information on December 31, 2017 regarding Stone
Securities Cost Market Company’s portfolio of equity securities is as follows:
Value Aggregate cost 1,700,000
A 600,000 700,000 Unrealized gains 40,000
B 450,000 400,000 Unrealized losses 260,000
C 800,000 900,000 Net realized gains during 2017 300,000
What amount of unrealized gain on these securities
should be included in the 2011 income statement? The equity investments are measured at fair value
a. 350,000 though other comprehensive income. On January 1,
b. 150,000 2017, Stone Company reported an unrealized loss
c. 550,000 of P15,000 to reduce investments to market on a
d. 0 portfolio basis.

6. Carmela Company acquired an equity instrument for In the December 31, 2017 statement of changes in
P4,000,000 on March 31, 2017 to be measured at equity, what amount of unrealized loss should be
fair value though other comprehensive income. The reported?
direct acquisition costs incurred amounted to a. 260,000
P700,000. b. 220,000
On December 31, 2017, the fair value of the c. 205,000
instrument was P5,500,000 and the transaction d. 0
costs that would be incurred on the sale of the
investment were estimated at P600,000.