INVESTMENTS

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 equipment
b. Investments
c. Property and
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. These investments are known as “financial assets at fair value

through profit or loss”.
a. Available for sale securities
b. Trading securities
c. Held to maturity securities
d. Nonmarketable equity securities

5. “Available for sale” securities are

a. Financial assets with fixed or determinable payments and fixed
maturity that are acquired with positive intent and ability of
holding them until maturity.

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 b. Debt and equity securities acquired by an enterprise principally
with the intent of selling them in the “near term” or very soon.
c. Debt and equity securities that are purchased and held
indefinitely and will be available to be sold in response to
liquidity needs.
d. Financial assets with fixed or determinable payments that are
not quoted in an active market.

6. Trading securities are investments that are, by their very nature

a. Readily marketable
b. Intended to be held for more than one year
c. Readily realizable and intended to be held for more than one
year
d. Readily realizable and intended to be held for not more than
one year

7. In addition to financial assets at fair value through profit or loss,

which of the following categories of financial assets is measured
at fair value in the balance sheet?
a. Available-for-sale financial assets.
b. Held-to-maturity investments.
c. Loans and receivables.
d. Investment in unquoted equity instruments.

8. Which category includes only debt securities?

a. Marketable securities
b. Available for sale securities
c. Trading securities
d. Held to maturity securities

9. Which of the following is true?

a. Trading securities can be classified as current or noncurrent
depending on management intent.
b. Held to maturity securities should not be classified as current
under any circumstances.
c. Trading securities should not be classified as current under
any circumstances.

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 d. Available for sale securities can be classified as current and
noncurrent depending on management intent.

10. If the combined market value of available for sale securities at the
end of the year is less than the market value of the same portfolio
of available for sale securities at the beginning of the year, the
difference should be accounted for by
a. Reporting an unrealized loss in equity section of the balance
sheet.
b. Reporting an unrealized loss in the income statement.
c. A footnote to the financial statements.
d. A credit to the available for sale securities account.

11. What is the best evidence of the 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
techniques, option pricing models or other valuation
techniques.
c. Its quoted price, if an active market exists for the financial
instruments.
d. The present value of the contractual cash flows less
impairment.

12. Transaction cost are incremental costs that are directly attributable
to the acquisition of financial assets and issue of financial
liabilities, transaction costs include which of the following
a. Debt premiums or discounts
b. Fees, commissions paid to agents, levies by regulatory
authorities, and transfer taxes and duties.
c. Financing costs
d. Internal administrative costs

13. Unrealized gains and losses on trading securities are

a. Included in the determination of income
b. Included in shareholder’s equity

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 c. Included in income for unrealized losses and included in equity
for unrealized gains
d. Disregarded

14. Ignoring unrealized gains and losses from prior years, a market
adjustment account on trading security investments with a credit
balance would mean that
a. An unrealized gain of the equivalent amount in stockholders’
equity
b. An unrealized loss of the equivalent amount in stockholders’
equity
c. An unrealized gain of the equivalent amount in profit or loss
d. An unrealized loss of the equivalent amount in profit or loss

15. The following statements relate to investments in trading and

available for sale securities. Which is the incorrect statement?
I. Realized and unrealized gains and losses on trading securities
are recognized in income.
II. Realized and unrealized gains and losses on available for sale
securities shall be reported as a separate component of
shareholders’ equity.
a. I only c. Both I and II
b. II only d. Neither I nor II

16. If there is objective evidence that the available for sale security is
impaired, the cumulative loss that had been recognized directly in
equity
a. Shall not removed from equity but amortized over a
reasonable period.
b. Shall not be removed from equity.
c. Shall be removed from equity and recognized in profit or loss.
d. Shall be removed from equity and recognized as an
adjustment of the beginning balance of retained.
17. Globe has a portfolio of marketable equity securities which it does
not intend to sell in the near term. How should Globe classify
these and how should it report unrealized gains and losses from
these securities?

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 a. Trading securities and any unrealized gains and losses are
reported as component of income.
b. Available for sale securities and any unrealized gains and
losses are reported as component of equity.
c. Trading securities and any unrealized gains and losses are
reported as component of equity.
d. Available for sale securities and any unrealized gains and
losses are reported as component of income.

18. On both December 31, 2007 and 2008, Kate Company’s only
marketable equity security had the same market value, which was
below cost. Kate considered the decline in value to be temporary
in 2007 but “other than temporary” in 2008. At the end of both
years, the security was classified as a noncurrent asset. Kate
considers the investment as “available for sale”. What should be
the effects of the determination that the decline was other than
temporary on Kate’s 2008 noncurrent assets and net income?
a. No effect
b. No effect on noncurrent assets and decrease in net income
c. Decrease in noncurrent assets and no effect on net income
d. Decrease in both noncurrent assets and net income

19. On the derecognition of an available for sale security

a. The difference between the consideration received and the
carrying amount shall be recognized in profit or loss.
b. The difference between the consideration received and the
carrying amount shall be recognized as an adjustment to
retained earnings.
c. The difference between the sum of the consideration received
and any cumulative gain or loss that has been recognized
directly in equity and the carrying amount shall be recognized
in profit or loss.
d. The difference between the sum of the consideration received
and any cumulative gain or loss that has been recognized
directly in equity and the carrying amount shall be included in
retained earnings.

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20. Held to maturity investments subsequent to initial recognition are
measured at
a. Cost
b. Fair value
c. Amortized cost using the effective interest method
d. Amortized cost using the straight-line method

21. When a debt security is transferred from held to maturity securities

to available for sale securities, any unrealized gain or loss at the
date of transfer shall be
a. Included in retained earnings
b. Reported as a component of shareholders’ equity
c. Included in earnings
d. Reported as a component of stockholders’ equity and
subsequently amortized through interest income over the
remaining life of the debt security using the effective interest
method of amortization

22. Which of the following is a valid statement on reclassifications of

“available for sale securities” to “held to maturity securities”?
a. The reclassification is measured at cost of the available for
sale security.
b. This reclassification is motivated by the absence of fair value
of the available for sale securities.
c. Any difference between the new amortized cost and the
maturity amount shall also be amortized over the remaining life
of the financial asset using the effective interest method.
d. The unrealized gain or loss on reclassification is amortized to
profit or loss using the straight-line method of amortization.

23. Derivatives are measured at

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

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24. A contract, traded on an exchange, that allows a company to buy
a specified quantity of a commodity or a financial security at a
specified price on a specified future date is referred to as a(n)
a. Interest rate swap c. Futures contract
b. Forward contract d. Call option

25. 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 referred to as a(n)
a. Interest rate swap c. Futures contract
b. Forward contract d. Call option

26. If a manufacturer wanted to lock in the price it would pay for

apples in August four months before harvest, it would be most
likely to enter into which kind of agreement?
a. Interest rate swap
b. Fixed commodities contract
c. Futures contract
d. Option

27. For which type of hedge are changes in fair value of a derivative
deferred and recognized as an equity adjustment?
a. Fair value hedge c. Operating hedge
b. Cash flow hedge d. Notional value hedge

28. In exchange for rights inherent in an option contract, the owner of

the option will typically pay a price
a. Only when a call option is exercised.
b. Only when a put option is exercised
c. When either a call option is or a put option is exercised.
d. At the time the option is received regardless whether the
option is exercised or not.

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29. A company enters into a futures contract with the intent of hedging
an account payable of DM400,000 due on December 31. The
contract requires that if the U.S. dollar value of DM400,000 is
greater than $200,000 on December 31, the company will be
required to pay the difference. Alternatively, if the U.S. dollar value
is less than $200,000, the company will receive the difference.
Which of the following statements is correct regarding this
contract?
a. The Deutsche mark futures contract effectively hedges against
the effect of exchange rate changes on the U.S. dollar value of
the Deutsche mark payable.
b. The futures contract is a contract to buy Deutsche marks at a
fixed price.
c. The futures contract is a contract to sell Deutsche marks at a
fixed price.
d. The contract obligates the company to pay if the value of the
U.S. dollar increases.

30. On February 1, Shoemaker Corporation entered into a firm

commitment to purchase specialized equipment from the Okazaki
Trading Company for ¥80,000,000 on April 1. Shoemaker would
like to reduce the exchange rate risk that could increase the cost
of the equipment in U.S. dollars by April 1, but Shoemaker is not
sure which direction the exchange rate may move. What type of
contract would protect Shoemaker from an unfavorable movement
in the exchange rate while allowing them to benefit from a
favorable movement in the exchange rate?
a. Interest rate swap c. Call option
b. Forward contract d. Put option

31. All of the following are alternatives for an investor who receives
stock rights except
a. Exercising the rights by purchasing additional stock.
b. Selling the rights.
c. Permitting the rights to expire.
d. Converting the rights into a cash dividend.

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32. It is an entity, including an unincorporated entity such as a
partnership, over which the investor has significant influence and
that is neither a subsidiary nor an interest in joint venture.
a. Subsidiary c. Parent
b. Associate d. Investee

33. 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 of decrease 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 reduced the carrying
amount of the investment.

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

35. 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.

36. 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.

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 b. Credited to retained earnings directly.
c. Credited to equity and amortized over the useful life.
d. A deferred gain.

37. Under the equity method (choose the incorrect one)

a. The investor’s share of the profit or loss of the investee is
recognized in the investor’s profit or loss.
b. Adjustments to the carrying amount may be necessary for
changes in the investor’s proportionate interest in the investee
arising from changes in the investee’s equity that have not
been recognized in the investee’s profit or loss.
c. If an investor’s share of losses of an associate equals or
exceeds its interest in the associate, the investor discontinues
recognizing its share of further losses.
d. If an associate has outstanding noncumulative preference
shares, the investor computes its share of profit or loss of the
investee after adjusting for the dividends on such preference
shares, whether or not the dividends have been declared.

38. 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.

39. Which of the following transactions does not affect the investment
in associate account?
a. Dividends received by the investor from the investee in the
form of shares.

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 b. Revaluation surplus and foreign currency translation
adjustment recorded during the year by the investee.
c. Net income reported by the investee.
d. Any excess of the investor’s share of the net fair value of the
associate’s identifiable assets, liabilities and contingent
liabilities over the cost of the investment.

40. 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

41. When an investor purchases sufficient ordinary shares to gain

significant influence over the investee, what is the proper
accounting treatment of any excess of cost over book value
acquired?
a. The excess remains in the asset account until the investment
is sold.
b. The excess is immediately charged to expense in the period in
which the investment is made.
c. The excess is amortized over the period of time that is
reasonable in light of the underlying cause of the excess.
d. The excess is charged to retained earnings at the time the
investor resells the ordinary shares.

42. 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

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43. When an entity increases its interest in an investment in equity
securities accounted for by the fair value method and changes to
the equity method. What is the initial carrying amount for
purposes of subsequent application of the equity method?
a. Carrying amount at the date of change
b. Market value at the date of change
c. The amount that would be reflected in the investment account
had the equity method been in use continually since the
purchase of the securities.
d. Original cost of the investment

44. It is a method of accounting for an investment whereby the

investor shall recognize income from the investment only to the
extent that the investor receives distribution from accumulated
profits of the investee arising after the date of acquisition.
a. Cost method c. Consolidation method
b. Equity method d. Fair value method

45. How is the premium or discount on bonds purchased as trading

securities reported in financial statements?
a. As an integral part of the cost of the asset acquired and
amortized over the remaining life of the bond issue.
b. As an integral part of the cost of the asset acquired until such
time as the investment is sold.
c. As expense or revenue in the period the bonds are purchased.
d. As an integral part of the cost of the asset acquired and
amortized over the period the bonds are expected to be held.

46. An investor purchased a long-term bond investment at the

beginning of the year. The investor’s interest income for the year
would be higher if the bond was purchased at
a. Discount c. Face value
b. Premium d. Current value
47. When interest payment dates of a bond are May 1 and November
1, and the bond is purchased on June 1, the amount of cash paid
by the investor will be
a. Decreased by accrued interest from June 1 to November 1.
b. Decreased by accrued interest from May 1 to June 1.

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 c. Increased by accrued interest from June 1 to November 1.
d. Increased by accrued interest from May 1 to June 1.

48. An investor purchased a bond to be held to maturity on January 1.

The investor’s carrying value at the end of the first year would be
highest if the bond was purchased at a
a. Discount and amortized by the straight-line method.
b. Discount and amortized by the effective interest method.
c. Premium and amortized by the straight -line method.
d. Premium and amortized by the effective interest method.

49. 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.

50. All of the following investment category may be classified as a

current asset, except
a. Financial asset at fair value through profit or loss.
b. Held to maturity securities.
c. Available for sale securities.
d. Investment in associate

51. Cash surrender value is classified as

a. Noncurrent asset
b. Property, plant and equipment
c. Current asset
d. Intangible asset

52. An increase in the cash surrender value of a life insurance policy

owned by an enterprise would be recorded by
a. Decreasing annual insurance expense
b. Increasing investment income
c. Recording a memorandum entry only
d. Decreasing deferred charge

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53. Tenacity Corporation’s 2008 dividend income included only part of
the dividend received from its Fey Corporation investment. The
dividend reduced Tenacity’s carrying amount for its Fey
investment. This reflects that Tenacity accounts for its investment
by the
a. Equity method, and its carrying amount exceeded the
proportionate share of Fey’s market value
b. Cost method, and only a portion of Luscious’ 2008 dividend
represents earnings before Tenacity’s acquisition
c. Cost method, and only a portion of Luscious’ 2008 dividend
represents earnings after Tenacity’s acquisition.
d. Cost method, and the 2008 dividend received by Tenacity was
a return of its investment
54. At which of the following dates has the shareholder theoretically
realized income from its equity security investments?
a. Date of declaration of dividends.
b. Date of record.
c. Date of payment of dividends.
d. Date of receipt of dividends.

55. 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

56. 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.

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57. 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

58. An investment property shall be measured initially at

a. Revalued amount.
b. Cost less accumulated depreciation
c. Depreciable amount
d. Cost
59. 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.

60. 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

61. 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.

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 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.

62. 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.

63. 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.
d. The entity can never transfer property into another
classification on the balance sheet once it is classified as
investment.

64. 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

65. A transfer from investment property carried at fair value to owner-

occupied property shall be accounted for at

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 a. Fair value, which becomes the deemed cost for subsequent
accounting
b. Carrying amount
c. Historical cost
d. Fair value less cost to sell.

66. 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

67. 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.

68. 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.

69. 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.

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 d. The difference between the net disposal proceeds and the
cost of the asset and shall be recognized in profit or loss.

70. The following in was extracted from the December 31, 2009
balance sheet of Gail Company:
Noncurrent assets:
Available for sale securities 2,000,000
Shareholders’ equity:
Unrealized loss on available for sale
securities (200,000)
The available for sale securities were acquired in 2009 while
incurring direct transaction cost of P100,000. What was the
historical cost of the available for sale securities?
a. 2,200,000 c. 1,800,000
b. 2,100,000 d. 1,900,000

71. Stanley Investment Corporation began operations on January 1,

2009. The following information pertains to the December 31,
2009 portfolio of marketable securities:

Trading Available for

sale
Aggregate cost 25,000,000 15,000,000
Aggregate market value 22,000,000 10,000,000
Aggregate lower of cost or market
value applied to each security 21,000,000 9,500,000
What amount should Stanley report as unrealized loss on these
securities in its 2009 income statement?
a. 3,000,000 c. 8,000,000
b. 4,000,000 d. 0

72. Gartha Company reported the following selected balances on its

financial statements for each of the three years 2007 – 2009:
2007 2008 2009
Market adjustment –
Trading securities 5,500,000 3,750,000 (1,200,000)
Market adjustment –

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 Available-for-sale
securities (1,300,000) 900,000 1,350,0000
How much net unrealized loss should be shown in the 2009
income statement?
a. 1,200,000 c. 4,500,000
b. 4,950,000 d. 3,600,000

73. Franklin Company reported the following selected balances on its

financial statements for the years 2007 and 2008:

2007 2008
Market adjustment – trading
securities (1,500,000) 2,800,000
Market adjustment – available for
sale securities 1,000,000 (4,000,000)

How much net unrealized loss on investment securities that should

be shown in the 2008 statement of changes in equity?
a. 4,000,000 c. 3,000,000
b. 5,000,000 d. 3,700,000

74. Weaver Company began operations in 2007. The company's

trading securities portfolio, which did not change in composition
during 2008, is as follows:
December 31, 2008
Unrealized
Cost Market Gain (Loss)
Nady Corporation 1,000,000 1,000,000 0
Michael Company 2,000,000 1,500,000 (500,000)
Mark Company 2,500,000 2,600,000 100,000
5,500,000 5,100,000 (400,000)

December 31, 2007

Unrealized
Cost Market Gain (Loss)
Nady Corporation 1,000,000 1,350,000 350,000
Michael Company 2,000,000 2,100,000 100,000
Mark Company 2,500,000 1,800,000 (700,000)
5,500,000 5,250,000 (250,000)

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 Ignoring income taxes, what amount should be reported as an
unrealized loss on trading securities in Weaver's 2008 income
statement?
a. 150,000 c. 400,000
b. 250,000 d. 550,000

75. On January 1, 2007 Gem Company purchased “trading” equity

securities. The cost and market value on December 31, 2007
were:
Cost_ Market
Security A 1,000,000 1,200,000
Security B 2,000,000 1,500,000
Security C 3,000,000 3,100,000
On July 1, 2008, Gem Company sold Security A for P1,400,000,
incurring P50,000 in brokerage commission and taxes. What
amount should be reported as gain on sale of trading securities in
the 2008 income statement?
a. 250,000 c. 100,000
b. 300,000 d. 150,000

76. The following information is provided by Genie Corporation

regarding its investments in equity securities purchased on
January 1, 2007 and held as “available-for-sale”:
Cost Fair value Fair Value
12/31/07 12/31/08
Orange Corp. Preferred
Stock 2,000,000 2,200,000 2,300,000
Peaches Inc. Common Stock 3,500,000 3,100,000 2,800,000
Mango Inc. Common Stock 4,000,000 4,500,000 4,800,000
Total 9,500,000 9,800,000 10,100,000
On January 20, 2008, Genie sold its Peaches Inc. ordinary shares
for P3,000,000. What is the gain or loss on sale to be recognized
from this transaction?
a. 200,000 gain c. 500,000 loss
b. 100,000 gain d. 300,000 loss

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77. Information regarding Anton Company’s available for sale securities for
the year ended December 31, 2007 is as follows:
Aggregate cost 4,000,000
Market adjustment-Available for Sale Securities 500,000

On March 1, 2008 Anton sold all of its available for sale security
investments for P5,500,000. An entry to reflect the sale of the
investment will include which of the following?
a. A debit to Market adjustment-Available for Sale Securities for
P500,000.
b. A credit to Gain on Sale of Available for Sale Securities for
P1,500,000.
c. A credit to Unrealized Gain on Available for Sale Securities for
P500,000.
d. A credit to Gain on Sale of Available for Sale Securities for
P1,000,000.

78. Information regarding Yaroslave Company’s available for sale

securities for the year ended December 31, 2007 is as follows:
Aggregate cost 5,000,000
Market adjustment-Available for Sale Securities 600,000
On March 1, 2008 Yaroslave sold all of its available for sale
security investments for P6,000,000. An entry to reflect the sale of
the investment will include which of the following?
a. A debit to Market adjustment-Available for Sale Securities for
P600,000.
b. A credit to Gain on Sale of Available for Sale Securities for
P400,000.
c. A debit to Unrealized Gain on Available for Sale Securities for
P600,000.
d. A credit to Unrealized Gain on Available for Sale Securities for
P400,000.

21
79. Ferrari Company purchased the following securities during 2008:

Classification Cost Market Value

(December 31,
2008)
Security A Trading 900,000 1,000,000
Security B Trading 1,000,000 1,600,000
On July 31, 2009, the company sold all of the shares of Security B
for a total of P1,100,000. As of December 31, 2009, the shares of
Security A had a market value of P600,000. No other activity
occurred during 2009in relation to the trading security portfolio.
What is the gain or loss on sale of Security B on July 31, 2009?
a. 500,000 gain c. 100,000 gain
b. 500,000 loss d. 100,000 loss

80. Giana Company acquired investments in available for sale equity

securities for P5,000,000 on January 1, 2006 including transaction
cost of P100,000. On December 31, 2008, Giana decided to
reclassify the available for sale securities as nonmarketable equity
securities, this due to the absence of market value for these
investments. The market value of the securities was P4,500,000
December 31, 2006. In its 2008 statement of changes in equity,
Giana should report unrealized loss on these securities at
a. 500,000 c. 100,000
b. 400,000 d. 0

81. On January 1, 2007, Gren Company purchased “held to maturity”

bonds with face value of P5,000,000 for P4,668,000. The bonds
are purchased to yield 10% interest. The nominal interest rate on
the bonds is 8% payable annually every December 31. On
December 31, 2008, as a result of a change in intention and
ability, Gren decided to reclassify the bonds as “available for sale”.
Gren appropriately uses the effective interest method of
amortization and the carrying amount of the securities on this date
is P4,808,000. The market value of the bonds on December 31,
2008 is 105. What amount of unrealized gain on these securities
should be reported in the 2008 statement of changes in equity?
a. 332,000 c. 442,000

22
 b. 192,000 d. 558,000

82. Genevieve Company had investments in bonds with a face value

of P5,000,000. The bonds were acquired at 110 on January 1,
2007 and classified as “available for sale” securities. The
investment had the following market value on these dates:
December 31, 2007 4,800,000
December 31, 2008 4,500,000
On December 31, 2008, as a result of a change in intention and
ability, Genevieve Company decided to reclassify the bond
investment as “held to maturity”. What amount should be reported
as unrealized loss on these securities in the 2008 statement of
changes in equity?
a. 1,000,000 c. 500,000
b. 700,000 d. 600,000

83. Information regarding Hendrix Company’s available for sale

securities is as follows:
Aggregate cost – December 31, 2008 5,000,000
Unrealized gains – December 31, 2008 900,000
Unrealized losses – December 31, 2008 200,000
Net realized gains during 2008 500,000
On January 1, 2008 Hendrix reported an unrealized gain of
P100,000 as a component of stockholders’ equity. In its December
31, 2008 stockholders’ equity section of the balance sheet,
Hendrix Company should report what amount of unrealized gain
on these securities?
a. 700,000 c. 60,000
b. 800,000 d. 900,000

84. On July 1, 2008, Honey Company purchased as trading

investment a P2,000,000 face value 10% bond for P2,100,000
plus accrued interest and transaction costs of P100,000. The
bond pays interest annually on January 1. On December 31,
2008, the bond investment has a market value of P1,800,000. On
February 15, 2008, Honey Company sold the bond investment for

23
 P2,300,000. In its 2008 income statement, what amount should
Honey report as unrealized loss?
a. 400,000 c. 200,000
b. 500,000 d. 300,000

85. On January 1, 2008, Heart Company paid P8,640,000 for 10%

bonds with a face amount of P8,000,000 to held as “held to
maturity securities”. Interest is paid on December 31 and the
bond matures on January 1, 2013. The bonds were purchased to
yield 8%. Heart uses the effective interest method to recognized
interest income from this investment. What should be reported as
the carrying amount of the bonds in the December 31, 2008
balance sheet?
a. 8,531,200 c. 8,512,000
b. 8,533,400 d. 8,436,800

86. On July 1, 2008, Hanni purchased as a long-term investment

P5,000,000 face value 8% bonds for P4,615,000 to yield 10% per
year. The bonds pay interest semiannually on January 1, and July
1. In its December 31, 2008 balance sheet, Hanni Company
should report accrued interest receivable at what amount?
a. 400,000 c. 230,750
b. 200,000 d. 233,333

87. On January 1, 2008, 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 “available for sale securities”. The bonds
mature on December 31, 2010 and pay interest of 8% annually
every December 31 with a 10% effective yield. On December 31,
2008, the bonds are quoted at 105. What amount of unrealized
gain on these bonds should be reported on the 2008 statement of
changes in equity?
a. 169,450 c. 300,000
b. 199,500 d. 179,500

88. On January 1, 2007, Hermie Company purchased P2,000,000

face value bonds of Steph Company to held as “available-for-sale
securities” for P2,126,800 including transaction cost of P60,000 at

24
 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, 2010.
Steph’s debt securities are actively traded in the bond market and
available market prices on December 31, 2007 and December 31,
2008 are P2,300,000 and P2,500,000, respectively. What is the
unrealized gain or loss to be recognized in Hermie’ statement of
changes in owner’s equity for 2008?
a. 430,572 c. 235,850
b. 373,200 d. 200,000

89. On January 1, 2008, Tanya Company purchased as a long-term

investment P4,000,000 face amount, 8% bonds of Meralco
Corporation for P3,645,500, including transaction cost of 45,500 to
yield 10% per year. The bonds pay interest semiannually on June
30 and December 31. In its December 31, 2008 balance sheet,
the book value of Tanya Company’s investment in bonds should
be
a. 3,667,800 c. 3,691,200
b. 3,690,050 d. 3,640,000

90. On January 1, 2008, Hershey Company purchased bonds with

face value of P5,000,000 at a cost of P4,700,000. The stated
interest rate is 10% and payable annually every December 31.
The bonds mature in 4 years or on January 1, 2012, and are
expected to be held until that time. The market value of the bonds
on December 31, 2008 is P4,900,000. What is the interest
income to be recognized by Hershey on December 31, 2008
(Round off your present value factors to 4 decimal places)?
a. 500,000 c. 528,930
b. 562,590 d. 575,260

91. On January 1, 2008 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
unidentifiable intangible asset which was undervalued on Noble’s
balance sheet and which had an indefinite life. For the year

25
 ended December 31, 2008, Noble reported net income of
P5,000,000 and paid cash dividends of P2,000,000 on its ordinary
shares and thereafter issued 10% stock dividend. What is the
proper carrying value of investment in associate at December 31,
2008?
a. 10,000,000 c. 11,250,000
b. 10,500,000 d. 10,750,000

92. On January 1, 2008, 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 2008, 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 2008?
a. 800,000 c. 640,000
b. 960,000 d. 680,000

93. On January 1, 2008, Izzanine Company purchased 40% of the

common 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 2008. Paula Company reported net income of
P4,000,000 for 2008 and paid no dividends during 2008. The
maximum amount which could be included in Izzanine’s 2008
income before tax to reflect Izzanine’s equity in earnings of Paula
Company should be
a. 1,250,000 c. 1,600,000
b. 1,350,000 d. 1,700,000

26
94. Immaculate Company acquired 30% of Cleo Company’s voting
stock for P5,000,000 on January 1, 2007. Immaculate’s 30%
interest in Cleo gave Immaculate the ability to exercise significant
influence over Cleo’s operating and financial policies. During
2007, Cleo earned P2,000,000 and paid dividends of P500,000.
Cleo reported earnings of P1,000,000 for the six months ended
June 30, 2008, and P2,000,000 for the remainder of the year. On
July 1, 2008, Immaculate sold half of its stock in Cleo for
P3,000,000, cash. Cleo paid dividends of P600,000 on October 1,
2008. In its 2008 income statement, what amount should
Immaculate report as gain from sale of half of its investment in
Cleo?
a. 125,000 c. 150,000
b. 80,000 d. 190,000
95. On January 1, 2007 Genesis Company acquired 10% of the outstanding
voting stock of Josiah Company. On January 1, 2008, Genesis gained
the ability to exercise significant influence over financial and operating
control of Josiah by acquiring an additional 20% of Josiah’s outstanding
stock. The two purchases were made at prices proportionate to the
value assigned to Josiah’s net assets, which equaled their carrying
amounts. For the years ended December 31, 2007 and 2008, Josiah
reported the following:
2007 2008
Dividends paid 1,500,000 3,000,000
Net income 4,000,000 6,000,000

What is the adjustment that will be made to 2007 income as a

result of the additional investment?
a. 400,000 c. 250,000
b. 750,000 d. 1,800,000

96. Ira Company purchased 10% of Charrise Company’s 500,000

outstanding shares of ordinary shares on January 1, 2008 for
P1,000,000 and appropriately classified this investment as
“available for sale securities”. The market value of this investment
on December 31, 2007 is P1,200,000. On January 1, 2009, Ira
purchased an additional 100,000 shares of Charrise for
P3,000,000. There was no goodwill as a result of either
acquisition. Charrise reported earnings of P3,000,000 for 2008.

27
 What amount should Ira report in its January 1, 2009 balance
sheet as investment in Charrise Company?
a. 4,000,000 c. 4,300,000
b. 3,000,000 d. 4,900,000

97. Nikon Company acquired 20,000 shares of Stone Company on

January 1, 2008, at P120 per share. Stone had 80,000 shares
outstanding with a book value of P8,000,000. The difference
between the book value and fair value of Stone on January 1,
2008, is attributable to a broadcast license intangible asset. Stone
recorded earnings of P3,500,000 and P4,000,000 for 2008 and
2009, respectively, and paid per-share dividends of P15 in 2008
and P20 in 2009. Nikon uses a 20-year straight-line amortization
policy for the broadcast license. Nikon Company shall report in
2008 its equity in earnings of Stone Company at
a. 1,000,000 c. 400,000
b. 980,000 d. 380,000

98. On January 1, 2005, Iwa Company acquired as a long-term

investment for P7,000,000, a 40% interest in Antonio Corporation
when the fair value of Antonio’s net assets was P17,500,000.
Antonio Corporation reported the following net losses:
2005 5,000,000
2006 7,000,000
2007 8,000,000
2008 4,000,000
On January 1, 2007, Iwa Corporation made cash advances of
P2,000,000 to Antonio Corporation. On December 31, 2007, it is
not expected that Iwa Company will provide further financial
support for Antonio Corporation. Iwa Company should report in
2008 a loss from this investment in the amount of
a. 1,600,000 c. 600 ,000
b. 1,000,000 d. 800,000

99. On January 1. 2007, Jesusa Company purchased 10% of Star

Company’s ordinary shares for P2,000,000. The investment is
classified as a nonmarketable security and accounted for

28
 appropriately under the cost method. The following data pertain to
Star’s operations for 2007 and 2008.
2007 2008
Net income 1,000,000 3,000,000
Dividend paid None 5,000,000
Jesusa Company should report dividend income in 2008 of
a. 500,000 c. 600,000
b. 400,000 d. 300,000

100. On January 2, 2007 Jin Company bought 15% of Christie

Corporation’s ordinary shares for P3,000,000. Jin Company
accounts for this investment by the cost method. Christie’s net
earnings for the years ended December 31, 2007 and December
31, 2008 were P1,000,000 and P5,000,000, respectively. During
2008 Christie declared a dividend of P7,000,000. No dividends
were declared in 2007. How much should Jin show on its 2008
income statement as income from this investment?
a. 1,575,000 c. 900,000
b. 1,050,000 d. 750,000

101. Data pertaining to dividends from Jenny Company’s ordinary

shares investments for the year 2008 follow:
* On October 1, 2008, Jenny received P500,000 liquidating
dividend from A Company. Jenny owns a 10% interest in A
Company.
* Jenny owns a 5% interest in B Company which declared a
P5,000,000 cash dividend on November 15, 2008 to
stockholders of record on December 15, 2008 payable on
January 15, 2008. Jenny does not have ability to exercise
significant influence over B Company.
* On December 1, 2008, Jenny received from C Company a
dividend in kind of one share D Company ordinary shares for
every 4 C Company common shares held. Jenny holds
100,000 C Company shares, which have a market price of P50
per share on December 1, 2008. The market price of D
Company common is P30 per share.

29
 What amount should Jenny report as dividend income in its 2008
income statement?
a. 500,000 c. 1,000,000
b. 1,500,000 d. 2,000,000

102. Jocelyn Company received dividends from its ordinary share

investments during the year 2008 as follows:

* A stock dividend of 10,000 shares from Volvo Company when

the market price of Volvo’s shares was P10 per share.

* A cash dividend of P1,500,000 from Opel Company in which

Jocelyn owns a 20% interest.

* 5,000 shares of ordinary shares of Astra Company in lieu of

cash dividend of P20 per share. The market price of Astra
Company’s shares was P150. Jocelyn holds originally 50,000
shares of Astra Company ordinary shares. Jocelyn owns 5%
interest in Astra Company.

What amount of dividend revenue should Jocelyn report in its 2008

income statement?
a. 2,500,000 c. 1,500,000
b. 2,250,000 d. 750,000
103. On July 1, 2008, Jazzy Company purchased as a long-term
investment 50,000 shares of Asia Corporation ordinary shares for
P80 per share. This purchase represents a 2% interest in Asia.
On August 1, 2008, Asia Corporation declared its annual dividend
on its ordinary shares of P10 per share payable on September 10
to stockholders of record at August 31, 2008. A retirement of an
issue of Jazzy’s serial bonds payable on August 25, 2008 required
additional working capital and Jazzy sold all 50,000 shares of
Asia’s stock for P5,200,000 including the accrued dividend. For
the year ended December 31, 2008, the gain on disposal to be
reported by Jazzy on this transaction should be
a. 700,000 c. 500,000
b. 200,000 d. 1,200,000

30
104. Bruno Company purchased 20,000 ordinary shares of Harper
Company P100 par value shares for P3,000,000 to be held as
available for sale securities. On March 1, 2008, Bruno received a
20% stock dividend. On June 1, 2008, Bruno sold all the stock
dividends that were received on March 1 at P200 per share. The
gain or (loss) on sale of investment be recorded by Bruno is
a. 100,000 c. 300,000
b. 150,000 d. 200,000

105. Jessica Company owns 60,000 shares of the outstanding ordinary

shares of Chris Company. These 60,000 shares were originally
purchased for P100 per share. On December 1, 2008, Chris
Company distributed 60,000 rights to Jessica. Jessica was
entitled to buy one new share of Chris ordinary shares for P120
and five of these rights. On December 1, 2008, each share of
stock has a market value of P150 ex-right and each right had
market value of P10. On December 31, 2008, Jessica exercised
all rights. What total cost should be recorded for the new shares
that Jessica acquired by exercising the rights?
a. 1,440,000 c. 1,560,000
b. 1,815,000 d. 1,840,000

Questions 106 through 107:

Jensen Company invested in stock of Alma Company in 2006, 150,000

shares at a total cost of P12,000,000 and in 2007, 100,000 shares at a
total cost of P10,000,000. Jensen Company received 250,000 rights in
2008 to purchase Alma stock at P80 per share. Five rights are required to
purchase one share. At issue date, the rights had a market value of P5
each and the stock was selling ex-right at P95. Jensen used the rights to
purchase 40,000 additional shares of Alma Company and allowed the
remaining rights to lapse.

31
106. What is the cost of the new investment using the FIFO method?
a. 3,200,000 c. 4,200,000
b. 4,080,000 d. 4,050,000

107. What is the cost of the new investment using the average method?
a. 3,200,000 c. 4,200,000
b. 4,080,000 d. 4,050,000

108. Integrity Company invested in stocks of Jesusa Company as

follows:
2006 50,000 shares at P50 2,500,000
2007 100,000 shares at P60 6,000,000

In 2008, Integrity received 150,000 rights to purchase Jesusa

stock at P90 per share plus five rights. At issue date, rights had a
market value of P5 each and stock was selling at P95 ex-right.
Integrity used rights to purchase 25,000 additional shares of
Jesusa stock and allowed the remaining rights to lapse. The FIFO
method is used in determining the stock rights exercised. What is
the cost of the new investment?
a. 2,600,000 c. 2,375,000
b. 2,250,000 d. 2,675,000

109. In January 1, 2003 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, 2009, 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, 2009?
a. No part of the sinking fund should appear in Cameron’s
balance sheet
b. P64,000 should appear as a current asset
c. P364,000 should appear as a current asset
d. P364,000 should appear as a noncurrent asset

110. The following information is a summary of the noncurrent

investment account that Jordin maintains with a trustee:

32
 Bond sinking fund – January 1, 2009 8,000,000
2008 additional contributions 1,800,000
Dividend receivable on investment 1,200,000
Interest income 400,000
Administrative expenses 500,000
Redemption of bonds 2,000,000
Bonds payable 10,000,000
Unamortized discount on bonds payable 1,000,000
What amount should Jordin report in its December 31, 2009
balance sheet as noncurrent investment in bond sinking fund?
a. 7,700,000 c. 8,900,000
b. 9,400,000 d. 10,900,000

111. On January 1, 2005 Josh Company purchased P2,000,000

ordinary life policy on its president. Additional data for the year
2008 are:
Cash surrender value, January 1 50,000
Cash surrender value, December 31 60,000
Annual advance premium paid on January 1, 2009 100,000
Dividend received on July 1, 2009 10,000
Josh Company is the beneficiary under the life insurance policy.
Josh should report life insurance expense for 2009 at
a. 110,000 c. 90,000
b. 100,000 d. 80,000
112. In 2004 Stevens Company purchased P10,000,000 life insurance
policy on its president, of which Stevens is the beneficiary.
Information regarding the policy for 2008 is
Cash surrender value- January 1 100,000
Cash surrender value- December 31 125,000
Annual premium paid on January 1, 2008 80,000
During 2008, dividends of P10,000 was applied to increase the
cash surrender value. What should be reported as life insurance
expense for 2008?
a. 65,000 c. 45, 000
b. 55,000 d. 80,000

33
113. In 2005 Janna Corporation purchased P5,000,000 life insurance
policy on its president and chief executive officer, of which Janna
is the beneficiary. Information regarding the policy for 2008 is
Cash surrender value- January 1 100,000
Annual premium paid on January 1, 2008 200,000
Dividends earned 20,000
The dividends were applied to increase the cash surrender value.
If the life insurance expense reported by Janna in 2008 was
P160,000, what is the cash surrender value on December 31,
2008?
a. 140,000 c. 120,000
b. 160,000 d. 200,000

114. On January 2, 2004, Maan Inc. acquired a P3,000,000 whole-life

insurance policy on its president. The annual premium is
P150,000. The company is the owner and beneficiary. Maan
charged Life Insurance Expense and received dividends as
follows:
Life insurance expense Dividends
2004 150,000 0
2005 142,000 8,000
2006 120,000 10,000
2007 125,000 5,000
2008 122,000 14,000
2009 130,000 6,000
In Maan's December 31, 2009 balance sheet, the investment in
cash surrender value should be
a. 68,000 c. 48,000
b. 111,000 d. 76,000

115. Jay-Anne Company and its subsidiaries provided the following

properties owned by the group:
Land held by Jay-Anne for undetermined future 2,000,000
use
Vacant building owned by Jay-Anne to be leased
out under an operating lease 3,000,000
Property held by a division of Jay-Anne,

34
 engaged in real estate firm, on the ordinary
course of business 5,000,000
Property held by Jay-Anne for use in production 4,000,000
Property that is being developed for future use
as investment property 2,500,000
Office of the building owned by a subsidiary of
Jay- Anne and for which the subsidiary
provides security and maintenance services
to the lessees 2,500,000
Equipment leased by Jay-Anne to a subsidiary 1,500,000
Property being constructed on behalf of another
party 500,000
Real estate held for capital appreciation 3,500,000
In the consolidated balance sheet of Jay-Anne Company and its
subsidiaries, what total amount should be shown as investment
property?
a. 11,000,000 c. 9,000,000
b. 10,000,000 d. 7,500,000

116. Josiah Company ventured into construction of a mega shopping

mall in the North area, which is rated as the largest shopping mall
in South East Asia. The company’s board of directors decided
that instead of selling the shopping mall to a local investor, the
company would hold this property for purposes of earning rentals
by letting out space on the shopping mall to tenants.
The construction of the shopping mall was completed and the
property was placed in service on December 31, 2007. The cost
of construction of the shopping mall was P100 million. The useful
life of the shopping mall is 10 years and its residual value is P10
million. An independent valuation expert provided the following
fair values at each subsequent year-end:
December 31, 2008 120 million
December 31, 2009 135 million
December 31, 2010 125 million
Using the “fair value model” and ignoring income tax implications,
what amount of gain or loss should be recognized for the year
ended December 31, 2010?

35
 a. 15,000,000 gain in profit or loss
b. 10,000,000 loss in profit or loss
c. 15,000,000 gain in equity
d. 10,000,000 loss in equity

117. On January 1, 2009, Martha Company entered into a two-year

P4,000,000 “Variable Interest Rate Loan” at the prevailing interest
rate of 12%. The 2010 interest payment will be equal to the
prevailing interest rate on January 1, 2010. The principal loan is
payable on December 31, 2010 and the interest is payable on
December 31 of each year. During 2009, Martha Company
entered into a “receive variable, pay fixed” interest swap
agreement as a cash flow hedge with a speculator bank at the
prevailing rate of interest of 12%. This derivative contract means,
that if the rate is higher than 12%, Martha will receive an interest
rate swap payment equal to the difference in rate times the
principal of the loan and will pay the bank an equivalent amount if
the rate is lower than 12% on January 1, 2010. If the prevailing
interest rate on January 1, 2010 is 15% and the present value of 1
at 15% for 1 period is .870, what is the derivative asset or liability
to be recognized by Martha on December 31, 2009?
a. 120,000 receivable c. 104,400 receivable
b. 104,400 payable d. 120,000 payable

118. Kendrick Company as estimated that it would approximately use

100,000 units of raw material in its manufacturing operations to
meet the demand for the Christmas season. On August 1, 2008,
Kendrick Company purchased a call option to buy 100,000 units of
raw materials on December 1, 2008 at a price of P100 per unit.
The company paid P300,000 for the call option. Kendrick
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, 2008 is P120 per unit and P130
on December 31, 2008. Kendrick’s gain on the call option in 2008
is
a. 1,700,000 c. 2,000,000
b. 2,700,000 d. 3,000,000

36
119. On January 1, 2007, La Salle Company entered into a two-year
P5,000,000 variable interest rate loan at the prevailing rate of
12%. In 2008, the interest rate is equal to the prevailing interest
rate at the beginning of the year.
The principal loan is payable on December 31, 2008 and the
interest is payable on December 31 of each year. On January 1,
2007, La Salle Company entered into a “receive variable, pay
fixed” interest swap agreement with a speculator bank.
The prevailing interest rate on January 1, 2008 is 15% and the
present value of 1 at 15% for one period is .869. What will be the
net cash settlement with the bank by La Salle Company on
December 31, 2008?
a. 150,000 payment c. 130,350 receipt
b. 150,000 receipt d. 130,350 payment

120. On December 1, 2009, Massachusetts Company sold some

limited edition art prints to Matsusaka Company for $500,000 to
be paid on March 1, 2010. The current exchange rate on
December 1, 2009, was P42=$1, so the total payment at the
current exchange rate would be equal to P21,000,000.
Massachusetts entered into a forward contract with a large bank
to guarantee the number of pesos to be received. According to
the terms of the contract, if $500,000 is worth less than
P21,000,000, the bank will pay Massachusetts the difference in
cash. Likewise, if $500,000 is worth more than P21,000,000,
Massachusetts must pay the bank the difference in cash.
Assuming the exchange rate on December 31, 2009 is P40.50=$1
and the exchange rate on March 1, 2010 is P39=$1, what is the
derivative to be recognized by Massachusetts on December 31,
2009?
a. 750,000 asset c. 1,500,000 asset
b. 750,000 liability d. 1,500,000 liability

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121. Barrera Company employs analysts who closely track news about
supply and demand for livestock and agricultural commodities.
Barrera uses the information to enter into futures contracts based
on its prediction on which way agricultural prices are heading. On
December 31, 2009, Barrera Company entered into the following
three contracts:
Type of Contract Quantity Futures Price Market Price per
per Pound Pound on Dec. 1,
2009
Purchase feeder 30,000 lbs. P750 P750
cattle
Sell pork bellies 20,000 lbs. 600 600
Purchase milk 80,000 lbs. 100 100

All three contracts are to be settled on January 1, 2010. The

market values per pound on December 31, 2009 are: feeder cattle,
P670; pork bellies, P690; and milk, P80. What is the total liability
arising from these forward contracts for speculation on December
31, 2009?
a. 5,800,000 c. 1,800,000
b. 4,000,000 d. 2,400,000

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