Actrev2 - Investments

Saint Paul School of Business and Law Campetic Road, Palo, Leyte Accountancy Department ACTREV 2 INVESTMENTS

jprocabo, CPA

INVESTMENTS - assets held for accretion of wealth through distribution (ex. Interest, royalties, dividends and rentals). - assets held for capital appreciation or for other benefits to the investing entity such as those obtained through trading relationship. Reasons 1. 2. 3. 4. 5.

for holding investment: Accretion of wealth Capital appreciation Ownership control Meeting business requirements Protection

Financial Instruments - any contract that gives rise to a financial asset of one entity and a financial liability or an equity instrument of another entity. - encompasses a financial asset, a financial liability and an equity instrument. Financial asset: Any asset that is: 1. Cash 2. A contractual right to receive cash or another financial asset from another entity. 3. A contractual right to exchange financial instrument with another entity under conditions that are potentially FAVORABLE. 4. An equity instrument of another entity. Financial liability Any liability that is a contractual obligation: 1. To deliver cash or other financial asset to another entity. 2. To exchange financial instruments with another entity under conditions that are potentially UNFAVORABLE. Equity security - encompasses any instrument representing ownership shares and right, warrants or options to acquire or dispose of ownership shares at a fixed or determinable price. CLASSIFICATION OF INVESTMENTS A. Investment in equity securities B. Investment in debt securities C. Investment property D. Other investments INVESTMENT IN EQUITY SECURITIES - represents ownership interest in an equity (ex. Ordinary share or preference share) or the right to acquire ownership interest (ex. Share options, share warrants and etc.). Note: This term does not encompass callable or redeemable preference share, treasury share and convertible bonds. 1. Small investments 2. Investment in subsidiary 3. Investment in associate

SMALL INVESTMENTS - are investments in the investee’s stock without controlling interest or significant influence. 1. Investment to Profit or Loss - also known as Trading Security. - acquired principally for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin. - generally marketable (with readily determinable market value). Measurement: a. Initial Recognition - measured at FAIR VALUE. - transaction cost incurred is considered as outright expense. b. Subsequent Recognition - measured at FAIR VALUE. - changes in fair value subsequent to acquisition are reported in the profit or loss of the period of such change. Reclassification of Investment to Profit or Loss - transfer in and out of this category is not allowed by the standards. 2. Investment to OCI or Equity - also known as Available for Sale Security. Measurement: 1. Initial recognition a. Marketable - measured at FAIR VALUE plus TRANSACTION COST. b. Non-marketable - measured at FAIR VALUE plus TRANSACTION COST. 2. Subsequent recognition a. Marketable - measured at FAIR VALUE or IMPAIRED VALUE (if there’s objective evidence of impairment). - any change(increase or decrease) is reported in equity. b. Non-marketable - measured at HISTORICAL COST or BOOK/CARRYING VALUE. - if securities are impaired, it is reported at IMPAIRED VALUE. Impairment of Available for sale – Equity - The cumulative loss that has been recognized directly in equity must be removed from equity and recognized in profit or loss. This includes any decline in fair value already recognized in equity plus the impairment loss. Acquisition of investment a. Dividends-on - if acquired or sold between the date of declaration and date of record. - the cost of acquiring the instruments includes the amount paid for the instruments plus the amount paid for the dividends. b. Ex-dividend - if acquired or sold between the date of record and date of payment. - the cost of acquiring the instruments include only the amount paid for the instrument.

Accounting for Dividends on Equity Instruments 1. Cash dividend - recognized as income at the date of declaration. - measured at Face Value. 2. Property dividend - recognized as income at the date of declaration. - measured at Fair Value of the property. 3. Share dividend - not recognized as income. - memo entry only is made to acknowledge the receipt of new shares. a. Small Dividends - if dividend is less than 20%. - recorded at Fair Value. b. Large Dividends - if dividend is 20% or above. - recorded at Par value. 4. Shares in lieu of cash dividends - recognized as income. - measured at fair value of the shares. 5. Cash in lieu of share dividends - not recognized as dividend income. - the cash received is the proceeds of the as if sale of shares. Accounting for share rights a. Upon receipt - the carrying value of the equity instrument is allocated using the percentage of their separate market values over the combined market values of the equity and the share rights. 1. Rights-on - means that the equity instrument is currently traded with the right to acquire additional shares. - the market value of the equity instrument already includes the market value of the share rights. 2. Ex-rights - means that the equity instruments are separately traded. - the market value of the equity instruments is separate from the market value of the share rights. b. Upon exercise - the cost assigned to the new shares acquired will be debited to a separate investment in equity account (trading or available for sale). - the cost assigned should include the amount paid in acquiring new shares plus the cost assigned to the rights being exercised. c. Upon expiration - if the share rights were not exercised and had they expired, the cost assigned to an expired share rights should be charged to Loss on Share Rights. INVESTMENT IN EQUITY & INVESTMENT IN ASSOCIATE Classification of Investment in Equity Securities 1. Investment in Subsidiary 2. Investment in Associate 3. Small Investments

INVESTMENT IN SUBSIDIARY - When the ownership interest is more than 50%. - The entity has Control over the other entity. - Accounted under Cost or Purchase Method. INVESTMENT IN ASSOCIATE - When the ownership interest is 20% to 50%. - The entity has Significant Influence over the other entity. - Accounted under Equity Method. Associate - is an entity, including an un-incorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. Measurement Equity Method - a method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for post-acquisition change in the investor’s share of net assets of the investee. - The profit or loss of the investor includes the investor’s share of the profit or loss of the investee adjusted for the effect of any fair value differences recognized on acquisition of the associate. 1. Initial Recognition - measured at historical cost (The fair value plus transaction cost incurred). 2. Subsequent Recognition - the cost and carrying value of the equity securities is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition. INVESTMENT IN DEBT INSTRUMENTS - represent creditor’s claim with fixed amount and usually some interest obligation (ex. Government securities, corporate bonds, convertible bonds, commercial paper, etc.). Classification of Debt Securities 1. Trading Securities 2. Available for Sale Securities 3. Held to Maturity Securities INVESTMENT TO PROFIT OR LOSS (TRADING SECURITIES) Measurement: 1. Initial Recognition - measured at historical cost (fair value which is the transaction price). - Any transaction cost incurred is recognized outright as an expense. 2. Subsequent Recognition - remeasured at fair value. - any increase or decrease in the value of the debt instrument is recognized in profit or loss. - not subject to amortization since they are sold within a very short period of time. INVESTMENT IN AVAILABLE FOR SALE SECURITIES Measurement: 1. Initial Recognition - measured at historical cost (fair value plus any transaction cost incurred).

2. Subsequent Recognition - remeasured at fair value. - any increase or decrease in the value of the debt instrument is recognized directly in equity. - subject to amortization because they are generally held for a longer period of time. INVESTMENT IN HELD TO MATURITY SECURITIES Held to maturity investments - Non-derivative financial assets. - With fixed or determinable payments and fixed maturity. - The entity has the positive intention to hold them to maturity. Measurement: 1. Initial Recognition - measured at historical cost (fair value plus any transaction cost incurred). 2. Subsequent Recognition - not remeasured but reported at amortized cost. - increases or decreases as a result of market fluctuations are not recognized. - if there is objective evidence of impairment the debt security should be remeasured at its impaired value. The Tainting Rules When an entity during the current financial year has sold or reclassified more than an insignificant amount of held to maturity investments before maturity, it is prohibited from classifying any financial asset as held to maturity for a period of two years after the occurrence of this event. Furthermore, all the entity’s held to maturity investments must be reclassified into the available for sale category and measured at fair value. In a sense a penalty is imposed for a change in management’s intention. When the prohibition ends (at the end of the second year following the tainting), the portfolio becomes cleansed and the entity is once more able to asset that it has the intent and ability to hold debt instruments to maturity. Change in the category of a debt instrument 1. AFS to HTM - measured at amortized cost rather than at fair value. - the amortized cost of the investment in available for sale on the date of transfer will become the cost of the new category. Note: The amortized cost is the expected net cash inflow based from holding the investment till maturity discounted at the effective rate which is the rate at the time the original investment was initially recognized. 2. HTM to AFS - measured at fair value at the date of transfer rather than at amortized cost. - the difference of the fair value and the amortized cost is recognized as unrealized gain or loss to be reported in the statement of comprehensive income under the category other comprehensive income. INVESTMENT PROPERTY Investment Property - A property held by the owner or the lessee under a finance lease to earn rentals or for capital appreciation or both. - Can be land or building or both.

Measurement 1. Initial Recognition - Initially recorded at cost (fair value plus directly attributable cost). 2. Subsequent Recognition a. Cost Model - measured at cost less accumulated depreciation less any accumulated impairment losses. - if cost model is followed, the fair value of the property should be disclosed. b. Fair Value Model - the fair value policy requires the enterprise to revalue its investment properties each year, any gain or loss being included in the net profit or loss for the period. Note: If an entity has previously measured an investment property at fair value, it shall continue to measure the property at fair value until disposal ( or until the property becomes owner-occupied property or the entity begins to develop the property for subsequent sale in the ordinary course of business) even if comparable market transactions become less frequent or market prices become less readily available. Transfer to or from Investment Property Classification (transfer under the fair value model) 1. Investment Property to Property, Plant and Equipment - it should be carried at fair value. - the fair value at the date of transfer becomes the deemed cost for subsequent accounting under PAS 16. 2. Investment Property to Inventory - it should be carried at fair value. - the fair value at the date of transfer becomes the deemed cost for subsequent accounting under PAS 2. 3. Property, plant and equipment to Investment Property - it should be carried at fair value up to the date of transfer. - any gain or loss is accounted for as revaluation surplus or deficit in equity in accordance with PAS 16. 4. Inventories to Investment Property - it should be carried at fair value. - any difference between the fair value and previous carrying amount at the date of transfer is recognized in profit or loss. 5. Property, plant and equipment(self-constructed or developed) to Investment Property - when construction or development of a self-constructed property is complete it should be transferred to investment property. Until this point the property is accounted for under PAS 16. - if the investment property is to be carried at fair value, any difference between fair value and previous carrying amount at the date of transfer should be recognized in profit or loss. Transfer under the cost model - When an entity has a policy of carrying the investment property at the cost model, properties transferred in the same way and under the same circumstances as described on the above transfers. However, such transfers do not change the carrying amount of the property transferred, that is, no revaluation gains or loss arise, nor they change the cost of the property for measurement or disclosure purposes.

FUND AND OTHER INVESTMENTS Fund – is defined as cash and other assets set aside for a specific purpose either by reason of the action of management or by virtue of a contract or legal requirement. - may be in the form of cash, securities and other assets. 1. Current (current asset) - includes petty cash fund, payroll fund, interest fund, dividend fund, and tax fund. 2. Non-current (long-term investment) - includes sinking fund, preference share redemption fund, replacement fund, plant expansion fund, contingency fund and insurance fund.

THEORIES: 1. Available for sale investment are securities a. Considered as a derivative instrument b. Purchased with the intent of selling in the near future or very soon to generate a profit from short-term fluctuation in price or dealer’s margin c. Purchased and held indefinitely and will be available to be sold when the need for liquid funds arises d. With fixed or determinable payments and fixed maturity that an enterprise has the positive intent and ability to hold to maturity 2. The term ‘financial assets at fair value through profit or loss’ may refer to a. Trading securities (TS) b. Available for sale securities (AFS) c. Held to maturity securities (HTM) d. Investment in unaffiliated companies and associates 3. Equity securities may be classified as a. TS only c. TS or AFS b. AFS only d. TS, AFS or HTM 4. Debt securities may be classified as a. HTM only c. AFS or HTM b. TS or HTM d. TS, AFS or HTM 5. Trading securities are classified as a. Current assets b. Noncurrent assets

c. Current or noncurrent assets d. Current or noncurrent liabilities

6. Investment(s) that may be classified as CURRENT at initial recognition. a. TS only c. TS and AFS b. AFS only d. TS, AFS and HTM 7. Investment(s) that may be classified as NON-CURRENT at initial recognition. a. TS and AFS c. TS and HTM b. AFS and HTM d. TS, AFS and HTM 8. Transaction costs incurred are expensed in acquiring this type of investment securities. a. TS only c. HTM only b. AFS only d. TS and AFS 9. Subsequent to acquisition, these securities are generally reported at FAIR VALUE. a. TS and AFS c. TS and HTM b. AFS and HTM d. TS, AFS and HTM

10. Unrealized gains or losses on TS are generally presented on the face of the a. Income statement b. Statement of cash flows c. Statement of financial position d. Statement of changes in equity 11. Unrealized gains or losses on AFS are included and presented in the a. Liability section of the balance sheet b. Equity section of the balance sheet c. Income statement d. Statement of cash flows 12. Held-to-maturity securities are generally carried subsequent to acquisition at a. Amortized cost (straight line method) b. Amortized cost (scientific method) c. Fair value less costs to sell d. net realizable value 13. Unrealized gains or losses on HTM are a. Recognized in the income statement b. Recognized in asset section of the balance sheet c. Recognized in equity section of the balance sheet d. Not recognized 14. Impairment loss may be recognized for all of the following, except a. Loans and receivables c. Available-for-sale securities b. Trading securities d. Held-to-maturity securities 15. Cash dividends are recognized as income by the investor on the a. Date of declaration c. Date of payment b. Date of record d. Date of balance sheet 16. Property dividends are treated by the investor as a (an) a. Return of investment b. Non-accountable event c. Income at the cost of the property d. Income at the fair value of the property 17. Liquidating dividends are treated by the investor as a (an) a. Return of investment b. Non-accountable event c. income at the cost of the property d. Income at the fair value of the property 18. Shares received in lieu of cash dividend are treated as a. Stock dividends b. Income at par value of the shares received c. Income at fair value of the shares received d. Income at the cash dividend that would have been received 19. Cash received in lieu of share dividends is treated as a. Income at the par value of the shares that would have been received b. Income at the fair value of the shares and investment cost per share c. If the stocks are received and later sold, with gain or loss on sale being recognized d. If the stocks are received and later sold, with gain or loss on sale not to be recognized

20. Reverse stock splits a. a. Increase the number of shares and investment cost per share b. Decrease the number of shares and investment cost per share c. Increase the number of shares but decrease the investment cost per share d. Decrease the number of shares but increase the investment cost per share 21. An entity over which the investor exercises significant influence is called a. Associate c. Subordinate b. Affiliate d. Subsidiary 22. Under PAS 28, significance influence means a. The holding of significant proportion of the share capital in another entity b. The contractually agreed sharing of control over an economic entity c. The power to participate in the financial and operating policy decisions of an entity d. The mutual sharing in the risks and benefits of a combined entity 23. What level of investment in voting stock would lead to the presumption that an investor has an ability to exercise significant influence over an associate? a. 20% or less c. More than 20% b. 20% or more d. More than 50% 24. Under the equity method, cash dividends received by the investor from the associate are recorded as a. Dividend income b. A deduction from the investment account c. A deduction from the investor’s share of the associate’s profits c. An addition to the investor’s share o f the associate’s profits 25. Under the equity method of accounting for investment in associates, the investment account is a. Increased by the share in the earnings of the associates but is not affected by the share in the losses of the associates b. Decreased by the share in the losses of the associates but is not affected by the share in the earnings of the associates c. Increased by the share in the earnings of the associates and decreased by the share in the losses of the associates d. Not affected by the share in the earnings or losses of the associates 26. An investor shall discontinue the use of equity method from the date it loses significant influence over an associate and upon loss of significant influence, the remaining interests shall be valued at a. Original cost of the investment b. Amortized cost uses effective interest method c. Fair value, with the resulting remeasurement gain or loss included in profit or loss d. Fair value, with the resulting remeasurement gain or loss included in other comprehensive income 27. Serial bonds are a. Bonds that give the bondholders the right to exchange their bonds for other securities b. Bonds that may be called in or redeemed by the issuing corporation prior to maturity date c. Bonds that have a series of maturity dates and hence, payable in installments d. Bonds that mature on a single date.

28. These are investments in bonds carried at fair value on BS date, with any unrealized gain or loss included as a component of income. a. Trading securities c. Held to maturity securities b. Available for sale securities d. None of the choices 29. If an entity fails to amortize the premium on its trading bond investment, the income is a. Overstated c. Not affected b. Understated d. Either overstated or understated 30. These are investments in bonds carried at fair value on BS date, with any unrealized gain or loss included as a component of equity. a. Trading securities c. Held to maturity securities b. Available for sale securities d. None of the choices 31. Investment in bonds classified as held to maturity (HTM) securities are generally carried at a. Fair value, with any unrealized gain or loss included as a component of income b. Fair value, with any unrealized gain or loss included as a component of equity c. Amortized cost, with any premium or discount amortized using straight-line method d. Amortized cost, with any premium or discount amortized using effective interest method 32. For a debt security transferred from HTM to AFS, the difference between the carrying amount of investment and fair value at the date of transfer is a. Recognized as a component of income b. Recognized as a component of equity c. Recognized as a component of cash flow d. Not recognized 33. For a debt security transferred from AFS to HTM, any previous unrealized gain or loss recognized directly in equity is a. Recognized in profit or loss immediately at the date of transfer b. Included in equity and amortized to profit or loss ovee the remaining life of the held to maturity using the straight line method. c. Included in equity and amortized to profit or loss over the remaining life of the held to maturity security using the effective interest method d. Recognized as an adjustment of retained earnings. 34. A bond investment with interest payment dates on May 1 and November 1 is purchased on August 1. The amount of (A) interest receivable and (B) interest income on December 31 would be equal to a. (A) 5 months (B) 8 months c. (A) 5 months (B) 5 months b. (A) 2 months (B) 8 months d. (A) 2 months (B) 5 months 35. Which of the following refers to the effective rate rather than nominal rate of interest? a. Stated rate c. Coupon rate b. Contract rate d. Yield rate 36. An entity made a year-end amortization for its only investment in bonds: Dec. 31

Investment (Bonds) 100 Interest Income

The bond investment must have been purchased at a. Par c. A discount b. Face value d. A premium

100

37. Assuming the same journal entry in no. 14, one can conclude that a. Effective rate is equal to the nominal rate b. Effective rate is higher than the nominal rate c. Effective rate is lower than the nominal rate d. Effective rate is less than or equal to the nominal rate 38. The investor’s interest income for a period would be highest if the bond is purchased at a. A discount c. Par b. A premium d. Face value 39. A bond investment with interest payment dates on February 1 and August 1 is sold June 1, the cash received from the sale a. Does not include the accrued interest b. Includes accrued interest for two (2) months c. Includes accrued interest for four (4) months d. Includes accrued interest for seven (7) months 40. An independent trustee holds cash in the sinking fund account representing annual deposits to the fund and the interest earned on those deposits. How should the sinking fund be reported in the company’s balance sheet? a. The cash in the sinking fund should appear as a current asset b. Only the accumulated deposits should appear as a noncurrent asset c. The entire balance in the sinking fund account should appear as a current asset d. The entire balance in the sinking fund account should appear as a noncurrent asset 41. If cash in a bond sinking fund is used to purchase investments, the sinking fund a. Increases when investments are purchased b. Decreases when investments are purchased c. Increases by the revenue earned on investments d. Is not affected by revenue earned on investments 41. Which of the following terms best describes property held to earn rentals or for capital appreciation? a. Freehold property b. Leasehold property c. Owner-occupied property d. Investment property 43. Under PAS 40, which of the following best describes owner-occupied property? a. Property held for sale in the ordinary course of business b. Property held for use in the production of goods and for administrative purposes c. Property held to earn rentals d. Property held for capital appreciation 44. PAS 40 requires that investment property be accounted for using the a. Cost model or fair value model b. Cost model or revaluation model c. Cost model or net realizable value model d. Cost, fair value or net realizable value model 45. Under the cost model, an investment property is carried on each balance sheet date at a. Fair value b. Cost less accumulated depreciation c. Cost less accumulated impairment losses d. Cost less accumulated depreciation and impairment losses

46. Under the fair value model, any unrealized gain or loss on investment property is a. Not recognized b. Recognized in the income statement c. Recognized in the equity section n of the balance sheet as a general reserve d. Recognized in the equity section of the balance sheet as a valuation reserve 47. In case of property held under an operating lease and classified as investment property, a. The entity has to account for the investment property under the cost model only. b. The entity has to use the fair value model only c. The entity has the choice between the cost model and fair value model d. The entity needs only to disclose the fair value and can use the cost model 48. Which of the following additional disclosures must be made when an entity chooses the cost model as its accounting policy for investment property? a. Fair value of the property b. Present value of the property c. Value in use of the property d. Net realizable value of the property 49. 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. Present value of expected future cash flows 50. 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 treated as a. A change in estimate b. A change in accounting policy c. Unrealized gain in profit or loss d. Revaluation of property, plant and equipment

PROBLEMS: SMALL INVESTMENTS 1. Master Company acquired the following portfolio of trading securities during 2010 and reported the following balances at December 31, 2010: Security Cost December 31, 2010 Market Value C 300,000 280,000 B 360,000 370,000 A 500,000 460,000 No sales occurred during 2010. All declines are considered to be temporary. What is the carrying value of the securities on December 31, 2010 on Master’s statement of financial position? a. 1,110,000 c. 1,160,000 b. 1,150,000 d. 1,170,000 2. National Bank began business in February of 2009. During the year, National Bank purchased the three-year trading securities listed below. In its December 31, 2009 balance sheet, National Bank appropriately reported a P40,000 debit balance in its “Fair Value adjustmentTrading Securities” account. There was no change during 2010 in the composition of National Bank’s portfolio of trading securities. Pertinent data are as follows:

Security C B A Total

Cost 1,200,000 900,000 1,600,000 3,700,000

December 31, 2010 Market Value 1,260,000 950,000 1,620,000 3,830,000

What amount of gain on these securities should be included in National Bank’s profit or loss for the year ended December 31, 2010? a. None c. 90,000 b. 40,000 d. 130,000 3. Gerald Company acquired available for sale securities during the year 2010 to be held as current investments. An analysis of the current investments on December 31, 2010 showed the following: Securities Cost Market P 1,500,000 1,400,000 I 2,200,000 2,300,000 C 3,000,000 2,900,000 U 3,800,000 4,000,000 Question 1: In Gerald’s December 31, 2010 statement of financial position, how much should be reported as the carrying value of the securities? a. 10,300,000 c. 10,500,000 b. 10,400,000 d. 10,600,000 Question 2: What amount of unrealized gain should be reported in Gerald’s December 31, 2010 profit or loss? a. None c. 200,000 b. 100,000 d. 300,000

4. On January 1, 2010, May Company appropriately reported a debit balance of P125,000 in the fair value adjustment account in conformity with the valuation of available for sale securities. There was no change during 2010 in the composition of the portfolio of available for sale investments. Pertinent data on December Securities C P A

31, 2010 are as follows: Cost Market 1,500,000 1,625,000 1,250,000 1,000,000 2,250,000 1,750,000

Question 1: By what amount the AFS decreased during 2010? a. None c. 625,000 b. 500,000 d. 750,000 Question 2: What amount of unrealized loss should May Company report in its December 31, 2010 shareholders’ equity related to its investment? a. None c. 625,000 b. 500,000 d. 750,000 5. Allied Bank began business on January 2, 2010 and at December 31, 2010, Allied Bank had the following portfolios of equity securities:

Aggregate Cost Aggregate market value

Trading 375,000 300,000

AFS 562,500 462,500

Question 1: None of the declines is judged to be other than temporary. Unrealized losses at December 31, 2010 should be recorded with corresponding charges against-

a. b. c. d.

Income -075,000 100,000 175,000

Shareholders’ Equity 175,000 100,000 75,000 -0-

Question 2: Assume that on December 31, 2010 there is objective evidence of impairment on the equity security, what amount of losses should be charged against income? a. 25,000 c. 100,000 b. 75,000 d. 175,000 6. Grand Company has P60,000 ordinary shares of Brand Corporation as an investment in AFS. These shares were acquired at fair market value, which was P80 per share on May 2, 2011. On December 20, 2011, the market value of these shares is P90 per share. On December 22, 2011, Grand Company sold 42,000 shares of its investment in Brand Corporation for P85 per share. Market value of Brand’s shares has yet to change; it remained at P90 per share. Question 1: What amount of realized gain or loss should Grand Company recognize in selling those shares? a. None c. 300,000 b. 210,000 d. 420,000 Question 2: What amount of unrealized gain or loss should Grand Company derecognize in selling those shares? a. None c. 210,000 b. 180,000 d. 420,000 Question 3: What amount of unrealized gain or loss should Grand Company carry over to the next measurement date? a. None c. 210,000 b. 180,000 d. 420,000 7. On November 1, 2009, Grain Company invested P600,000 in equity securities representing 20,000 ordinary shares of Brain Company. The investment was classified as AFS since the company does not intend to sell the security for a short-term profit. On December 31, 2009, the investment has a market value of P580,000. On December 31, 2010, the market value of the investment was P640,000. On January 15, 2011, Grain Company sold the investment for P650,000. What amount of realized gain should Grain Company recognize on the disposal of the AFS? a. None c. 30,000 b. 20,000 d. 50,000 8. On January 2, 2010, Lotus Company purchased 8,000 shares of Pearl Co. at P100 per share and classified as AFS. Brokerage fees of P24,000 and tax of P4,000 were paid on the same date. A P5 dividend per share of Pearl had been declared on December 17, 2009 to be paid on March 1, 2010 to shareholders of record on January 31, 2010. On July 31, 2010, Lotus Company received a 10% share dividend. Question 1: If fair market value of Pearl Company securities is not clearly determinable as of December 31, what amount should be shown as the carrying value of the investment in its December 31, 2010 statement of financial position? a. 788,000 c. 824,000 b. 800,000 d. 828,000 Question 2: Assuming Lotus investment in Pearl Company has a total market value of P900,000 as of December 31, 2010, what amount of unrealized gain before tax should be shown in the statement of comprehensive income? a. None c. 100,000 b. 72,000 d. 112,000

9. On September 30, 2010, Pilgrims Company exchanged equipment for 2,500 AFS of Theme Company’s ordinary share. On that date, the equipment had a carrying value of P250,000 and its fair value was not clearly determinable. The par value of Theme’s share was P80 per share but its market value on September 30, 2010 is P90 per share. Question 1: What is the cost of investment? a. 225,000 b. 250,000

c. 290,000 d. 290,100

Question 2: What is the amount of gain or loss on the disposal of the equipment? a. None c. 25,000 loss b. 25,000 gain d. 40,000 gain 10. Threshold Company purchased 20,000 shares out of 200,000 shares outstanding of Power Company’s ordinary shares on February 23, 2010 for P924,000. Threshold Company intends to hold the instrument for an indefinite period of time. Threshold Company received a P40,000 cash dividend on Power Company on July 1, 2010. Power declared a 10% share dividend on December 1, 2010 to shareholders of record as of December 31, 2010. The dividend was distributed on January 31, 2011. The market price of the share was P38 on December 1, 2010, P40 on December 31, 2010 and P42 on January 31, 2011. Question 1: What amount should Threshold record as dividend revenue for the year ended December 31, 2010? a. 40,000 c. 116,000 b. 88,000 d. 120,000 Question 2: What amount should Threshold Company report the investment in its 2010 balance sheet? a. 800,000 c. 880,000 b. 836,000 d. 924,000 INVESTMENT IN EQUITY AND INVESTMENT IN ASSOCIATE 1. On January 1, 2009, Oval Company purchased 10% of the outstanding ordinary shares of Tin Corporation for P800,000, when the fair value of Tin’s net assets was P4,000,000. Oval does not have the ability to exercise significant influence over the operating and financial policies of Tin. The following data concerning Tin are available for 2010: December 31, December 31, 2009 2010 Net income 1,200,000 1,000,000 Dividends declared and paid 0 2,500,000 Question 1: In its income statement for the year ended December 31, 2010, how much should Oval report from this investment? a. None c. 220,000 b. 100,000 d. 250,000 Question 2: What is the carrying value of Oval’s investment in Tin as of December 31, 2010? a. 770,000 c. 830,000 b. 800,000 d. 460,000 2. On January 2, 2010, Faith Corporation bought 30% of the outstanding ordinary shares of Love Corporation for P2,580,000 cash. Faith accounts for this investment by equity method. At the date of acquisition of the stock, Love’s net assets had a book and fair value of P6,200,000. Love’s net income for the year ended December 31, 2010 was P1,800,000. During 2010, Love declared and paid cash dividends of P200,000. On December 31, 2010, how much should Faith carry its investment in Love? a. 2,340,000 c. 3,024,000 b. 2,580,000 d. 3,060,000 3. In January 2010, Compact Corporation acquired 20% of the outstanding ordinary shares of ABC Company for P2,457,600. This investment gave Compact Company the ability to exercise significant influence over ABC. The book value of the acquired shares was

P2,022,400. The excess of the cost over the book value was attributed to the building which was undervalued on ABC’s balance sheet and that had a remaining useful life of ten years. For the year ended December 31, 2010, ABC reported net of tax income of P504,000 and paid cash dividends of P112,000 on its ordinary share. Income tax rate is 32%. Question 1: By what amount ABC Company’s building was understated? a. None c. 640,000 b. 435,000 d. 3,200,000 Question 2: What is the proper carrying value of Compact’s investment in ABC at December 31, 2010? a. 2,457,600 c. 2,492,480 b. 2,472,000 d. 2,536,000 INVESTMENT IN DEBT INSTRUMENTS 1. On May 1, 2011, Graham Company purchased a short-term P2,000,000 face value, 9% debt instruments for P1,860,000 including the accrued interest and classified it as an investment to profit or loss security. The debt instruments mature on January 1, 2014 and pay interest semi-annually on January 1 and July 1. On December 31, the fair market value of the instruments is 98%. On March 2, 2012, Graham Company sold the trading security for P1,980,000. Question 1: What amount should Graham report for short-term debt securities on December 31, 2011? a. 1,800,000 c. 1,960,000 b. 1,860,000 d. 1,980,000 Question 2: What amount of unrealized gain or loss should the company report in its 2011 statement of comprehensive income related to its investment in trading securities? a. None c. 160,000 b. 120,000 d. 200,000 2. On October 1, 2011, Nile Company purchased a debt security having a face value of P3,000,000 with an interest rate of 10% for P3,200,000 including the accrued interest. A total of P50,000 was incurred and paid by Nile Company which is in relation to the acquisition of the debt instrument. Nile Company intends to hold the instrument for an indefinite period but not until maturity. The bonds mature on January 1, 2016, and pay interest semi-annually on January 1 and July 1. On December 31, 2011, the bonds had a market value of P3,400,000. What amount should Parrot report for a short-term investment in debt securities? a. 3,125,000 c. 3,200,000 b. 3,175,000 d. 3,250,000 3. Marker Company purchased a held to maturity instruments with a face value of P5,000,000 on January 2, 2011. The bonds will mature on January 2, 2016 and the nominal rate of interest is 12%. Interest is payable annually every December 30. The market rate of interest on this date is 10%. How much did Marker pay in acquiring the instruments? a. 5,247,610 c. 5,348,580 b. 5,326,006 d. 5,379,600 4. On January 1, 2011, Sun Company purchased the debt instruments of Silk Company with a face value of P5,000,000 bearing an interest rate of 8% for P4,621,006 to yield 10% interest per year. The bonds mature on January 1, 2016 and pay interest annually on December 30 but Sun Company does not intend to hold the instruments until maturity. If the market value of the instruments as of December 31, 2012 is 96% of its face amount, what amount of unrealized gain or loss should Sun Company report in its 2012 shareholders’ equity?

a. None b. 26,559 unrealized gain

c. 48,582 unrealized gain d. 116,892 unrealized gain

INVESTMENT PROPERTY AND OTHER LONG-TERM INVESTMENTS 1. Company Q is a supplier of industrial products, in 2010, the company purchased a plot of land on the outskirts of a major city. The land was originally acquired at a cost of P15,000,000. The area has mainly low-cost public housing and very limited public transport facilities. The national government has plans to develop the area as an industrial park in five years time and land is expected to greatly appreciate in value if the government proceeds with the plan. Company Q’s management has not decided what to do with the property. On December 31, 2011, the property has a current fair value of P15,400,000 How should the company classify the property in its December 31, 2011 statement of financial position? a. As land at its historical cost of P15,000,000. b. As land at its current fair value of P15,400,000. c. As investment property at its current fair value of P15,400,000. d. As inventory at the lower of cost of P15,000,000 or current fair value of P15,400,000. 2. Act Company acquired an investment property with an installment price of P2,400,000. The acquisition of the property requires a down payment of 20% and a non-interest bearing note payable at the end of each year for five years. The prevailing market rate of interest for similar instrument is 12%. The present value factor of annuity of 12% for four periods is 3.605. Act Company incurred transaction costs amounting to P50,000 for the property. What is the cost of acquiring the property? a. 1,862,400 c. 2,400,000 b. 1,914,320 d. 2,450,000 3. On December 31, 2011, Dolphin’s investment in real property has a carrying value of P3,600,000 under the fair value model, before considering market value adjustment. If the fair market value at December 31, 2011 is P3,000,000, how much should be the gain or loss on transfer if Dolphin Company would shift to cost model? a. Gain of P600,000 reported as other comprehensive income. b. Loss of P600,000 reported as other loss in the income statement. c. Loss of P600,000 reported in equity as decrease in revaluation surplus. d. Zero 4. On January 1, 2011, Jim Company acquired an investment property at a total costs of P5,000,000. At December 31, 2011, the carrying value of the property in the company’s books is P6,000,000. On December 31, 2012, Jim Company decided to use the property and immediately reclassified as plant asset (owner occupied property). Question 1: What would be the initial cost of the plant asset if it has a fair value of P6,500,000 at conversion date? a. 5,000,000 c. 6,000,000 b. 5,500,000 d. 6,500,000 Question 2: What amount of revaluation surplus Jim Company would recognize at the time of conversion? a. None c. 1,000,000 b. 500,000 d. 1,500,000 5. On January 2, 2011, Mighty Company converted its occupied property to investment property that is to be carried at fair value. The carrying value of the property in the company’s books is P4,000,000. Question 1: Assuming the fair value of the property on the date of transfer or conversion is P3,800,000, Mighty Company should recognize a. A impairment loss of P200,000 in the profit or loss. b. A P200,000 deferred loss as an asset. c. A P200,000 unrealized loss in the shareholders’ equity. d. A P4,000,000 cost of investment property.

Question 2: Assuming the fair value of the property on the date of transfer of conversion is P4,400,000, Mighty Company should recognize a. A P400,000 unrealized gain in the profit or loss. b. A P400,000 revaluation surplus in the shareholders’ equity. c. A P400,000 unrealized gain in the liability section. d. A P400,000 direct credit to accumulated profits or loss. 6. In 2010, Tremor Company has an investment property with a carrying amount of P40,000,000 is destroyed by fire. The building element of the property was carried at P12,000,000. A claim was made for compensation to the company’s insurers, but has not been agreed at the time the financial statements for 2010 are issued. In 2011, the claim is agreed and the company receives P20,000,000 in compensation. Also, at the end of the year 2011 a replacement building is constructed at a cost of P16,000,000. Question 1: What amount of impairment loss should Tremor Company recognize in its 2010 statement of comprehensive income? a. None c. 16,000,000 b. 12,000,000 d. 40,000,000 Question 2: What amount of insurance claim should Tremor Company recognize in its 2010 statement of comprehensive income? a. None c. 16,000,000 b. 12,000,000 d. 20,000,000 Question 3: What amount of insurance claim should Tremor Company recognize in its 2011 statement of comprehensive income? a. None c. 16,000,000 b. 12,000,000 d. 20,000,000 Question 4: What is the carrying value of the investment property in Tremor Company’s statement of financial position for the year ended December 31, 2011? a. 16,000,000 c. 36,000,000 b. 28,000,000 d. 44,000,000 Question 5: Assuming the compensation of P20,000,000 become receivable during 2011, how should the compensation and impairment loss be presented in the statement of comprehensive income of 2010? a. Report a revenue of P20,000,000. b. Report an impairment loss of P12,000,000. c. Report a net revenue of P8,000,000. d. Report a revenue of P20,000,000 and impairment loss of P12,000,000 separately. 7. The following information relates to noncurrent investments that Dragon Company placed in trust as required by underwriter of its bonds. Bond sinking fund balance, January 1, 2011, P2,000,000; Additional investment during 2011, P500,000; Interest revenue, P20,000; Administrative costs, P15,000; Carrying value of bonds payable, P3,000,000. What amount should Dragon Company report in its December 31, 2011 balance sheet related to its noncurrent investment for bond sinking fund requirements? a. 2,000,000 c. 2,505,000 b. 2,500,000 d. 3,000,000 8. On January 1, 2008, Chives Company purchased a P4,000,000 ordinary life insurance policy on its president. Additional data for the year 2011 are: Cash surrender value, January 1, P200,000; Cash surrender value, December 31, P220,000; Annual insurance premium paid on January 1, 2011, P80,000; Dividend received on August 1, P10,000. Chives Company is the beneficiary under the life insurance policy. Chives should report life insurance expense for 2011 of a. 50,000 c. 70,000 b. 60,000 d. 80,000

It is not the critic who counts, nor the man who points out how the strong man stumbled, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs and comes short again and again; who knows great enthusiasms, great devotions; who spends himself in a worthy cause; who, at the best, knows in the end the triumph of high achievement, and who, at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those timid souls who know neither victory nor defeat. It is not good for all our wishes to be filled; through sickness we recognize the value of health; through evil, the value of good; through hunger, the value of food; through exertion, the value of rest. ...Attitude to me is more important than facts. It is more important than the past, than education, than money, than circumstances, than failures, than success, than what other people think, say or do. It is more important than appearance, gift, or skill. It will make or break a company...a church...a home. The remarkable thing is we have a choice every day regarding the attitude we will embrace for that day...I am convinced that life is 10% what happens to me and 90% how I react to it. And so it is with you... we are in charge of our attitudes. Everything happens for a reason. Nothing happens by chance or by means of good or bad luck. Illness, injury, love, lost moments of true greatness and sheer stupidity all occur to test the limits of your soul. Without these small tests, if they be events, illnesses or relationships, life would be like a smoothly paved, straight, flat road to nowhere. If someone hurts you, betrays you , or breaks you heart, forgive them. For they have helped you learn about trust and the importance of being cautious to who you open your heart to. If someone loves you, love them back unconditionally, not only because they love you, but because they are teaching you to love and opening your heart and eyes to things you would have never seen or felt without them. Make every day count. Appreciate every moment and take from it everything that you possibly can, for you may never be able to experience it again. Talk to people you have never talked to before, and actually listen. Hold your head up because you have every right to. Tell yourself you are a great individual and believe in yourself, for if you don't believe in yourself, no one else will believe in you either. You can make of your life anything you wish. Create your own life and then go out and live it. There comes a time when you must stand alone. You must feel confident enough within yourself to follow your own dreams. You must be willing to make sacrifices. You must be capable of changing and rearranging your priorities so that your final goal can be achieved. Sometimes, familiarity and comfort need to be challenged. There are times when you must take a few extra chances and create your own realities. Be strong enough to at least try to make your life better. Be confident enough that you won't settle for a compromise just to get by. Appreciate yourself by allowing yourself the opportunities to grow, develop, and find your true sense of purpose in this life. Don't stand in someone else's shadow when it's your sunlight that should lead the way.

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God Bless You Always - jpr