AC7&8

FINAL EXAMINATIONS
THEORIES:
1. What is the principle for recognition of a financial asset or a financial liability in PFRS
9?
A. A financial asset is recognized when, and only when, it is probable that future
economic benefits will flow to the entity and the cost or value of the instrument
can be measured reliably.
B. A financial asset is recognized when, and only when, the entity obtains control of
the instrument and has the ability to dispose of the financial asset independent of
the actions of others.
C. A financial asset is recognized when, and only when, the entity obtains the risks
and rewards of ownership of the financial asset and has the ability to dispose the
financial asset.
D. A financial asset is recognized when, and only when, the entity becomes a party
to the contractual provisions of the instrument.

2. Which of the following is true?

A. The fair value method of accounting is the most appropriate method of
accounting for short-term investments in marketable equity securities.
B. All bond investments are accounted for by the amortized cost method.
C. The carrying value of an investment in trading securities or investments at FVOCI is
limited to market value at the date of acquisition.
D. The realized gain or loss on a short-term investment in an equity security is usually
equal to the difference between its cost and its sale price.
3. An entity has several investments in equity securities that are purchased and held
principally for the purpose of generating gains on resale in the short term. How
would this financial asset be measured under IFRS 9?
A. Amortized cost
B. Historical cost
C. Fair value through OCI
D. Fair value through profit or loss

4. How are the transaction costs for financial assets classified as held-to-maturity
treated at initial recognition?
A. These costs are amortized.
B. These costs are capitalized.
C. These costs are expensed.
D. None of the above is correct.
5. Regarding PFRS 9, which of the following is incorrect?
A. Only equity instruments of other entities can qualify as financial assets. The
entity’s own equity instruments are not financial assets
B. The term financial instrument refers to both financial assets and financial
liabilities.
C. Equity instruments refer only to those instruments issued by a corporation.
Other types of organizations cannot issue equity instruments.
D. The term financial instruments include a vast array of instruments, including petty
cash fund.
6. The option to designate financial assets at FVPL may be made if
A. the financial asset is an equity security
B. the financial asset is a debt security
C. the designation minimizes accounting mismatch
D. the entity is a corporation
7. TANJIRO Company acquired 30,000 equity shares, representing 8% of the issued
ordinary share capital in NEZUKO Company. Two Plane's shares are listed on a Stock
Exchange. In accordance with PFRS 9 Financial Instruments, in which of the
following classifications could TANJIRO’s investment in the equity shares be
classified?
A. FVPL
B. FVOCI
C. Either A or B
D. Neither A nor B
8. 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 instrument.
D. The present value of the contractual cash flows less impairment.
9. PAS 28 applies to which of the following?
A. investments in associates held by a venture capital organization or mutual fund
measured at fair value through profit or loss
B. a 20% investment in preference shares
C. an interest in a partnership which gives the investor significant influence over
the partnership
D. a 60% investment in ordinary shares of another entity
10. Which of the following statements is correct?
A. According to PAS 28 Investments in Associates, a partnership cannot be an
associate.
B. Goodwill included in the carrying amount of an investment in an associate is
tested for impairment separately.
C. Only investments in ordinary shares can be classified as Investment in Associate.
D. Only investments which give the investor voting rights can be classified as
Investment in Associate
11. Significant influence is presumed to exist
A. if an investor holds, directly or indirectly (e.g. through subsidiaries), more than
20% of the voting power of the investee.
B. if an investor holds, directly or indirectly (e.g. through subsidiaries), 51% or more
of the voting power of the investee.
C. if an investor holds, directly or indirectly (e.g. through subsidiaries), 100% or more
of the voting power of the investee.
D. if an investor holds, directly or indirectly (e.g. through subsidiaries), 20% or
more of the voting power of the investee.

12. In which of the following does X have significant influence?

A. X owns 30% of the voting shares of ABC Co., the other 60% is held by Y and all
seats on the board of directors are appointed by Y.
B. X owns 30% of the preference shares of Z Co.
C. X owns 15% of the voting shares of ABC Co., all other shares are held in very
small blocks and therefore X has representatives in the board of directors.
D. X owns 80% of Y, and Y owns 40% of Z. In Y’s separate financial statements, the
investment in Z is classified as “held for sale” in accordance with PFRS 5.
13. According to PAS 28, significant influence is the investor’s participation in the
financial and operating policy decisions of the investee but not control of these
decisions. Which of the following may an investor be unable to exercise significant
influence?
A. participation in policy making process
B. material intercompany transactions
C. majority ownership of the investee concentrated among a small group of
shareholders who operate the investee without regard to the views of the
investor
D. technological dependency
14. Under the equity method, which of the following does not decrease the investment
account?
A. share in associate’s loss
B. amortization of undervaluation of asset
C. amortization of overvaluation of asset
D. share in dividends declared by the associate

15. The excess of purchase cost of an investment in associate over the fair value of the
interest acquired represents
A. goodwill that should not be amortized but tested for impairment at least annually
B. negative goodwill that should be recognized in the investor’s profit or loss in the
year of acquisition.
C. negative goodwill that should be deferred and amortized
D. goodwill that is not required to be accounted for separately

16. ZENITSU Co. owns 10% of the common stock of INOSUKE Co. throughout the year.
INOSUKE Co. has no preferred stock outstanding. ZENITSU’s stock gives him the
right to
A. be paid 10% of the firm’s profits in cash each year
B. receive dividends equal to 10% of the par value each year
C. receive dividends equal to 10% of the total dividends paid by the corporation
for the year to common stockholders
D. keep the corporation from issuing any additional stock unless he is willing to buy
10% of the newly issued shares

17. The investment in associate is reduced to zero when

A. the investment in associate is partly reclassified to FVPL
B. the share in the losses of the associate exceeds the share in the profits
C. at no instance should the investment be reduced to zero unless the investment is
derecognized through sale or other forms of disposal
D. the share in the losses of the associate exceeds the investor’s interest in the
associate

18. If the investor ceases to have significant influence over an associate, how should
the investment be treated?
A. It should still be treated using equity accounting.
B. It should be treated in accordance with PFRS 9.
C. The investment should be frozen at the date at which the investor ceases to have
significant influence.
D. The investment should be treated at cost.
19. The following statements relate to equity method. Choose the incorrect statement.
A. In accounting for investments in common stock under the equity method, sales of
stock of an investee by an investor, should be accounted for as gains or losses
equal to the difference at the time of sales between selling price and carrying
amount of the stock sold.
B. The general rule is that an investor owning 20% or more of the voting stock of an
investee is presumed to have the ability to exercise significant interest over the
investee.
C. Under the equity method of accounting, the investments in common stock
should be shown as a single amount, and the investor’s share of earnings or
losses from its investment should ordinarily be shown in its income statement
as a single amount including the results of discontinued operations.
D. The equity method of recording security transactions assumes a close economic
relationship between the investor and the investee. It is used, when influential
interest exists.
20. Stock dividends on common stock should be recorded at their fair market value by
the investor when the related investment is accounted for under which of the
following methods?
Cost Equity
A. Yes Yes
B. Yes No
C. No Yes
D. No No

21. Which is not an essential characteristic of an accounting liability?

A. The liability is the present obligation of a particular enterprise.
B. The liability arises from past transaction or event.
C. There must be an obligation to transfer an economic resource.
D. The liability is payable to a specifically identified payee.

22. Current liabilities include:

A. only obligations which are expected to be settled within the normal operating
cycle.
B. only obligations which are due to be settled within one year from balance sheet
date.
C. obligations which are expected to be settled within the normal operating cycle
and obligations which are due to be settled within one year from balance sheet
date.
D. refinanced long-term debt falling due within one year from balance sheet.
23. Some obligations that are due to be repaid within the next operating cycle and
expected to be refinanced or “rolled over” should be classified as noncurrent:
A. If the refinancing or “rolling over” is at the discretion of the enterprise and the
refinancing agreement has been reached before the issuance of the statements.
B. If the refinancing or “rolling over” is at the discretion of the enterprise regardless
of whether a refinancing agreement has been reached or not before the issuance
of the statements.
C. If the refinancing or “rolling over” is not at the discretion of the enterprise.
D. Subject to no conditions.

24. A long-term debt falling due within one year should be reported as noncurrent
liability should be reported as noncurrent liability if the following conditions are
met, except for:
A. The original term is for a period of more than one year.
B. The enterprise intends to refinance the obligation on a long-term basis.
C. The intent to refinance is supported by an agreement to refinance which is
completed before the issuance of the financial statements.
D. The intent to refinance is supported by an agreement to refinance which is
completed after the issuance of the financial statements.

25. KANAO Company has a loan due for repayment in six months' time, but KANAO has
the option to refinance for repayment two years later. KANAO plans to refinance
this loan. In which section of its statement of financial position should this loan be
presented, according to PAS 1 Presentation of financial statements?
a. Current liabilities
b. Current assets
c. Noncurrent liabilities
d. Equity

26. All of the following are considered contractual obligations on financial liabilities,
except:
A. to deliver cash or another financial asset to another entity
B. to exchange financial assets or financial liabilities to another entity under
conditions that are potentially favorable to the entity
C. that will or may be settled in the entity's own equity instruments and is a non-
derivative for which the entity may be obliged to deliver a variable number of the
entity's own equity instruments
D. that will or may be settled in the entity's own equity instruments and is a
derivative that will or may be settled other than by exchange of a fixed amount of
 cash or a financial asset for a fixed number of the entity's own equity
instruments.
27. What is the principle of accounting for a compound instrument?
A. The issuer shall classify a compound instrument as either equity or liability.
B. The issuer shall classify the liability and equity components of compound
instruments separately as liability or equity.
C. The issuer shall classify a compound instrument as equity on its entirety.
D. The issuer shall classify a compound instrument as liability on its entirety.

28. Perpetual debt instruments

A. Are compound financial instruments
B. Are derivative financial instruments
C. Provide the holder the contractual right to receive payments of interest at fixed
dates extending into the indefinite future either with a right or no right to a
return of principal
D. All of the choices are correct

29. Which is true when the effective interest method of amortizing bond discount is
used?
A. Interest expense varies from period to period
B. Interest expense is constant for each period
C. Interest expense increases each period
D. Interest expense decreases each period

30. A purchase made towards the end of the accounting period, where goods are still in
transit, should be recognized as a liability when the term of shipment is
A. FOB shipping point
B. FOB destination
C. Either A or B
D. Neither A nor B
PROBLEMS:
31. On January 1, 2020, TOMIOKA Industries purchased nontrading equity securities
which are irrevocably designated at fair value through other comprehensive
income:

Purchase price Transaction cost Market – 12/31/2020

Security A 1,000,000 100,000 1,500,000

Security B 2,000,000 200,000 2,400,000
Security C 4,000,000 400,000 4,700,000

On July 1, 2021, TOMIOKA sold Security C for P5,200,000. What amount should be
credited to retained earnings as a result of the sale of the investment in 2021?

a. 800,000
b. 500,000
c. 300,000
d. 0

Purchase price of security C 4,000,000

Transaction cost 400,000
Total cost 4,400,000
If the equity investment is measured at fair value through other comprehensive income
(FVOCI), the transaction cost is capitalized
Market value of security C 12/31/2020 4,700,000
Historical cost 4,400,000
Unrealized gain – OCI 12/31/2020 300,000

Journal entry on July 1, 2021

Cash 5,200,000
Unrealized gain – OCI 300,000
Financial asset – FVOCI 4,700,000
Retained earnings 800,000
 32. UZUI Mfg. frequently borrowed from the bank in order to maintain sufficient
operating cash. The following loans were at a 12% interest rate with interest
payable at maturity. The entity repaid each loan on scheduled maturity date.

Date of loan Amount Maturity date Term of loan

November 1, 2020 500,000 October 31, 2021 1 year
February 1, 2021 1,500,000 July 31, 2021 6 months
May 1, 2021 800,000 January 31, 2022 9 months

The entity recorded interest expense when the loans are repaid. As a result, interest
expense of P150,000 was recorded in 2021. If no correction is made, by what amount
would interest expense be understated for 2021?
a. 54,000
b. 62,000
c. 64,000
d. 72,000

Problem 32 Answer A

January 1, 2021 to October 31, 2021 (500,000 x 12% x 10/12) 50,000

February 1, 2021 to July 31, 2021 (1,500,000 x 12% x 6/12) 90,000
May 1, 2021 to December 31, 2021 (800,000 x 12% x 8/12) 64,000
Correct interest expense 204,000
Recorded interest expense 150,000
Interest expense understated 54,000
For numbers 33-35, refer to the following information.

On January 1, 2020, KANROJI Inc. acquired a 10% interest in IGURO Corp. for
P3,000,000. The investment was accounted for under the cost method. During 2020,
IGURO reported net income of P4,000,000 and paid dividend of P2,000,000. On January
1, 2021, KANROJI acquired a further 15% interest in IGURO Corp. for P8,500,000. On
such date, the carrying amount of the net assets of IGURO was P36,000,000 and the fair
value of the 10% existing interest was P4,500,000. The fair value of the net assets of
IGURO is equal to carrying amount except for a sword factory whose fair value was
P4,000,000 greater than carrying amount. The sword factory had a remaining life of 10
years. IGURO reported net income of P8,000,000 for 2021 and paid dividend of
P5,000,000 on December 31, 2021.

33. What amount of investment income should be recognized in 2020?

a. 400,000
b. 200,000
c. 500,000
d. 300,000

34. What total amount of income should be recognized by KANROJI in 2021?

a. 2,000,000
b. 2,500,000
c. 3,400,000
d. 2,300,000

35. What is the carrying amount of the investment in associate on December 31, 2021?
a. 13,650,000
b. 12,550,000
c. 11,950,000
d. 12,750,000
Question 33 Answer B

Dividend income (10% x 2,000,000) 200,000

Under cost method, the investment income is based on dividend declared or paid.

Existing 10% interest remeasured at fair value 4,500,000

New 15% interest 8,500,000
Total cost – January 1, 2021 13,000,00
0
Net assets acquired (25% x 36,000,000) ( 9,000,000
)
Excess of cost over carrying amount 4,000,000
Excess attributable to sword factory whose fair value is greater than carrying
amount          (25% x 4,000,000) ( 1,000,000)
Goodwill 3,000,000

Question 34 Answer C

Share in net income (25% x 8,000,000) 2,000,000

Amortization of excess attributable to sword factory (1,000,000 / 10 years)
( 100,000)
Net investment income 1,900,000

Fair value of 10% interest 4,500,000

Historical cost 3,000,000
Remeasurement gain
1,500,000
Net investment income 1,900,000
Total income in 2021 3,400,000

If the investment in associate is achieved in stages the old interest is remeasured at fair
value through profit or loss.

Question 35 Answer A

Total cost 1/1/2021 13,000,00

0
Net investment income 1,900,000
 Share in cash dividend (25% x 5,000,000) ( 1,250,000)
Carrying amount – 12/31/2021 13,650,00
0

36. SHINAZUGAWA Corp. reported accounts payable on December 31, 2020 at

P4,500,000 before any necessary year-end adjustments relating to the following
transactions:

 On December 27, 2020, the entity wrote and recorded checks to creditors totaling
P2,000,000 causing an overdraft of P500,000 in the entity’s bank account on
December 31, 2020. The checks were mailed on January 10, 2021.

 On December 28, 2020, the entity purchased and received goods for P750,000, terms
2/10, n/30. The entity recorded purchases and accounts payable at net amount. The
invoice was recorded and paid January 3, 2021.

 Goods shipped FOB destination on December 20, 2020 from a vendor to the entity
were received January 2, 2021, The invoice cost was P325,000.

On December 31, 2020, what amount should be reported as accounts payable?

a. 7,575,000
b. 7,250,000
c. 7,235,000
d. 7,553,500

Accounts payable per book 4,500,000

Reversal of undelivered checks 2,000,000
Goods purchased, received and recognized at net amount (750,000 x 735,000
98%)
Accounts payable to be reported 7,235,000
The undelivered checks should be restored to the cash balance and accounts payable.
The goods purchased and received on January 2, 2021 should be excluded from accounts
payable because the term is FOB destination.
37. HIMEJIMA Industries has outstanding a 7%, ten-year P100,000 face value bond. The
bonds were originally sold to yield 6% annual interest. The entity uses the effective
interest method to amortize bond premium and does not elect the fair value option
for reporting financial liabilities. On June 30, 2020, the carrying amount of the
outstanding bond was P105,000. What amount of unamortized premium on bond
should be reported on June 30, 2021?

a. 1,050
b. 3,950
c. 4,300
d. 4,500

Interest paid (7% x 100,000) 7,000

Interest expense (6% x 105,000) 6,300
Premium amortization 700

Carrying amount – 6/30/2015 105,000

Face amount 100,000
Premium on bonds payable – 6/30/2015 5,000
Amortization 7/1/2015 to 6/30/2016 ( 700)
Unamortized premium – 6/30/2016 4,300
38. RENGOKU Company has an investment in financial equity instrument in UZUI
Company acquired at a cost of P900,000 in 2020. This investment was designated
at initial recognition as fair value to other comprehensive income. RENGOKU’s
investment in UZUI has a market value of P700,000, as a result, RENGOKU Company
recognized the impairment loss of its investment in the 2020 other comprehensive
income.
During the year 2021, due to changes in financial climate, there has been a
complete turn-around in UZUI Company’s financial instrument. The market value of
RENGOKU Company’s investment, market value at the close of 2021 was
established at P950,000. On April 30, 2022, RENGOKU Company sold all the equity
investment in UZUI Company at the prevailing market value of P1,000,000.
What amount of impairment reversal should RENGOKU Company recognize in its
2021 profit or loss?
A. 50,000
B. 200,000
C. 250,000
D. NIL

Equity instruments, being financial assets measured at fair value are not subject to impairment under PFRS 9.

39. TOKITO Corp. issued bonds payable with warrants of 4,000, 10% 5-year bonds, face
value of Php 1,000 at 96 on January 1, 2020. Each bond is accompanied by warrant
that permits the bondholder to purchase 20 shares of common stock, par Php 50 at
Php 55 per share.
The nominal rate is payable annually on December 31. The bonds mature on
December 31, 2024. When the bonds are issued, the prevailing market rate of
interest for similar bonds without warrants is 12% per annum. What amount should
be reported as share warrants outstanding on the date of issuance?
A. 208,480
B. 208,840
C. 128,480
D. 128,840
Total proceeds (4M x .96) 3,840,000
Fair value of bonds without the warrants:
PV of principal (4M x 0.5674) 2,269,600
PV of interest payments (4M x 10% x 3.6048) 1,441,920 (3,711,520)
Amount allocated to warrants 128,480

40. KOCHO Inc. has an overdue note payable to a bank of Php 9,000,000. The note bears
interest of 12%.

As a result of a settlement on December 31, 2020, the bank agreed to the following
restructuring agreement:
I. Extend the maturity date to December 31, 2022.
II. Annual interest of 10% is to be paid on December 31, 2021 and 2022.

At what amount KOCHO must record a gain on modification of debt? (Round off PV
factors to four decimal places)

A. 208,480
B. (304,110)
C. 304,110
D. NIL, it must be a loss on extinguishment of debt of 304,110

Carrying amount of liability extinguished 9,000,000

PV of cash flows based on new terms:
PV of principal (9M * 0.7972) 7,174,800
PV of interest payments (9M * 10% * 1.6901) 1,521,090 (8,695,890)
Gain (loss) 304,110

304,110
Percentage = = 3.38%, thus the gain is a gain on modification of debt of
9,000,000
304,110.

THE END