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FINANCIAL ACCOUNTING AND REPORTING INVESTMENTS, INVESTMENT IN ASSOCIATE, AND BOND INVESTMENT INVESTMENTS 1. An entity provided the following information on December 31, 2019:
Aggregate cost Aggregate market value Aggregate lower of cost or market applied individually
Trading 3,600,000 3,200,000 3,040,000
Nontrading 5,500,000 4,600,000 4,200,000
The costs of disposal are estimated at P100,000 for trading securities and P150,000 for nontrading securities. The nontrading securities are designated as measured at FVOCI . What total amount should be reported as unrealized loss in 2019 income statement? a. 900,000 b. 560,000 c. 400,000 d. 500,000 2. On January 1, 2019, an entity purchased equity investments held for trading. Purchase Transaction cost Security A 1,000,000 100,000 Security B 2,000,000 200,000 Security C 3,000,000 300,000
Market – 12/31/2019 12/31/2019 1,200,000 1,500,000 3,100,000
On July 1, 2020, the entity sold Security A for P1,900,000. 1.
What amount of unrealized loss should be recognized in the 2019 income statement? a. 200,000 b. 800,000 c. 400,000 d. 0 2. What amount should be reported as gain on sale of trading securities in the 2020 income statement? a. 900,000 b. 700,000 c. 600,000 d. 800,000 3. On January 1, 2019, an entity purchased nontrading equity investments which are irrevocably designated at FVOCI: Purchase Price Transaction cost Market – 12/31/2019 12/31/2019 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, 2020, the entity sold Security C for P5,200,000. 1.
What amount of unrealized loss should be recognized in the 2019 income statement? a. 1,600,000 gain b. 1,600,000 loss c. 900,000 gain d. 900,000 loss 2. What is the adjustment to retained earnings as a result of the sale of the investment in 2020? a. 500,000 credit b. 500,000 debit c. 800,000 credit d. 0 4. On January 1, 2019, Lebanon Company purchased equity securities to be held at fair value through other comprehensive income. On December 31, 2019, the cost and market value were: Cost Market Security X 2,000,000 2,400,000 Security Y 3,000,000 3,500,000 Security Z 5,000,000 4,900,000 On July 1, 2020, the entity sold Security X for P2,500,000. What amount should be recognized directly in retained earnings as a result of the sale of financial asset in 2020?
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a. b. c. d.
500,000 100,000 400,000 0
5. During 2019, Lawan Company bought the shares of Burwood Company. June 1 December 1 Transactions for 2020 January 10 July 20 December 10
20,000 shares @ P100 30,000 shares @ P120
2,000,000 3,600,000 5,600,000
Received 20% share dividend. Received cash dividend of P10 per share. Sold 30,000 shares at P125 per share.
1. What amount should be reported as dividend income for 2020? a. 600,000 b. 500,000 c. 400,000 d. 300,000 2. What is the gain on the sale of shares under FIFO approach? a. 1,150,000 b. 950,000 c. 150,000 d. 550,000 3. What is the gain on sale of shares under average approach? a. 390,000 b. 950,000 c. 500,000 d. 600,000 6. Day Company received dividends from share investments during the current year: A share dividend of 4,000 shares from Parr Company when the market price of Parr’s share was P20. Day Company owns less than 1% of Parr’s share capital. A cash dividend of P150,000 from Lark Company in which Day Company owns a 25% interest. A majority of Lark’s directors are also directors of Day Company. What amount of dividend revenue should be reported for the current year? a. 230,000 b. 150,000 c. 80,000 d. 0 7. During the current year, Neil Company held 30,000 shares of Brock Company’s 100,000 outstanding shares and 6,000 shares of Amal Company’s 300,000 outstanding shares. During the year, Neil received P300,000 cash dividend from Brock, P15,000 cash dividend and 10% share dividend from Amal. The closing price of Amal share is P150. What amount should be reported as dividend revenue for the current year? a. 342,000 b. 315,000 c. 442,000 d. 15,000 8. An entity received dividends from ordinary share investments during the current year: A share dividend of 10,000 shares from A Company when the market price of the share was P10. A cash dividend of P1,500,000 from B Company in which the entity owned a 15% interest. 5,000 share of C Company in lieu of cash dividend of P20 per share. The market price of the share was P150. The entity had 50,000 shares of C Company and owned 5% interest in C Company. What amount of dividend revenue should be reported for the current year? a. 2,500,000 b. 2,250,000 c. 1,500,000 d. 2,350,000 9. An entity provided the following data pertaining to dividends on ordinary share investments for the current year: On October 1, the entity received P600,000 liquidating dividend from A Company. The entity owned a 10% interest in A Company.
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The entity owned a 20% interest in B Company which declared and paid a P4,000,000 cash dividend to shareholders on December 31. On December 1, the entity received from C Company a dividend in kind of one share of D Company for every 4 C Company shares held. The entity had 100,000 C Company shares which have a market price of P50 per share on December 1. The market price of D Company share was P10.
What amount should be reported as dividend income for the current year? a. 1,650,000 b. 1,050,000 c. 850,000 d. 250,000 10. An entity owned 50,000 shares of another entity. These 50,000 shares were originally purchased for P100 per share. On October 1, 2019, the investee distributed 50,000 rights to the entity. The entity was entitled to buy one new share for P140 and five of these rights. On October 1, 2019, each share had a market value of P150 and each right had market value of P10. On December 31, 2019, the entity exercised all rights. The share rights are accounted for separately and measured initially at fair value. What total cost should be recorded for the new shares that are acquired by exercising the rights? a. 1,400,000 b. 1,900,000 c. 1,650,000 d. 1,000,000 11. An entity issued rights to subscribe to its share capital, the ownership of 4 shares entitling the shareholders to subscribe for 1 share at P100. An investor owned 50,000 shares with total cost of P5,000,000. The share is quoted right-on at 125. The share rights are accounted for separately and measured initially at fair value. What is the cost of new investment assuming all of the share rights are exercised by the investor? a. 1,500,000 b. 1,250,000 c. 1,562,500 d. 1,450,000
INVESTMENT IN ASSOCIATE
12. On January 1, 2019, an entity purchased 40% of the outstanding ordinary shares of another entity for P5,000,000 when the net assets of the investee amounted to P10,000,000. At acquisition date, the carrying amounts of identifiable assets and liabilities of the investee were equal to their fair value, except for land whose fair value was P2,000,000 greater than carrying amount and inventory whose fair value was P1,500,000 greater than cost. The land was sold in 2019 and one-half of the inventory was sold during 2019. During 2019, the investee reported net income of P8,000,000, issued 10% stock dividends and paid cash dividends of P2,500,000. 1.
What is the investment income for 2019? a. 3,200,000 b. 2,100,000 c. 2,500,000 d. 3,300,000 2. What is the carrying amount of the investment on December 31, 2019? a. 6,500,000 b. 6,100,000 c. 7,200,000 d. 7,300,000 13. An entity owned 100% of another entity’s preference shares and 20% of ordinary shares. The investee’s share capital outstanding on December 31, 2019 included P5,000,000 of 10% cumulative preference shares and P10,000,000 of ordinary shares. The investee reported net income of P8,000,000 for 2019. No dividend was declared for both preference and ordinary shares in 2019. What amount should be reported as investment income for 2019? a. 1,600,000 b. 1,500,000 c. 2,000,000 d. 1,000,000
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14. At the beginning of the current year, Sage Company bought 40% of Eve Company’s outstanding shares for P4,000,000. The carrying amount of Eve’s net assets at the purchase date totaled P9,000,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by P900,000 and P100,000, respectively. The plant has an 18-year life. All inventory was sold during the current year. During the current year, the investee reported net income of P1,200,000 and paid a P200,000 cash dividend. 1. What is the excess of cost over the carrying amount of net assets acquired? a. 360,000 b. 400,000 c. 500,000 d. 0 2. What amount should be reported as investment income for the current year? a. 480,000 b. 420,000 c. 360,000 d. 320,000 3. What is the carrying amount of the investment in associate at year-end? a. 4,400,000 b. 4,420,000 c. 4,340,000 d. 4,220,000 15. At the beginning of current year, Occidental Company purchased 40% of the outstanding ordinary shares of Manapla Company for P3,500,000 when the net assets of Manapla amounted to P7,000,000. At the acquisition date, the carrying a mounts of the identifiable assets and liabilities of Manapla were equal to their fair value, except for equipment for which the fair value was P1,500,000 greater than carrying amount and inventory whose fair value was P500,000 greater than cost. The equipment has a remaining life of 4 years and the inventory was all sold during the current year. Manapla Company reported net income of P4,000,000 and paid P1,000,000 cash dividend during the current year. 1. What is the excess fair value over the acquisition cost? a. 100,000 b. 700,000 c. 500,000 d. 0 2. What is the maximum amount of the “equity in earnings of the investee”? a. 1,350,000 b. 1,250,000 c. 1,600,000 d. 1,700,000 3. What is the carrying amount of the investment in associate at year-end? a. 4,450,000 b. 4,350,000 c. 4,700,000 d. 4,850,000 16. On January 1, 2019, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted for under the cost method. During 2019, the investee reported net income of P4,000,000 and paid dividend of P1,000,000. On January 1, 2020, the entity acquired a further 15% interest in the investee for P8,500,000. On such date, the carrying amount of the net assets of the investee was P36,000,000 and the fair value of the 10% existing interest was P3,500,000. The fair value of t he net assets of the investee is equal to carrying amount except for a n equipment whose fair value was P4,000,000 greater than carrying amount. The equipment had a remaining life of 5 years. The investee reported net income of P8,000,000 for 2020 and paid dividend of P5,000,000 on December 31, 2020. 1.
What amount of investment income should be recognized in 2019? a. 400,000 b. 100,000 c. 500,000 d. 300,000
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2.
What is the implied goodwill arising from the acquisition on January 1, 2020? a. 3,000,000 b. 2,000,000 c. 2,500,000 d. 750,000 3. What total amount of income should be recognized by the investor in 2020? a. 2,000,000 b. 2,500,000 c. 2,300,000 d. 1,800,000 4. What is the carrying amount of the investment in associate on December 31, 2020? a. 12,550,000 b. 12,350,000 c. 11,950,000 d. 12,750,000 17. On January 1, 2019, an entity acquired 30% of the voting share capital of another entity for P2,000,000 which was equal to the carrying amount of interest acquired. The investee reported net income of P800,000 for 2019 and paid dividend of P500,000 on December 31, 2019. The investee reported net income of P1,000, 000 for the six months ended June 30, 2020 and P2,500,000 for the year ended December 31, 2020 but paid dividend of P1,000,000 on October 1, 2020. On July 1, 2020 the investor sold half of the investment for P1,500,000. The fair value of the retained investment is P1,600,000 on July 1, 2020 and P2,000,000 on December 31, 2020. The retained investment is to be measured at FVPL. 1.
What is the carrying amount of the investment before the disposal on June 30, 2020? a. 2,390,000 b. 2,090,000 c. 1,195,000 d. 1,790,000 2. What is the gain on sale of investment that should be reported for 2020? a. 245,000 b. 305,000 c. 350,000 d. 455,000 3. What total amount of income should be reported in 2020? a. 1,560,000 b. 1,410,000 c. 1,160,000 d. 1,260,000 18. On January 1, 2019, an entity acquired 40% of the ordinary shares of an associate. On such date, assets and liabilities of the investee were recorded at fair value and the acquisition showed that goodwill of P1,000,000 was acquired. The investee reported net income of P8,000,000 for 2019. In December 2019, the investee sold inventory costing P3,000,000 to the investor for P5,000,000. The inventory remained unsold by the investor on December 31, 2019. On January 1, 2019, the investee sold an equipment to the investor with carrying amount of P2,500,000 for P4,000,000. The remaining life of the equipment is 5 years. What amount of investment income should be reported for 2019? a. 1,920,000 b. 1,800,000 c. 3,200,000 d. 2,400,000 19. Glorious Company acquired 40% interest in an associate, Alta Company, for P5,000,000 on January 1, 2019. At the acquisition date, there were no differences between fair value and carrying amount of identifiable assets and liabilities. Alta Company reported the following net income and cash dividend for 2019 and 2020:
Net income Dividend paid
2019 2,000,000 800,000
2020 3,000,000 1,000,000
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The following transactions occurred between Glorious Company and Alta Company: On January 1, 2019, Alta Company sold an equipment costing P500,000 to Glorious Company for P800,000. Glorious Company applied a 10% straight line depreciation.
On July 1, 2020, Alta Company sold an equipment for P900,000 to Glorious Company. The carrying amount of the equipment is P500,000 at the time of sale. The r emaining life of the equipment is 5 years and Glorious Company used the straight line depreciation. On December 1, 2020, Alta Company sold an inventory to Glorious Company for P2,800,000. The inventory had a cost of P2,000,000 and was still on hand on December 31, 2020.
1. What is the investment income for 2019? a. 692,000 b. 800,000 c. 680,000 d. 920,000 2. What is the investment income for 2020? a. 880,000 b. 748,000 c. 720,000 d. 732,000 3. What is the carrying amount of the investment in associate on December 31, 2019? a. 5,692,000 b. 5,000,000 c. 5,372,000 d. 5,360,000 4. What is the carrying amount of the investment in associate on December 31, 2020? a. 5,692,000 b. 5,704,000 c. 5,720,000 d. 6,120,000
BOND INVESTMENT
20. On January 1, 2019, an entity purchased as a long-term investment P5,000,000 face value 8% bonds for P4,530,000. The bonds were purchased to yield 10% interest. The bonds pay interest annually on December 31. The effective interest method of amortization is used. 1.
What is the interest income for 2019? a. 500,000 b. 400,000 c. 453,000 d. 250,000 2. What is the carrying amount of the investment in bonds on December 31, 2019? a. 5,000,000 b. 4,583,000 c. 4,477,000 d. 4,983,000 21. On July 1, 2019, an entity paid P5,990,000 for a 10% bond with a face amount of P5,000,000. Interest is payable semiannually on June 30 and December 31. The bond was purchased to yield 8%. The effective interest method is used. 1. What is the interest income for 2019? a. 479,200 b. 239,600 c. 250,000 d. 200,000 2. What is the carrying amount of the bond investment on December 31, 2019? a. 6,039,500 b. 5,990,000 c. 5,979,600 d. 5,965,250 22. On January 1, 2019, an entity purchased 12% bonds with face amount of P5,000,000 for P5,500,000 including transaction cost of P100,000. The bonds provide an effective yield of 10%. The bonds are dated January 1, 2019 and pay interest annually on December 31 of each year. The bonds are quoted at 115 on December 31, 2019. The entity has irrevocably elected to use the fair value option.
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1.
What is the carrying amount of the bond investment on December 31, 2019? a. 5,750,000 b. 5,400,000 c. 5,500,000 d. 5,450,000 2. What amount of gain from change in fair value should be reported for 2019? a. 750,000 b. 250,000 c. 350,000 d. 0 3. What amount of interest income should be reported for 2019? a. 600,000 b. 550,000 c. 660,000 d. 540,000 23. On January 1, 2019, an entity purchased bonds with face amount of P5,000,000. The entity paid P4,500,000 plus transaction cost of P168,600. The bonds mature on December 31, 2022 and pay 6% interest annually on December 31 of each year with 8% effective yield. The bonds were quoted at 105 on December 31, 2019 and 110 on December 31, 2020. The business model in managing the financial asset is to collect contractual cash flows that are solely payments of principal and interest and also to sell the bonds in the open market. The entity has not elected the fair value option. On December 31, 2020, the entity changed its business model to collect only contractual cash flows. On December 31, 2021, the bonds are quoted at 115 and the market interest rate is 10%. 1.
2.
3.
4.
5.
What amount of unrealized gain should be reported as component of OCI in the statement of comprehensive income for 2019? a. 250,000 b. 690,000 c. 507,912 d. 0 What amount of unrealized gain should be reported as component of OCI in the statement of comprehensive income for 2020? a. 500,000 b. 250,000 c. 170,633 d. 185,200 What amount of cumulative unrealized gain should be reported as component of OCI in the statement of changes in equity for 2020? a. 500,000 b. 678,545 c. 250,000 d. 875,200 What is the interest income for 2021? a. 300,000 b. 500,000 c. 385,716 d. 369,984 What is the carrying amount of the investment on December 31, 2021? a. 4,694,784 b. 4,668,600 c. 4,907,171 d. 5,750,000
Theory 1. A financial asset is any of the following, except a. Cash b. An equity instrument of another entity. c. Contractual right to receive cash or another financial asset from another entity. d. Contractual right to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity.
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2. Financial assets include all of the following, except a. Cash in bank b. Trade accounts and notes receivable c. Loan receivables d. Inventories, property, plant and equipment, intangible assets and prepaid expenses 3. A financial liability a. Must be classified as noncurrent liability. b. Is a contractual obligation to deliver cash or another financial asset to another entity. c. Is a contractual obligation to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity. d. Is a contractual obligation to deliver cash or any asset to another entity. 4. Financial liabilities include all of the following, except a. Trade accounts and notes payable b. Bonds payable c. Loans payable d. Income taxes payable and deferred revenue 5. How should preference shares that are redeemable mandatorily be presented in the statement of financial position? a. Noncurrent financial liability b. Current financial liability c. Equity d. Either current or noncurrent financial liability depending on redemption date 6. IFRS requires entities to measure financial assets based on all the following, except a. The entity’s business model for managing financial assets. b. Whether the financial asset is a debt or equity investment. c. The contractual cash flow characteristics of the financial asset. d. All of the choices are IFRS requirements. 7. Debt investments that meet the business model and contractual cash flow tests are reported at a. Net realizable value b. Fair value c. Amortized cost d. The lower of amortized cost or fair value 8. What is the correct valuation approach for financial assets? a. Not held for collection at fair value and held for col lection at fair value. b. Not held for collection at amortized cost and held for collection at amortized cost. c. Not held for collection at fair value and held for col lection at amortized cost. d. Not held for collection at amortized cost and held for collection at fair value. 9. Debt investments that are reported at amortized cost are a. Managed and evaluated based on a documented risk -management strategy b. Trading debt investments c. Held for collection debt investments d. All of the above are correct 10. Which of the following statement is correct in regard to trading investments? a. Trading investments are held with the intention of selling them in a short period of time. b. Unrealized holding gains and losses are reported as part of net income. c. Any discount or premium is not amortized. d. All of these statements are correct. 11. An entity may make an irrevocable election to present in other comprehensive income changes in fair value of a. An investment in equity instrument that is held for trading. b. An investment in equity instrument that is not held for trading c. A financial asset measured at amortized cost d. A financial asset measured at fair value through profit or loss. 12. Equity investments accounted for by recognizing unrealized holding gains or losses as component of other comprehensive income are a. Nontrading where an entity has holdings of less than 20%. b. Trading investments where an entity has holdings of less than 20%. c. Investments where an entity has holdings of between 20% and 50%. d. Investments where an entity has holdings of more than 50%.
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13. A debt investment asset shall be measured subsequently at amortized cost a. By irrevocable designation b. When the debt investment is managed and evaluated on a document risk-management strategy. c. When the debt investment is held for trading d. When the business model is to collect contractual cash flows that are sorely payments of principal and interest. 14. Amortized cost is the initial recognition amount of the investment minus a. Repayments and net of any reduction for uncollectibility. b. Cumulative amortization an net of any reduction for uncollectibility. c. Repayments plus or minus cumulative amortization and net of any reduction for uncollectibility. d. Repayments plus or minus cumulative amortization. 15. A debt investment shall be measured at fair value through other comprehensive income a. When the debt investment is held for trading. b. When the debt investment is not held for trading. c. By irrevocable designation d. When the business model is to collect contractual cash flows that are solely payments of principal and interest and also to sell the financial asset. 16. Which statement is correct about the effective interest method of amortization? a. The effective-interest method applied to debt investments is different from that applied to bonds payable. b. Amortization of discount decreases from period to period. c. Amortization of premium decreases from period to period. d. The effective interest method applies the effective interest rate to the beginning carrying amount for each interest period. 17. Under the fair value option, an entity may a. Irrevocably designate a debt investment as measured at fair value through profit or loss even if the amortized cost measurement is satisfied. b. Irrevocably designate a debt investment as measured at fair value through other comprehensive income. c. Revocably designate a debt investment as measured at fair value through profit or loss even if the amortized cost measurement is satisfied. d. Designate all instruments as measured at fair value through profit or loss. 18. Under IFRS, the fair value option a. Must be applied to all instruments the entity holds. b. May be selected as a valuation method at any time during the first two years of ownership. c. Reports all gains and losses in income. d. All of the choices are correct. 19. The fair value option allows an entity to a. Record income when the fair value of its investment increases. b. Value its debt investments at fair value in some years but not other years. c. Report most financial instruments at fair value by recording gains and losses as separate component of shareholders’ equity. d. All of the above are true of the fair value option. 20. Entities account for transfers of investments between categories a. Prospectively, at the end of the reporting period after the change in the business model. b. Prospectively, at the beginning of the period after the change in the business model. c. Retroactively, at the end of the period after the change in the business model. d. Retroactively, at the beginning of the period after the change in the business model. 21. Transfers between categories a. Result in entities omitting recognition of fair value in the year of the transfer. b. Are accounted for at fair value for all transfers. c. Are considered unrecognized if transferred out of held for collection into fair value. d. Always result in an impact on net income. 22. When a debt investment at amortized cost is reclassified to FVPL, the difference between the previous carrying amount and fair value at reclassification date is a. Recognized in profit or loss b. Not recognized c. Recognized in other comprehensive income d. Included in retained earnings 23. Which statement is true when a debt investment at FVPL is reclassified to amortized cost?
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a. b. c. d.
The new carrying amount at amortized cost is equal to fair value on reclassification date. A new effective rate is computed based on the fair value at reclassification date. Interest income is determined using the effective interest method. All of these statements are true for reclassification from FVPL to amortized cost.
24. Which statement is true when a debt investment at amortized cost is reclassified to FVOCI? a. The debt investment is measured at fair value at reclassification date. b. The difference between the previous carrying amount and fair value at reclassification date is recognized in other comprehensive income. c. The original effective rate is not adjusted. d. All of these statements are true. 25. Which statement is true when a debt investment at FVOCI is reclassified to amortized cost? a. The fair value at reclassification date becomes the new carrying amount. b. The cumulative gain or loss previously recognized in OCI is removed from equity and adjusted against the fair value at reclassification date. c. The original effective rate is not adjusted. d. All of these statements are true. 26. Which statement is true when a debt investment at FVPL is reclassified to FVOCI? a. The new carrying amount is equal to fair value at reclassification date. b. A new effective rate is computed based on the fair value at reclassification date. c. Interest income is determined using the effective interest method. d. All of these statements are true for a reclassification from FVPL to FVOCI. 27. Which statement is true when a financial asset at FVOCI is reclassified to FVPL? a. The financial asset continues to be measured at fair value. b. The fair value at reclassification date becomes the new carrying amount. c. The cumulative gain or loss previously recognized in OCI is reclassified to profit or loss. d. All of these statements are true. 28. What financial assets are assessed for impairment? a. Equity investments at FVPL b. Equity investments at FVOCI c. Debt investments at FVPL d. Debt investments at amortized cost and debt investments at FVOCI 29. Impairments of debt investments are a. Based on discounted contractual cash flows. b. Recognized as component of other comprehensive income. c. Based on fair value for nontrading investments and on negotiated value for held for collection investments. d. Evaluated at each reporting date for every held for collection investment. 30. Under IFRS, an entity a. Should evaluate every investment for impairment. b. Accounts for an impairment as an unrealized loss as part of other comprehensive income. c. Calculates the impairment loss on debt investments as the difference between the carrying amount plus accrued interest and the expected discounted future cash flows. d. All of the choices are correct. 31. When an entity holds between 20% and 50% of the outstanding ordinary shares, which of the following statements is true? a. The investor must use the equity method. b. The investor should use the equity method unless circumstances indicate that it is unable to exercise significant influence over the investee. c. The investor must use the fair value method. d. The investor should use the fair value method unless it can clearly demonstrate an ability to exercise significant influence over the investee. 32. When an entity accounts for an investment in ordinary shares under the equity method, cash dividend received is recorded as a. A reduction of the carrying amount of the investment b. Share premium c. An addition to the carrying amount of the investment d. Dividend income 33. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
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a. b. c. d.
Investor sells the investment. Investee declares a dividend. Investee pays a dividend. Earnings are reported by the investee in its financial statements.
34. Goodwill arising from an investment in associate is a. Included in the carrying amount of the investment and amortized over the useful life. b. Included in the carrying amount of the investment and not amortized. c. Excluded from carrying amount of the investment but charged to retained earnings. d. Excluded from carrying amount of the investment but charged to expense immediately. 35. How is the impairment test carried out for investment in associate? a. The goodwill is separated from the rest of the investment and is impairment tested individually. b. The entire carrying amount of the investment is tested for impairment by comparing its recoverable amount with the carrying amount. c. The carrying amount of the investment should be compared with market value. d. The recoverable amounts of all investments in associates should be assessed together to determine whether there has been an impairment on all investments. 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. b. Credited to retained earnings directly. c. Included in other comprehensive income. d. A deferred gain. 37. What should happen when the financial statements of an associate are not prepared at the same date as that of the investor? a. The associate should prepare financial statements for use by the investor at the same date as that of the investor. b. The financial statements of the associate prepared at a different date will be used as normal. c. Any major transactions between the date of the financial statements of the investor and that of the associate should be accounted for. d. As long as the gap is not greater than three months, there is no problem. 38. When investment ceases to be an associate and is accounted for in accordance with IFRS 9, the fair value of the investment at the date when it ceases to be an associate a. Is regarded as its cost on initial recognition as a financial asset. b. Is regarded as its fair value on initial recognition as a financial asset. c. Is regarded as its fair value on initial recognition as a financial liability. d. Is regarded as its amortized cost on initial recognition as an available for sale investment.
END
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INVESTMENTS Summary of measurement rules: Equity Investments: 1. Held for trading
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FVPL
2. Not held for trading 3. Not held for trading
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FVPL FVOCI by irrevocable election
4. All other investments in quoted equity instruments
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FVPL
5. Investment in unquoted equity instruments
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Cost
6. Investments of 20%-50%
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Equity Method
7. Investments of more than 50%
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Consolidation Method (Advanced Accounting)
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FVPL
2. Held for collection of contractual cash flows 3. Held for collection of contractual cash flows
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Amortized Cost
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FVPL by irrevocable election/ FV Option
4. Held for collection of contractual cash flows and for sale of financial asset 5. Held for collection of contractual cash flows and for sale of financial asset
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FVOCI
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FVPL by irrevocable election/ FV Option
EQUITY INVESTMENT - less than 20% of the ordinary share of another company - Passive Interest 1. FVPL (Held for trading/Not held for trading) a. Transaction cost on purchase – Expense b. FV changes – P/L c. No Impairment d. Dividend – Income 2. FVOCI (Not held for trading by irrevocable election) a. Transaction cost on purchase – Capitalize b. FV changes – OCI c. No Impairment d. Dividend – Income e. OCI – Retained Earnings (on disposal) f. Cumulative Gain/Loss previously recognized in OCI – Retained Earnings (on disposal) Income:
Exercise of Right: Inv. In Equity Securities Cash Stock Right #
Pxx Pxx
Pxx Pxx xx
Right-On:
1. Held for trading
Accounted for separately: Acquisition: Stock Rights Inv. In Equity Securities #
Debt Investments:
Stock Rights 1. Preemptive Right – to preserve the Equity Interest 2. Valuable – Exercise Price < Market Price 3. Inherent in every share: 1 Share held = 1 Stock Right 4. Accounted for separately – FV of Stock Right 5. Not accounted for separately – Memo Entry
Cash Dividend Property Dividend Shares in Lieu of Cash Measurement: o 1. FV of shares 2. Cash dividend
MV of Share Right-on - Subscription Price No. of Rights Purchase 1 Share + 1 Ex-Right: MV of Share Ex-Right - Subscription Price No. of Rights Purchase 1 Share
INVESTMENT IN ASSOCIATE - 20% or more - Equity Method Investment in Associate Beginning Share in Dividends Investment Income End
Investment Income Share in Net Loss Share in Net Income Amortization Excess Net FV End
Investment in Associate Beginning Share in Dividends Share in Net Income Share in Net Loss Excess Net FV Amortization End Acquisition Cost > FV Net Assets = Goodwill Acquisition Cost < FV Net Assets = Excess Net FV *PAS 28, paragraph 32, provides that any excess of the net fair value of the associate’s identifiable net assets is included in investment income. NOTE!!!
Land and Inventory shall be amortized only if sold Goodwill not amortized
1911
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Investee’s Income (whole) Income UGP RGP Gain (F/A) Loss (F/A) RGL (F/A) RGP (F/A) Preference Dividends Pxx x % (Investor’s %) Pxx (Investor’s Share in Net Income)
3.
Held for Collection of Contractual Cash Flows (Principal/Interest) and Sell A.
Transaction cost – Capitalize FV changes – OCI Interest Income – Effective Int. Method d. Amortization of Discount/Premium e. Subject to Impairment f. Upon derecognition/disposal: OCI – P/L
Cumulative – Deduct whether declared/not Not Cumulative – Deduct only if declared
B.
Investment in Associate Achieved in Stages: 1. Previous Interest a. Remeasured @ FV b. Change – P/L 2.
FV – Previous interest Cost – Additional interest Cost – Associate - CA of New Asset Acquired Excess Cost
FVPL a. b.
FV Option – Irrevocable election Same rules apply for FVPL – Held for Trading
Reclassification Model Only reclassify financial assets when it changes its business model for managing the financial assets Entity shall apply reclassification prospectively from the reclassification date Not restate any previously recognized gains, losses, and interest
If the previous interest is measured at – FVOCI a. FV change – OCI b. OCI – Retained Earnings
3.
FVOCI a. b. c.
Px x Px (x) Px
Preference Share Non-voting Cost Method / FV Method only Dividend Received – Income Note!!! Recognize as income only if declared
1. FVPL to Amortized Cost Measurement: FV @ Reclassification date Difference of the new CA and Face Value of the financial assets: Amortized through P/L over the o remaining life of the financial asset using the Effective Interest Method
BOND INVESTMENT 1.
2.
Held for Trading (FVPL) a. Any transaction cost - Expense b. FV changes - P/L c. Interest Income - Nominal Rate d. No discount/premium amortization e. Not subject to impairment / No impairment
Held for Collection of Contractual Cash Flows (Principal/Interest) A.
B.
Amortized Cost a. Transaction cost – Capitalize b. Interest Income – Effective Int. Method c. Amortization of Discount/Premium d. Subject to Impairment FVPL a. b.
2. Amortized Cost to FVPL Measurement: FV @ Reclassification date Difference of the Previous CA and FV is recognized in P/L 3. FVPL to FVOCI Measurement:
FV @ Reclassification date
4. FVOCI to FVPL Measurement: FV @ Reclassification date Cumulative Gain/Loss OCI to P/L 5. Amortized Cost to FVOCI Measurement: FV @ Reclassification date - Any Gain or Loss arising from the difference between the Amortized Cost carrying amount and FV is recognized in OCI Note!!! Effective Interest Rate and Measurement of Expected Credit Losses are not adjusted as a result of the reclassification 6. FVOCI to Amortized Cost Measurement: FV @ Reclassification date Cumulative Gain/Loss previously recognized in OCI is removed from equity and adjusted against the FV @ Reclassification date
FV Option – Irrevocable election Same rules apply for FVPL – Held for Trading
1911
