INVESTMENT

ILLUSTRATIVE EXERCISES
1. Information:

Investments Percentage Measurement Fair Value Transaction

Share Cost
Equity Investment 10% Held for trading 1,000,000 10,000
Equity Investment 15% Not Held for trading-FVOCI option 2,000,000 20,000
elected
Equity Investment 12% Not Held for trading-FVOCI option 1,050,000 12,000
not elected
Equity Investment 20% Equity Method 1,000,000 15,000

REQUIREMENT: Compute the initial measurement of each equity investment.

2. Data from Eve Sanico Company:

Date of Purchase 1-Jan-18
Date of Maturity 31-Dec-20
Face Value 5,000,000.00
Fair Value 4,400,000.00
Transaction cost 102,630.00
Nominal Rate 6%
Effective Rate 10%

Quoted Price:
12/31/2018 105
12/31/2019 110

Compute the following:

a. Carrying Amount - January 1, 2018, December 31, 2018 & December 31, 2019
b. Interest Income- December 31, 2018 & December 31, 2019

Assumption 1: The business model of the entity in managing the financial asset is only to collect
contractual cash flows that are solely payment of principal and interest
Assumption 2: The business model of the entity in managing the financial asset is not only to
collect contractual cash flows that are solely payment of principal and interest
but also to sell the bonds in the open market
Assumption 3: The business model of the entity satisfies the conditions of a financial asset
measured at amortized cost but elected the fair value option
Assumption 4: The business model of the entity satisfies the conditions of a financial asset
measured at fair value through other comprehensive income but elected the
fair value

3. Cornellia Misagal Company carried the following portfolio of equity securities as of December 31,
2018

Security Shares Cost Fair Value

Merill Company ordinary 6,000.00 180,000.00 250,000.00
Joshua Company ordinary shares 5,000.00 125,000.00 100,000.00
Paul Company preference 4,000.00 160,000.00 200,000.00
No additional purchase or sale was made in 2019. On December 31, 2019, the securities are quoted
as follows:

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 Merill Company P50/share
Joshua Company P27/share
Paul Company P70/share

Compute the following:

3.1 Carrying amount of investments as of January 1, 2019
3.2 Carrying amount of investments as of December 31, 2019
3.3 Net unrealized gain/loss to be reported in income statement in 2019
3.4 Net unrealized gain/loss to be reported in statement of comprehensive income in
2019
3.5 Net unrealized gain/loss to be reported as other comprehensive income

Assumption 1: The securities are held for trading.

Assumption 2: The securities are not held for trading. Misagal Company made an irrevocable
election to present such securities at fair value through other comprehensive
income.

4. Mama Bel Corp. invested its excess cash in equity securities during 2018. The business model for
these investments is to profit from trading on price changes.As of December 31, 2018, the equity
investment portfolio consisted of the following:

Investment Quantity Cost Fair Value

Tatay Duds. Inc 5,000 shares P 500,000 P 600,000
Ate Duds. Inc 7,000 shares P 490,000 P 550,000
Kuya Chan Inc. 3,000 shares P 450,000 P 400,000

Requirements:
 How much is the cost per share of Tatay Duds Inc. at the time of acquisition?
 How much is the fair value per share of Ate Duds. Inc at December 31, 2018?
 How much is the net gain to be recognized in the other comprehensive income at December
31, 2018?
 How much is the net gain to be recognized in the profit and loss at December 31, 2018?
 How much is the carrying value at the end of the year of the investment portfolio?

5. The following information pertaining to an investment portfolio held for trading of Alma Company
are as follows:

Fair Value Fair Value Fair Value

Investment Quantity Cost 12/31/2018 12/31/2019 12/31/2020
Young Inc. 40,000 shares 400,000 P 15 per share P 12 per share P 18 per share
Old Inc. 50,000 shares 500,000 P 12 per share P 15 per share P 13 per share
Middle Inc. 2,000 shares 200,000 P 120 per share P 110 per share P 115 per share

Additional Information:
a. On January 20, 2019, Alma Company sold 10,000 shares of Young Inc. for P 18 per share.
b. On February 28, 2019 Alma Company sold 15,000 shares of Old Inc. for 8 per share.
c. On June 25, 2020 Alma Company sold 500 shares of Middle Inc. for P 115 per share.

Requirements:
 How much is the unrealized net gain or loss presented in the other comprehensive income
in 2018?
 How much is the unrealized net gain or loss presented in the profit and loss in 2018?
 How much is the carrying value of the investment in 2018?
 How much is the gain/loss on sale on January 20, 2019?
 How much is the gain/loss on sale on February 28, 2019?
 How much is the unrealized gain/loss to be presented in the profit and loss in 2019?
 How much is the carrying value of the investment in 2019?
 How much is the unrealized gain or loss in 2020?

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  How much is the carrying value of the investment in 2020?

6. The securities owned by LGBTQ Company were held as permanent investments. During the current
year, the following transactions occurred:

January 1 Purchased 10,000 shares of Gay Company at P 70 per share

March 1 Purchased 10,000 shares of Queer Company for P660,000
April 1 Received a cash dividend of P5 per share from Gay Company
July 1 Received 20% stock dividend from Queer Company
Aug 1 Purchased 10,000 shares of Princess Company at P50
October 1 The share of Queer Company was split a 5-for-1 basis
October 1 Received a cash dividend of P5 per share from Gay Company
Queer Company offered shareholders rights to subscribe to one new
share for every 10 rights tendered at P20. At the time of issuance, the
October 31 market value of the right is P3. Stock rights are not accounted for
separately.
November 15 Exercised the Queer Company stock rights
December 1 Received a cash dividend of P5 per share from Queer Company
December 15 Sold 10,000 shares of Queer Company at P30 per share. Use FIFO
approach

Requirement: Prepare the relevant entries

7. The following transactions occurred in the order mentioned:

1. Free Company acquired 40,000 ordinary shares of XYZ Company at P50 per share
2. The shares are exchanged in a 5-for-1 split
3. Received a preference share dividend of 1 share for every 10 ordinary shares held. Ordinary
share is selling ex-dividend at 15 and preference share is selling at 10
4. Received a dividend in kind of 1 ordinary share of ABC Company, market price , P6 for every 4
ordinary shares held
5. Sold 80,000 ordinary shares of XYZ Company at P15 per share.

Prepare journal entries to record the foregoing transactions.

8. Vivacious Company issued rights to subscribe to its share capital, the ownership of 4
shares entitling the shareholders to subscribe for 1 share at par, P100. The investor owned
25,000 shares with total cost of P2, 100,000. The stock rights are accounted for separately.

 Assuming the share is quoted at P125 right-on; prepare journal entries to record the
receipt of rights and the subsequent exercise of the rights.
 Assuming the share is quoted at P125 ex-right; prepare journal entries to record the
receipt of rights and the subsequent exercise of rights.

9. Mature Company carried the following transactions in bond investments held for trading
during the current year.

Purchased 5,000, P1, 000, 12% bonds of Acme Company at 104 plus
August 1 accrued interest of P150, 000. The bonds pay interest semiannually
on May 1 and November 1.
Purchased 2,000, P1, 000, 12% bonds of Avco Company at 98 plus
August 31 accrued interest. Semiannual payment of interest, June 30 and
December 31.
December 1 Sold 2,000 of the Acme bonds at 102 plus accrued interest.
Brokerage fee, P160, 000
The following quotations were obtained:
December 31 Acme bonds 98

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 Avco bonds 99

Prepare journal entries to record the transactions.

10. On January 1, 2018, Demeanor Company purchased bonds with face value of P5, 000,000
to be held as financial assets at amortized cost. The entity paid P 4,600,000 plus
transaction cost of P 142,000.00. The bonds mature on December 31, 2020 and pay 6%
interest annually on December 31 of each year with 8% effective yield. The bonds are
quoted at 105 on December 31, 2018.

Prepare journal entries for CY 2018

11. On January 1, 2018, Agusan Company purchased bonds with face amount of P5, 000,000.
The business model of the entity in managing the financial asset is not only to contractual
cash flows that are solely payment of principal and interest but also to sell the bonds in
the open market. The entity has not elected the fair value option of measuring the
financial asset. The entity paid P4, 600,000 plus transaction cost of P142, 000 for the bond
investment. The bonds mature on December 31, 2020 and pay 6% interest annually on
December 31 each year with 8% effective yield. The bonds are quoted at 105 on December
31, 2018 and 110 on December 31, 2019. The bonds are redeemed at face amount on
December 31, 2020.

Prepare journal entries for 2018, 2019, and 2020.

12. On January 1, 2018, Reign Company purchased 12% bonds with face amount of P5,
000,000 for P 5,380,000. The bonds provide for an effective yield of 10%. The bonds are
dated January 1, 2018, mature on January 1, 2023 and pay interest annually on December
31, 2018 of each year. The bonds are quoted at 120 on December 31, 2018 and 115 on
December 31, 2019. The entity has elected the fair value option for the bond investment.

Prepare journal entries for 2018 and 2019.

13. On January 1, 2018 Balais Company acquired 40% of the ordinary shares of another entity for P
6,000,000.There is no undervaluation of assets. For the years ended December 31, 2018 and 2019,
the investee reported the following:

2018 2019
Dividend paid 1,500,000 5,000,000
Net income 4,500,000 6,000,000

On September 30, 2019, Cement sold 75% of its ordinary shares for P7, 000,000. The fair value of
the remaining investment on such date is P3, 000,000. The fair value of the remaining investment is
P3, 700,000 on December 31, 2019. The dividends were declared and paid by the investee on
October 31, 2018 and October 1, 2018.

Compute for the following:

 Carrying amount of investment as of December 31, 2018
 Carrying amount of investment as of September 30, 2019 before disposal
 Carrying amount of investment as of December 31, 2019
 Total amount of income to be recognized in profit/loss
 Total net amount to be recognized in other comprehensive income

Assumption 1: The remaining investment is held for trading

Assumption 2: The remaining investment is irrevocable designated at fair value through other
comprehensive income
Assumption 3: The remaining investment is measured at cost

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14. Gay Company acquired a 30% interest in Man Company for P5, 000,000 on October 1, 2018. This
cost exceeds the underlying net assets of the investee by P1, 000,000 which is attributed to an
undervalued depreciable asset by the investee with useful life of five years.

Man Company reported the following for 2018 and 2019.

Net Income Dividends Paid
2018 4,000,000 3,000,000
2019 6,000,000 5,000,000

Required:
Prepare all entries on the books of Gay Company from October 1, 2018 to December 31, 2019.

15. On January 1, 2016, Jay Lourd Company acquired as a long term investment for P7, 000,000, a 40%
interest in Paul Ian Company when the fair value of Paul Ian Company’s net assets was P17, 500,000.
Paul Ian Company reported the following net losses:

2016 5,000,000
2017 7,000,000
2018 8,000,000
2019 4,000,000

On January 1, 2018, Jay Lourd Company made cash advances of P2, 000,000 to Paul Ian Company.
On December 31, 2019, it is not expected that Jay Lourd Company will provide further financial
support for Paul Ian Company.

Requirements: Prepare all journal entries from 2016 to 2019 in relation to the investment in
associate.

PRACTICAL EXERCISES
1. Ella Company began operations at the beginning of current year and provided the following
portfolio of equity investments at year-end:
Trading Nontrading
Aggregate cost 3,600,000 5,500,000
Aggregate fair value 3,200,000 4,500,000
Aggregate lower of cost or market
applied to each security 3,040,000 4,200,000

The nontrading equity investment is measured at FVOCI. What amount should be reported as
unrealized loss in the income statement for the current year?
a. 1,400,000 c. 1,300,000
b. 560,000 d. 400,000

2. During 2019, Latvia Company purchased trading securities with the following cost and market value
on December 31, 2019:
Security Cost Market Value
A- 1, 000 shares 200,000 300,000
B- 10,000 shares 1, 700,000 1,600,000
C- 20,000 shares 3,100,000 2,900,000
5,000,000 4,800,000

The entity sold 10,000 shares of Security B on January 15, 2020, for P150 per share.

2.1 What amount of unrealized gain or loss should be reported in the income statement for
2019?
a. 200,000 loss c. 300,000 loss

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 b. 200,000 gain d. 300,000 gain

2.2 What amount should be reported as loss on sale of trading investment in 2020?
a. 200,000 gain c. 100,000 gain
b. 200,000 loss d. 100,000 loss

3. On December 31, 2019, Fay Company appropriately reported a P 100,000 unrealized loss. There was
no change during 2020 in the composition of the portfolio on nontrading equity securities held at
fair value through other comprehensive income.

Security Cost Market Value (December 31, 2020)

A 1, 200,000 1,300,000
B 900,000 500,000
C 1,600,000 1,500,000
3,700,000 3,300,000

3. 1 What is the market value of the investment on December 31, 2019?

a. 3,600,000 c. 3,500,000
b. 3,700,000 d. 3,800,000

3.2 What amount of loss on these securities should be included in the statement of
comprehensive income for the year ended December 31, 2020 as component of other
comprehensive income?
a. 400,000 c. 100,000
b. 300,000 d. 0

3.3 What cumulative amount of loss on these securities should be reported in the statement of
changes in equity for the year ended December 31, 2020 as component of other
comprehensive income?
a. 100,000 c. 400,000
b. 200,000 d. 0

4. On January 1, 2018, Sheena Company purchased nontrading equity investments which are
irrevocably designated at FVOCI:
Purchase Price Transaction Cost Market-12/31/2018
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, 2019, the entity sold Security C for P 5,200,000. What amount should be credited to
retained earnings as a result of the sale of the investment in 2019?
a. 800,000 b. 500,000
b. 300,000 d. 0

5. On January 1, 2018, Jessica Company acquired a nontrading equity investment for P5, 000,000
irrevocably designated at FVOCI. On December 31, 2018, the market value of the investment was P
4,000,000. On December 31, 2019, the issuer of the equity instrument was in severe financial
difficulty and the fair value of the equity investment had fallen to P 1,500,000.00. The decline is
judged to be nontemporary. What amount of cumulative loss should be reported in the statement
of changes in equity for 2019 as component of OCI?
a. 1,000,000 c. 2,500,000
b. 2,500,000 d. 3,500,000

6. Jonna Company received dividends from ordinary shares investments during the current year:
 A stock dividend of 10,000 shares from A Company when the market price of the share
was P10.
 A cash dividend of P 1,500,000 from B Company in which the entity owned a 15%
interest.

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  5,000 shares 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 c. 1,500,000
b. 2,250,000 d. 2,350,000

7. Ronalyn Company 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.
 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 c. 850,000
b. 1,050,000 d. 250,000

8. Amor Company owned 50,000 shares of another entity. These 50,000 shares were originally
purchased for P100 per share. On October 1, 2018, 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,
2018, each share had a market value of P150 and each right had market value of P10. On December
31, 2018, the entity exercised all rights. The stock rights are accounted for separately and measured
initially at fair value. What total cost should be recorded for the new shares that are acquired be
exercising the rights?
a. 1,400,000 c. 1,650,000
b. 1,900,000 d. 1,000,000

9. Aira Company issued rights to subscribe to its stock, 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 stock rights are accounted for separately and
measured initially at fair value. What is the cost of the new investment assuming all of the stock
rights are exercised by the investor?
a. 1,500,000 c. 1,562,500
b. 1,250,000 d. 1,450,000

10. Grant Company acquired 30% of South Company’s voting share capital for P2, 000.000 on January 1,
2018. Grant’s 30% interest in South gave Grant the ability to exercise significant influence over
South’s operating and financial policies. During 2018, South earned P800, 000 and paid dividend of
P500, 000. South reported earnings of P1, 000,000 for the 6 months ended June 30, 2019, and P
2,000,000 for the year ended December 31, 2019. On July 1, 2019, Grant sold half of the investment
in South for P 1,500,000 cash. South paid dividend of P600, 000 on October 1, 2019.

The fair value of the retained investment is P 1,600,000 on July 1, 2019 and P 1,800,000 on
December 31, 2019. The retained investment is to be held as financial asset at fair value through
profit or loss.

10.1 Before income tax, what amount should be included in the 2018 income statement as a
result of the investment?
a. 150,000 c. 240,000
b. 240,000 d. 800,000

10.2 On December 31, 2018, what is the carrying amount of the investment in associate?
a. 2,000,000 c. 2, 240,000

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 b. 2,090,000 d. 2,300,000

10.3 In the income statement for 2019, what amount should be reported as gain from sale of
investment?
` a. 245,000 c. 350,000
b.305, 000 d. 455,000
10.4 In the income statement for 2019, what amount should be reported as gain from
remeasurement of the retained investment?
a. 605,000 ` c. 710,000
b. 405,000 d. 910,000

11. Glorious Company acquired 40% interest in an associate, Alta Company, for P 5,000,000 on January
1, 2018. At the acquisition date, there were no differences between the fair value and carrying
amount of identifiable assets and liabilities.

Alta Company reported the following net income and dividend for 2018 and 2019:
2018 2019
Net Income 2,000,000 3,000,000
Dividend Paid 800,000 1,000,000

The following transactions occurred between Glorious Company and Alta Company:
 On January 1, 2018, Alta Company sold an equipment costing P500,000 to Glorious
Company for P800,000. Glorious Company applied a 10% straight line method.
 On July 1, 2019, Alta Company sold equipment for P900, 000 to Glorious Company.
The carrying amount of the equipment is P500, 000 at the time of sale. The
remaining life of the equipment is 5 years and Glorious Company used the straight
line method.
 On December 31, 2019, Alta Company sold an inventory to Glorious Company for P
2,800,000. The inventory had a cost of P 2,000,000 and was still on hand on
December 31, 2019.

11.1 What is the inventor’s share in the profit of the associate for 2018?
a. 692,000 c. 680,000
b. 800,000 d. 920,000

11.2. What is the investor’s share in the profit of the associate for 2019?
a. 880,000 c. 720,000
b. 748,000 d. 732,000

11.3 What is the carrying amount of the investment in associate on December 31, 2018?
a. 5,692,000 c. 5.372,000
b. 5,000,000 d. 5,360,000

11.4 What is the carrying amount of the investment in associate on December 31, 2019?
` a. 5,692,000 c. 5,720,000
b.5, 704,000 d. 6,120,000

12. On January 1, 2018, Dumaguete Company purchased bonds with face amount of P4, 000,000 for P 4,
206,000. 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 bonds mature on December 31, 2020 and pay 10% interest annually on December 31 each year
with 8% effective yield.

The bonds are quoted at 95 on December 31, 2018 and 90 on December 31, 2019.

12.1 What amount of unrealized loss should be reported as component of other comprehensive
income in 2018?

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 a. 342,480 c. 469,520
b. 406,000 d. 0

12.2 What amount of unrealized loss should be reported as component of other comprehensive
income in 2019?
a. 473,878 c. 200,000
b. 131,398 d. 0

12.3 What amount of cumulative unrealized loss should be reported in the statement of
changes in equity for 2019?
a. 406,000 c. 473,878
b. 606,000 d. 0

12.4 What is the carrying amount of the bond investment to be reported on December 31,
2019?
a. 4,206,000 c. 3,800,000
b. 3,600,000 d. 4,673,878

13. On January 1, 2018, Gelyka Company purchased 12% bonds with face amount of P5, 000,000 for P
5,500,000 including transactions cost of P100, 000. The bonds provide an effective yield of 10%.

The bonds are dated January 1, 2018 and pay interest annually on December 31 of each year.

The bonds are quoted at 115 on December 31, 2018. The entity has irrevocably elected to use
the fair value option.

13.1 What amount of gain from change in fair value should be reported for 2018?
a. 750,000 c. 350,000
b. 250,000 d. 0

13.2 What amount of interest income should be reported for 2018?

a. 600,000 c. 660,000
b. 550,000 d. 540,000

13.3 What is the carrying amount of the bond investment on December 31, 2018?
a. 5,750,000 c. 5,500,000
b. 5,400,000 d. 5,450,000

13.4 What total amount of income from the investment should be reported in the income
statement for 2018?
a. 540,000 c. 890,000
b. 950,000 d. 900,000

14. On January 1, 2018, Tagbilaran Company purchased bonds with face amount of P2, 000,000. The
bonds are dated January 1, 2018 and mature on January 1, 2022. The interest on the bonds is 10%
payable semiannually every June 30 and December 31. The prevailing market rate of interest on the
bonds is 12%.

The present value of 1 at 6% for periods is .63 and the present value of an ordinary annuity of 1 at
6% for 8 periods is 6.21. What is the present value of the bonds on January 1, 2018?
a. 1,881,000 c. 1,360,000
b. 1,888,000 d. 1,480,000

15. On January 1, 2018, Gilberto Company purchased 9% bonds with a face amount of P4, 000,000 for P
3,756,000 to yield 10%. The bonds are dated January 1, 2018, mature on December 31, 2027 and
pay interest annually on December 31. The interest method of amortizing bond discount is used.

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 15.1 What amount should be reported as interest revenue for 2018?
a. 338,040 c. 375,600
b. 360,000 d. 400,000

15.2 What amount should be reported as interest revenue for 2019?

a. 400,000 c. 360,000
b. 375,600 d. 377,160

16. Major Company revealed the following investment at cost and fair value:

Cost Fair value – 12/31/18 Fair value – 12/31/19

Bond investment 2,000,000 1,400,000 1,800,000
Share investment 3,500,000 3,700,000 4,000,000

The business model for the bond investment is to collect contractual cash flows composed of
principal and interest and to sell the asset. The bonds were purchased at face amount of P2,
000,000. The ordinary shares are nontrading and the entity elected to present fair value changes in
other comprehensive income. On January 1, 2020, the entity sold the bonds and shares for P2,
500,000 and P4, 500,000 respectively.

16.1 What amount in OCI is recognized in the statement of comprehensive income for 2019?
a. 300,000 c. 700,000
b. 400,000 d. 500,000

16.2 What amount is recognized as gain on disposal included in profit or loss for 2020?
a. 700,000 c. 1,000,000
b. 500,000 d. 1,500,000

17. On January 1, 2018 Cement Company acquired 40% of the ordinary shares of another entity for P6,
000,000. The purchase was made at prices proportionate to the value assigned to the investee’s net
assets which equaled carrying amounts. For the years ended December 31, 2018 and 2019, the
investee reported the following:

2018 2019
Dividend paid 2,000,000 6,000,000
Net income 5,000,000 8,000,000

On October 1, 2019, Cement sold 75% of its ordinary shares for P7,500,000. The fair value of the
remaining investment on such date is P3,000,000 and such investment was designated irrevocably
at FVOCI. The fair value of the remaining investment is P3, 700,000 on December 31, 2019. The
dividends were declared and paid by the investee on November 1, 2018 and December 31, 2019?

17.1 What is the carrying amount of the investment on October 1, 2019 before disposal?
a. 9.600,000 c. 7,200,000
b. 10,400,000 d. 8,000,000

17.2 What is the gain or loss on disposal on October 1, 2019?

a. 1,500,000 gain c. 300,000 loss
b. 2,100,000 gain d. 300,000 gain

17.3 What total amount of income is recognized in profit or loss for 2019?
a. 4,600,000 c. 3,900,000
b. 3,300,000 d. 1,500,000

18. Ray Moand Company acquired 30% of South Company’s voting share capital for P 2,000,000 on
January 1, 2016. Ray Moand Company’s 30% interest in South gave Ray Moand the ability to
exercise significant influence over South’s operating and financial policies. During 2016, South
earned P800, 000 and paid dividend of P500, 000. South reported earnings of P1, 000,000 for the 6

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 months ended June 30, 2017 and P2, 000,000 for the year ended December 31, 2017. On July 1,
2017, Ray Moand sold half of the investment in South for P 1,500,000 cash. South paid dividend of
P600, 000 on October 1, 2017.

The fair value of the retained investment is P1, 600,000 on July 1, 2017 and P1, 800,000 on
December 31, 2017. The retained investment is to be held as financial asset at fair value though
profit or loss.

18.1 Before income tax, what amount should be included in the 2016 income statement as a
result of the investment?
a. 150,000 c. 500,000
b. 240,000 d. 800,000

18.2 On December 31, 2016, what is the carrying amount of the investment in associate?
a. 2,000,000 c. 2,240,000
b. 2,090,000 d. 2,300,000

18.3 In the income statement for 2017, what amount should be reported as gain from sale of
investment?
a. 245,000 c. 350,000
b. 305,000 d. 455,000

18.2 In the income statement for 2017, what amount should be reported as gain from
remeasurement of the retained investment?
a. 605,000 c. 710,000
b. 405,000 d. 910,000

19. On January 1, 2018, Jamond Company purchased 8% bonds in the face amount of P 8,000,000. The
bonds mature on January 1, 2023 and were purchased for P8, 671,680 to yield 6%.Jamond’s
business model for this investment is to collect contractual cash flows composed of principal and
interest, and sell the asset in the open market.

Interest is payable annually every December 31. The fair value of the bonds on December 31, 2018
was P7, 737,600 with an effective yield of 9%.
19.1 What is the interest income for 2018?
a. 640,000 c. 513,119
b. 520,301 d. 780,451

19.2 What amount of unrealized loss in OCI is reported in the statement of comprehensive
income for 2018?
a. 814,381 c. 262,400
b. 377,439 d. 671,680

20. Carmela Company acquired an equity instrument for P4, 000,000 on March 31, 2018. The equity
instrument is classified as financial asset at fair value through other comprehensive income. The
transaction cost incurred amounted to P700,000.On December 31, 2018, the fair value of the
investment was P5,500,000 and the transaction cost that would be incurred on the sale of the
investment is estimated at P600,000.
What amount of gain should be recognized in other comprehensive income for the year ended
December 31, 2018?
a. 200,000 c. 800,000
b. 900,000 d. 0

THEORY OF ACCOUNTS
1. Any investment may be accounted for at fair value through profit or loss when:
a. It is a debt instrument.

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 b. It is an equity instrument.
c. It is traded in active market.
d. The instrument matures within 2 years.

2. A financial instrument is any contract that gives rise to:

a. A financial asset
b. A financial liability
c. A financial asset of one entity and a financial liability of another entity.
d. A financial asset of one entity and a financial liability or equity instrument of another
entity.

3. Investments in trading debt investments are generally reported at:

a. Amortized cost
b. Face Value
c. Fair Value
d. Maturity Value

4. IFRS requires entities measure financial assets based on all of 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 PFRS requirements.

5. Financial assets include all of the following except:

a. Cash in bank
b. Trade accounts and notes receivable
c. Loans receivable
d. Inventories, property, plant and equipment, intangible assets and prepaid expenses

6. 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.

7. Under the fair value option for debt instrument, entities report all changes in fair value in:
a. Equity
b. Income
c. Other comprehensive income
d. Income or other comprehensive income

8. Which of the following statements best describes the term “significant influence”?
a. The mutual sharing in the risks and benefits of a combined entity.
b. The contractually agreed sharing of control over an economic entity.
c. The holding of a significant proportion of the share capital in another entity.
d. The power to participate in the financial and operating policy decisions of the entity.

9. Under PAS 28, beyond the mere 20% threshold, the existence of significant influence is usually
evidenced by:
a. Participation in policy making process
b. Representation in the board of directors
c. Material transactions between the investor and the investee.
d. All of these.

10. When a company holds between 20% and 50% of the outstanding stock of an investee,
which of the following statements applies?
a. The investor should always use the equity method to account for its investment.

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 b. The investor should always use the fair value method to account for its investment.
c. The investor must use the fair value method unless it can clearly demonstrate the ability
to exercise “significant influence” over the investee.
d. The investor should use the equity method to account for its investment unless
circumstances indicate it is unable to exercise “significant influence” over the investee.

11. How is goodwill arising on the acquisition of an associate dealt with in the financial
statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss.
d. Goodwill is not recognized separately within the carrying amount of the investment.

12. Under the equity method of accounting for investments, an investor recognizes the share
of the earnings in the period in which the:
a. Investee pays a dividend
b. Investor sells the investment
c. Investee declares a dividend
d. Earnings are reported by the investee in the financial statements.

13. How will the receipt of dividends affect the investment account under the fair value and
equity method?
a. No effect under both fair value method and equity method.
b. Decrease under fair value method and no effect under equity method.
c. Increase under fair value and decrease under equity method.
d. No effect under fair value method and decrease under equity method.

14. A financial asset is classified held for trading if:

a. It is acquired principally for the purpose of selling or repurchasing it in the near term.
b. On initial recognition, it is part of a portfolio of identical financial assets that are
managed together and for which there is evidence of a recent actual pattern of short-
term profit taking.
c. It is a derivative except for a derivative that is a financial guarantee or a designated and
an effective hedging instrument.
d. All of these are classified as held for trading.

15. Transaction costs include

a. Fees and commission paid to agent, levies by regulatory authorities and transfer taxes
b. Debt premium or discount
c. Financing costs
d. Internal administrative costs

16. Which of the following 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 are correct.

17. 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.

18. A debt investment shall be measured subsequently at amortized cost:

a. By irrevocable designation

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 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 solely payments of
principal and interest

19. 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 payment of
principal and interest and also to sell the financial asset.

20. Amortized cost is the initial recognition amount of the investment minus:
a. Repayments and net of any reduction for uncollectibility.
b. Cumulative amortization and 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.

21. 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 in the carrying amount of the investment and but charged to retained
earnings
d. Excluded in the carrying amount of the investment but charged to expense immediately

22. The fair value option, an entity may

a. Irrevocably designate a financial asset as measured at fair value through profit or loss
even if the amortized cost of measurement is satisfied.
b. Irrevocable designate a financial asset as measured at fair value through other
comprehensive income
c. Revocably designate a financial asset 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 though profit or loss.

23. The fair value option allows an entity to:

a. Record income when the fair value of investment increases
b. Measure 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 a
component of other comprehensive income
d. All of these are true regarding the fair value option

24. Equity investments acquired by an entity which are 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 20%

25. A “passive interest” in another entity should be accounted for by:

a. Consolidation
b. Using the effective interest method
c. Using the equity method
d. Using the fair value method

ANSWER KEY- INVESTMENTS

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PRACTICAL EXERCISE

1.D 5.D 9.A 13.D,A,A,B 17.A,D,C

2.A,D 6.B 10.B,B,B,B 14.A 18.B,B,B,B
3.A,B,C 7.D 11.A,B,C,C 15.C,D 19.B,A
4.A 8.B 12.A,B,C,B 16.C,B 20.C

THEORY OF ACCOUNTS

1.C 6.D 11.D 16.D 21.B

2.D 7.B 12.D 17.B 22.A
3.C 8.D 13.D 18.D 23.A
4.D 9.D 14.D 19.D 24.A
5.D 10.D 15.A 20.C 25.D

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