QUIZ 1: TRUE OR FALSE 1 10. According to PERS 9 Financial instruments, investments in stocks are initially recorded at cost and all commissions, taxes, and other fees are expensed as incurred. Unrealized holding gains and losses on investments in held for trading securities are recognized in profit or loss, Unrealized gains and losses on investments in equity securities measured at FVOCI are recognized in the income statement A debit balance in the “Fair Adjustment — FVOCI" account implies @ corresponding owners’ ‘equity account with a credit balance of the same amount. According to PFRS 9, the classification of financial assets for subsequent measurement purposes is based on management's intentions. The net reported balance in the “investment in equity securities - FVOCT’ account is the original cost plus a credit balance in the fair value adjustment account or minus a debit balance in the fair value adjustment account. When investments in held for trading securities are sold, the realized gain or loss is the difference in the fair value since acquisition. Unrealized holding gains on investments measured at fair value through other comprehensive income are recognized as direct increases to owners’ equity, rather than through the statement of comprehensive income. Increases in the fair value of held for trading secunties and investments in equity securities measured at FVOCI cause the related fair value adjustment account to decrease. Investments in held for trading securities may be classified as current or long-term. “Go ahead and be lazy; sleep on, but you will go hungry.” (Proverbs 19:18) -END- ANSWERS TO QUIZ 1: 1 FALS FALS E BE z FALS: TRUE Le 3. FALS FALS. _£E 8 E 4 FALS ~ TRUE @E 5 FALS FALS E 10 &NAME: Date: Professor: [ Section: Score: QUIZ 2: 1. Changes in fair value of this type of securities are accumulated as a separate component in the stockholders’ equity section of the balance sheet. a, Financial assets measured at amortized cost b. FVOCI securities c. Held for trading securities d. Designated financial assets 2. Which category includes only debt securities? a, Financial assets measured at amortized cost b. FVPL assets c. Held for trading securities d. FVOCI (election) 3. Acorrect valuation is a. investment in equity securities at amortized cost. b. held for trading securities at amortized cost. c. debt securities, to be held until maturity to collect cash flows from principal and interests, at fair value. d. none of these. a Securities which could be classified as financial assets measured at amortized cost are a. investment in stocks. b. warrants. ¢. municipal bonds. d. treasury stock. e Which of the following is not correct regarding held for trading securities? a. They are held to be sold in a short period of time. b. Unrealized holding gains and losses are reported as part of profit or loss. c. Any discount or premium is not amortized. d. All of these are correct. - A debit balance in the “Fair Value Adjustment - FVOCI Securities’ account at the end of a year should be interpreted as ‘a. the net unrealized holding gain for that year. b. the net realized holding gain for that year. c. the net unrealized holding gain to date. d. the net realized holding gain to date. a A debit balance in the “Fair Value Adjustment - Held for Trading Securities’ account at the end of a year should be interpreted as a. the net realized holding gain to date. b. the net unrealized holding gain to date. c. the net realized holding gain for that year. d. the net unrealized holding gain for that year. > Unrealized holding gains or losses which are recognized in profit or loss are from securities classified as a. amortized cost.b. FVOCI, c. held for trading. d. designated and held for trading. 9. An unrealized holding gain on a company's FVOCI securities should be reflected in the current financial statements as a. an extraordinary item shown as a direct increase to retained earnings. b. accurrent gain resulting from holding securities. c. anote or parenthetical disclosure only. d. other comprehensive income and included in the equity section of the balance sheet. 10. Changes in fair value of an investment measured at fair value through other comprehensive income a. must be recognized in profit or loss. b. must be recognized directly in equity. c. may be recognized in profit or loss or directly in equity. d. must be recognized in other comprehensive income and accumulated in a separate equity account. 14. At initial recognition, an entity may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in equity securities within the scope of PFRS 9 that is not held for trading. In accounting for such financial instruments, all of the following are true except a. amounts presented in other comprehensive income are not be subsequently transferred to profit or loss. b. the entity may transfer any cumulative fair value gains or losses within equity. c. dividends received on the investments are recognized in profit or loss. d. cumulative fair value gains or losses are transferred to profit or loss when the financial asset is derecognized 8 . An entity sells an investment that is measured at FVPL during the year. The realized gain or loss ‘on the sale is computed as a. the difference between the sale price and the carrying amount of the investment as at the date of sale. b. the difference between the sale price and the original acquisition cost of the investment. c. the difference between the net proceeds received from the sale and the carrying amount of the investment as at the date of sale. d. the difference between the net proceeds received from the sale and the carrying amount of the investment as at the date of sale adjusted for any accumulated fair value gains or losses recognized since the investment was acquired. 13. For which type of investments would unrealized fair value gains and losses be accumulated in an equity account? a. Equity method securities b. FVOCI securities c. Held for Trading securities d, Held-to-maturity securities 14. If the combined fair value of held for trading securities at the end of the year is less than the fair value of the same portfolio of held for trading securities at the beginning of the year, the difference should be accounted for by a. reporting an unrealized loss in security investments in the stockholders’ equity section of the balance sheet.b. reporting an unrealized loss in security investments in profit or loss. c. a footnote to the financial statements. d. adebit to Investment in Held for Trading Securities. 15. Information regarding Stone Co.'s portfolio of FVOCI securities is as follows: Aggregate cost as of 12/31/03 170,000 Unrealized gains as of 12/31/03 4,000 Unrealized losses as of 12/31/03 26,000 Net realized gains during 2003 30,000 At December 31, 2002, Stone reported an unrealized loss of P1,500 in other comprehensive income to reduce these securities to market. Under the accumulated other comprehensive income in stockholders’ equity section of its December 31, 2003 balance sheet, what amount should Stone report? a. 26,000 c. 20,500 b. 22,000 0 16. Caloy Co. bought 1,000 shares from Bayan Co. The shares have no active market, bul an identical or similar asset has an active market. The identical asset, however, has multiple markets. Caloy determines that the identical asset has the following market values: Market Market A B Quoted price 500 600 Related transaction Geet 25 150 How much is fair valuation of the investment? a. 500,000 c. 450,000 b. 475,000 d.borc 17. On January 1, 20x1, Allan Co. purchased P400,000 bonds for P392,000. The bonds mature on January 1, 20x5 and pay 12% annual interest beginning January 1, 20x2. Transaction costs are negligible. The bonds were classified as held for trading securities. On December 31, 20x1, the bonds are selling at a yield rate of 10%. How much is the unrealized gain (loss) recognized on December 31, 20x1? a. 27,986 b. 31,298 c. 28,964 d. 33,359 18.On January 1, 20x1, Rizzi Co. purchased 12,000 shares of Andre, Inc. for 400,000. Commission paid to broker amounted to P20,000, Management made an irrevocable choice to subsequently measure the shares at fair value through other comprehensive income. On December 31, 20x1, the shares were quoted at P40 per share. On January 3, 20x2, all of the shares were sold at P60 per share. Commission paid on the sale amounted to P24,000. How much is the unrealized gain (loss) recognized in profit or loss on December 31, 20x1? a. (60,000) b, 60,000 c. (80,000) d.0Use the following information for the next two questions: Karen Co, purchased the following equity securities on January 1, 20x1 for a total amount of 360,000. Cost Alaska Co. preference shares 200,000 Valdez Co. ordinary shares 180,000 2 Totals P360,000 The shares did not qualify for recognition as held for trading. Accordingly, they were classified as investment in equity securities measured at fair value through other comprehensive income. On December 31, 20x1, the portfolio of Karen Co. comprised the following. Fair value = 12/31/x4 Alaska Co. preference shares 240,000 Valdez Co. ordinary shares 60,000 Total 300,000 On December 31, 20x2, the portfolio of Karen Co. comprised the following: Fair value ~ 12/31/x2 Alaska Co. preference shares 220,000 Valdez Co. ordinary shares 180,000 Total 400,000 On February 2, 20x3, all of the Alaska Co. preference shares were sold for P160,000 net of transaction costs. 19. How much is the unrealized gain (loss) recognized in other comprehensive income on December 31, 20x17? a, 60,000 b. (60,000) c. 100,000 4.0 a 8 How much is the cumulative unrealized gain (loss) that is presented as a separate component in equity as of December 31, 20x2? a. 40,000 b. (40,000) c. 100,000 4.0 “From the fruit of his mouth a man's stomach is filled; with the harvest from his lips he is satisfied." (Proverbs 18:20) -END-SOLUTIONS TO QUIZ 2: 1. B 2A 3.0 4. C 5. D 6. Cc 7. B 8D 9D 10.D 14.2 12.C 13.B 14.B 15.B Solution: Unrealized gains as of 12/31/03 4,000 Unrealized losses as of 12/31/03 (26 000) Accumulated net unrealized losses in equity as of 1213103 (22,000) Market = Market B A Quoted price 500 600 Related transaction cost 25) 150 Net selling price 475 450 The more advantageous market is Market A and the quoted price in this market is #500. 1T. D [(400,000 x PV of 1 @10%, n=4) + (400,000 x 12% x PV ordinary annuity of 1 @10%, n=4) = 425,359 — 392,000 = 33,359 The fair value of the bonds on Dec. 31, 20x1 is computed as follows: Present Future cash flows PV @10%, n=3 PV factors value Principal 400,000 PV of P1 0.751315, 300,526 Interest (400K x 12%) 48,000 PV of ordinary annuity 2.486852 119,369 Fair value as of December 31, 20x1 (419,895 — 392,000) = 27,895 18, D — The investment is FVOCI. Any unrealized gain (loss) is recognized in OC! and not P/L. 19. B (300,000 — 360,000) = (60,000) 20. A (400,000 FV 12/31/x2 — 360,000 cost) = 40,000 unrealized gainquiz: 1 ‘Securities classified as financial asset measured at amortized cost are reported at a. acquisition cost, b. acquisition cost plus amortization of a discount. . acquisition cost plus amortization of a premium. d. fair value. In accounting for investments in debt securities that are classified as held for trading securities, a. a discounts reported separately. b. a premium is reported separately. ¢, any discount or premium is not amortized. d. none of these. According to PFRS 9 Financial Instruments, investments in debt securities that are classified at amortized cost are initially measured at a. cost including accrued interest, b. maturity value. ©. cost including brokerage and other fees. d. fair value plus brokerage and other fees. Pippen Co, purchased ten-year, 10% bonds tha pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for a, 10 periods and 10% from the present value of 1 table. b. 10 periods and 8% from the present value of 1 table. ©. 20 periods and 5% from the present value of 1 table. d. 20 periods and 4% from the present value of 1 table. Solo Co. purchased P300,000 bonds for P315,000, The securities are to be held until maturity to collect the contractual cash flows. The entry to record the investment includes a. a debit to Held-for-Trading Securities at P300,000. b. acredit to Premium on Investments of P15,000. . adebit to Investment in bonds measured at amortized cost for 315,000, d._none of these. Use the following information for the next two questions: On January 1, 20x1, Kevin Co. acquired 12%, P4,000,000 bonds for 4,198,048, The principal is due on December 31, 20x3 but interest is made annually starting December 31, 20x1. The effective interest rate on the bonds is 10%. 6. How much is the interest income recognized in 20x1? a. 419,805 ©. 407,273 413,884 , 480,000 How much is the carrying amount of the investment on December 31, 20x12 a. 4,198,048 ©. 4,072,727 b. 4,138,843 4. 4,000,000 On April 1, 20x1, Ronald Ryan Co, acquired 12%, P4,000,000 bonds dated January 1, 20x1 at 98 including interest. The bonds mature on December 31, 20x3 but pays annual interest at each year-end, How much is the initial carrying amount of the investment? a, 3,920,000 . 3,800,000 c. 4,000,000 . 4,120,0009. On January 1, 20x1, Mitch Co. acquired 12%, P4,000,000 bonds at 98. Commission paid to brokers amounted to P204,000. Principal is due on December 31, 20x4 but interest payments ate made annually starting December 31, 20x1. The adjusted effective interest rate on the investment is closest to a. 12% b.11% ©. 10.2650% d. indeterminable Use the following information for the next three questions: On January 1, 20x1, ABC Co. acquired 10%, 1,000,000 bonds for P827,135. The bonds mature on December 31, 20x3 and pay annual interest every December 31. ABC Co. incurred transaction costs peojpoo on the acquisition. The effective interest rate adjusted for the effect of the transaction costs is 14 The bonds are to be held under a *hold to collect and sell” business model. Information on fair values is as follows: December 31, 20x1..... December 31, 20x2. December 31, 20x3... 98 10. How much is the carrying amount of the investment on December 31, 20x1? a, 935,134 b. 1,002,000 c. 980,000 d. 965,443 11. How much is the unrealized gain (loss) recognized in other comprehensive income on December 31, 20x17 a. 45,866 b. (45,866) c. (37,899) d.0 12. How much is the interest income recognized in 20x2? a. 126,999 «. 135,088 b. 130,779 . 144,388 “Do nothing out of selfish ambition or vain conceit. Rather, in humility value others above yourselves, not looking to your own interests but each of you to the interests of the others. In your relationships with one another, have the same mindset as Christ Jesus.” (Pniippions 23-5) -END— ANSWERS: 1 Oo. 8. ooo S 6. A (See amorizaton table below) 7. B (See amortization table below) Solution Date Collections Interest income __ Amortization Present value Alt12/31x1 480,000 419,895 60,105 4,138,843 8. B (4,000,000 x 98%) — (4,000,000 x 12% x 3/12) = 3,800,000 9 8B Solution: Acquisition cost (ant x 98°) 3,920,000 Direct cost 204.000 Initial carrying amount 24,000 “Trial and error” approach: Future cash flows x PV factor at x% = Present value (4M x PV of P1 @ x%, n=4) + (4M x 12% x PV of an ordinary annuity of P1 @ x%, n=4) = 4,124,000 There is premium because the carrying amount is greater than the face amount. Therefore, the effective interest rate must be fower than the nominal rate of 12%. First trial: (using 11%) Future cash flows x PV factor at x% = PV or intial carrying amount > (Mx PV of P1 @ 11%, n=A) + (4M x 12% x PV of an ordinary annuity of P1 @ 11%, n=4) = 4,424,000 > (4M x 0.658731) + (480,000 x 3.102448) = 4,124,000 (2,634,924 + 1,489,174) = 4,124,098 approximates 4,124,000 (a difference of only P98) Ifthe difference of P96 is judged immaterial, then 11% is deemed the effective interest rate, 10. C= 1Mx88% 41. A Soluton Amortization table Interest Date received Interest income ___ Amortization Present value ix 907,135 arstixt 100,000 126.999 26,999 1215192 00,000 43079 30,79 964.913 12/311x3 100,000 135,088, 35,088 7,000,000 > (CIM x 98%) ~ 934,134) = 45,866 Unrealized gain— OCI 12. B (See table above)