QUIZ - Financial Instruments

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Which of the following should be classified as financial instrument?

a. Inventories c. Patents
b. Land and building d. Trade accounts receivable
2. How should preference shares that are redeemable mandatorily be presented in the statement of financial position?
a. Equity
b. Current liability
c. Noncurrent liability
d. Either current or noncurrent liability depending on redemption date
3. An entity has preference shares in issue. The preference shares are redeemable five years from now. How will the
preference shares and the preference dividend be reported respectively in the current year?
a. Equity and Finance cost
b. Equity and Deducted from equity
c. Noncurrent liability and Finance cost
d. Noncurrent liability and Deducted from equity
4. Which of the following information is not required to be disclosed about exposure to risks arising from financial
instruments?
a. Qualitative and quantitative information about credit risk.
b. Qualitative and quantitative information about market risk.
c. Qualitative and quantitative information about liquidity risk.
d. Qualitative and quantitative information about operational risk.
5. Which of the following categories for financial assets is permitted?
a. Cost c. Amortized cost
b. Fair value d. Fair value and amortized cost
6. Trading bond investments are reported at
a. Amortized cost c. Fair value
b. Face value d. Maturity value
7. Which of the following describes a principal market for establishing fair value of an asset?
a. Any broker or dealer market that buys or sells the asset.
b. The market in which the amount received would be maximized.
c. The most observable market in which the price of the asset is minimized.
d. The market that has the greatest volume and level of activity for the asset.
8. Which of the following is not a valuation technique used in fair value measurement?
a. Cost approach c. Market approach
b. Income approach d. Residual value approach
9. The market approach for measuring fair value requires which of the following? [ ]
a. Present value of future cash flows.
b. The price to replace the service capacity of the asset.
c. The weighted average of the present value of future cash flows.
d. Prices and other relevant information of transactions from identical or comparable assets.
10. An entity acquired listed equity shares representing a small percentage for the purpose of selling or repurchasing
them in the near term. What is the appropriate classification of this investment?
a. Financial assets held for trading
b. Financial assets at amortized cost
 c. Financial assets at fair value through profit or loss
d. Financial assets at fair value through other ?2?comprehensive income
11. Which of the following statements is correct in regard to trading bond investments?
a. Any discount or premium is not amortized.
b. Unrealized gains and losses are reported as part of net income.
c. Trading bond investments are held with the intention of selling them in a short period of
time.
d. All of the statements are correct.
12. A gain or loss on sale of trading bond investment is the difference between
a. Face amount and carrying amount c. Sale price and carrying amount
b. Fair value and carrying amount d. Sale price and fair value
13. An entity purchased equity shares in another entity with the intention of holding this investment over the long
term. What is the most appropriate classification of this equity investment?
a. Amortized cost
b. Held for trading
c. At fair value through profit or loss
d. At fair value through other comprehensive income
14. Transfers of investments between categories
a. Are unrecognized.
b. Result in omitting recognition of fair value.
c. Are accounted for at fair value for all transfers.
d. Should always result in an impact on net income.
15. Which of the following statements is true concerning recognition of unrealized gains and losses on financial
assets?
I Unrealized gains and losses on financial assets held for trading shall be included in profit or loss.
II Unrealized gains and losses on financial assets ?2?measured at amortized cost shall be included as ?2?
component of other comprehensive income.
a. I only c. Both I and II
b. II only d. Neither I nor II

The next item(s) is/are based on the following

On December 3.1, 2011, MABUHAY COMPANY'S statement of financial position showed the following balances
related to its securities accounts:
Trading securities P1,477,500
Available-for-sale securities (AFS) 1,180,000
Interest receivable --Manila Water bonds 12,500
Unrealized gain - AFS 100,000

Mabuhay's securities portfolio on December 31, 2011, was made up of the following securities:
Security Classification Cost Market
10,000 shares Yemen Corp. stock Trading P750,000 P762,500
8,000 shares Toronto, Inc. stock Trading 550,000 528,250
10% Manila Water bonds, (interest payable Trading 250,000 186,750
semiannually on Jan. 1 and July 1)
10,000 shares Bulacan, Inc. stock Available-for-sale 590,000 630,000
20,000 shares Jumbo Unlimited, Inc. stock Available-for-sale 490,000 550,000

During 2012, the following transactions took place:

Jan. 3 Received interest on the Manila Water bonds.
 Mar. 1 Purchased 3,000 additional shares of Yemen Corp. stock for P229,500, classified as a trading
security.
Apr. 15 Sold 4,000 shares of the Toronto, Inc. stock for P69 per share.
May 4 Sold 4,000 shares of the Bulacan, Inc. stock for P6.2 per share.
July 1 Received interest on the Manila Water bonds.
Oct. 30 Purchased 15,000 shares of Pasay Co. stock for P832,500, classified as a trading security.

The market values of the stocks and bonds on December 31, 2012, are as follows:
Yemen Corp. stock P76.60 per share
Toronto, Inc. stock P68.50 per share
Pasay Co. stock P55.25 per share
Manila Water bonds P205,550
Bulacan, Inc. stock P61.00 per share
Jumbo Unlimited, Inc. stock P27.00 per share

Based on the above and the result of your audit, determine the following:

16. Gain or loss on sale of 4,000 Toronto, Inc. shares on April 15, 2012
a. P1,000 gain c. P11,875 gain
b. P1,000 loss d. P11,875 loss
17. Net realized gain or loss on sale of 4,000 Bulacan, Inc. shares on May 4, 2012
a. P4,000 gain c. P12,000 gain
b. P4,000 loss d. P12,000 loss
18. Carrying amount of Trading Securities as of December 31, 2012
a. P2,287,800 c. P2,304,100
b. P2,297,400 d. P2,337,000
19. Carrying amount of Available-for-Sale Securities as of December 31, 2012
a. P806,000 c. P906,000
b. P844,000 d. P944,000

The next item(s) is/are based on the following

HARLINGTON COMPANY buys and sells securities expecting to earn profits on short-term differences in price.
During 2015, Harlington Company purchased the following trading securities:
Security Cost Fair Value Dec. 31.2015
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000
Before any adjustments related to these trading securities, Harlington Company had net income of P2,700,000.

20. What is Harlington's net income after making any necessary trading security adjustments?
a. P2,286,000 c. P2,700,000
b. P2,430,000 d. P2,934,000
21. What would Harlington's net income be if the fair value of security B were P855,000?
a. P2,601,000 c. P2,700,000
b. P2,655,000 d. P2,799,000

The next item(s) is/are based on the following

LABADA CO.'s portfolio of trading securities includes the following on December 31, 2015:
Cost Fair Value
15,000 ordinary shares of Camias Co. P1,431,000 P1,251,000
 30,000 ordinary shares of Ganda Co. 1.638.000 1,710.000
P3,069,000 P2,961,000
All of the above securities have been purchased in 2015. In 2016, Labada Co. completed the following securities
transactions:
Mar. 1 Sold 15,000 shares of Camias Co. ordinary shares at P93, less brokerage commission of P13,500.
April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, and other transaction costs
of P4,950.

The Labada Co. portfolio of trading securities appeared as follows on December 31, 2016:
Cost Fair Value
30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000 1
1,800 ordinary shares of Waston, Inc. 247,950 225,0002
P1,885,950 P1,965.000
1
Net of P19,500 estimated transaction exists that would be incurred on the sale of the securities.
2
Net of P4,500 estimated transaction costs that would be incurred on the sale of the securities.

22. What amount of unrealized gain on these securities should be reported in the 2016 income statement?
a. P31,050 c. P79,050
b. P36,000 d. P84,000
23. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2016?
a. P13,500 c. P130,500
b. P27,000 d. P144,000
24. What amount should be reported as trading securities in Labada's statement of financial position on December 31,
2016?
a. P1,885,950 c. P1,965,000
b. P1,909,950 d. P1,989,000
25. During 2014, Garr Company purchased marketable equity securities as a trading investment. For the year
ended December 31, 2014, the entity recognized an unrealized loss of P230,000.
There were no security transactions during 2015. Pertinent information on December 31, 2015 is as
follows:
Security Cost Market value
A 2,450,000 2,300,000
B 1,800,000 1,820,000
4,250,000 4,120,000
In the 2015 income statement, what amount should be reported as unrealized gain or loss?
a. Unrealized gain of P100,000 c. Unrealized gain of P130,000
b. Unrealized loss of P100,000 d. Unrealized loss of P130,000

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

Quondam Company held the following securities as trading investments on December 31, 2014:
Cost Market value
100,000 shares of Company A nonredeemable
preference share capital, par value P75 775,000 825,000
7,000 shares of Company B preference share
capital, par value P100, subject to
mandatory redemption by the issuer
at par on Dec. 31, 2012 690,000 625,000
26. What is the carrying amount of the trading investments on December 31, 2014?
a. 1,400,000 c. 1,465,000
b. 1,450,000 d. 1,475,000
27. What amount should be recognized as unrealized gain(loss) in the income statement?
a. (50,000) c. 15,000
b. 0 d. (15,000)

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

On December 31, 2014, Fay Company appropriately reported a P100,000 unrealized loss. There was no
change during 2015 in the composition of the portfolio of marketable equity securities held as financial
asset at fair value through other comprehensive income.
Market value
Security Cost December 31, 2015
A 1,200,000 1,300,000
B 900,000 500,000
C 1,600,000 1,500,000

28. What amount of loss on these securities should be included in the statement of comprehensive income for
the year ended December 31, 2015 as component of other comprehensive income?
a. 0 c. 300,000
b. 100,000 d. 400,000

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

At the beginning of current year, Laudable Company acquired 200,000 ordinary shares of an investee for
P9,000,000. The investment is measured at fair value through other comprehensive income. At the time
of purchase, the investee had outstanding 800,000 shares with a carrying amount of P36,000,000. The
following events took place during the year:
 The investee reported net income of P1,800,000.
 Laudable Company received from the investee a dividend of P0.75 per ordinary share.
 The market value of the investee's share had declined to P40 at year-end.

29. What is the carrying amount of the investment at year-end?

a. 8,000,000 c. 9,300,000
b. 9,000,000 d. 9,450,000

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

Inspiration Company had trading and non-trading investments held throughout 2014 and 2015. The non-
trading investments are measured at fair value through other comprehensive income. The investments had
a cost of P3,000,000 for trading and P3,000,000 for non-trading. The investments had the following fair
value at year-end:
December 31, 2014 December 31, 2015
Trading 4,000,000 3,800,000
Non-trading 3,200,000 3,700,000

30. What amount of unrealized gain or loss should be reported in the income statement for 2015?
a. 200,000 gain c. 300,000 gain
b. 200,000 loss d. 300,000 loss