6_Investments Theory of Accounts

Investments in Equity (less than 20%) and Debt Securities

1. IFRS requires entities to 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 financial asset.
d. All of the choices are PFRS requirements.

2. A financial asset is classified as 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 identified financial assets that are
managed together and for which there is evidence of a recent actual pattern of the 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.

3. Transaction cost 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

4. 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.

5. 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.

6. 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 solely
payments of principal and interest.

7. 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 is to collect contractual cash flows that are solely
payments of principal and interest and also to sell the financial asset.

8. Amortized cost is the initial recognition amount of investment minus

a. Repayments and net of any reduction for uncollectibility.
b. Cumulative amortization and net of any reduction for uncollectibility
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c. Repayments plus or minus cumulative amortization and net of any reduction for
uncollectibility.
d. Repayments plus or minus cumulative amortization.

9. Under 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 measurement is satisfied.
b. Irrevocably designate a financial asset measured at fair value through other
comprehensive income
c. Revocably designate a financial asset 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.

10. 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

11. 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. Non-trading 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%-50%.
d. Investments where an entity has holdings of more than 50%

Investments in Associate
12. 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 must use the fair value method unless it can clearly demonstrate an ability
to exercise significant influence over the investee.

13. 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

14. The excess of the investor’s share of the net fair value of the associates net assets over the
cost of the investment is
a. Included in the determination of the investors share of the associate’s profit or loss in the
period in which the investment is acquired.
b. Credited to the retained earnings directly
c. Included in other comprehensive income
d. A deferred gain.
6_Investments Theory of Accounts

15. An investor used the equity method for the 30% interest in an investee, how should the
investor report a receivable from the investee at year-end?
a. None of the receivable should be reported but offset against the investee’s payable to the
investor.
b. Only 70% of the receivable should be reported and the balance is eliminated.
c. The total receivable should be reported separately.
d. The total receivable should be included as part of investment in associate without separate
disclosure.

Investment Property
16. Which of the following noncurrent assets may not be classified as Investment property?
A. Land B. Building C. Machinery D.All of them may qualify

17. Which of the following is not an investment property?

A. Land held for long-term capital appreciation C. Land held as a future plant site
B. Land held for currently undetermined use D. Land developed for use as
investment property

18. If the entity has not determined that it will use the land either as owner-occupied of for short-
term sale, the land is classified as
A. Owner-occupied property C. Noncurrent asset held for sale
B. Investment property D. Other noncurrent asset

19. Which of the following building shall be classified as investment property?

A. Building owned and leased out to others under finance leases
B. Building leased under finance lease and used for administrative purposes
C. Building that is vacant and held to be sold in the near future
D. Building constructed for future use as investment property

20. An entity shall choose which model as its accounting policy for its investment property?
A. Fair value model C. Revaluation model
B. Cost model D. Either a or b

21. Which of the following is considered in determining fair valuation of an item of investment
property?
I. Transaction costs on disposal II. Accrued operating income
A. I only B. II only C. Both I and II D. .Neither I nor II

22. Linden Corporation has investment property that is held to earn rental income. Linden
prepares its financial statements in accordance with PFRS. Linden uses the fair value model
for reporting the investment property. Which of the following is true?
A. Changes in fair value are reported as profit or loss in the current period.
B. Changes in fair value are reported as other comprehensive income for the period.
C. Changes in fair value are reported as an extraordinary gain on the income statement.
D. Changes in fair value are reported as deferred revenue for the period.

23. An investment property should be measured initially at

A. Cost C. Depreciable cost less accumulated impairment losses
B. Cost less accumulated impairment losses D. Fair value less accumulated impairment losses

24. The applicable PFRS/PAS for a property being constructed or developed for future use as
investment property is
A. PAS 2 B. PAS 40 C. PAS 11 D. PAS 16
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25.. Transfers from investment property to property, plant, and equipment are appropriate
A. When there is change of use
B. Based on the entity’s discretion
C. Only when the entity adopts the fair value model under PAS 38
D. The entity can never transfer property into another classification on the statement of
financial position once it is classified as investment property.

Practice questions:
1. A financial instrument is any contract that gives rise to
a. A financial asset only
b. A financial liability only
c. A financial asset of one entity and a financial liability of another entity only
d. A financial asset of one entity and a financial liability or equity instrument of another
entity

2. These investments are known as “financial assets at fair value through profit or loss”.
a. FVOCI securities
b. FVPL
c. Amortized cost securities
d. Nonmarketable equity securities

3. FVPL are investments that are, by their very nature

a. Readily marketable
b. Intended to be held for more than one year
c. Readily realizable and intended to be held for more than one year
d. Readily realizable and intended to be held for not more than one year

4. Which category includes only debt securities?

a. Marketable securities
b. FVOCI
c. FVPL
d. Amortized cost securities

5. If the combined market value of FVOCI securities at the end of the year is less than the
market value of the same portfolio of FVOCI securities at the beginning of the year, the
difference should be accounted for by
a. Reporting an unrealized loss in equity section of the statement of financial position.
b. Reporting an unrealized loss in the income statement.
c. A footnote to the financial statements.
d. A credit to the FVOCI securities account.

6. Transaction cost are incremental costs that are directly attributable to the acquisition of
financial assets and issue of financial liabilities, transaction costs include which of the
following
a. Debt premiums or discounts
b. Fees, commissions paid to agents, levies by regulatory authorities, and transfer taxes
and duties.
c. Financing costs
d. Internal administrative costs

7. Ignoring unrealized gains and losses from prior years, a market adjustment account on
trading security investments with a credit balance would mean that
6_Investments Theory of Accounts

a. An unrealized gain of the equivalent amount in stockholders’ equity

b. An unrealized loss of the equivalent amount in stockholders’ equity
c. An unrealized gain of the equivalent amount in profit or loss
d. An unrealized loss of the equivalent amount in profit or loss

8. Amortized cost investments subsequent to initial recognition are measured at

a. Cost
b. Fair value
c. Amortized cost using the effective interest method
d. Amortized cost using the straight-line method

9. It is an entity, including an unincorporated entity such as a partnership, over which the

investor has significant influence and that is neither a subsidiary nor an interest in joint
venture.
a. Subsidiary c. Parent
b. Associate d. Investee

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

11. 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. Credited to equity and amortized over the useful life.
d. A deferred gain.

12. If an investor’s share of losses of an associate equals or exceeds its interest in the associate
the investor should not do which of the following?
a. The investor shall continue recognizing its share of further losses.
b. The investment is reduced to zero.
c. Additional losses are provided only to the extent that the investor has incurred legal or
constructive obligations or made payments in behalf of the associate.
d. If the associate subsequently reports profits, the investor resumes recognizing its share
of losses only after its share of the profits equals the share of the losses not recognized
previously.

13. When an investor uses the equity method to account for investment in ordinary shares, cash
dividends received by the investor from the investee should be recorded as
a. Dividend income
b. A deduction from the investor’s share of the investee’s earnings
c. A deduction from investment account
d. A deduction from goodwill
6_Investments Theory of Accounts

14. An investor uses the equity method to account for investment in ordinary shares. The
purchase price implies a fair value of the investee’s depreciable assets in excess of the
investee’s net asset carrying values. The investor’s amortization of the excess
a. Decreases the investment account
b. Decreases the goodwill account
c. Increases the investment revenue account
d. Does not affect the investment account

15. It is a method of accounting for an investment whereby the investor shall recognize income
from the investment only to the extent that the investor receives distribution from
accumulated profits of the investee arising after the date of acquisition.
a. Cost method c. Consolidation method
b. Equity method d. Fair value method

16. An investor purchased a long-term bond investment at the beginning of the year. The
investor’s interest income for the year would be higher if the bond was purchased at
a. Discount c. Face value
b. Premium d. Current value

17. An investor purchased a bond to be Amortized cost on January 1. The investor’s carrying
value at the end of the first year would be highest if the bond was purchased at a
a. Discount and amortized by the straight-line method.
b. Discount and amortized by the effective interest method.
c. Premium and amortized by the straight -line method.
d. Premium and amortized by the effective interest method.

18. All of the following investment category may be classified as a current asset, except
a. Financial asset at fair value through profit or loss.
b. Amortized cost securities.
c. FVOCI securities.
d. Investment in associate

19. An increase in the cash surrender value of a life insurance policy owned by an enterprise
would be recorded by
a. Decreasing annual insurance expense
b. Increasing investment income
c. Recording a memorandum entry only
d. Decreasing deferred charge

20. At which of the following dates has the shareholder theoretically realized income from its
equity security investments?
a. Date of declaration of dividends.
b. Date of record.
c. Date of payment of dividends.
d. Date of receipt of dividends.

21. Investment property includes all of the following, except

a. Land held for long-term capital appreciation.
b. Land for a currently undetermined use.
c. Building owned by the entity or held under a finance lease and leased out under one or
more operating leases.
d. Property held for sale in the ordinary course of business or in the process of construction
or development for such sale.
6_Investments Theory of Accounts

22. An investment property shall be measured initially at

a. Revalued amount.
b. Cost less accumulated depreciation
c. Depreciable amount
d. Cost

23. Subsequent to initial recognition, investment property shall be measured at

I. Fair value
II. Cost less accumulated depreciation and any accumulated impairment losses
a. Both I and II c. I only
b. Neither I nor II d. II only

24. A gain arising from a change in the fair value of an investment property for which an entity
has opted to use the fair value model is recognized in
a. Net profit or loss for the year.
b. General reserve in the shareholders’ equity.
c. Valuation reserve in the shareholders’ equity.
d. Retained profits.

25. When the entity uses the cost model, transfers between investment property, owner-
occupied property and inventory shall be made at
a. Fair value c. Cost
b. Carrying amount d. Assessed value

26. If owner-occupied property is transferred to investment property that is to be carried at fair

value, the difference between the carrying amount of the property and its fair value shall be
a. Included in profit or loss
b. Included in retained earnings
c. Accounted for as revaluation of property, plant and equipment.
d. Included in equity

27. When a property under construction is completed and transferred to investment property
that is to be carried at fair value, the difference between the carrying amount and its fair
value shall be
a. Recognized in profit or loss
b. Recognized in retained earnings
c. Recognized in equity
d. Accounted for as revaluation of property, plant and equipment.

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