INVESTMENT PROPERTY AND OTHER NON-CURRENT FINANCIAL ASSETS

**Included Investment related problems/questions

Theories:

1. It is defined as property (land or building or part of building or both) by an owner or finance lessee
to earn rentals or for capital appreciation or both.

a. Investment property c. Mining property

b. Owner-occupied property d. Rental property

2. Investment property includes all of the following except

a. Land held for long-term capital appreciation
b. Land held for currently undetermined use
c. Building owned by the reporting entity or held by a finance lessee 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 for such sale.
e.
3. An owner-occupied property is held by an owner or finance lessee
I. For use in the production of goods or services
II. For administration purposes
f.

a. I only c. Both I and II

b. II only d. Neither I and II

e.
4. If an entity owns and manages a hotel, services provided to guests are significant component of
the arrangement as a whole. In such case, the hotel is classified as
a. Investment property
b. Owner-occupied property
c. Partly investment property and partly owner-occupied property
d. Neither investment property nor owner-occupied property
f.
5. Which of the following is an investment property?
a. Property being constructed or developed on behalf of third parties.
b. Property that is being constructed and developed as investment property.
c. Property held for future development and subsequent use as owner-occupied property.
d. Owner-occupied property awaiting disposal.
g.
6. Which statement is correct if the property is partly investment and partly owner-occupied?
I. If the investment and owner-occupied portions could be sold or leased out separately, the
portions shall be accounted for separately as investment property and owner-occupied
property.
II. If the investment and owner-occupied portions could not be sold or leased out separately,
the property is investment property if only an insignificant portion is held for
manufacturing or administrative purposes.
h.

a. I only c. Both I and II

b. II only d. Neither I and II

e.
7. Which statement is correct concerning property leased to affiliate?
 I. From the perspective of the individual entity that owns it, the property leased to an
affiliate is considered an investment property.
II. From the perspective of the affiliates as a group and for purposes of consolidated
financial statements, the property is treated as owner-occupied property.
a.

b. Both I and II d. I only

c. Neither I and II e. II only

f.
8. An investment property is recognized when
I. It is probable that the future economic benefits that are associated with the investment
property will flow in the entity.
II. The cost of investment property can be measured reliably.
a.

b. Both I and II d. I only

c. Neither I and II e. II only

f.
9. Which of the statement is incorrect concerning initial measurement of an investment property?
a. The investment property shall be measured initially at fair value.
b. The cost of the purchased investment property includes its purchase price and any
directly attributable expenditure.
c. The initial cost of a property interest held under a lease and classified as an investment
property shall be the lower of the fair value of the property and the present value of the
minimum lease payments.
d. If payment for an investment property is deferred, its cost is the cash price equivalent.
e.
10. Directly attributable expenditures related to investment property include
a. Professional fees for legal services, property transfer taxes and other transaction
costs.
b. Start up costs.
c. Initial operating losses incurred before the investment property achieves the planned
level occupancy.
d. Abnormal amounts of wasted material, labor and other resources incurred constructing or
developing the property.
e.
11. Subsequent to initial recognition, the investment property shall be measured at
a. Fair value
b. Cost less any accumulated depreciation and any accumulated impairment losses
c. Revalued amount
d. Either fair value or cost less any accumulated depreciation and any accumulated
impairment losses
e.
12. What is the best evidence of fair cvalue of an investment property?
a. Current price in an active market for similar property in the same location and
condition
b. Current price in an active market for property of different nature, condition and location
adjusted to reflect those differences.
c. Recent price of similar property in less active market.
d. Discounted cash flow projection based on reliable estimate of future cash flows.
e.
13. Which statement is incorrect in determining the fair value of an investment property?
 a. An entity shall determine the fair value of investment property by deducting
transaction cost that may be incurred upon disposal.
b. The fair value of investment property shall reflect market conditions at the end of the
reporting period.
c. If an office is leased on a furnished basis, the fair value of the office generally includes
the fair value of the furniture because the rental income relates to the furniture office
d. The fair value of the investment property excludes prepaid or accrued operating lease
income.
e.
14. Which statement is correct if there is inability to determine the fair value of an investment property
reliably?
I. PAS 40 mandates that the entity shall measure such investment property using the cost
model until the disposal of the investment property.
II. The residual value of such investment property shall be assumed zero under such
exceptional circumstance only.
a.

b. I only d. Both I and II

c. II only e. Neither I and II

f.
15. When the entity uses the cost model, transfer between investment property, owner-occupied
property and inventory shall be accounted for at

a. Fair value c. Cost

b. Carrying amount d. Assessed value

e.
16. A transfer from investment property carried at fair value to owner-occupied property shall be
accounted for at
a. Fair value, which becomes the deemed cost for subsequent accounting
b. Carrying amount
c. Historical cost
d. Fair value less cost to sell
e.
17. 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. Included in equity
d. Accounted for as revaluation of property, plant, and equipment
e.
18. If an inventory is transferred to investment property that is to be carried at fair value, the
remeasurement to fair value is
a. Included in profit or loss
b. Included in equity
c. Included in retained earnings
d. Accounted for as revaluation of inventory
e.
19. When an investment property under construction is completed and to be carried at fair value, the
difference between the carrying amount and fair value shall be
a. Included in profit or loss
b. Included in retained earnings
c. Included in other comprehensive income
 d. Accounted for as revaluation of property, plant and equipment
e.
20. Gain or loss from disposal of investment property shall be determined as the difference between
the
a. Net disposal proceeds and carrying amount of the asset and shall be recognized in
profit or loss.
b. Net disposal proceeds and carrying amount of the asset and shall be recognized in
equity.
c. Net disposal proceeds and carrying amount of the asset and shall be recognized in
retained earnings.
d. Net disposal proceeds and fair value of the asset and shall be recognized in profit or loss.
e.
21. 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. Profit or loss
b. General reserve in shareholders’ equity
c. Valuation reserve in the shareholders’ equity
d. Retained profits
e.
22. An investment property shall be measured initially at
a. Cost
b. Cost less accumulated impairment loss
c. Depreciation cost less accumulated impairment losses
d. Fair value less accumulated impairment losses
e.
23. In case of property held under an operating lease and classified as investment property
a. The entity has to account for the investment property under cost model only
b. The entity has to use the fair value model only
c. The entity has the choice between the cost model and fair value model
d. The entity needs only to disclose the fair value and can use the cost model
e.
24. Transfer from investment property to property, plant and equipment is 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.
d. The entity can never transfer property into another classification once it is classified as
investment.
e.
25. An investment property is derecognized when
a. It is disposed to a third party.
b. It is permanently withdrawn from use.
c. No future economic benefits are expected from its disposal.
d. In all of the above cases.
e.
26. Which of the following statements best describes owner-occupied property?
a. Property held for sale in the ordinary course of business
b. Property held for use in the production and supply of goods or services and
property held for administrative purposes
c. Property held to earn rentals
d. Property held for capital appreciation
e.
27. Which of the following terms best describes property held to earn rentals or for capital
appreciation?

a. Freehold property b. Leasehold property

 c. Owner-occupied property d. Investment property

e.
28. Which of the following additional disclosures must be made when an entity chooses the cost
model as its accounting policy for investment property?
a. The fair value of the property
b. The present value of the property
c. The value in use of the property
d. The net realizable value of the property
e.
29. PAS 40 gives a choice between two different models as the accounting policy to be used in
relation to investment property. Which of the following disclosures shall be made when the fair
value model has been adopted?
a. Depreciation method used
b. The amount of impairment loss recognized
c. Useful life or depreciation rate used
d. Net gains or losses from fair value adjustments
e.
30. The following properties fall under the definition of investment property, except?
a. Land held for long-term capital appreciation
b. Property occupied by an employee paying market rent
c. Land held for a currently undetermined use
d. A building owned by an entity and leased out under an operating lease

e. (Source: Theory or Accounts 2010 edition; Conrado T Valix, BSC, LLB / Christian Aris M.
Valix, BSME, BSA)

f.
31. Which of the following is not a debt security?

a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.
a.
32. A correct valuation is

a. Available-for-sale at amortized cost.

b. Held-to-maturity at amortized cost.
c. Held-to-maturity at fair value.
d. None of these.
a.
33. Securities which could be classified as held-to-maturity are

a. Redeemable preferred stock. c. Municipal bonds.

b. Warrants. d. Treasury stock.
34.
35. Unrealized holding gains or losses which are recognized in income are from securities classified
as

a. Held-to-maturity. c. Trading.
b. Available-for-sale. d. None of these.
e.
36. When an investor's accounting period ends on a date that does not coincide with an interest
receipt date for bonds held as an investment, the investor must
 a. Make an adjusting entry to debit Interest Receivable and to credit Interest Revenue
for the amount of interest accrued since the last interest receipt date.
b. Notify the issuer and request that a special payment be made for the appropriate portion
of the interest period.
c. Make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for
the total amount of interest to be received at the next interest receipt date.
d. Do nothing special and ignore the fact that the accounting period does not coincide with
the bond's interest period.
f.
37. Debt securities that are accounted for at amortized cost, not fair value, are

a. Held-to-maturity debt securities.

b. Trading debt securities.
c. Available-for-sale debt securities.
d. Never-sell debt securities.
e.
38. Debt securities acquired by a corporation which are accounted for by recognizing unrealized
holding gains or losses and are included as other comprehensive income and as a separate
component of stockholders' equity are

a. Held-to-maturity debt securities.

b. Trading debt securities.
c. Available-for-sale debt securities.
d. Never-sell debt securities.
f.
39. Use of the effective-interest method in amortizing bond premiums and discounts results in

a. A greater amount of interest income over the life of the bond issue than would result from
use of the straight-line method.
b. At varying amount being recorded as interest income from period to period.
c. A variable rate of return on the book value of the investment.
d. A smaller amount of interest income over the life of the bond issue than would result from
use of the straight-line method.
g.
40. Equity securities acquired by a corporation which are accounted for by recognizing unrealized
holding gains or losses as other comprehensive income and as a separate component of
stockholders' equity are

a. Available-for-sale securities where a company has holdings of less than 20%.

b. Trading securities where a company has holdings of less than 20%.
c. Securities where a company has holdings of between 20% and 50%.
d. Securities where a company has holdings of more than 50%.
h.
i.
 41. A requirement for a security to be classified as held-to-maturity is

a. Ability to hold the security to maturity. c. The security must be a debt security.
b. Positive intent. d. All of these are required.
e.
42. Held-to-maturity securities are reported at

a. Acquisition cost.
b. Acquisition cost plus amortization of a discount.
c. Acquisition cost plus amortization of a premium.
d. Fair value.
f.
43. Watt Co. purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to
maturity, the entry to record the investment includes

a. A debit to Held-to-Maturity Securities at $300,000.

b. A credit to Premium on Investments of $15,000.
c. A debit to Held-to-Maturity Securities at $315,000.
d. None of these.
g.
44. Which of the following is not correct in regard to trading securities?

a. They 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.
h.
45. In accounting for investments in debt securities that are classified as trading securities,

a. A discount is reported separately.

b. A premium is reported separately.
c. Any discount or premium is not amortized.
d. None of these.
i.
46. Investments in debt securities are generally recorded at

a. Cost including accrued interest.

b. Maturity value.
c. Cost including brokerage and other fees.
d. Maturity value with a separate discount or premium account.
j.
47. Jordan Co. purchased ten-year, 10% bonds that 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.
c. 20 periods and 5% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
k.

l.
 48. Investments in debt securities should be recorded on the date of acquisition at

a. lower of cost or market.

b. market value.
c. market value plus brokerage fees and other costs incident to the purchase.
d. face value plus brokerage fees and other costs incident to the purchase.
m.

49. An available-for-sale debt security is purchased at a discount. The entry to record the
amortization of the discount includes a

a. Debit to Available-for-Sale Securities.

b. Debit to the discount account.
c. Debit to Interest Revenue.
d. None of these.
n.
50. APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt
security, the

a. Effective-interest method of allocation must be used.

b. Straight-line method of allocation must be used.
c. Effective-interest method of allocation should be used but other methods can be
applied if there is no material difference in the results obtained.
d. par value method must be used and therefore no allocation is necessary.
o.
51. Which of the following is correct about the effective-interest method of amortization?

a. The effective interest method applied to investments in debt securities is different from
that applied to bonds payable.
b. Amortization of a discount decreases from period to period.
c. Amortization of a premium decreases from period to period.
d. The effective-interest method produces a constant rate of return on the book value
of the investment from period to period.
p.
52. When investments in debt securities are purchased between interest payment dates, preferably
the

a. Securities account should include accrued interest.

b. Accrued interest is debited to Interest Expense.
c. Accrued interest is debited to Interest Revenue.
d. Accrued interest is debited to Interest Receivable.
q.
53. Which of the following is not generally correct about recording a sale of a debt security before
maturity date?

a. Accrued interest will be received by the seller even though it is not an interest payment
date.
b. An entry must be made to amortize a discount to the date of sale.
c. The entry to amortize a premium to the date of sale includes a credit to the
Premium on Investments in Debt Securities.
d. A gain or loss on the sale is not extraordinary.
r.

s.
 54. When a company has acquired a "passive interest" in another corporation, the acquiring company
should account for the investment

a. By using the equity method.

b. By using the fair value method.
c. By using the effective interest method.
d. By consolidation.
t.

55. Santo Corporation declares and distributes a cash dividend that is a result of current earnings.
How will the receipt of those dividends affect the investment account of the investor under each of
the following accounting methods?

u. Fair Value Method Equity Method

a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect
v.
56. An investor has a long-term investment in stocks. Regular cash dividends received by the
investor are recorded as

w. Fair Value Method Equity Method

a. Income Income
b. A reduction of the investment A reduction of the investment
c. Income A reduction of the investment
d. A reduction of the investment Income
x.
57. 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.
b. The investor should use the equity method to account for its investment unless
circum-stances indicate that it is unable to exercise "significant influence" over the
investee.
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 always use the fair value method to account for its investment.
y.
58. If the parent company owns 90% of the subsidiary company's outstanding common stock, the
company should generally account for the income of the subsidiary under the

a. Cost method.
b. Fair value method.
c. Divesture method.
d. Equity method.
z.
59. Koehn Corporation accounts for its investment in the common stock of Sells Company under the
equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells
as

a. A reduction of the carrying value of the investment.

b. Additional paid-in capital.
c. An addition to the carrying value of the investment.
d. Dividend income.
aa.
60. 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.
ab.
61. Judd, Inc. owns 35% of Cosby Corporation. During the calendar year 2010, Cosby had net
earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these
transactions using the fair value method rather than the equity method of accounting. What effect
would this have on the investment account, net income, and retained earnings, respectively?

a. Understate, overstate, overstate

b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
ac.
62. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000.
After applying the equity method, the Investment in Club Co. account has a balance of
$3,040,000. At December 31, 2011 the fair value of the investment is $3,120,000. Which of the
following values is acceptable for Dublin to use in its balance sheet at December 31, 2011?
I. $3,000,000
II. $3,040,000
III. $3,120,000

a. I, II, or III.
b. I or II only.
c. II only.
d. II or III only.
ad.
63. The fair value option allows a company to

a. Value its own liabilities at fair value.

b. Record income when the fair value of its bonds increases.
c. Report most financial instruments at fair value by recording gains and losses as a
separate component of stockholders’ equity.
d. All of the above are true of the fair value option.
ae.
64. Impairments are

a. Based on discounted cash flows for securities.

b. Recognized as a realized loss if the impairment is judged to be temporary.
c. Based on fair value for available-for-sale investments and on negotiated values for held-
to-maturity investments.
d. Evaluated at each reporting date for every investment.
af.
65. A reclassification adjustment is reported in the

a. Income statement as an Other Revenue or Expense.

b. Stockholders’ equity section of the balance sheet.
c. Statement of comprehensive income as other comprehensive income.
d. Statement of stockholders’ equity.
ag.
 66. When an investment in a held-to-maturity security is transferred to an available-for-sale security,
the carrying value assigned to the available-for-sale security should be

a. Its original cost.

b. Its fair value at the date of the transfer.
c. The lower of its original cost or its fair value at the date of the transfer.
d. The higher of its original cost or its fair value at the date of the transfer.
ah.
67. When an investment in an available-for-sale security is transferred to trading because the
company anticipates selling the stock in the near future, the carrying value assigned to the
investment upon entering it in the trading portfolio should be

a. Its original cost.

b. Its fair value at the date of the transfer.
c. The higher of its original cost or its fair value at the date of the transfer.
d. The lower of its original cost or its fair value at the date of the transfer.
ai.
68. A debt security is transferred from one category to another. Generally acceptable accounting
principles require that for this particular reclassification (1) the security be transferred at fair value
at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried
as a separate component of stockholders' equity be amortized over the remaining life of the
security. What type of transfer is being described?

a. Transfer from trading to available-for-sale

b. Transfer from available-for-sale to trading
c. Transfer from held-to-maturity to available-for-sale
d. Transfer from available-for-sale to held-to-maturity
aj.
69. “Gains trading” or “cherry picking” involves

a. moving securities whose value has decreased since acquisition from available-for-sale to
held-to-maturity in order to avoid reporting losses.
b. reporting investment securities at fair value but liabilities at amortized cost.
c. selling securities whose value has increased since acquisition while holding those
whose value has decreased since acquisition.
d. All of the above are considered methods of “gains trading” or “cherry picking.”
ak.
70. Transfers between categories

a. Result in companies omitting recognition of fair value in the year of the transfer.
b. Are accounted for at fair value for all transfers.
c. Are considered unrealized and unrecognized if transferred out of held-to-maturity into
trading.
d. Will always result in an impact on net income.
al.
71. Companies that attempt to exploit inefficiencies in various derivative markets by attempting to
lock in profits by simultaneously entering into transactions in two or more markets are called

a. Arbitrageurs.
b. Gamblers.
c. Hedgers.
d. Speculators.
am.
72. All of the following statements regarding accounting for derivatives are correct except that
 a. They should be recognized in the financial statements as assets and liabilities.
b. They should be reported at fair value.
c. Gains and losses resulting from speculation should be deferred.
d. Gains and losses resulting from hedge transactions are reported in different ways,
depending upon the type of hedge.
an.
73. All of the following are characteristics of a derivative financial instrument except the instrument

a. Have one or more underlings and an identified payment provision.

b. Requires a large investment at the inception of the contract.
c. Requires or permits net settlement.
d. All of these are characteristics.
ao.
74. Which of the following are considered equity securities?
ap. I. Convertible debt.
aq. II. Redeemable preferred stock.
ar. III. Call or put options.

a. I and II only.
b. I and III only.
c. II only.
d. III only.
as.
75. The accounting for fair value hedges records the derivative at its
a. amortized cost.
b. carrying value.
c. fair value.
d. historical cost.
at.
76. Gains or losses on cash flow hedges are

a. Ignored completely.
b. Recorded in equity, as part of other comprehensive income.
c. Reported directly in net income.
d. Reported directly in retained earnings.
au.
77. An option to convert a convertible bond into shares of common stock is a(n)

a. Embedded derivative.
b. Host security.
c. Hybrid security.
d. Fair value hedge.
av.
78. All of the following are requirements for disclosures related to financial instruments except
a. Disclosing the fair value and related carrying value of the instruments.
b. Distinguishing between financial instruments held or issued for purposes other than
trading.
c. Combining or netting the fair value of separate financial instruments.
d. Displaying as a separate classification of other comprehensive income the net gain/loss
on derivative instruments designated in cash flow hedges.
aw.
79. A variable-interest entity has

a. Insufficient equity investment at risk.

b. Stockholders who have decision-making rights.
 c. Stockholders who absorb the losses or receive the benefits of a normal stockholder.
d. All of the above are characteristics of a variable-interest entity.
ax.
80. Under U.S. GAAP, which of the following models may be used to determine if an investment is
consolidated?

ay. Risk-and-reward model Voting-interest approach

a. Yes No
b. No Yes
c. No No
d. Yes Yes
az.
ba. (Source: Test bank for Intermediate Accounting, Thirteenth Edition: Dr. M. D. Chase )

bb.

bc.
 bd. Problems:

1. In January 2008, Cameron Company established a sinking fund in connection with its issue of bonds
due in 2012. A bank was appointed as independent trustee of the fund. On December 31, 2008, the
trustee held P364, 000 cash in the sinking fund account representing P300, 000 in annual deposits
to the fund, and P64, 000 of interest earned on those deposits. How should the sinking fund be
reported in Cameron’s statement of financial position at December 31, 2008? (PHILCPA Adapted)
be.

a. No part of the sinking fund should appear in Cameron’s statement of financial position.
b. P64,000 should appear as a current asset
c. P364,000 should appear as a current asset
d. P364,000 should appear as a noncurrent asset
bf.
bg. Solution 1 Answer d

bh. The annual deposits to the fund and the interest earned on those deposits should form part of the
sinking fund to be classified as noncurrent asset.

bi.

2. The following information relates to noncurrent investments to Fall Company placed in trust as
required by the underwriter of its bonds:
bj.
bk. Bond sinking fund balance, January 1, 2008
4,500,000
bl. 2008 additional investment
900,000
bm. Dividends on investments
150,000
bn. Interest revenue
300,000
bo. Administration costs 50,000
bp. Carrying amount of bonds payable
8,000,000
bq.
br. What amount should Fall report on December 31, 2008 related to its noncurrent
investment for bond sinking fund requirements? (AICPA Adapted)
bs.
a. 5,850,000 c. 5,750,000
b. 5,800,000 d. 5,400,000
e.
f. Solution 2 Answer b
g. Sinking fund balance – 1/1/2008 4,500,000
h. Add: 2008 additional investment 900,000
i. Dividends on investment 150,000
j. Interest revenue 300,000 1,350,000
k. Total 5,850,000
l. Less: Administration costs 50,000
m. Sinking fund balance – 12/31/2008 5,800,000
n.
o.
3. On March 15, 2008, Ashe Company adopted a plan to accumulate P5, 000,000 by September 1,
2012. Ashe plans to make four equal annual deposits to a fund that will earn interest at 10%
compounded annually. Ashe made the first deposit on September 1, 2008. Future value factors are as
follows:
 p.
q. Future value of 1 at 10% for 4 periods 1.46
r. Future value of an ordinary annuity of 1 at 10% for 4 periods 4.64
s. Future value of an annuity of 1 in advance at 10% for 4 periods 5.11
t.
u. Ashe should make four annual deposits (rounded) of: (AICPA Adapted)
v.
a. 1,250,000 c. 978,500
b. 1,077,500 d. 730,000
w.
x. Solution 3 Answer c
y. Annual deposit (5,000,000/5.11) 978,500 (rounded)
z.
aa. The annual deposit is computed by dividing the amount of the fund to be accumulated b the
future value factor. In this case, the future value factor of an annuity in advance is used because
the annual deposit is made at the beginning of each year of the four-year period.
ab.
ac.
4. On January 1, 2008, Beal Company adopted a plan to accumulate funds for a new plant building to
be erected beginning July 1, 2013, at an estimated cost of P6,000,000. Beal intends to make five
equal annual deposits in a fund that will earn interest at 8% compounded annually. The first deposit is
made on July 1, 2008. Present value and future value factors are as follows:
ad.
ae. Present value of 1 at 8% for 5 periods 0.68
af. Present value of 1 at 7% for 6 periods 0.63
ag. Future value of an ordinary annuity of 1 at 7% for 5 periods 5.87
ah. Future value of an annuity of 1 in advance at 7% for 5 periods 6.34
ai.
aj. Beal should make five annual deposits (rounded) of
ak.
a. 1,022,150 c. 946,400
b. 816,000 d. 756,000
e.
f.
g. Solution 4 Answer c
h. Annual deposit (6,000,000/6.34) 946,400 (rounded)
i.
j. Again, the annual deposit is made at the beginning of each year of the five-year period. Thus,
the future value of an annuity of 1 in advance is used.
k.
5. On January 1, 2008, Mandaue Company adopted a plan to accumulate P5,000,000 by January 1,
2013. Mandaue plans to make 5 equal annual deposits that will earn interest at 9% compounded
annually. Mandaue made the first deposit on December 31, 2008. The future value of an ordinary
annuity of 1 at 9% for 5 periods is 5.98, and the 6.52. What amount must be deposited annually at the
compound interest to accumulate the desired amount of P5,000,000.

a. 766,871 c. 664,894
b. 836,120 d. 609,756
e.
f.
g. Solution 19-5 Answer b
h. Annual deposit (5,000,000/5.98) 836,120
i.
j. The future value of an ordinary annuity of 1 is used because the annual deposit is made at the
end of each year of the 5-year period.
 k.
l.
6. Cebu Company made an investment of P5,000,000 at 10% per annum compounded annually for 6
years. What is the amount of the investment on the date of maturity? Round off future value factor to
two decimal places.

a. 8,850,000 c. 9,750,000
b. 8,050,000 d. 5,500,000
e.
f.
g. Solution 6 Answer a
h.
i. Principal amount 5,000,000
j. Multiply by future value of 1 for 6 periods at 10% 1.77
k.
l. Future value at maturity 8,850,000
m.
n.
7. Mactan Company made investment for 5 years at 12% per annum compounded semiannually to
equal P7,160,000 on the date of maturity. What amount must be deposited now at the compound
interest to provide the desired sum? Round off future value factor to two decimal places.

a. 4,000,000 c. 4,236,680
b. 4,068,180 d. 3,768,420
e.
f. Solution 7 Answer a
g. Future value at maturity 7,160,000
h. Divide by future value of 1 for 10 periods at 6% 1.79
i. Initial investment 4,000,000
j.
k. The annual interest of 12% is compounded semiannually for 5 years. Therefore, there are 10
interest periods at 6%.
l.
m.
8. Ball Company purchased a P1, 000,000 ordinary life insurance policy on its president. The policy
year and Ball’s accounting year coincide. Additional data are available for the year ended December
31, 2008:
n.
o. Cash surrender value, January 1 43,500
p. Cash surrender value, December 31 54,000
q. Annual advance premium paid January 1 20,000
r. Dividend received July 1 3,000
s.
t. Ball Company is the beneficiary under the life insurance policy.
u. How much should Ball report as life insurance expense for 2008?
v.
a. 6,500 c. 17,000
b. 9,500 d. 20,000
e.
f. Solution 8 Answer a
g. Annual premium paid 20,000
h. Less: Increase in cash surrender value
i. (54,000 – 43,500) 10,500
j. Dividend received 3,000 13,500
k. Life insurance expense 6,500
 l.
m. The dividend received is not considered an income but a reduction of life insurance expense.
n.
o.
9. Chain Company purchased a P1,000,000 life insurance policy on its president, of which Chain is the
beneficiary. Information regarding the policy for the year ended December 31, 2008 follows:
p.
q. Cash surrender value, January 1
87,000
r. Cash surrender value, December 31
108,000
s. Annual advance premium paid January 1 40,000
t.
u. During 2008, dividend of P6,000 was applied to increase the cash surrender value of the policy.
What amount should Chain report as life insurance expense for 2008?
v.
a. 40,000 c. 19,000
b. 25,000 d. 13,000
10.

11. Solution 9 Answer c

12. Premium paid 40,000
13. Less: Increase in cash surrender value
14. (108,000 – 87,000) 21,000
15. Life insurance expense 19,000
16.
17. The dividend of P6,000 is not deducted anymore because it is already part of the increase in cash
surrender value.
18.

19. Slovenia Company insured the life of its president for P2, 000,000, the company being the beneficiary
of an ordinary life insurance policy. The annual premium is P80, 000 and the policy is dated January
1, 2005. The cash surrender values are:
20.
21. December 31, 2007 15,000
22. December 31, 2008 19,000
23.
24. The company follows the calendar year as its fiscal period. The president dies on October 1,
2008 and the policy is settled on December 31, 2008.

25. Slovenia Company should report gain on life insurance settlement in its 2008 income statement
at
26.
a. 1,962,000 c. 1,961,000
b. 2,000,000 d. 1,981,000
27.

28. Solution 10 - Answer a

29. Cash surrender value – 12/31/2007 15,000
30. Increase in CSV from January 1 to October 1, 2008
31. (4,000 x 9/12) 3,000
32. Cash surrender value – October 1, 2008 18,000
33.
34. Face of policy 2,000,000
35. Case surrender value ( 18,000)
36. Unexpired premium (80,000 x 3/12) ( 20,000)
 37.
38. Gain on life insurance settlement 1,962,000
39.

40. Slovenia Company should report life insurance expense for 2008 at
41.
a. 80,000 c. 77,000
b. 60,000 d. 57,000
42.

43. Solution 11 Answer d

44. Annual premium paid on 1/1/2008 80,000
45. Unexpired premium on 10/1/2008 (20,000)
46. Increase in CSV from January 1 to October 1, 2008 ( 3,000)
47.
48. Life insurance expense for 2008 57,000
49.

50. Galore Company ventured into construction of a condominium in Makati which is rated as the largest
state-of-the-art structure. The entity’s board of directors decided that instead of selling the
condominium, the entity would hold this property for purposes of earning rentals by letting out space
to business executives in the area.

51.

52. The construction of the condominium was completed and the property was placed in
service on January 1, 2008. The cost of the construction was P50 million. The useful life of the
condominium is 25 years and its residual value is P5 million. And independent valuation expert
provided the following fair value at each subsequent year-end:
53.
54. December 31, 2008 55 million
55. December 31, 2009 53 million
56. December 31, 2010 60 million
57.
58. Under the cost model, Galore Company should report depreciation of investment property for
2008 at
a. 1,800,000 c. 2,200,000
b. 2,000,000 d. 0
e.

f. Solution 12 Answer a
g. Cost of investment property
50,000,000
h. Residual value
(5,000,000)
i. Depreciable amount
45,000,000
j.
k. Annual depreciation (45,000,000/25)
1,800,000
l.

59. Under the fair value model, Galore Company should recognize gain from change in fair value in
2008 at
a. 5,000,000 b. 3,000,000
 c. 7,000,000 d. 0
60.

61. Solution 13 Answer a

62. Fair value – 12/31/2008 55,000,000
63. Cost – 1/1/2008 50,000,000
64.
65. Gain from change in fair value in 2008 5,000,000
66.
67. The entry to recognize the gain on December 31, 2008 is:
68.
69. Investment property 5,000,000
70. Gain from change in fair value 5,000,000
71.
72. Fair value – 12/31/2009 53,000,000
73. Carrying value – 12/31/2008 55,000,000
74.
75. Loss from change in fair value in 2009 ( 2,000,000)
76.
77. The entry to recognize the loss on December 31, 2009 is:
78. Loss from change in fair value 2,000,000
79. Investment property 2,000,000
80. Fair value – 12/31/2010 60,000,000
81. Carrying value – 12/31/2009 53,000,000
82.
83. Gain from change in fair value in 2010 7,000,000
84.
85. The entry to recognize the gain on December 31, 2010 is:
86. Investment property 7,000,000
87. Gain from change in fair value 7,000,000
88.
89. Note that if the investment property is accounted for under the fair value model, no depreciation
is recognized.
90.

91. 14. Eragon Company and its subsidiaries own the following properties that are accounted for in
accordance with international accounting standards:
92.
93. Land held by Eragon for undetermined use 5,000,000
94. A vacant building owned by Eragon and to be
95. Leased out under an operating lease 3,000,000
96. Property held by a subsidiary of Eragon, a real
97. Estate firm, in the ordinary course of business 2,000,000
98. Property held by Eragon for use in production 4,000,000
99. Building owned by a subsidiary of Eragon and
100. for which the subsidiary provides security
101. and maintenance services to the lessees
1,500,000
102. Land leased by Eragon to a subsidiary under an
103. operating lease
2,500,000
104. Property under construction for use as investment
6,000,000
105. Land held for future factory site
3,500,000
106. Machinery leased out by Eragon to an unrelated
 107. party under an operating lease
1,000,000
108.
109. What is the total investment property that should be sown in the consolidated statement
of financial position of the parent and its subsidiaries?

a. 12,000,000 c. 10,500,000
b. 15,500,000 d. 9,500,000
e.

f. Solution 14 Answer d
g.
h. Land for the undetermined use 5,000,000
i. Vacant building to be leased out under an operating lease 3,000,000
j. Building owned and for which the subsidiary provides
k. Security and maintenance services to the lesses 1,500,000
l.
m. Total investment property 9,500,000
n.
o.
p. The property held by a subsidiary in the ordinary course of business is included in inventory.
q.
r. The property held for use in production is owner-occupied property and therefore part of
property, plant, and equipment.
s.
t. The land leased by the parent to the subsidiary under an operating lease is owner-occupied
property for purposes of consolidated financial statements. However, from the perspective of
separate financial statements of the parent, the land is an investment property.
u.
v. The property under construction for use as investment property is considered owner-occupied
property until the completion of the construction. Upon completion, the building becomes
investment property.
w. The land held for future factory site is owner-occupied property and therefore included in property,
plant and supplement.
x.
y. The machinery leased out to an unrelated part is owner-occupied property because investment
property includes only land and building and not movable property, like machinery.
z.

15. The following accounts appear on the adjusted trial balance of Grand Company on December 31,
2008:

aa.
ab. Petty cash fund 10,000
ac. Payroll fund 100,000
ad. Sinking fund cash 500,000
ae. Sinking fund securities 1,000,000
af. Accrued interest receivable – sinking fund securities 50,000
ag. Plant expansion fund 600,000
ah. Cash surrender value 150,000
ai. Land held for capital appreciation 3,000,000
aj. Advances to subsidiary 200,000
ak. Investment in joint venture 2,000,000
al.
am. How much should be reported as noncurrent investments on December 31, 2008?
an.
a. 7,500,000 c. 7,450,000
b. 4,500,000 d. 2,300,000
e.

f. Solution 19-13 Answer a

g.
h. All accounts are noncurrent investments except the petty cash fund and payroll fund.
i.

j. (Source: Practical Accounting 1 2009 edition; Conrado T Valix, BSC, LLB)