Intermediate Accounting Part 1

Second long quiz

SY 2020-2021 (2nd Semester)

THEORIES

True/False (10 items):

1. Financial instrument is defined by PAS 32 as any contract that gives rise to both a financial asset
of one entity and a financial liability or equity instrument of another entity.

True

2. An entity may make an irrevocable election to present in other comprehensive income

subsequent changes in fair value of an investment in equity instrument that is held for trading.

False

3. On derecognition of an investment presented at other comprehensive income, the amount of any

cumulative unrealized gain/loss shall be reverted to the investment account.

False

4. If the investment is in preference shares, the equity method is not appropriate regardless of the
percentage of ownership because the preference share is a nonvoting equity.

True

5. If the excess of cost over fair value of investment is attributable to undervaluation of depreciable
asset, it is only amortized when the asset is ultimately sold or disposed of.

False

6. PAS 28 provides that the excess of the investor’s share of the net fair value of the associate’s
identifiable assets and liabilities over the cost of the investment is included as income in the
determination of the investor’s share of the associate’s profit or loss in the period in which the
investment is acquired.

True

7. On the date the significant influence is lost, the investor shall measure any retained investment in
associate at its carrying amount.

False

8. When using equity method, any dividends received shall be deducted from the investment
account based on the percentage of holdings.

True
9. Financial assets measured at amortized cost could be either a debt instrument or an equity
instrument.

False

10. Shares received in lieu of cash dividend are recorded as income at fair value of the shares
received.

True
Multiple Choices (30 items):

1. An impairment loss is the excess of the carrying amount of the debt investment over
a. Expected cash flows
b. Present value of the expected cash flows
c. Contractual cash flows
d. Present value of the contractual cash flows

2. An investor that owns 10% of the ordinary shares has the right to
a. Be paid 10% of the investee’s profit in cash each year
b. Receive dividend equal to 10% of the par each year
c. Receive dividend equal to 10% of the total dividend paid by the investee for
the year to shareholders
d. Keep investee from issuing any new shares unless the investor is willing to buy 10% of
the new shares

3. The irrevocable election to present subsequent changes in fair value in other comprehensive
income is applicable only to
a. Investment in equity instruments that is not held for trading
b. Investment in equity instrument that is held for trading
c. Financial asset measured at amortized cost
d. Financial asset measured at fair value

4. A financial asset
a. Must be classified as noncurrent asset
b. Is a contractual right to receive cash or another financial asset from another
entity
c. Is a contractual right to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavorable to the entity
d. Is a contractual right to receive cash or any asset from another entity

5. In which of the following circumstances is derecognition of a financial asset not appropriate?

a. The contractual rights to the cash flows of the financial asset have expired
b. All the risks and rewards of ownership of the transferred asset have been transferred
c. The entity has retained substantially all risks and rewards of ownership of the
transferred asset
d. The entity has lost control of the transferred asset

6. Financial assets include all of the following, except

a. Prepaid expenses
b. Cash in bank
c. Trade accounts receivable
d. Loans receivable

7. What is the primary accounting treatment when the financial statements of an associate are not
prepared as of the same date as the financial statements of the investor?
a. The associate shall prepare financial statements at the same date as that of
the investor
b. The financial statements of the associate prepared up to a different date would be used
c. Any major transactions during the time gap of the financial statements shall be
accounted for
d. As long as the gap is not greater than three months, there is no problem.
8. When an investor uses the equity method to account for investment in ordinary shares, the
investment account is increased when the investor recognizes
a. A proportionate interest in the net income of the investee
b. A cash dividend received from the investee
c. Periodic amortization of the goodwill
d. Depreciation related to the excess of market value over carrying amount of the investee’s
depreciable assets at the date of purchase

9. The excess of 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. Included in other comprehensive income
d. A deferred gain

10. When an investor uses the fair value method to account for the investment in ordinary shares,
cash dividends received by the investor from the investee should be recorded as
a. Dividend income
b. An addition to the investor’s share of the investee’s profit
c. A deduction from investor’s share of profit of the investee
d. A deduction from investment account
PROBLEMS

Short Problems (7 items):

1. On 2020, Estonia Company purchased marketable equity securities to be measured at fair value
through OCI. On December 31, 2020, the balance in the unrealized loss on these securities was
P200,000. There were no security transactions during 2021. Pertinent data on December 31,
2021 are as follows: (1) Security A at P2,100,000 cost and P1,700,000 market value; (2)
Security B at P1,850,000 cost and P2,100,000 market value; and (3) Security C at P1,050,000
cost and P900,000 market value. In the statement of changes in equity for 2021, what amount
should be included as cumulative unrealized loss as component of OCI?
a. 500,000
b. 300,000
c. 200,000
d. 0

MV 4,700,000
-Cost 5,000,000
Cumulative loss 300,000

2. Slovakia Company invested in shares of another entity: (1) on 2018, 20,000 shares costing
P2,000,000; and (2) on 2019, additional 40,000 shares at P3,500,000.

In 2020, the entity received 60,000 rights to purchase one share at P80. Five rights are required
to purchase the share. At issue date, rights had a market value of P5 each.

The entity used rights to purchase 10,000 additional shares of the investee and allowed the
rights not exercised to lapse.

What amount was debited in investment account for the purchase of the additional new shares?
a. 1,100,000
b. 1,050,000
c. 800,000
d. 900,000

Share rights 300,000

Investment in shares 300,000
(60,000 x 5)

Investment in shares 1,050,000

Cash (10,000 x 80) 800,000
Share right (10,000 x 5 x 5) 250,000

Loss on share rights 50,000

Share rights 50,000
(300,000-250,000)

3. On April 30, 2020, France Company purchased 30,000 shares of Belgium Company’s 100,000
outstanding ordinary shares for P200 per share.

On December 15, 2020, Belgium Company paid P1,000,000 in dividends. Belgium Company’s net
income for 2020 was P5,000,000 earned evenly throughout the year.
 What amount of income from the investment should be reported for the current year?
a. 1,500,000
b. 1,125,000
c. 750,000
d. 1,000,000

5M x (30K/100k) x 8/12

4. Tobago Company provided the following portfolio of equity investments measured at fair value
through OCI: (1) Aggregate cost on December 31, 2019 = P1,700,000; (2) Unrealized gain on
December 31, 2019 = P40,000; (3) Unrealized loss on December 31, 2019 = P260,000; and (4)
Net realized gain during 2019 = P300,000.

On January 1, 2019, the entity reported and unrealized loss of P15,000 as a component of OCI.

In 2019 statement of changes in equity, what cumulative amount should be reported as

unrealized loss on these securities?
a. 260,000
b. 220,000
c. 205,000
d. 0

Unrealized loss 260,000

Unrealized gain 40,000
Cumulative net UNrealized loss (Dec 31, 2019) 220,000
Unrealized loss (January 1, 2019) 15,000
Increase in unrealized loss 205,000

5. Norway Company received dividends from share investments during the current year:

Ø A share dividend of 400 shares from Tajikistan Company when the market price of
Tajikistan’s share was P20. Norway Company owns less than 1% of Tajikistan’s share capital.
Ø A cash dividend of P150,000 from Latvia Company in which Norway Company owns a 25%
interest. A majority of Latvia’s directors are also directors of Norway Company.

What amount of dividend revenue should be reported for the current year?
a. 230,000
b. 150,000
c. 80,000
d. 0

6. At the beginning of current year, Japan Company purchased 10% of Korea Company’s
outstanding ordinary shares for P4,000,000.

Japan Company is the largest single shareholder in Korea and Japan’s officers are a majority of
Korea’s board of directors.

The investee reported net income of P5,000,000 for the current year and paid cash dividend of
P1,500,000.

What amount should be reported as investment in Korea Company at year-end?

a. 4,500,000
 b. 4,350,000
c. 4,000,000
d. 3,850,000

Acquisition 4,000,000
Share in net income (10%x5M) 500,000
Total 4,500,000

Share in cash dividend (10%x1.5M)

Carrying amount of investment

7. Brazil Company purchased 10% of China Company’s 100,000 outstanding ordinary shares on
January 1, 2019 for P500,000.

On December 31, 2019, Brazil Company purchased an additional 20,000 shares of China
Company for P1,500,000. China Company had not issued any additional shares during 2019.

The fair value of the 10% interest is P900,000 on December 31, 2019.

What is the carrying amount of the investment in associate on December 31, 2019?
a. 2,300,000
b. 2,000,000
c. 2,400,000
d. 2,900,000

FV of 10% interest 900,000

Cost of additional 1,500,000
CA 2,400,000

Long Problems (1 item):

1. Problem #1 (3 questions) – At the beginning of current year, Philippines Company acquired a 30%
interest in an investee at a cost of P3,400,000.

The equity of the investee on the date of acquisition was P6,000,000, consisting of P4,000,000
share capital and P2,000,000 retained earnings.

All identifiable assets and liabilities of the investee were recorded at fair value except for an
equipment with a fair value of P3,000,000 greater than carrying amount. The remaining useful
life of the equipment is 5 years.

At yearend, Philippines Company had inventory costing P2,000,000 on hand which had been
purchased from the investee. A profit of P600,000 had been made on the sale.

During the current year, the investee reported net income of P4,000,000 and paid dividend of
P1,500,000.
 The equity of the investee at yearend showed the following: (1) Share capital = 4,000,000; (2)
Retained earnings = 3,500,000; (3) Retained earnings appropriated = P1,000,000; (4)
Revaluation surplus = P2,000,000.

The revaluation surplus arose from a revaluation of land made at the end of the current year.

The retained earnings appropriate arose from a transfer of unappropriated retained earnings to
retained earnings appropriated for contingencies.

What is the implied goodwill from the acquisition of the investment?

a. 1,400,000
b. 700,000
c. 500,000
d. 0

Using the same details in Problem #1, what amount should be reported as investment income for
the current year?
a. 1,200,000
b. 1,020,000
c. 840,000
d. 750,000

Using the same details in Problem #1, what is the carrying amount of the investment in associate
at year-end?
a. 3,200,000
b. 3,690,000
c. 4,190,000
d. 4,390,000

See 38-10, Page 456 of P1

Theories T/F 10
Theories MC 10
Short probs MC 14
Long probs MC 6
Total points. 40

Bonus points = 0