162 Chapter ee ee Chapter 6 Financial Assets Learning Objectives 1. Define a financial asset and give examples. 2. Account for cash and cash equivalents. 3. Account for receivables. 4, Account for investments. Introduction Financial instrument - is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. (PPSAS 28.9) Financial asset - is any asset that is: a. b. a Cash; An equity instrument of another entity; A contractual right to receive cash or another financial asset from another entity; ‘A contractual right to exchange financial instruments with another entity under conditions that are potentially favorable; or . A contract that will or may be settled in the entity’s own equity instruments. Financial liability - is any liability that is: a. b. A contractual obligation to deliver cash or another financial asset to another entity; A contractual obligation to exchange financial assets o financial liabilities with another entity under conditions that are potentially unfavorable to the entity; or A contract that will or may be settled in the entity's ow" equity instruments.Financial Assets 163 Equity instrument — is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. The issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial asset, a financial liability and an equity instrument. (GAM for NGAs, Chapter 7, Sec. 23) Example: Bank deposit is a financial instrument. It is a contract that gives rise to both a financial asset (i.e, Cash in bank) on the part of the depositor and a financial liability (i.e., Deposit liability) on the part of the bank. The depositor has a contractual right to withdraw his cash while the bank has a contractual obligation to deliver cash when the depositor withdraws. Cash is the most basic financial instrument because it is the medium of exchange and the basis of measurement of all financial statement elements. Initial Recognition A financial asset is recognized when an entity becomes a party to the contractual provisions of the instrument. (PPSAS 29.16) Initial Measurement Financial assets are initially measured at fair value plus transaction costs, except for financial assets at fair value through surplus or deficit whose transaction costs are expensed. Transaction costs are incremental costs that are directly attributable to the acquisition, issue, or disposal of a financial instrument, An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed the financial instrument. Transaction costs include: (a) fees and commissions paid to agents, advisers, brokers and dealers; (b)164 Chapter § levies by regulatory agencies and securities exchanges; and (c) transfer taxes and duties. Our succeeding discussions on financial assets are subdivided into the following: a. Cash and cash equivalents b. Receivables c. Investments d. Derivatives Cash and Cash Equivalents Cash ~ comprises cash on hand, cash in bank and cash treasury accounts. Adjustments for Unreleased Commercial Checks Unreleased checks are checks drawn but not yet given to the payees as of the end of the period. Unreleased checks are reverted back to cash as follows: Date] Cash in Bank, Local Currency-Current x Accounts Payable (or other liability account) x Unreleased checks are not physically cancelled. At the start of the following year, the adjusting entry above is reversed to recognize the availability of the checks for release. This procedure does not apply to the “Cash-Modified Disbursement System (MDS)” account because there is no actual cash with the Government Servicing Bank. Recall that any unused NCA is reverted back to the National Government, and therefore, the balance of the “Cash-Modified Disbursement System (MDS)" account is zeroed-out at the end of each period.Financial Assets . 5s Accounting for Cancelled Checks Checks ate cancelled when they become stale, voided or spoiled. A check is considered stale if it has been outstanding for over 6 months from its date. Replacement checks may be issued for cancelled checks that were already released to payees, upon submission of the cancelled checks to the Accounting Unit. Cancelled checks are reverted back to cash as follows: The cancelled check pertains to: Current year Prior period Cash-Modified Disbursement Accumulated Surplus/ System (MDS), Regular Xx (Deficit) xx Accounts payable xx Accounts payable xx To recognize the cancellation of To recognize the cancellation of stale/voided/spoiled MDS checks stale/voided/spoiled MDS checks in prior yr. For prior period MDS checks, the “Accumulated Surplus/(Deficit)” account is debited. This is because, again, the “Cash-Modified Disbursement System (MDS)” account is zeroed- out at the end of each period. For cancelled commercial checks, the “Cash in Bank-Local Currency, Current” account is debited for both current year ‘and prior period. If a replacement check is issued, the replacement check is recorded in the regular manner, i.e,, debit to accounts payable and credit to cash. Petty Cash Fund Petty Cash Fund (PCF) refers to the amount granted to duly designated Petty Cash Fund Custodian for payment of authorized Petty or miscellaneous expenses which cannot be conveniently Paid through checks or ADA. (GAM for NGAs, Chapter 6, Sec. 2)166 Chapter ¢ Guidelines: a. The Head of Agency shall approve the amount of PCF to be established, which shall be sufficient to defray recurring petty expenses for 1 month. b. The PCF Custodian shall be properly bonded whenever the established amount of PCF exceeds 5,000 (@ Bonded” means an insurance shall be taken on the custodian. In the eveny that the custodian misuses the funds, the entity can claim from the insurance company, and the insurance company in turn will go after the custodian, c. The PCF shall be maintained using the Imprest System. At all times, total cash on hand and unreplenished expenses shall be equal to the PCF ledger balance. d. The PCF shall be kept separately from other advances or collections and shall not be used to pay for regular expenses, such as rentals, electricity, water, and the like. e. PCF payments shall not exceed 915,000 for each transaction, except when otherwise authorized by law or by the COA. Splitting of transactions to avoid exceeding the ceiling is prohibited. f. A canvass from at least 3 suppliers is required for purchases amounting to 1,000 and above, except for purchases made while on official travel. g. PCF disbursements shall be supported by properly accomplished and approved Petty Cash Vouchers, invoices, ORs, or other evidence of disbursements. h. Replenishment shall be made as soon as disbursements reach at least 75% or as needed. i. At the end of the year, the PCF Custodian shall submit all unreplenished Petty Cash Vouchers to the Accounting Unit for recording in the books of accounts. j. The unused balance of the PCF shall not be closed at year-end, It shall be closed only upon the termination, separation retirement or dismissal of the PCF Custodian, who in turn shall refund any balance to close his/her cash accountability.Financial Assets Illustration: 167 After careful estimates of recurring monthly petty expenses, the Head of Entity A approves the establishment of a 50,000 petty cash fund. {Date | Petty Cash Cash-Modified Disbursement System | (MDS), Regular To record the establishment of PCF 50,000 | 50,000 Just like the accounting by business entities, no journal entries are made as disbursements are made out of the PCF. Journal entries will be made when the PCF is (a) replenished or (b) adjusted at the end of the period for unreplenished expenses. A cash count of the PCF reveals the following: Coins and Currencies 12,500 Vouchers: Office Supplies Expenses 10,000 Fuel, Oil and Lubricants 15,000 Postage and Courier Expenses 8,000 Other Maintenance and Operating Expenses __ 4,500 __ 37,500 Total per count Accountability Shortage (Overage) Case 1: The PCF is replenished. Date | Office Supplies Expenses 10,000 Fuel, Oil and Lubricants 15,000 | Postage and Courier Expenses 8,000 | Other Maintenance and Operating Expenses | 4,509 Cash-Modified Disbursement System (MDS), Regular To record the replenishment of the PCFChapter 6 we Case 2: The PCF is not replenished. Date | Office Supplies Expenses 10,000 Fuel, Oil and Lubricants ° 15,000 Postage and Courier Expenses 8,000 Other Maintenance and Operating Expenses 4,500 Petty Cash 97,500 To adjust the!PCF for unreplenished disbursements Case 3: The PCF Custodian retires and the PCF is closed. Date | Cash-Collecting Officer 12,500 Petty Cash 12,500 To record the return of unused PCF upon retirement of the Petty Cash Custodian Accounting for Cash Shortage/Overage of Disbursing Officer The disbursing officer is liable for any cash shortage while any cash overage that he cannot satisfactorily explain to the auditor is forfeited in favor of the government. ° Relevant provision of law: “The failure of a public officer to have duly forthcoming any public funds or property with which he is chargeable, upon demand by any duly authorized. officer, shall be prima facie evidence that he has put such missing funds or property to personal use.” (Revised Penat Code. Art. 217) “Cash shortage Date | Due from Officers and Employees xx Advances for/to..(Appropriate account) x To recognize cash shortage of disbursing officer Date_| Cash — Collecting Officers x Due from Officers and Employees x To recognize restitution of cash shortageprmanciad Assets : 169 jute | Cash-Treasury/Agency Deposit, Regular [xx Cash ~ Collecting Officers i To recognize the remittance of restituted cash shortage to the BTr : Cash overage Date | Cash Collecting Officers ] | Miscellaneous Income “ To recognize forfeiture of cash ov disbursing officer | Cash-Treasury/Agency Deposit, Regular Xx Cash - Collecting Officers xx To recognize the remittance of forfeited cash overage to the BTr | rage of the Date Dishonored Checks A dishonored check is a check that is not accepted when presented for payment, e.g., a check returned by the bank because of lack of sufficient funds - ‘bounced’ check. The drawer of the dishonored check is liable for the amount of the check and all penalties resulting from the dishonor, without prejudice to his criminal liability for a ‘bounced’ check. Guidelines: a. When a check is dishonored, the Collecting Officer shall i, issue a Notice of Dishonored Checks to the drawer and any endorser; and ii. cancel the related OR. If the Collecting Officer fails to issue the notice, the dishonored check becomes his personal liability. The drawer and any endorser not given the notice will be relieved from any liability A check refused by the drawee bank when presented within 90 days from its date is a prima facie evidence that the drawer has knowledge about the insufficiency of his funds, unless the drawer pays the check in full or makes arrangement with thewoe drawee bank for the full payment of the check within 5 banking days after receiving the notice of the dishonor. d. A dishonored check shall be settled by payment in cash or certified check. The dishonored check shall not be returned to the payor unless he returns first the previous OR therefor. Journal entries a . Dishonored checks are recorded to the ‘Other receivables’ account as follows: > Collections remitted to BTr Current year Prior year (Other receivables XX ‘Other receivables xx Cash-Treasury/Agency Accumulated Surplus/(Deficit) xx Deposit, Regular xx To recognize the cancellation of To recognize the cancellation of | prior year's deposited collections due to current year's deposited collections due | dishonored checks to dishonored checks > Collections remitted to Authorized Government Depository Bank Current year Prior year Other receivables xx Other receivables xx Cash in Bank-Local Cash in Bank-Local Currency, Current Account _xx ney Currency, Current Account Bank Reconciliation A bank reconciliation statement is a report that is prepared for the purpose of bringing the balances of cash (a) per records and (b) per bank statement into agreement. A bank statement is a report issued bya bank which shows the credits and debits to the depositor’s account duri eriod, as well as the account's cumulative balance. ae ‘ pFinancial Assets v1 Guidelines: a. Bank reconciliations shall be prepared as internal control to ensure the correctness of cash records and as deterrent to fraud. The Chief Accountant or designated staff shall prepare separate bank reconciliations for each bank account maintained by the entity within 10 days from receipt of the monthly bank statement. The Adjusted Balance Method shall be used. Under this method, the unadjusted book and bank balances are brought to an adjusted balance that is reported on: the Statement of Financial Position. Bank reconciliations shall be prepared in 4 copies to be submitted within 20 days from receipt of bank statement to the following: COA Auditor, Head of Agency, Accounting Division, and Bank, if necessary. : A Journal Entry Voucher (JEV) shall be prepared to record any reconciling items. Cash Equivalents Cash Equivalents - are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (PPSAS 2.8) Only debt instruments acquired within 3 months before * their scheduled maturity date can qualify as cash equivalents. Receivables Receivables represent claims for cash or other assets from other entities. Examples: a. b, Accounts receivable - refers to amounts due from customers arising from regular trade and business transactions. Notes receivable — represents claims, usually with interest, for which a formal instrument of credit is issued as evidence of debt, such as promissory notes.172 d. Chapter 6 Chapter Loans receivable - used in the BTr-NG books to recognize loang extended by the National Government to Government Financial Institutions ‘GFls’ or GOCCs, covered by loan agreements, Other receivables, such as, interest receivable, due from employees/officers/ other NGAs, lease receivables, dividends receivable, and the like, ‘ (GAM for NGAs, Vol. 3) Receivables are initially measured at fair value plus transaction costs and subsequently measured at amortized cost. Investments Categories of Financial Assets For. purposes of subsequent measurement, financial assets are classified as follows: Financial asset at fair value through surplus or deficit — is one that is either: a. Held-for-trading, or b. Designated as at fair value through surplus or deficit on initial recognition. Any financial asset can be classified in this category if its fair value can be reliably measured. Held-to-maturity investments - are non-derivative financial assets with fixed or determinable payments and_ fixed maturity that an entity has the positive intention and ability to hold until maturity. Loans and receivables - are non-derivative financial assets with fixed or determinable payments and are not quoted in a active market.Financial Assets d. Available-for-sale financial assets — are non-derivative financial assets that are designated as available for sale or are not classifiable under the other categories (Q Summary of Measurements: __ Type of Examples Initial Subsequent Financial Asset Measurement | Measurement a. Financial > Investments Fair value Fair value; asset at fair | in quoted changes in fair value stocks or value are through bonds. recognized in surplus or surplus/deficit deficit b. Held-to- > Investments | Fair value plus | Amortized cost maturity ‘in bonds and transaction | (using the other debt costs effective interest securities to method) be held until maturity c. Loansand | > Accounts, Fair value plus | Amortized cost receivables Notes, Loans transaction (using the receivable costs effective interest method) d. Available- | > Investments | Fair value plus | Fair value; for-sale instocks or | transaction | changes in fair financial bonds not costs value are assets classified recognized in under (a) to equity (c) above. Investments in unquoted equity instruments whose fair value cannot be reliably measured are measured at cost.4 174 Chapter ¢ Mlustration 1: Initial measurement | Entity A acquires an investment for 100,000. Transaction costs amount to #10,000. Case 1: The investment is classified as Financial Asset Held for Trading. Date | Financial Assets Held for Trading, 100,000 Other Financial Charges 10,000 Cash in Bank-Local Currency, Bangko : Sentral ng Pilipinas 110,000 Case 2: The investment is classified as Held-to-maturity investments. Date | Investments in Treasury Bills-Local 110,000 Cash in Bank-Local Currency, Bangko Sentral ng Pilipinas 110,000 Case 3: The investment is classified as Available-for-sale assets. Date | Investments in Stocks (or Bonds) 110,000 Cash in Bank-Local Currency, Bangko Sentral ng Pilipinas 110,000 Illustration 2: Subsequent measurement Assume the investment in Illustration 1 is investment in stocks. The fair value at the end of the period is ®120,000. Case 1: The investment is classified as Financial Asset Held fot Trading. Date | Financial Assets Held for Trading 20,000 | Gain from Changes in Fair Value of Financial Instruments (120k - 100k) 20,000 Rimancial Assets . i 175 Case 2: The investment financial assets is classified as Available-for-sale ini - Investments in Stocks Unrealized G ain/(Loss) from Changes in | Fair Value of Financial Assets (20k - 110%) Interest income from debt instruments, other than those which are classified as financial asset at fair value through surplus or deficit, is recognized using the effective interest method. Therefore, if the investment in the illustration above in is in the form of bonds and is classified as available-for-sale financial assets, the unrealized gain (loss) would have been computed as the difference between the fair value at year-end and the carrying amount adjusted for the amortization of bond discount or premium: Only debt securities can be classified as held-to-maturity investments. Thus, this category is omitted in Illustration 2 above. Held-to-maturity investments are subsequently measured at amortized cost, and therefore, changes in fair value are ignored. Ilustration 3: Held-to-maturity investments Op January 1, 20x1, Entity A acquires 5-year, 5%, 1,000,000 face amount bonds for 957,876 and classifies them as held-to-maturity investments. The issuer pays annual interest every December 31. The effective interest rate is 6%. 1 | Investment in Bonds 957,876 Cash in Bank-Local Currency, Bangko | Sentral ng Pilipinas | To recognize investment in bonds 957,876176 Chapter ¢ Amortization Table: Interest Interest Date received income Amortization Present valye V1/x1 957,876 12(81/x1 50,000 57,473 7A73 965,349 12/31/x2 50,000 , 57,921 7,921 973,270 12/31/x3 50,000 58,396 8,396 981,666 42/31/x4 50,000 58,900 8,900 990,566 12/31)x5 50,000 59,434 9,434 1,000,009 2231/x1 | Cash in Bank-Local Currency, Bangko Sentral ng Pilipinas 50,000 Investment in Bonds 7473 Interest income 57,473 To recognize interest income Subsequent journal entries follow the same pattern. Variation: Available-for-sale financial assets Assume the bonds are classified as available-for-sale financial assets and the fair value at year-end is 1,010,000. The unrealized gain that is recognized in net assets would have been 44,651 (®1,010,000 fair value — ®965,349 carrying amount adjusted for discount amortization). The same amount of interest income would be recognized. Impairment of Financial Assets An entity shall assess at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. If any such evidence exists, the entity shall measure the amount of loss as the difference between the carrying amount of the asset and the Present value of estimated future cash flows discounted at the financial asset's originél effective interest rate. The carrying amount of the asset shall be reduced either directly or through the use of an allowance account. The amount of the loss shall be recognized in surplus deficit.Financial Assets 177 In case of Accounts Receivable, the Allowance for Impairment shall be provided in an amount based on collectability of receivable balances and evaluation of such factors as aging of accounts, collection experiences of the agency, expected loss experiences and identified doubtful accounts. (GAM for NGAs, Chapter 7, Sec. 10) Derecognition of Financial Assets Derecognition is the process of removing a previously recognized asset, liability or equity from the statement of financial position. A financial asset is derecognized when: a. The contractual rights to the cash flows from the financial asset expire or are waived; or b. The financial asset is transferred and the transfer qualifies for derecognition, such as when the risks and rewards of ownership and control of the financial asset are relinquished. The derecognition of financial assets is subject to the provisions of the State Audit Code of the Philippines (P.D. No. 1445) on the writing off of receivables and other policies issued by the COA. (GAM for NGAs, Chapter 7, Sec. 10) Illustration: Impairment and Derecognition Entity A, a government hospital, receives promissory notes from several patients amounting to #1,000,000. Pate | Notes Receivable 1,000,000 Hospital Fees 1,000,000 To recognize receipt of promissory notes At year-end, it was estimated that ®300,000 notes are impaired.178 Chapter 6 Impairment Loss-Loans and Receivables 300,000 Allowance for Impairment-Notes a0 Receivable 10,009 To recognize impairment of notes receivable A subsequent audit reveals that 100,000 of the impaired Notes cannot be collected anymore. The COA authorizes the derecognition (write-off) of these notes. Date | Allowance for Impairment-Notes Receivable | 100,000 Notes Receivable 100,000 To recognize the derecognition of notes receivable Derivatives A derivative is a financial instrument or other contract that derives its value from the changes in value of some other underlying asset or other instrument. Characteristics of a derivative a. Its value changes in response to the change in an underlying; b. It requires no initial net investment (or only a very minimal initial net investment); and c. Itis settled at a future date. An “underlying” is a specified price, rate, or other variable (e.g,, interest rate, security or commodity Price, foreign exchange rate, index of prices or rates, etc.), including a scheduled event (e.g., a payment under contract) that may or may not occur. Purpose of a derivative The very purpose of derivatives is risk management, Risk management is the process of identifying the desired level of risk, identifying the actual level of risk and altering the latter to equal the former. (GAM for NGAs, Chapter 7, Sec 19)Financial Assets 179 Hedging Hedging is a method of Offsetting a potential financial loss or the structuring of a transaction to reduce ri: ts isk involving financial instruments. Hedge accounting recognizes the offsetting effects on surplus or deficit of changes in the fair values of the hedging instrument and the hedged item. Hedging Relationships a. Fair value hedge - a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect surplus or deficit. b. Cash flow hedge ~ a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognized asset or liability (such as all or some future interest payments on variable rate debt) or.a highly probable forecast transaction and (ii) could affect surplus or deficit. c. Hedge of a net investment in a foreign operation. Components of a Hedging Relationship a. Hedging Instrument — a designated derivative or.a designated non-derivative financial asset or non-derivative financial liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of designated hedged item. b. Hedged Item - an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that (a) exposes that entity to risk of changes in fair value or future cash flows and (b) is designated as being hedged.180 Chapter 6 Chapter 6 Summary: right to receive cash ent of another entity, | instruments under ss: cash and cash debt and equity ° Financial asset is any asset that is: cash or or other financial asset, an equity instrum or contractual right to exchange financia’ potentially favorable condition. Example equivalents, receivables, investments 1 securities, and derivative assets. | © The Petty Cash Fund of a government entity is: - maintained using the imprest system. - sufficient to defray recurring petty expenses for 1 month. - used for disbursements not exceeding 15,000 per transaction. - replenished as soon as disbursements reach at least 75% or as needed. « A government entity prepares monthly bank reconciliations using the adjusted balance method. «Only debt instruments acquired 3 months or less before their scheduled maturity date can qualify as cash equivalents. « Receivables are initially measured at fair value plus transaction costs and subsequently measured at amortized cost. e For subsequent measurement purposes, a government entity classifies its financial assets into the following categories: (a) Financial asset at fair value through surplus or deficit; (b) Held-to-maturity investments; (c) Loans and receivables; and (d) Available-for-sale financial assets.Financial Assets 181 PROBLEMS PROBLEM 6-1: TRUE OR FALSE 1, According to the GAM for NGAs, all financial assets are initially measured at fair value. 2. According to the GAM for NGAs, government entities shall prepare bank reconciliations only at year-end or whenever the need arises. 3. Only debt instruments with remaining maturity of 3 months or less can qualify as cash equivalents. 4. The PCF of a government entity is replenished when disbursements reach at least 90%, or as needed. 5, No journal entry is prepared when a disbursement is made out of the petty cash fund. a A government entity established a 30,000 petty cash fund. The custodian must be bonded for at least ®5;000. N According to the GAM for NGAs, all financial assets shall be initially measured at fair value plus transaction costs. Transaction costs on financial assets classified under the held to maturity category are expensed outright. ~ 9. A derivative derives its value from the changes in value of a specified rate, price, event or some other variable. 10. Risk management is the process of identifying the desired level of risk, identifying the actual level of risk and altering the latter to equal the former.182 Chapter ¢ PROBLEM 6-2: MULTIPLE CHOICE 1. Which of the following is not considered a financial asset? a. Petty cash fund b. Investment in debt securities ¢. Accounts receivable . d. Prepaid assets A cash shortage of a government entity is most likely recorded asa a. debit to a receivable account b. debit to a cash shortage or overage account c. credit to miscellaneous income account d. credit to a cash shortage or overage account Dishonored checks are recorded by a government entity as a. Notes receivable c. Accounts receivable b. Other receivables d. Losses The entry to record the replenishment of a petty cash fund of a government entity is Expense accounts Xxx Cash-Modified Disbursement System (MDS), Regular Expense accounts Petty Cash Expense accounts Cash-Collecting Officers Expense accounts Cash-Treasury/Agency Deposit, Regular xx 200 20x XXX x00 Under this method of bank reconciliation statement preparation, the unadjusted book and bank balances a brought to an adjusted balance that is reported on the statement of financial position. a. Bank to Book Method c. Adjusted Balance Method b. Book to Bank Method d. All of these ailFinancial Assets 183 6. Which of the following may be paid through the petty cash fund of a government entity? a. Rent worth #12,000. b. Pantry supplies worth 15,000. c. Office supplies worth ®20,000. d. None of these. Entity A maintains a petty cash fund. At any given point of time, the cash on hand and the petty cash vouchers must b: equal to the ledger balance of the petty cash fund. If these are not equal, the difference is either shortage or overage. This system of handling petty cash fund is called a. Impress System c. Pretty Cash System b. Fluctuating Balance System —_d. Imprest System According to the GAM for NGAs, the establishment of a petty cash fund a, requires the approval of the Head of Agency. b. requires the approval of the Chief Accountant. c. requires the approval of the President of the Philippines. d. does not require any formal approval because petty cash funds are likely to be immaterial. The “Loans Receivable” account is most likely to be used in the books of accounts of which of the following government agencies? a. COA ce. BTr b. NIA d. All of these . Which of the following is not one of the characteristics of a derivative? a. It requires no notional amount (or only a very minimal notional amount). b. Its value changes in response to the change in an underlying.184 Chapter 6 ©. It requires no initial net investment (or only @ very minimal initial net investment). d. Itis settled at a future date. PROBLEM 6-3: MULTIPLE CHOICE 1. According to the GAM for NGAs, these refer to incremental] costs that are directly attributable to the acquisition, issue, or disposal of a financial instrument. a. Costs to sell c. Financial costs b. Transaction costs d. Variable costs 2. Which of the following is not one of the categories of financial assets under the GAM for NGAs? a. Held-to-maturity investments b. Loans and receivables c. Available-for-sale financial assets d. Financial asset through other comprehensive income 3. Entity A acquires an investment for #1,000,000. Transaction costs amount to 10,000. At year-end, the investment has a fair value of 900,000. If the investment is classified as financial asset through surplus or deficit, how much is the loss from the change in fair value? a. 100,000 c. 110,000 “b. 90,000 d.0 Use the following information for the next four questions On January 1, 20x1, Entity A acquires 10-year, 10%, ®2,000,000 face amount bonds for *1,456,792 and classifies them as held-to- maturity investments. Transaction costs on the acquisition amount to 125,919. The issuer pays annual interest every December 31. The effective interest rate is 14%. 4. The initial carrying amount of the investment on January |, 20x1 is |Financial Assets 185 a. 1,456,792 ¢. 1,582,711 b. 1,330,873 d. 2,000,000 The interest income in 20x1 is a. 221,580 c. 186,322 b. 203,951 d. 200,000 If the investment is classified as available for sale financial asset and the fair value at year-end is 1,800,000, how much is the gain (loss) from the change in fair value? a. (200,000) c. 195,709 b. (217,289) d. 238,869 If the investment is classified as available for sale financial asset, how much is the interest income in 20x1? a. 221,580 cc, 186,322 b. 203,951 d. 200,000 According to the GAM for NGAs, changes in fair value of investments classified as available for sale financial assets are a. recognized in surplus or deficit b. recognized in net assets c. not recognized d. aorb Entity A acquires an investment for *100,000 and incurs transaction costs of #10,000. At year-end, the fair value of the investment is ®80,000. Entity A recognizes a ®30,000 loss from the change in fair value. The investment would most likely to have been classified under which of the following categories of financial assets? a. Available-for-sale financial assets b. Financial asset through surplus or deficit c. Held-to-maturity investments d. Loans and receivables186 Chapter 5 10. Entity A acquires an investment for #100,000 and incur, transaction costs of #10,000. At year-end, the fair value of the investment is 120,000, However, the investment js appropriately reported in the year-end statement ot financial Position at a carrying amount of 106,382. The investment would most likely to have been classified under which of the following categories of financial assets? a. Available-for-sale financial assets b. Held-to-maturity investments c. Loans and receivables d. Cannot be determined due to insufficient information PROBLEM 6-4: FOR CLASSROOM DISCUSSION 1. According to the GAM for NGAs, a government entity's cash comprises all of the following except a. cash on hand c. cash equivalents b. cash in bank d. cash treasury accounts 2. Which of the following is excluded from the amount of cash that is reported in the statement of financial position of a government entity? a. unreleased checks drawn _c. undeposited collections b. cancelled checks drawn d. post-dated checks received 3. An unexplained cash overage of a government entity is recorded as a a. credit to a payable account b. debit to a cash shortage or overage account c. credit to miscellaneous income account d. credit to a cash shortage or overage account 4. All of the following are considered internal controls over cas except a. Requiring a cash custodian to be properly bonded. The amount of bond shall not be less than the accountability of the custodian,Financial Assets ; ee b. Preparing a bank reconciliation for each bank account maint ‘ained by a government entity. c oe _ estimates of recurring expenses _ before est al ishing an amount for a petty cash fund. Maintaining the petty cash fund under a Fluctuating al ance System wherein the total cash on hand and petty cash vouchers may or may not be equal to a fixed amount of petty cash fund at any given point of time. e. Requiring at least three bidders or canvasses before making purchases, 5. The per transaction threshold for petty cash disbursements of a government entity is ‘ a. 5,000 c. P15,000 b. 10,000 d. No limit; sky is the limit. 6. A government agency shall prepare a bank reconciliation for each bank account maintained. Bank reconciliations are prepared using the a. Bank to Book Method c. Adjusted Balance Method b. Book to Bank Method d. Any of these 7. If the adjusted balance of cash is less than the unadjusted balance per books and there are no other reconciling items or errors, the difference is most likely caused by a. Credit memo c. Deposits in transit b. Debit memo d. Outstanding checks 8. According to the GAM for NGAs, receivables are measured at Initial . Subsequent a, Fair value Amortized cost b. Fair value plus transaction costs Amortized cost c. Fair value minus transaction costs Amortized cost 4 Fair value Fair value188 Chapter ¢ Stor 9. The subsequent changes in the fair value of an LPESEB EO fig is classified as available for sale are recognized in a. surplus or deficit b. net assets or equity c. not recognized / d. any of these as an accounting policy choice 10. According to the GAM for NGAs, the very purpose of, derivatives is a. risk management c. risk incurrence b. speculation d.aorb