CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING] FAR 004P (22-23)

INTEGRATED TOPIC 1 – FINANCIAL ACCOUNTING AND

REPORTING
(Practice Set)

Investment in Equity Securities

I. Theories

1. If the equity securities are acquired for trading purposes, its appropriate classification shall be?
a. Investment in equity securities at fair value through profit or loss
b. Investment in equity securities at fair value through comprehensive income
c. Investment in associate
d. Investment in subsidiary

2. When a company has acquired a passive interest in another company, 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

3. Unrealized holding gains and losses which are taken to profit or loss are from securities that are
classified as:
a. Equity investments at fair value through profit or loss
b. Equity investments at fair value though other comprehensive income
c. Investment in associate
d. Amortized cost

4. An unrealized holding gain or loss on a company’s equity investments at fair value through other
comprehensive income should be reflected in the current year financial statement as:
a. Income or loss on the statement of comprehensive income
b. Other comprehensive income in the equity section of the statement of financial position
c. Direct adjustment to retained earnings
d. A disclosure in the notes to the financial statements

5. The cumulative unrealized gains and losses in other comprehensive income as a result of
measuring equity securities at fair value through other comprehensive income
a. Shall be reversed to profit or loss at the date the equity securities are disposed
b. Shall be reversed to profit or loss when there is an objective evidence of impairment
c. Shall not be reversed to profit or loss but may be transferred to another equity account
d. Shall be presented in OCI permanently

6. ABC Co. owns 15% of the ordinary shares of XYZ Corporation. Which of the following is correct?
a. ABC Co. has the right to receive dividends equal to 15% of the total par value of XYZ
Corporation’s ordinary shares outstanding
b. ABC Co. has the right to receive dividends equal to 15% of the total fair value of XYZ
Corporation’s ordinary shares outstanding as of date of declaration
c. ABC Co. has the right to receive dividends equal to 15% of the total dividends declared by
XYZ Corporation for the period
d. ABC Co. has the right to recognize investment income equal to 15% of XYZ Corporation’s
profit for the period
7. Which of the following is the proper recoding of shares received in lieu of cash dividends?
a. The shares received shall be recorded at fair value
b. The shares received shall be recorded at par value
c. The shares received shall be recorded at the amount cash dividends that would have been
received
d. The shares received shall be recorded by means of memorandum entry only

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 CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING]

8. What is the effect of split up on the investment account, number of shares held, and the carrying
value per share?
Investment account Number of shares Carrying value per share
a. No effect Increase Decrease
b. No effect Increase Increase
c. Increase Increase Decrease
d. Increase Increase Increase

9. Significant influence over another company is normally acquired when

a. The investor has ownership interest of less than 20% over another company
b. The investor has ownership interest between 20% - 50% over another company
c. The investor has ownership interest more than 20% but not exceeding 50% over another
company
d. The investor has ownership interest of more than 50% over another company

10. A company can acquire significant influence or control over another company if its ownership
interest is in the form of the following?
a. Ordinary shares
b. Preference shares
c. Both ordinary and preference shares
d. Debt securities

11. According to equity method, an investor recognizes its share of earnings in the period which
a. The investee declares dividends
b. The investee pays dividends
c. The investee reports its earnings for the period
d. The investor disposes the investment in its associate

12. IFRS does not require the equity method to be applied when the associate has been acquired
and held with a view to its disposal within a certain time period. What is the period within which the
associate must be disposed of?
a. Three months
b. Six months
c. Twelve months
d. In the near future

13. An investor shall discontinue the use of equity method when:

a. The investor ceases to have significant influence over the associate
b. The investor ceases to have control over the associate
c. The investor disposes partial holdings of its investment in the associate
d. The associate operates under sever long-term restrictions

14. When an investment ceases to be an associate and is accounted for in accordance with IFRS 9,
the fair value of the investment at the date when it ceases to be an associate is regarded as its
a. Its cost on initial recognition as investment
b. Its fair value on initial recognition as an investment
c. Its cost on initial recognition as financial asset
d. Its fair value on initial recognition as financial asset

15. An investor uses the equity method to account for its investment in ordinary shares. The purchase
price implies that fair value of one of the investee’s depreciable assets exceeds the carrying amount.
What is the effect of the amortization of this excess?
a. The amortization increases the investment income to be reported by the investor
b. The amortization decreases the investment income to be reported by the investor
c. The amortization increases the investment account
d. The amortization does not affect the investment account nor the investment income of the
investor

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 CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING]

II. Problems
On January 02, 2023, Hulk Company purchased 2,500 ordinary shares of Hogan Corporation at P210
per share plus transaction costs of P5,250. These shares are acquired for trading purposes. On
December 31, 2023, the ordinary shares of Hogan Corporation are quoted at P244 per share.

On February 14, 2024, Hulk Company sold 750 shares of the Hogan Corporation ordinary shares at
P252 per share. Hulk Company incurred transaction costs amounting to P2,840 in relation to the sale.
On December 31, 2024, the ordinary shares of Hogan Corporation are quoted at P274 per share.

1. At What amount shall Hulk Company initially recognize its investment in Hogan Corporation
ordinary shares on January 01, 2023?
a. 519,750
b. 525,000
c. 530,250
d. 610,000

2. At what amount shall Hulk Company report its investment in Hogan Corporation ordinary shares on
December 31, 2023?
a. 519,750
b. 525,000
c. 530,250
d. 610,000

3. What amount of unrealized gain (loss) on fair value change shall be reported in profit or loss for
2023?
a. 79,750
b. (79,750)
c. 85,000
d. (85,000)

4. What amount of gain (loss) on sale shall be recognized on February 14, 2024?
a. 3,160
b. (3,160)
c. 6,000
d. (6,000)

5. At what amount shall Hulk Company report its investment in Hogan Corporation ordinary shares on
December 31, 2024?
a. 441,000
b. 479,500
c. 630,000
d. 685,000

6. What amount of unrealized gain (loss) on fair value change shall be reported in profit or loss for
2024?
a. 38,500
b. (38,500)
c. 52,500
d. (52,500)

7. What total amount shall be reported in profit or loss for the year 2024 in relation to the Hogan
Corporation ordinary shares?
a. 41,660
b. 44,500
c. 55,660
d. 58,500

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 CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING]

Kangaroo Company acquired 40% of Jack Company’s share on January 01, 2023 for P7,000,000.
Jack’s net asset had a carrying amount of P12,750,000. Jack identifiable assets are equal to its
carrying amount except for the following:

Inventory is understated by P500,000. All were sold by the end of 2023

Land is overstated by P700,000
Plant and equipment with a 10 –year remaining usefull life is understated by P4,000,000

Jack Company sold the land in 2024. Jack company reported net income of P1,500,000 for 2023 and
P2,500,000 for 2024. Jack Company paid P500,000 cash dividend on December 31, 2023 and
P1,000,000 on December 31, 2024

8. What is the investment income for 2023?

a. 200,000
b. 240,000
c. 290,000
d. 440,000

9. What is the investment income in 2024?

a. 540,000
b. 840,000
c. 1,140,000
d. 1,440,000

10. What is the carrying amount of investment in associate on December 31, 2024?
a. 7,780,000
b. 8,000,000
c. 8,380,000
d. 8,980,000

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