Quiz 2

Conceptual Framework and Accounting Standards

I. TRUE OR FALSE

FALSE Investment in subsidiary is accounted using equity method.

TRUE In applying the equity method of accounting, an entry should only consider ordinary
shares.

FALSE The investment in associate account that is accounted for using equity method shall be
presented as non-current asset in the statement of comprehensive income.

FALSE If an investor holds 20% or more of the voting power of an investee, it is presumed that
the investor has significant control over the investee.
TRUE Normally a financial asset classified as fair value through other comprehensive income is
classified as noncurrent.
FALSE Normally, a trading security acquired must be presented as current liabilities.
TRUE Under the equity method, any dividends received by the investor from the investee is
credited on the investment in associate account.
TRUE Material transactions between investor and investee may be presumed to be an evidence
of significant influence.
TRUE Equity security is a financial asset in the perspective of the investor.
TRUE Cash in bank is a financial liability of the depository bank.
TRUE Transaction cost are expensed outright if the financial asset acquired is measured at fair
value through profit or loss.
FALSE When a security that is classified as financial asset at fair value through profit or loss is
sold at a price above its book value, a gain is recognized in the profit or loss section of
the statement of financial position.
TRUE Treasury bills issued by the Bureau of Treasury is an example of debt security.
FALSE The gain or loss on equity instrument held for trading may or may not be presented as
component of the other comprehensive income.
TRUE The equity method is not applicable when investor’s debt and equity instruments are not
traded.
FALSE After the initial recognition, an entity should measure the financial asset at fair value
only.
TRUE Trading securities should be measured at fair value through profit or loss.
TRUE Bills and coins are considered a financial liability of the government.
FALSE Debt security is a financial liability in the part of the investor.
TRUE Warranty liability recorded by the seller of goods are not considered to be a financial
liability.
FALSE The term financial instrument encompasses only financial assets and liabilities but not
equity instruments.
TRUE A liability that is a contractual obligation to exchange financial instruments with another
entity under conditions that are potentially unfavorable is considered as financial liability.
FALSE Only ordinary share capital are considered to be equity instruments under the PFRS
FALSE A contract may or may not have two parties involved.
FALSE Patents and franchises which are intangible asset of a business may qualify as a financial
asset.
TRUE Significant influence must be lost first before an entity may stop to use the equity method
of accounting.
FALSE Significant influence is a power to control the operations and financial policy of an entity.
TRUE A security that represents a creditor relationship with the entity is called debt security.
FALSE Equity securities issued by publicly listed entities have maturity date and maturity value.

TRUE Participation in policy making process would be an evidence of significant influence.

FALSE Evidence of significant influence does not include representation in the highest governing
body of a corporation.

II. QUESTION TYPE

According to PAS 28, all of the following fall under the situation of “existence of significant influence by
an investor in the financial and operating policies but not control of the investee”, except:

Material intercompany transactions

Power to govern the financial and operating decision and obtain the benefits from it.

Participation in the policy making.

Technological dependency

An investor uses the cost method to account for an investment in common stock. A portion of the
dividends received this year were in excess of the investors share of the investee’s earnings subsequent to
the date of investment. The amount of dividend revenue that should be reported in the investor’s income
statement for this year should be:

The total amount of dividends received this year.

Zero
 The portion of the dividends received this year that were in excess of the investor’s share of
investee’s earnings subsequent to the date of investment.

The portion of the dividends received this year that were not excess of the investor’s share of
investee’s earnings subsequent to the date of investment.

Which of the following should be taken to profit or loss for investment measured at fair value through
other comprehensive income?
Gain or loss on disposal of the security.
Change in fair value during the reporting period.
Dividends received declared from current year’s earnings of the investee.
Impairment of the value of the securities
Which of the following is not true?
Financial assets held for trading is part of the portfolio of financial assets that are managed
together and for which there is an actual pattern of short-term profit taking.
Financial assets held for trading is acquired principally for the purpose of selling or repurchase it
in the near term.
Financial assets held for trading is a derivative that is designated as an effective hedging
instrument.
Financial assets held for trading is a derivative that is not designated as an effective hedging
instrument.
Equity securities acquired for trading should be measured at:
Fair value, with change in fair value taken to profit or loss.
Cost, being the purchase price.
Fair value, with change in fair value taken to other comprehensive income.
Cost, being the purchase price plus transaction cost.
An entity over which investor has significant influence is called:
Subsidiary
Investor
Controlee
Associate
How is impairment loss on debt investment at amortized cost measured?
Excess of amortized cost using straight-line method over fair value
Excess of previous fair value over current fair value
 Excess of amortized cost using effective interest method over present value of modified cash
flows
Excess of cost over fair value
Under IFRS 9, the cumulative balance of the equity as a result of measuring financial asset through other
comprehensive income.
Shall be reversed to profit or loss when there is an objective evidence of impairment.
Shall not be reversed to profit or loss and may not be transferred to another equity account.
Shall not be reversed to profit or loss but may be transferred to another equity account.
Shall be reversed to profit or loss at the date the security is sold.
Under IFRS 9, investment in debt securities that meet the business model test of collecting contractual
cash flows, and for which the enterprise does not exercise its option to measure at fair value shall be
initially recognized at:
Purchase price
Purchase price plus transaction cost
Fair value
Purchase price plus transaction cost plus accrued interest
Which of the following is true?
Debt investment reported at amortized cost are non-trading debt investment.
Debt investment reported at amortized cost are held for collecting debt investment.
Debt investment reported at amortized cost are trading debt investment.
Debt investment reported at amortized cost are managed and evaluated based on a documented
risk management strategy.
How is the good will arising on the acquisition of an associate dealt with in the financial statements?
It is not recorded separately.
It is recorded and tested for impairment annually.
It is amortized.
It is always written off against profit or less.
Under which type of investment classification is directly attributable cost of acquisition is not included in
initial measurement basis?
Financial asset at amortized cost
Financial asset at fair value through profit or loss
Investment in associate
 Financial asset at fair value through other comprehensive income.
Under the equity method of accounting for investments, an investor recognizes its share of the profit in
the period in which the
Investee pays a dividend.
Investor sells the investment.
Investee declares a dividend.
Profit is reported by the investee in the income statement.
An investor uses the equity method to account for investment in associate. The purchase price implies a
fair value of the investee’s depreciable assets in excess of the investee’s net asset carrying value. The
investee’s amortization of excess
Increases the investment income account.
Decreases the investment account.
Does not affect the carrying value of the investment.
Decreases the goodwill account.
Which of the following is not correct regarding trading securities?
Any discount or premium in debt securities are not amortized.
Gain on sale is the excess of the net selling price over the cost of the securities sold.
Unrealized holding gains or losses are reported in profit or loss.
They are held with the intention of being sold in a short period of time.
What should happen when the financial statements of an associate are not prepared to the same date as the
investor’s accounts?
The financial statements of the associate prepared up to a different accounting date will be used
as normal.
As long as the gap is not greater than three months, there is no problem.
The associate should prepare financial statements for the use of the investor at the same date as
those of the investor.
Any major transactions between the date of the financial statements of the investor and that of the
associate should be accounted for
Which of the following is incorrect concerning the equity method?
Dividends received by the investor from the investee reduced the carrying amount of the
investment.
The investment in associate is initially recorded at cost.
 Investor’s share of the loss of the investee is not recognized in the investor’s profit or loss
statement.
The investment in associate is increased by investor’s share in profit.
Which of the following is false regarding PAS 28?
Associate is an entity over which the investor has significant influence.
Significant influence arises when there is a contractual agreed sharing of control oven an
economic activity.
Investor must discontinue the equity method when the investor ceases to have significant
influence over the associate.
Goodwill arising from an investment in associate is included in the carrying amount of the
investment and not amortized.
After the date of acquisition, the account using the equity method would.
Be increased by its share of earnings of the investee and be decreased by its share of the losses of
the investee.
Not be affected by its share of the earnings but be decreased by its share of the losses of the
investee.
Not be affected by its share of the earnings or losses of the investee.
Be increased by its share of earnings of the investee, but not affected by its share of the losses of
the investee.
When an entity increases its interest in an investment in equity securities accounted for by the fair value
method, and changes to the equity method, what is the initial carrying value for purposes of subsequent
application of the equity method?
Market value at the date of the change
The amount that would be reflected in the investment account had equity method been in use
continually since the purchase of the securities.

Book value at the date of the change.

Original cost plus or minus the net market value change since acquisition.
It is an arrangement of which two or more parties have joint control.
Associate
Joint Arrangement
Joint Association
Material Control
Which of the following transactions does not affect the investment in associate account?
 Cash dividends received by the investor at the end of the month.
Net loss incurred by the investee for the period.
Profit reported by the investee.
Dividends received by the investor in the form of shares.
When an investor uses the equity method to account for investment in ordinary shares, cash dividends
received by the investor from the investee should be recorded as:
Deduction of goodwill
Deduction from investment account
Dividend income
Addition to retained earnings of the investee.
Any instrument representing ownership shares.
Debt security
Equity security
Shareholder’s equity
Marketable security