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COLEGIO DE DAGUPAN

Arellano Street, Dagupan City


School of Business and Accountancy

BUSINESS POLICY AND STRATEGY


First Semester, AY 2018-2019
Preliminary Examination

Set A
1. Which of the following is not a basic financial instrument?
a.Investment in non-convertible, non-puttable preference shares
b.An entity’s own equity instrument
c.A fixed-interest, fixed-term loan payable to a bank
d.A variable-interest, fixed-term loan payable to a bank
e.An interest-free loan from a parent entity

2. A hedged item can be any of the following except:


A. A recognized asset or liability
B. A highly probable forecast transaction
C. Held-to-maturity investment with respect to interest-rate risk or prepayment risk
D. Loans and receivables

Answer: C. Held-to-maturity investment with respect to interest-rate risk or prepayment risk

As defined in paragraph 9 of PAS 39, Financial Instruments: Recognition and Measurement, a hedged
item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a
foreign operation that (a) exposes the entity to risk of changes in fair value or future cash flows and (b) is
designated as being hedged

Choice C does not qualify as a hedged item. Paragraph 79 of PAS 39 further provides: Unlike loans and
receivables, a held-to-maturity investment cannot be a hedged item with respect to interest-rate risk or
prepayment risk because designation of an investment as held to maturity requires an intention to hold
the investment until maturity without regard to changes in the fair value or cash flows of such an
investment attributable to changes in interest rates. However, a held-to-maturity investment can be a
hedged item with respect to risks from changes in foreign currency exchange rates and credit risk.

3. The existence of significant influence is not evidenced by


a. Participation in the policy making process, including participation in decisions about dividends or other
distributions.
b. Representation in the board of directors or equivalent governing body of the investee.
c. Power to cast the majority of votes at meetings of the board of directors or equivalent governing
body.
d. Provision of essential technical information.

4. When trading securities are transferred into available for sale securities, the unrealized gain or loss at the
date of transfer shall be
a. Included in stockholder’s equity
b. Included as a component of income
c. Included in additional paid in capital
d. Included in retained earnings

5. Coco Company has a portfolio of marketable debt securities which it intends to hold to maturity. How would
Coco report unrealized gains and losses from these securities?
a. As a component of income
b. As a component of stockholder’s equity
c. Not recognize in income nor stockholder’s equity
d. Not recognize temporary gains and losses but recognize realized losses as a component of income

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6.According to PFRS 7, Financial Instruments: Disclosures, an entity that has designated a loan or
receivable (or group of loans or receivables) as at fair value through profit or loss shall disclose the
following, except:

A.The maximum exposure to market risk of the loan or receivable (or group of loans or receivables) at
the reporting date
B.The amount by which any related credit derivatives or similar instruments mitigate that maximum
exposure to credit risk
C.The amount of the change in the fair value of any related credit derivatives or similar instruments that
has occurred during the period and cumulatively since the loan or receivable was designated
D.The amount of change, during the period and cumulatively, in the fair value of the loan or receivable
(or group of loans or receivables) that is attributable to changes in the credit risk of the financial asset
determined either: (a) as the amount of change in its fair value that is not attributable to changes in
market conditions that give rise to market risk; or (b) using an alternative method the entity believes
more faithfully represents the amount of change in its fair value that is attributable to changes in the
credit risk of the asset

Answer: A. The maximum exposure to market risk of the loan or receivable (or group of loans or
receivables) at the reporting date.

PFRS 7 par. 9:
If the entity has designated a loan or receivable (or group of loans or receivables) as at fair value
through profit or loss, it shall disclose:
(a) the maximum exposure to credit risk (see paragraph 36(a)) of the loan or receivable (or group of
loans or receivables) at the end of the reporting period.
(b)the amount by which any related credit derivatives or similar instruments mitigate that maximum
exposure to credit risk.
(c) the amount of change, during the period and cumulatively, in the fair value of the loan or receivable
(or group of loans or receivables) that is attributable to changes in the credit risk of the financial asset
determined either:
(i) as the amount of change in its fair value that is not attributable to changes in market conditions that
give rise to market risk; or
(ii) using an alternative method the entity believes more faithfully represents the change in its fair value
that is attributable to changes in the credit risk of the asset.
Changes in market conditions that give rise to market risk include changes in an observed (benchmark)
interest rate, commodity price, foreign exchange rate or index of prices or rates.
(d) the amount of the change in the fair value of any related credit derivatives or similar instruments that
has occurred during the period and cumulatively since the loan or receivable was designated.

7. The following are types of hedging relationships except?


A.Fair Value Hedge
B.Cash Flow Hedge
C.Hedge of a Net Investment in a Foreign Operation
D.Hedge of Foreign Currency Risk of a Firm Commitment

Answer: D

PAS 39, Financial Instruments: Recognition and Measurement, paragraph 86 provides that hedging
relationships are of three types a sfollows:
a)fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an
unrecognised firm commitment, or an identified portion of such an asset, liability or firm commitment,
that is attributable to a particular risk and could affect profit or loss.
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 recognised 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 profit or loss.
c)hedge of a net investment in a foreign operation as defined in PAS 21.

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8. When assessing impairment of financial assets measured at cost or amortised cost, which must be
assessed individually?
a. All financial assets that are individually significant
b. All equity instruments that are individually significant
c. All equity instruments
d. All financial assets except equity instruments
e. All equity instruments and other financial assets that are individually significant

9. Which of the following disclosures must be made when the fair value model is used for
investment property?
a. Depreciation method
b. The amount of impairment loss recognized
c. Useful life or depreciation rate
d. Net gains or losses from fair value adjustments

10. The following transfers/reclassifications of financial assets are permitted, except


a. Transfer from held-to-maturity investments to available-for-sale category.
b. Reclassification of non-derivative financial assets out of the fair value through profit or
loss category if the financial asset is no longer held for the purpose of selling it in the near term in
particular circumstances.
c. Reclassification of non-derivative financial assets designated at fair value through profit
or loss by the entity upon initial recognition out
of the fair value through profit or loss category.
d. Transfer from the available-for-sale category to the loans and receivables category a financial asset
that would have met the definition of loans and receivables (if the financial asset had not been
designated as available-for-sale), if the entity has the intention and ability to hold that financial asset for
the foreseeable future.

11. Entity buys 100 ordinary shares in Co X on London Stock Exchange for 20 per share, plus
brokerage
fee of 100. Co X is not a subsidiary, not a JV, not an associate of the entity. Entity should initially
recognise the investment at:
a. 1,900
b. 2,000.
c. 2,100

Quoted equity instrument, so FVTPL, therefore 100 fee is expensed

12. On July 1, 2006, Cleopatra Corporation acquired 25% of the shares of Marcus, Inc. for
P1,000,000. At that date, the equity of Marcus was P4,000,000, with all the identifiable assets
and liabilities being measured at amounts equal to fair value. The table below shows the profits
and losses made by Marcus during 2006 to 2010:
Year Profit(Loss)
2006 P 200,000
2007 (2,000,000)
2008 (2,500,000)
2009 160,000
2010 300,000
What is the carrying amount of the investment in Marcus, Inc. as of December 31, 2010?
a. P40,000
b. P75,000
c. P15,000
d. P 0

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13. On December 28, 2010, Cross Company commits itself to purchase a financial asset to be
classified as held to maturity for P1,000,000, its fair value on commitment (trade) date. This
security has a fair value of P1,002,000 and P1,005,000 on December 31, 2010 (Cross' financial
year-end), and January 5, 2011 (settlement date), respectively. If Cross applies the settlement
date accounting method to account for regular-way purchases of its securities, the financial
asset should be recognized on January 5, 2011 at
a. P1,000,000
b. P1,005,000
c. P1,002,000
d. P 0

14. On January 1, 2009, YOU TOO Corporation purchased P1,000,000 10% bonds designated as held-
to-maturity. The bonds were purchased to yield 12%. Interest is payable annually every
December 31. The bonds mature on December 31, 2013. On December 31, 2009 the bonds were
selling at 99. On December 31, 2010, YOU TOO sold P500,000 face value bonds at 101. The bonds were
selling at 103 on December 31, 2011. (Round off present value factors to four decimal places How much
is the realized gain on sale of the investment in bonds in 2010?
a. P41,060
b. P35,387
c. P29,034
d. P10,000

15. On December 31, 2010, Entity X acquired an investment for P100,000 plus a purchase
commission of P2,000. The investment is classified as available-for-sale. On December 31, 2010,
quoted market price of the investment is P100,000. If the investment were sold, a commission of P3,000
would be paid. On December 31, 2010, the entity should recognize loss in other comprehensive income
of
a. P2,000
b. P5,000
c. P3,000
d. P 0

16. Avent Company sells a financial asset with a carrying amount of P500,000 for P600,000 and
simultaneously enters into a total return swap with the buyer under which the buyer will return
any increases in value to Avent and Avent will pay the buyer interest plus compensation for any
decreases in the value of the investment. Avent expects the fair value of the financial asset to decrease
by P40,000. How much should Avent recognize as gain on sale of financial asset?
a. P600,000
b. P60,000
c. P100,000
d. P 0

17. Anika Claudette Cuisine operates a chain of fine seafood restaurants. The Company makes very
detailed long-term planning. On October 1, 2015, Anika Claudette determined that it would
need to purchase 1,000,000 pounds of deluxe fish, on October 1, the company negotiated a
special forward contract with Jennelyn Investment Bank for Anika Claudette to purchase
1,000,000 pounds of deluxe fish on January 2017, at a price of P16,000,000. The price of deluxe
fish was P16 per pound on October 1. Jennelyn Investment Bank has a staff of financial analysts
who specialize in forecasting fish prices. These analysts are predicting a drop in worldwide fish
prices between October 1, 2015, and January 2017. On December 31, 2015, the price of a pound
of deluxe fish is P20. On December 31, 2016, the price of a pound of deluxe fish P11. The
appropriate discount rate throughout this period is 10%.

What is the fair value or the forward contract on December 31, 2015?

a. P4,000,000
b. P3,636,364

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c. P5,000,000
d. P4,545,454

Answer: B
Fair Value, December 31, 2015:
October 1, 2015: Original Forward price:
1,000,000 x P16 P16,000,000
December 31,2015: Remaining Forward price:
1,000,000 x P20 20,000,000
Fair Value of forward contract, December 31, 2015 P 4,000,000
Divided by: [100% + 10% remaining one year] 1.10
PV of forward contract, 12/31/2015 P 3,636,364

18. On January 1, 2009, Fredo Company purchased marketable equity securities to be held as "trading"
for P4,000,000. The company also paid commission to the stockbroker in the amount of P100,000. No
securities were sold during 2009. The market value of the equity securities on December 31, 2009 is
P4,500,000.What amount of unrealized gain on these securities should be reported in the 2009 income
statement?
A. 0
B. 300,000
C. 400,000
D. 500,000

19. Dude Company purchased 10% of Pal Company's 100,000 outstanding ordinary shares on January 1,
2009 for P500,000. On December 31, 2009, Dude purchased an additional 20,000 shares of Pal for
P1,500,000. The was no goodwill as a result of either acquisition, and Pal had not issued any additional
shares during 2009. Pal reported earnings of P3,000,000 for 2009. What amount should Dude report in
its December 31, 2009 balance sheet as investment in Pal?
A. 1,700,000
B. 2,000,000
C. 2,300,000
D. 2,900,000

20. Entity borrows 10,000 from a bank 5 years, fixed interest payable annually 6% in arrears. (This is a
market rate.) Bank charges entity 50 loan application fee. Entity should measure the loan on initial
recognition at
a. 7,473 (= PV 10,000 at 6% for 5 years)
b. 7,423
c. 9,950
d. 10,000
e. 10,050

Loan will be carried at amortised cost. Fee is netted against loan. Affects effective interest.

21. On January 1, 2009 Libya Company purchased equity securities to be held as "available for sale". On
December 31, 2009, the cost and market value were: COST
MARKETSecurity X 2,000,000 2,400,000Security Y
3,000,000 3,500,000Security Z 5,000,000
4,900,000On July 1, 2010, Libya Company sold Security X for P2,500,000. What amount of gain on sale of
AFS securities should be reported in the 2010 income statement?
A. 0
B. 100,000
C. 400,000
D. 500,000

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22. On January 1, 2009, Ron Company purchased 40% of the outstanding ordinary shares of Kim
Company, paying P6,400,000 when the book value of the net assets of Kim Company equaled
P12,500,000. The difference was attributed to equipment which had a book value of P3,000,000 and a
fair market value of P5,000,000 and to building which had a book value of P2,500,000 and a fair value of
P4,000,000. The remaining useful life of the equipment and building was 4 years and 12 years,
respectively. During 2009, Kim Company reported net income of P5,000,000 and paid dividends of
P2,500,000. Ron Company shall report investment income for 2009 at:
A. 1,000,000
B. 1,750,000
C. 1,800,000
D. 2,000,000

23. On October 1, 2008, Pentel Company purchased 6,000 of the P1,000 face value, 10% bonds of Ophra
Company for P6,600,000 including accrued interest of P150,000. The bonds , which mature on January 1,
2015, pay interest semiannually on January 1 and July 1. Pentel used the straight line method of
amortization and appropriately recorded the bonds as a long-term investment. On Pentel’s December
31, 2009 balance sheet, the bonds should be reported at:
A. 6,450,000
B. 6,432,000
C. 6,426,000
D. 6,360,000

24. La Goon Company purchased the following securities during 2009: CLASSIFICATION
COST MARKET VALUE 12/31/09Security A Trading 900,000
1,000,000Security B Trading 1,000,000 1,600,000On July 31, 2010, the
company sold all of the shares of security B for a total of P1,100,000. As of December 31, 2010, the
shares of security A had a market value of P600,000. No other activity occurred during 2008 in relation
to the trading security portfolio. What is the gain or loss on the sale of security B on July 31, 2010?
A. 500,000 gain
B. 100,000 gain
C. 500,000 loss
D. 100,000 loss

25. On January 1, 2009, Ken Company purchased 30% interest in Barbie Company for P2,500,000. On
this date Barbie's shareholders' equity was P5,000,000. The carrying amounts of Barbie's identifiable net
assets approximated their fair values, except for land whose fair value exceeded its carrying amount by
P2,000,000. Barbie reported net income of P1,000,000 for 2009 and paid no dividends. Ken accounts for
this investment using the equity method. In its December 31, 2009 balance sheet, what amount should
Ken report as investment in associate?
A. 2,100,000
B. 2,200,000
C. 2,760,000
D. 2,800,000

26. Rose Company was organized on January 1, 2009. At December 31, 2009, Rose had the following
investment portfolio of marketable equity securities: TRADING
AVAILABLE FOR SALE Aggregate Cost 3,000,000 4,500,000 Aggregate
Market Value 2,400,000 3,700,000 Net Unrealized Loss 600 ,000
800,000All of the declines are judged to be temporary. What amount of unrealized loss should be shown
as component of income and shareholders' equity?
A. Income: 600,000 Shareholder's equity: 800,000
B. Income: 800,000 Shareholder's equity: 600,000
C. Income: 1,400,000 Shareholder's equity: 0
D. Income: 0 Shareholder's equity: 1,400,000

27. During 2009, Lava Company purchased trading equity securities as a short-term investment. The cost
and market value at December 31, 2009 were as follows: SECURITY COST

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MARKET VALUEA - 1,000 shares 200,000 300,000B - 10,000 shares
1,700,000 1,600,000C - 20,000 shares 3,100,000 2,900,000
5,000,000 4,800,000Lava sold 10,000 shares of Company B stock on January 15, 2010,
for P130 per share, incurring P50,000 in brokerage commission and taxes. On the sale, Lava should
report a loss of
A. 300,000
B. 350,000
C. 400,000
D. 450,000

28. On January 1, 2009, Cage Company purchased equity securities to be held as "available for sale". The
cost and market value of the securities were: COST MARKET VALUE 12/31/09
MARKET VALUE 12/31/10 Security R 3,000,000 3,200,000 --------
Security S 4,000,000 3,500,000 3,700,000 Security T 5,000,000
4,600,000 4,700,000 On January 31, 2010, Cage Company sold Security R for
P3,500,000.What amount unrealized loss on these securities should be reported in the 2010 statement
of changes in equity?
A. 0
B. 600,000
C. 300,000
D. 200,000

29. On January 1, 2009, Paloma Company purchased bonds with face value of P2,000,000 for P1,900,500
including transaction costs of P100,500 to be held as "available for sale". The bonds mature on
December 31, 2011 and pay interest of P8% annually every December 31 with a 10% effective yield. On
December 31, 2009, the bonds are quoted at P105. What amount of unrealized gain on these bonds
should be reported on the 2009 statement of changes in equity?
A. 169,450
B. 179,500
C. 199,500
D. 300,000

30. On December 31, 2009, Otter Company had investments in trading securities as follows:
COST MARKET VALUE Man Company 1,000,000
1,300,000 Kemo Company 900,000 1,100,000 Fenn Company
1,100,000 900,000 3,000,000
3,300,000Otter's December 31, 2009 balance sheet should report the following trading securities at:
A. 3,000,000
B. 2,900,000
C. 3,300,000
D. 2,800,000

31. On January 1, 2009, Weller Company purchased 10% of Pea Company's outstanding ordinary shares
for P4,000,000. Weller is the largest single shareholder in Pea and Weller's officers are a majority of
Pea's board of directors. Pea reported net income of P5,000,000 for 2009 and paid dividends of
P1,500,000. In its December 31, 2009 balance sheet, what amount should Weller report as investment in
Pea?
A. 3,850,000
B. 4,000,000
C. 4,350,000
D. 4,500,000

32. On January 1, 2008, Broker Company purchased "held to maturity" bonds with face value of
P5,000,000 for P4,562,000. The bonds are purchased to yield 10% interest. The stated interest rate on
the bonds is 8%, payable annually on December 31. On December 31, 2009, Broker Company decided to
reclassify the bonds as "available for sale". On such date, the carrying value of the bonds is P4,680,000
after amortization of discount using the effective interest method. The market value of the bonds on

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December 31, 2009 is P5,200,000.What amount of unrealized gain on these securities should be
reported in the 2007 statement of changes in equity?
A. 0
B. 200,000
C. 520,000
D. 638,000

33. On July 1, 2009, Pellet Company purchased Grown Company ten-year, 8% bongs with a face amount
of P5,000,000 for P4,200,000. The bongs mature on June 30, 2017 and pay interest semiannually on
June 30 and December 31. Using the interest method, Pellet recorded bond discount amortization of
P18,000 for the six months ended December 31, 2009. From this long-term investment, Pellet should
report 2009 revenue of:
A. 168,000
B. 182,000
C. 200,000
D. 218,000

34. On January 1, 2009, Riyadh Company purchased serial bonds with face value of P3,000,000 and
stated 12% interest payable annually every December 31. The bonds mature at an annual installment of
P1,000,000 every December 31. The rounded present value of 1 at 10% for: One period
0.91 Two periods 0.83 Three periods
0.75What is the market price of the serial bonds on January 1, 2009?
A. 3,060,000
B. 3,045,000
C. 3,106,800
D. 3,149,400

35. Socks Company uses approximately 300,000 units of raw material in its manufacturing operations.
On December 1, 2009, Socks Company purchased a call option to buy 300,000 units of the raw material
on March 1, 2010 at a price of P25 per unit. Socks paid P50,000 for the call option and designated the
call option as a cash flow hedge against price fluctuation for its March purchase.On December 31, 2009,
the market price of the raw material is P27 per unit and on March 1, 2010, the market price is P28.What
is the fair value of the call option or derivative asset on December 31, 2009?
A. 550,000
B. 600,000
C. 850,000
D. 900,000

36. During 2008 Carr Company purchased marketable equity securities as a trading investment. For the
year ended December 31, 2008, the company recognized an unrealized loss of P230,000. There were no
security transactions during 2009. Pertinent information at December 31, 2009 is as follows: SECURITY
COST MARKET VALUE A 2,450,000 2,300,000
B 1,800,000 1,820,000 4,250,000
4,120,000In its 2009 income statement, Carr should report
A. Unrealized loss of P100,000
B. Unrealized loss of P130,000
C. Unrealized gain of P100,000
D. Unrealized gain of P130,000

37. On January 1, 2009 Russo Company purchased 5-year bonds with face value of P8,000,000 and
stated interest of 10% per year payable semiannually January 1 and July 1. The bonds were acquired to
yield 8%. Present value factors are:Present value of an annuity of 1 for 1 periods at 5%
7.72Present value of an annuity of 1 for 10 periods at 4% 8.11Present value of 1 for
10 periods at 4% 0.6756What is the purchase price of the bonds?
A. 7,351,200
B. 7,382,400
C. 8,617,600
D. 8,648,800

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38. On January 1, 2009, Bell Company adopted a plan to accumulate funds for a new plant building to be
erected beginning July 1, 2014, at an estimated cost of P6,000,000. Bell 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, 2009. Present value and future amount factors are as follows:Present value of 1 at 8% for 5
periods 0.68Present value of 1 at 8% for 6 periods
0.63Future amount of ordinary annuity of 1 at 8% for 5 periods 5.87Future amount of
annuity in advance of 1 at 8% for 5 periods 6.34Bell should make five annual deposits
(rounded) of:
A. 756,000
B. 816,000
C. 946,400
D. 1,022,150

39. The following data pertain to the equity investments held by Doritos Company classified as
"available for sale":Cost 3,000,000Market value: December 31, 2008
2,400,000 December 31, 2009 3,200,000What amount should be reported as unrealized
gain in December 31, 2009 shareholders' equity?
A. 0
B. 200,000
C. 800,000
D. 1,900,000

40. Chalk Company acquired a 40% interest in Film Company for P1,700,000 on January 1, 2009. The
shareholder's equity of Film Company on January 1 and December 31, 2009 is presented below.
JANUARY 1 DECEMBER 31Share capital 3,000,000
3,000,000Revaluation surplus 1,300,000Retained earnings
1,000,000 1,500,000On January 1, 2009, all the identifiable assets and liabilities of Film
Company were recorded at fair value. Film Company reported profit of P650,000, after income tax
expense of P350,000 and paid dividend of P150,000 to shareholders during the current year.The
revaluation surplus is the result of the revaluation of land recognized by Film Company on December 31,
2009. Additionally, depreciation is provided by Film Company on the diminishing balance method
whereas Chalk Company uses the straight line. Had Film Company used the straight line, the
accumulated depreciation would be increased by P200,000. The tax rate is 35%What is the carrying
value of Chalk Company's investment in Film Company on December 31, 2009?
A. 1,700,000
B. 1,900,000
C. 2,320,000
D. 2,420,000

41. On January 1, 2008, Pearl Company purchased as a long-term investment P5,000,000 face value of
Show Company's 8% bonds for P4,562,000. The bonds were purchased to yield 10% interest annually on
January 1. Pearl uses the interest method of amortization. What amount (rounded to nearest P100)
should Pearl report on its December 31, 2009 balance sheet for this long-term investment?
A. 4,562,000
B. 4,618,000
C. 4,662,000
D. 4,680,000

42. Seed Company bought 40% of Adam Company's outstanding ordinary shares on January 1, 2009, for
P4,000,000. The carrying amount of Adam's net assets at the purchase date totaled P9,000,000. Fair
values and carrying amounts were the same for all items except for plant and inventory, for which fair
values exceeded their carrying amounts by P900,000 and P100,000, respectively. The plant has an 18-
year life. All inventory was sold during 2009. During 2009, Adam reported net income of P1,200,000 and
paid a P200,000 cash dividend. What amount should Seed report in its income statement from its
investment in Adam for the year ended December 31, 2009?

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A. 320,000
B. 360,000
C. 420,000
D. 480,000

43. On January 1, 2006, Bert Company acquired as a long term investment for P7,000,000, a 40%
interest in Hallway Company when the fair value of Hallway's net assests was P17,500,000. Hallway
Company reported the following net losses: 2006 5,000,000
2007 7,000,000 2008 8,000,000
2009 4,000,000On January 1, 2008, Bert Company made cash advances of P
2,000,000 to Hallway Company. On December 31, 2009, it is not expected that Bert Company will
provide further financial support for Hallway Company. Bert Company should report in 2009 a loss from
investment of:
A. 600,000
B. 1,000,000
C. 1,600,000
D. 4,000,000

44. On January 1, 2009, Bell Company paid P18,000,000 for 50,000 ordinary shares of Base Company
which represent a 25% interest in the net assets of Base. The acquisition cost is equal to the book value
of the net assets acquired. Bell has the ability to exercise significant influence over Base. Bell received a
dividend of P35 per share from Base in 2009. Base reported net income of P9,600,000 for the year
ended December 31, 2009. In its December 31, 2009 balance sheet, Bell should report the investment in
Base Company at:
A. 18,000,000
B. 18,650,000
C. 20,400,000
D. 22,150,000

45. On January 1, 2009, Trix Company purchased marketable equity securities for P5,000,000 to be held
as "available for sale". The company also paid P200,000 in the form of transaction costs. The equity
securities had a market value of P4,600,000 on December 31, 2009. No securities were sold during
2009.What amount of unrealized loss on these securities should be reported in the 2009 statement of
changes in equity?
A. 200,000
B. 400,000
C. 600,000
D. 0

46. On its December 31, 2008 balance sheet, Fry Company appropriately reported a P100,000 unrealized
loss. There was no change during 2009 in the composition of Fry's portfolio of marketable equity
securities held as "available for sale". Pertinent data are as follows: SECURITY COST
MARKET VALUE at 12/31/09 A 1,200,000 1,300,000 B
900,000 500,000 C 1,600,000 1,500,000
3,700,000 3,300,000What amount of loss on these securities should be included in
Fry's statement of shareholders' equity for the year ended December 31, 2009?
A. 0
B. 100,000
C. 300,000
D. 400,000

47. Letterman Company reported the following selected balances on its financial statements for each of
the three years 2009 - 2011: 2009 2010
2011Market adjustment - Trading securities 5,500,000 3,750,000

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(1,200,000)Market adjustment - Available for sale securities (1,300,000) 900,000
1,350,000How much net unrealized loss should be shown in the 2011 income statement?
A. 1,200,000
B. 3,600,000
C. 4,500,000
D. 4,950,000

48. Jacob Company purchased bonds at a discount of P100,000. Subsequently, Jacob sold these bonds at
a premium of P140,000. During the period that Jacob held this investment, amortization of the discount
amounted to P20,000. What amount should Jacob report as gain on the sale of the bonds?
A. 120,000
B. 220,000
C. 240,000
D. 260,000

49. Comma Company acquired long term 12% bonds. P2,000,000 face value for P2,192,000 including
accrued interest and brokerage of P92,000 on January 1, 2009. The bonds pay semiannual interest and
mature May 1, 2015. On December 31, 2009, Comma sold all bonds for P2,300,000 excluding accrued
interest. What is the gain on sale of bonds?
A. 108,000
B. 148,000
C. 172,000
D. 300,000

50. Data regarding Maggy Company's available for sale securities follow:
COST MARKETDecember 31, 2008 5,000,000
5,200,000December 31, 2009 5,000,000 5,900,000Difference between
cost and market value are considered temporary. The December 31, 2009 statement of shareholders'
equity should report unrealized gain on these securities at
A. 0
B. 200,000
C. 700,000
D. 900,000

Company A invests in a subordinated perpetual note, redeemable at the


issuer’s option, with a fixed coupon that can be deferred indefinitely if the
issuer does not pay a dividend on its ordinary shares. The issuer classifies
this instrument as equity.
How can Company A record this under IFRS 9?
FVOCI or FVTPL

Company Acme invests in units issued by a close-ended fund. The fund holds
only debt instruments that themselves would qualify for amortised cost
classifications under IFRS 9 had these instruments been directly held by the
unit holder. The fund’s objectives is to hold the assets to maturity rather
than to realise fair value changes.
How should Acme record its investments in the units under IFRS9?
Amortised cost

An entity has a past practice of factoring its receivables, such that the
significant risks and rewards are transferred from the entity, resulting in
the original receivables being derecognised from the statement of financial
position. The entity does not hold its receivables to collect cash flows and
intends to sell them.
How should the entity classify such receivables?

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FVTPL

1. Which of the following risks is not eligible for hedge accounting under PFRS for SMEs?

A. Interest rate risk in debt instrument measured at amortized cost


B. Foreign exchange risk in debt instrument measured at amortized cost
C. Foreign exchange risk in a firm commitment
D. Interest rate risk in a firm commitment
E. Foreign exchange risk in a net investment in a foreign operation

Answer: B. Foreign exchange risk in debt instrument measured at amortized cost

Section 12.17 of PFRS for SMEs provides:

“This PFRS permits hedge accounting only for the following risks:
(a) interest rate risk of a debt instrument measured at amortized cost.
(b) foreign exchange or interest rate risk in a firm commitment or a highly probable forecast transaction.
(c) price risk of a commodity that it holds or in a firm commitment or highly probable forecast
transaction to purchase or sell a commodity.
(d) foreign exchange risk in a net investment in a foreign operation.”

1. Paolo Company holds an investment of 30% in the ordinary shares of Uneta Company, an
associate that has a net assets of P4,000,000 for the year ended December 31, 2014 which
includes the current year net profit of P490,000. The associate has issued 100,000 9% cumulative
preference shares with a nominal value of P10. The preference shares are classified by the
associate as equity instruments. The associate declared dividends on the cumulative preference
shares amounting to P270,000 for dividends in arrears and current year’s dividend. How much is
Paolo Company’s share in profit or loss of the associate for calendar year ended December 31,
2014?

Answer: P120,000

Silvana 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, 2006.
The cash surrender values are:December 31, 2008 15,000December 31,
2009 19,000The company follows the calendar year as its fiscal period. The
president dies on October 1, 2009 and the policy is settled on December 31, 2009.Silvana Company
should report gain on life insurance settlement in its 2009 income statement at:
A. 1,961,000
B. 1,962,000
C. 1,981,000
D. 2,000,000

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The following information was extracted from December 31, 2009 balance sheet of Phil
Company:Noncurrent assets: Available for sale securities (carried at market)
3,700,000Shareholders' equity: Unrealized loss on available for sale securities (
300,000)Historical cost of the long-term investment in available for sale securities was
A. 3,700,000
B. 3,400,000
C. 4,300,000
D. 4,000,000

On January 1, 2008, Eve Company purchased as a long-term investment on 100,000 ordinary shares of
Miles Company for P40 a share. On December 31, 2008, the market price of Miles' share was P35,
reflecting a temporary decline in market price. On December 28, 2009 Eve sold 80,000 shares of Miles
Company for P30 a share. For the year ended December 31, 2009, Adam should report a loss on disposal
of long-term investment of:
A. 400,000
B. 800,000
C. 900,000
D. 1,000,000

During 2009, Scotch Company purchased marketable equity securities to be held as "available for sale".
Pertinent data follow: SECURITY COST MARKET VALUE at 12/31/09
D 360,000 400,000 E 800,000
600,000 F 1,800,000 1,860,000
2,960,000 2,860,000Scotch appropriately carries these securities at market value.
The amount of unrealized loss on these securities in Scotch's 2009 income statement should be:
A. 200,000
B. 140,000
C. 100,000
D. 0

Mass Company owns 20% of Dub Company's preference share capital and 80% of its ordinary share
capital. Dub's square capital outstanding at December 31, 2009 is as follows:10% cumulative preference
share capital 5,000,000Ordinary share capital
7,000,000Dub reported net income P3,000,000 for the year ended December 31, 2009. What amount
should Mass record as equity in earnings of Dub for the year ended December 31, 2009.
A. 2,000,000
B. 2,100,000
C. 2,300,000
D. 2,400,000

Duff Company acquired 20,000 ordinary shares of Post Company on October 1, 2008, at a cost of
P4,400,000. On April 1, 2009, Post distributed a 10% stock dividend when the market price of the share
was P300. On December 30, 2009, Duff sold 2,000 shares for P640,000. For the year ended December
31, 2007, how much should Duff report as gain on sale?
A. 40,000
B. 240,000
C. 400,000
D. 640,000

On March 1, 2009, Evan Company purchased 10,000 ordinary shares of Bruce at P80 per share. On
September 30, 2009, Evan received 10,000 stock rights to purchase an additional 10,000 shares at P90
per share. The stock rights had an expiration date of February 1, 2010. On September 30, 2009, Bruce's
share had a market value ex-right of P95 and the stock right had a market value of P5. What amount
should Evan report in its September 30, 2009 balance sheet for investment in stock rights?

FAR3/scf/1801/q1/scs Page 13
A. 40,000
B. 50,000
C. 100,000
D. 150,000

Uno Company acquired 20,000 shares of Dos Company on January 1, 2009 at P120 per share. Dos
Company had 80,000 shares outstanding with a book value of P8,000,000. The difference between the
book value and fair value of Dos Company on January 1, 2009 is attributable to a broadcast license
intangible asset. Dos Company recorded earnings of P3,600,000 and P3,900,000 for 2009 and 2010,
respectively, and paid per-share dividend of P16 in 2009 and P20 in 2010. Uno Company has a 20-year
straight-line amortization policy for the broadcast license. What is the balance of Uno Company's
investment in Dos Company on December 31, 2010?
A. 2,400,000
B. 3,515,000
C. 3,555,000
D. 4,275,000

On January 1, 2009, XYZ Company purchased 40,000 shares of TUV at P100 per share. Brokerage fees
amounted to P120,000. A P5 dividend per share of TUV had been declared on December 15, 2008, to be
paid on March 31, 2009 to shareholders of record on January 31, 2009. No other transactions occurred
in 2009 affecting the investment in TUV shares. The cost of the investment is:
A. 3,800,000
B. 3,920,000
C. 4,000,000
D. 4,120,000

On January 1, 2009, Beige Company purchased 25,000 shares of the 100,000 outstanding shares of Falls
Company for a total of P1,000,000. At the time of the purchase, the book value of Falls Company's
equity was P3,000,000. Falls Company assets having a market value greater than book value at the time
of the acquisition were as follows: BOOK VALUE MARKET VALUE
REMAINING LIFEInventory 400,000 500,000 Less than 1
yearEquipment 2,000,000 2,500,000 5 yearsGoodwill
0 400,000 IndefiniteFalls Company's net income in 2009 was P700,000.
Dividends per share paid by Falls Company amounted to P3 in 2009. What is the balance of Beige
Company's investment in Falls Company on December 31, 2009?
A. 1,000,000
B. 1,050,000
C. 1,075,000
D. 1,100,000

The following information relates to noncurrent investments that Hall Company placed in trust as
required by the underwriter of its bonds:Bond sinking fund balance, January 1, 2009
4,500,0002009 additional investment 900,000Dividends on
investments 150,000Interest revenue
300,000Administration costs 50,000Carrying amount of
bonds payable 8,000,000What amount should Hall report in its December
31, 2009 balance sheet related to its noncurrent investment for bond sinking fund requirements?
A. 5,400,000
B. 5,750,000
C. 5,800,000
D. 5,850,000

Crane Company purchased a P1,000,000 life insurance policy on its president, of which Crane is the
beneficiary. Information regarding the policy for the year ended December 31, 2009, follows:Cash
surrender value, 1/1 87,000Cash surrender value, 12/31
108,000Annual advance premium paid 1/1 40,000During 2009, dividend of

FAR3/scf/1801/q1/scs Page 14
P6,000 was applied to increase the cash surrender value of the policy. What amount should Crane
report as life insurance expense for 2009?
A. 13,000
B. 19,000
C. 25,000
D. 40,000

On January 1, 2009 Mary Company purchased 40% of the outstanding ordinary shares of Letter
Company paying P2,560,000 when the book value of the net assets of Letter equaled P5,000,000. The
difference was attributed to equipment which had a book value of P1,200,000 and a fair value of
P2,000,000, and to building with a book value of P1,000,000 and a fair value of P1,600,000. The
remaining useful life of the equipment and building was 4 years and 12 years, respectively. During 2009,
Letter reported net income of P1,600,000 and paid dividends of P1,000,000. What is the carrying
amount of the investment in Letter Company on December 31, 2009?
A. 2,550,000
B. 2,700,000
C. 2,800,000
D. 3,050,000

On February 15, 2009, Bart Company purchased 20,000 shares of Homer Company's newly issued 6%
cumulative P75 par preference share capital for P1,520,000. Each share carried one detachable share
warrant entitling the holder to acquire at P10, one ordinary share of Homer Company. On February 15,
2009, the market price of the preference share ex-warrant was P72 and the market price of the share
warrant was P8. On December 31, 2009, Bart sold all the share warrants for P205,000. The gain on the
sale of the share warrants was:
A. 0
B. 5,000
C. 45,000
D. 53,000

Leviathan Company had investments in bonds with face value of P8,000,000. The bonds were acquired
at face value on January 1, 2008 and classified as "available for sale". The bond investment had the
following market value: December 31, 2008 7,500,000 December 31, 2009
7,200,000On December 31, 2009, Leviathan decided to reclassify the bong investment as "held to
maturity" as a result of a change in intention and ability. What amount should be reported as unrealized
loss on these securities in the 2009 statement of changes in equity?
A. 0
B. 300,000
C. 500,000
D. 800,000

On July 1, 2009, Salt Company exchanged a truck for 25,000 ordinary shares of Alas Company. On that
date, the truck's carrying amount was P2,500,000 and its fair value was P3,000,000. Also, the book value
of Alas' share was P60. On December 31, 2009, Alas had 250,000 ordinary shares outstanding and its
book value per share was P50. What amount should report in its December 31, 2009 balance sheet as
investment in Alas?
A. 1,250,000
B. 1,500,000
C. 2,500,000
D. 3,000,000

In January 1, 2009, Camelot Company established a sinking fund in connection with its issue of bonds
due in 2014. A bank was appointed as independent trustee of the fund. On December 31, 2009, the
trustee held P364,000 cash in the sinking fund account representing P300,000 in annual deposits. How
should the sinking fund be reported in Camelot's balance sheet at December 31, 2009?
A. No part of the sinking fund should appear in Cameron's balance sheet

FAR3/scf/1801/q1/scs Page 15
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

Seko Company has 100,000 ordinary shares outstanding. Kobe Company acquired 30,000 shares of Seko
for P120 per share in 2007. The securities are being held as long-term investment. Changes in retained
earnings for Seko for 2009 and 2010 are as follows:Retained earnings (deficit), January 1, 2009
(500,000)Net income for 2009 700,000Retained earnings,
December 31, 2009 200,000Net income for 2010
800,000Cash dividend paid on December 31, 2010 (400,000)Retained earnings,
December 31, 2010 600,000What is the balance of Kobe Company's
investment in Seko Company on December 31, 2010?
A. 3,600,000
B. 3,780,000
C. 3,930,000
D. 4,080,000

Granny Company acquired 30% of Seahorse Company's voting share capital for P2,000,000 on January 1,
2009. Granny's 30% interest in Seahorse gave Granny the ability to exercise significant influence over
Seahorse's operating and financial policies. During 2009, Seahorse earned P800,000 and paid dividend of
P500,000. Seahorse reported earnings of P1,000,000 for the 6 months ended June 30, 2010, and
P2,000,000 for the year ended December 31, 2010. On July 1, 2010, Granny sold half of its stock in
Seahorse for P1,500,000 cash. Seahorse paid dividend of P600,000 on October 1, 2010.Before income
tax, what amount should Granny include in its 2009 income statement as a result of the investment?
A. 150,000
B. 240,000
C. 500,000
D. 800,000

Information regarding Trinity Company's portfolio of available for sale securities is as follows:Aggregate
cost - December 31, 2009 1,700,000Unrealized gains - December 31, 2009
40,000Unrealized losses - December 31, 2009 260,000Net realized gains during
2009 300,000On January 1, 2007 Trinity Company reported an unrealized
loss of P15,000 as a component of shareholders' equity. In its December 31, 2009 shareholders' equity
section of the balance sheet, Trinity Company should report what amount of unrealized loss on these
securities?
A. 0
B. 205,000
C. 220,000
D. 260,000

On January 1, 2009, Tree Company borrowed P5,000,000 from a bank at a variable rate of interest for 4
years. Interest will be paid annually to the bank on December 31 and the principal is due on December
31, 2012. Under the agreement, the market rate of interest every January 1 resets the variable rate for
that period and the amount of interest to be paid on December 31. In conjunction with the loan, Tree
Company entered into a "receive variable, pay fixed" interest rate swap agreement with another bank
speculator. The interest rate swap agreement was designated as a cash flow hedge. The market rates of
interest are: January 1, 2009 10% January 1, 2010
14% January 1, 2011 12% January 1, 2012 11%
The present value of an ordinary annuity of 1 is as follows: At 14% for three periods
2.32 At 12% for two periods 1.69 At 11% for one period
0.90 What is the derivative asset or liability on December 31, 2010?
A. 200,000 asset
B. 200,000 liability
C. 169,000 asset
D. 169,000 liability

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Gallery Company ventured into construction of a condominium in Ortigas 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.The construction of the condominium was completed and the property
was placed in service on January 1, 2009. The cost of the construction was P50 million. The useful life of
the condominium is 25 years and its residual value is P5 million. An independent valuation expert
provided the following fair value at each subsequent year-end:December 31, 2009
55 millionDecember 31, 2010 53 millionDecember 31, 2011
60 millionUnder the cost model, Gallery Company should report depreciation of investment property for
2009 at:
A. 0
B. 1,800,000
C. 2,000,000
D. 2,200,000

On July 1, 2009, Easter Company purchased as a long-term investment P5,000,000 face amount, 8%
bonds of Ranch Company for P4,615,000 to yield 10% per year. The bonds pay interest semiannually on
January 1 and July 1. In its December 31, 2009 balance sheet Eastern should report interest receivable
of:
A. 184,600
B. 200,000
C. 230,750
D. 250,000

Data regarding Bondoc Company's trading securities follow: COST


MARKETDecember 31, 2008 5,000,000 4,600,000December 31, 2009
5,000,000 5,800,000Differences between cost and market value are considered temporary.
The income statement for 2009 should report unrealized gain on these securities at
A. 0
B. 400,000
C. 800,000
D. 1,200,000

Elven Company and its subsidiaries own the following properties that are accounted for in accordance
with international accounting standards:Land held by Elven for undetermined use
5,000,000A vacant building owned by Elven and to be leased out under an operating lease
3,000,000Property held by a subsidiary of Elven, a real estate firm, in the ordinary course of business
2,000,000Property held by Elven for use in production 4,000,000Building owned
by a subsidiary of Elven and for which the subsidiary provides security and maintenance services to
the lessees 1,500,000Land leased by Elven to a subsidiary under an operating
lease. 2,500,000Property under construction for use as an
investment property 6,000,000Land held for
future factory site 3,500,000Machinery leased out by Elven to an
unrelated party under and operating lease 1,000,000What will be the
total investment property to be shown in the consolidated balance sheet of the parent and its
subsidiaries?
A. 9,500,000
B. 10,500,000
C. 12,000,000
D. 15,500,000

On January 1, 2009, Cage Company purchased equity securities to be held as "available for sale". The
cost and market value of the securities were:
COST MARKET VALUE 12/31/09 MARKET VALUE 12/31/10Security R 3,000,000
3,200,000 --------Security S 4,000,000 3,500,000
3,700,000Security T 5,000,000 4,600,000 4,700,000On January 31, 2010,
Cage Company sold Security R for P3,500,000.What is the gain or loss on the sale of Security R on
January 31, 2010?

FAR3/scf/1801/q1/scs Page 17
A. 300,000 gain
B. 500,000 gain
C. 300,000 loss
D. 500,000 loss

On January 1, 2009, Augustine Company purchased bonds with face value of P5,000,000 to be held as
"available for sale". The company paid P4,600,000 plus transaction costs of P142,000. The bonds mature
on December 31, 2011 and pay 6% interest annually on December 31 of each year with 8% effective
yield. The bonds are quoted at 105 on December 31, 2009. The bonds are sold at 110 on December 31,
2010. What amount of gain on sale on these bonds should be reported in the 2010 income statement?
A. 250,000
B. 500,000
C. 592,931
D. 758,000

Bulk Company purchased a P1,000,000 ordinary life insurance policy on its president. The policy year
and Bulk's accounting year coincide. Additional data are available for the year ended December 31,
2009:Cash surrender value, 1/1 43,500Cash surrender value, 12/31
54,000Annual advance premium paid 1/1 20,000Dividend received 7/1
3,000Bulk Company is the beneficiary under the life insurance policy. How much should Bulk report as
life insurance expense for 2009?
A. 6,500
B. 9,500
C. 17,000
D. 20,000

On January 1, 2009, Dryer Company acquired as a long-term investment a 20% ordinary share interest in
Epson Company. Dryer paid P7,000,000 for this investment when the fair value of Epson's net assets was
P35,000,000. Dryer can exercise significant influence over Epson's operating and financial policies. For
the year ended December 31, 2009, Epson reported net income of P4,000,000 and declared and paid
cash dividends of P1,600,000. How much revenue from this investment should Dryer report for 2009?
A. 320,000
B. 480,000
C. 800,000
D. 1,120,000

During 2009, Giant Company purchased trading securities as a short-term investment. The cost of the
securities and their market value on December 31, 2009 follow:SECURITY COST
MARKET VALUE A 650,000 750,000 B 1,000,000
540,000 C 2,200,000 2,260,000At the beginning of 2009, Giant had a
zero balance in the market adjustment for trading securities account. Before any adjustment related to
these trading securities, Giant had net income of P3,000,000. What is the net income after making any
necessary trading security adjustment?
A. 2,540,000
B. 2,700,000
C. 3,000,000
D. 3,300,000

On January 1, 2009, Den Company purchased ten-year bonds with a face value of P1,000,000 and a
stated interest rate of 8% per year payable semiannually July 1 and January 1. The bonds were acquired
to yield 10%. Present value factors are as follows:Present value of 1 for 10 periods at 10%
.386Present value of 1 for 20 periods at 5% .377Present value of an
annuity of 1 for 10 periods at 10% 6.145Present value of an annuity of 1 for 20 periods
at 5% 12.462The purchase price of the bonds is:
A. 875,380
B. 1,000,000

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C. 1,100,000
D. 1,124,620

Neil Company held the following marketable securities as trading investments at December 31, 2009:
COST MARKET VALUE100,000 shares of Company A nonredeemable preference
share capital, par value P75 775,000 825,0007,000 shares of Company B
preference share capital, par value P100, subject to mandatory redemption by the issuer at par on
December 31, 2010 690,000 625,000
1,465,000 1,450,000In the December 31, 2009 balance sheet, trading securities should
be reported at:
A. 1,400,000
B. 1,450,000
C. 1,465,000
D. 1,475,000

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