CABRIA CPA REVIEW CENTER

INVESTMENT IN EQUITY SECURITIES AND DEBT SECURITIES Tel. Nos. (043) 980-6659
ERNIE M. LAT II

LECTURE
Investment in Equity Securities
Share capital (capital stock) of other companies may be purchased by an enterprise for a number of reasons, as follows:
1) as temporary placements of excess cash and held primarily for sale in the near term to generate income on short-
term price fluctuations;
2) to obtain long term customer or supplier or creditor relationship to secure certain operating of financing
arrangement with these companies;
3) to exercise significant influence or even control over the operating policies of another entity.

Equity Securities
a. Equity investments at fair value through profit or loss;
b. Equity investments at fair value through comprehensive income;
c. Investment in associate; and
d. Investment in subsidiaries

Less than 20% 20% - 50% More than 50%

It is presumed It is presumed that the It is presumed that the investor has

that the investor investor has significant control over the investee company.
does not have influence over the Parent-subsidiary relationship exists.
significant investee company. Consolidate the financial statements,
influence over unless falling under the exemption in
the investee PAS/IAS 27.
company.

Equity Investment in associates Investment in subsidiaries

investments at (Use equity method
FV unless expected to be
disposed within 12 mos.
(IFRS 9) (IAS 28) (IAS 27)

 The designation as to whether the equity investment is at fair value through profit or loss or through other
comprehensive income depends upon whether the securities are trading or non-trading.
 Trading Equity Securities  Fair value through profit or loss
 Non-trading Equity Securities  Day 1 Irrevocable choice of designating at fair value through other
comprehensive income or at fair value through profit or loss.
 Equity securities which provide holder the ability to participate (but not control) the financial and
operating policy decisions of the investee company shall be designated as investment in associate or
investment in joint venture.
 Equity securities that give the holder the power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities are designated as investment in a subsidiary.

Financial Instruments
 Financial instrument is “any contract that gives rise to a financial asset of one entity and a financial liability or
equity instrument of another entity.”
 Financial instruments include both financial assets and financial liabilities.

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 Financial instruments include equity instruments of another entity but exclude an entity’s own equity instruments.
An entity’s own equity instruments are neither assets nor liabilities, but rather equity.

Financial assets
A financial asset is any asset that is
a. Cash;
b. Equity instrument of another entity;
c. Contractual right to receive cash or another financial asset or to exchange financial assets or financial liabilities
with another entity under conditions that are potentially favorable to the entity

Financial liabilities
A financial liability is any liability that is:
a. a contractual obligation to deliver cash or another financial asset to another entity; or
b. a contractual obligation to exchange financial assets or financial liabilities with another entity under conditions that
are potentially unfavorable to the entity.

Initial recognition and Classification

Financial assets are recognized only when the entity becomes a party to the contractual provisions of the instrument.

Classification
Financial assets are classified as either:
1. Financial assets at amortized cost, or
2. Financial assets at fair value

Basis of classification
1. The entity’s business model for managing the financial assets; and
2. The contractual cash flow characteristics of the financial asset.

Classification at amortized cost

A financial asset shall be measured at amortized cost if both of the following conditions are met:
a. the asset is held within a business model whose objective is to hold assets in order to collect contractual cash
flows.
b. the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding.

Classification at fair value

Financial assets that do not meet the criteria for classification at amortized cost shall be measured at fair value.

Financial assets measured at fair value are sub-classified into the following:
1. FVPL
a. Designated – an option allowed if it reduces “accounting mismatch;” irrevocable choice at initial
recognition
b. Held for trading

2. FVOCI – irrevocable choice at initial recognition

Fair Value Measurement

 Fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.” (PFRS 13)

 Fair value is based on the market price of the asset in a:

a. principal market; or
b. the most advantageous market (in the absence of a principal market)

 The market price used in measuring fair value is not adjusted for any transaction costs, but is adjusted for any
transport costs.

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FAIR VALUE HIERARCHY
Level 1 Observable inputs that reflect quoted prices for identical Most reliable
assets or liabilities in active markets.
Level 2 Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability either directly or through
corroboration with observable data.
Level 3 Unobservable inputs (for example, an entity’s own data or Least reliable
assumptions).

Type of Investment Composition Classificatio Initial Subsequent Fair value

n in the SFP recognition measurement changes
1. Designated at FVPL Debt or equity Current Fair value Fair value P/L
securities
2. Held for trading Debt or equity Current Fair value Fair value P/L
securities
3. Investment in FVOCI Equity Current or Fair value plus Fair value OCI
securities noncurrent transaction cost
4. Financial assets at amortized Debt securities Current or Fair value plus Amortized cost Ignored
cost noncurrent transaction
costs

Part II

Bonds
 Bonds are long-term debt instruments similar to term loans except that they are usually offered to the public and
sold to many investors.
 Bond indenture is the contractual arrangement between the issuer and the bondholders. It contains restrictive
covenants intended to prevent the issuer from taking actions contrary to the interests of the bondholders. A trustee,
often a bank, is appointed to ensure compliance.

Types of bonds
 Term bonds – bonds maturing on a single date.
 Serial bonds – bonds having staggered or series of maturity dates.
 Registered bonds – bonds issued in the name of the holder (owner). Interest payments are sent directly to the
holder.
 Coupon (bearer) bonds – bonds that can be freely transferred and have a detachable coupon for each interest
payment.
 Zero-coupon bonds (strip bonds) – bonds that do not pay periodic interests. Principal and compounded interest
are due only at maturity date.
 Callable bonds – bonds containing call provisions giving the issuer thereof the right to redeem the bonds prior to
their maturity date.
 Convertible bonds – bonds giving the holder thereof the option of exchanging the bonds for shares of stocks of
the issuer.

Accounting for investments measured at amortized cost

The accounting for investments in bonds (measured at amortized cost) is similar to the accounting for notes and loans
receivables. In the sense that, the accounting for investment in bonds (measured at amortized cost) also involves:
a. Present value computations; and
b. Preparation of amortization table (Effective interest method)

Discount vs. Premium

 If the carrying amount is less than the face amount, the difference represents a discount.
 If the carrying amount is more than the face amount, the difference represents a premium.
 If there is a discount, the EIR is higher than the NIR.
 If there is a premium, the EIR is lower than the NIR.
 Discount or premium is amortized using the effective interest method.

Effect of discount amortization

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You have acquired a bond with face amount of ₱5,000 for ₱4,000.
Would this be favorable or an unfavorable on your part?
Favorable. Why? --- You will be collecting ₱5,000 (excldg. interest) while your cash outflow is only ₱4,000.
On acquisition date, it seems you have earned a “gain” of ₱1,000 right?
Yes; however, PFRSs prohibit you from recognizing this “gain” outright. You need to amortize it over the term of the bond.
The “gain” represents the discount (Carrying amt. less than Face amt.).
The effect of the amortization is an increase in interest income.
Over the term of the bonds, interest income will be greater than collections on interests – the difference is the ₱1,000
“gain.”

Transaction costs
 Transaction costs incurred in the acquisition of bonds to be measured at amortized cost are included as part of the
cost of the investment.

Sale of bonds prior to maturity

When bonds are sold prior to maturity, the difference between the net disposal proceeds and the carrying amount of the
bonds, adjusted for any discount or premium amortization up to date of disposal, is recognized as gain or loss in profit or
loss.

Serial bonds
Serial bonds are bonds having staggered or series of maturity dates. Serial bonds are accounted for in much the same way
as for term bonds (i.e., bonds maturing on a single date such as those discussed up to this point). However, the periodic
collections on serial bonds include not only collections for interests but also collections for principal.

Zero-coupon bonds
Zero-coupon bonds are bonds that do not pay periodic interests. Both principal and interest are due only at maturity
date.

Regular way purchase or sale of financial assets

 A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require
delivery of the asset within the time frame established generally by regulation or convention in the marketplace
concerned.

 Trade date accounting vs. Settlement date accounting

a. Under trade date accounting, the financial asset purchased (sold) is recognized (derecognized) at the trade
date (i.e., the date the entity commits to purchase or sell the financial asset).
b. Under settlement date accounting, the financial asset purchased (sold) is recognized (derecognized) at the
settlement date (i.e., the date the ownership of the financial asset is transferred).

Reclassification

 After initial recognition, financial assets are reclassified only when the entity changes its business model for
managing financial assets.
 Reclassification date is the first day of the first reporting period following the change in business model that results
in an entity reclassifying financial assets.

Reclassification Initial Recognition Difference between the fair value

and the carrying amount
From amortized cost to held for Fair value on reclassification date Recognize in profit or loss
trading
From held for trading to amortized Fair value on reclassification date Recognize in profit or loss. Any
cost difference between the fair value on
reclassification date and the face
amount is subsequently amortized as
discount or premium
Into or out of “designated at FVPL” or N/A N/A
“FVOCI”

Dividends

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Dividends received from equity securities measured at FVPL or FVOCI (except share dividend) are recognized as dividend
revenue.

Stock rights
Stock rights, being equity instruments, are measured at fair value.

Disclosure of Risks on financial instruments

1. Credit risk - The risk that one party to a financial instrument will cause a financial loss for the other party by
failing to discharge an obligation.
2. Liquidity risk - The risk that an entity will encounter difficulty in meeting obligations associated with financial
liabilities that are settled by delivering cash or another financial asset.
3. Market risk - The risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market prices. Market risk comprises the following.
a. Interest rate risk
b. Currency risk
c. Other price risk

Part III

Other Long-Term Investment

Other long-term investments include investments in funds set aside for specific and long-term purpose and cash surrender
value.

Examples of other long-term investments

 Sinking fund
 Preference share redemption fund
 Asset replacement fund
 Expansion fund
 Contingency fund
 Insurance fund
 Cash surrender value

Cash surrender value

A cash surrender value accumulates when premiums and interest paid on a whole life insurance exceed the cost of
insurance.

Accounting for cash surrender value

INITIAL RECOGNITION:
 On initial recognition, the cash surrender value is allocated over the required holding period necessary for it to
accumulate (e.g., 3 years). The amount allocated to the current year is recognized as a deduction from insurance
expense while the amount allocated to prior years is credited to retained earnings. The cash surrender value is
classified as noncurrent investment.

 Pro-forma entry:

Cash surrender value xx

Retained earnings xx
Insurance expense xx

SUBSEQUENT PERIODS:
 Subsequent to initial recognition, increases in cash surrender value are treated as deduction from the insurance
expense recognized during the period.
 Pro-forma entry:

Cash surrender value xx

Insurance expense xx

 Cash dividends received from the insurance are not recognized as income but rather as deduction from the
insurance expense recognized during the period.

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 Pro-forma entry:

Cash xx
Insurance expense xx

SETTLEMENT:

When the insured key employee dies during the year, the increase in cash surrender value is recognized up to the date of
death. The difference between (a) insurance proceeds received or receivable and (b) the sum of cash surrender value and
any unexpired portion of prepaid insurance is recognized as gain on life insurance settlement.

Pro-forma entry:
Cash xx
Cash surrender value xx
Insurance expense/ Prepaid insurance xx
Gain on settlement xx

REVIEW QUESTIONS

1. A financial instrument is any contract that gives d. Loans and receivable

rise to
a. A financial asset 6. Financial liabilities include all of the following
b. A financial liability except:
c. A financial asset of one entity and a financial a. Trade accounts payable
liability of another entity b. Notes payable
d. A financial asst of one entity and a financial c. Bonds payable
liability or equity instrument of another d. Income tax payable
entity 7. How should preference shares that are redeemable
mandatorily be presented in the SFP?
2. Which of the following cannot be considered a
a. Noncurrent financial liability
financial asset?
b. Current financial liability
a. Cash
c. Equity
b. A contractual right to receive cash or another
d. Either current or noncurrent financial liability
financial asset from another entity.
depending on redemption date
c. A contractual right to exchange financial
instruments with another entity under 8. What is the presentation of preference dividend on
conditions that are potentially unfavorable. mandatorily redeemable preference shares?
d. An equity instrument of another entity. a. Deducted from retained earnings
3. A financial liability b. Deducted from share premium
a. Must be classified as noncurrent liability c. Finance cost as component of profit or loss
b. Is a contractual obligation to deliver cash or d. Finance cost as component of OCI
another financial asset to another entity
c. Is a contractual obligation to exchange financial 9. Which is not classified as a financial instrument?
assets or financial liabilities with another entity a. Convertible bond
under conditions that are potentially favorable b. Foreign currency contract
to the entity c. Warranty provision
d. Loan receivable
d. Is a contractual obligation to deliver cash or any
asset to another entity
10. Which should be classified as financial asset?
4. It is any contract that evidences residual interest in a. Patent
the assets of an entity after deducting all of the b. Trade accounts receivable
liabilities. c. Inventory
a. Equity instrument d. Land
b. Debt instrument
c. Loan and receivable 11. Which of the following is a financial liability?
d. Financial asset with indeterminable fair value a. Deferred revenue
b. A warranty obligation
5. Financial assets include all of the following except:
c. A constructive obligation
a. Prepaid expenses
d. An obligation to deliver own shares worth a
b. Cash in bank
fixed amount of cash
c. Trade accounts receivable

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12. Which of the following financial instruments would a. The risk that an entity will encounter difficulty
not be classified as financial liability? in meeting obligations associated with financial
a. A preference shares that must be redeemed by liability.
the issuer for cash on a future date b. The risk that an entity will encounter in
b. A contract for the delivery of as many of the disposing a financial asset due to lack of market
entity’s ordinary shares as are equal to the liquidity.
value in fixed amount of cash on a future date c. The risk that an entity will encounter in meeting
c. A written call option that gives the holder the cash flow needs due to cash flow problems.
right to purchase a fixed number of the entity’s d. The risk that an entity’s cash inflows will not be
ordinary shares in return for a fixed price sufficient to meet the entity’s cash outflows.
d. An issued perpetual debt instrument
18. The components of market risk are
13. What are conditions for offsetting financial asset a. Credit risk and liquidity risk
and financial liability? b. Currency risk and credit risk
a. A legal right of offset c. Interest rate risk and currency risk
b. A legal right of offset and an intention to settle d. Liquidity risk and currency risk
net or simultaneously
c. The existence of a clearing mechanism for net 19. Which of the following best describes credit risk?
settlement and an expectation of net a. The risk that one party to a financial instrument
settlement will cause a financial loss for the other party by
d. A netting agreement failing to discharge an obligation.
b. The risk that an entity will encounter difficulty
14. What is the principle for recognition of a financial in meeting obligations associated with financial
asset? liability.
a. A financial asset is recognized when it is c. The risk that the fair value associated with an
probable that future economic benefits will flow instrument will vary due to change in the
to the entity. counterparty’s credit rating.
b. A financial asset is recognized when the entity d. The risk that an entity’s credit facilities will be
obtains control of the instrument. withdrawn due to cash flow sensitivities.
c. A financial asset is recognized when the entity
obtains the risk and rewards of ownership of 20. Which information is not required to be disclosed
the financial asset. about exposure to risk arising from financial
d. A financial asset is recognized when the entity instruments?
becomes a party to the contractual provisions a. Information about market risk
of the instrument. b. Information about credit risk
c. Information about operational risk
15. In which of the following circumstances is d. Information about liquidity risk
derecognition of a financial asset not appropriate?
a. The contractual rights to the cash flows of the FINANCIAL ASSETS AT FAIR VALUE
financial asset have expired. 21. Depending on the business model for managing
b. All the risks and rewards of ownership of the financial assets, an entity shall classify financial
transferred asset have been transferred. assets subsequent to initial recognition at
c. The entity has retained substantially all the risk a. FV through profit or loss
and rewards of ownership of the transferred b. Amortized cost
asset. c. FV through OCI
d. The entity has lost control of the transferred d. All of these are used in measuring financial
asset. assets

16. Which of the following is not a relevant 22. How does the standard distinguish between the
consideration whether to derecognize a financial measurements methods to be used?
liability? a. By reviewing the business model and the risks
a. Whether the obligation has been discharged. and rewards of the transaction.
b. Whether the obligation has been canceled. b. By reviewing the business model and the
c. Whether the obligation has expired. contractual cash flow characteristics of the
d. Whether substantially all the risks and rewards instrument.
of ownership have been transferred. c. By reviewing the realizability and the
contractual cash flow characteristics of the
17. Liquidity risk is defined as instrument.
d. By reviewing the realizability of the instrument
and risks and rewards of ownership.

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d. Held as financial assets at FV through other
23. Which of the following is not a characteristic of a comprehensive income
financial asset held for trading?
a. It is acquired principally for the purpose of 29. Entities are required to measure financial asset
selling or repurchasing it in the near term. based on all of the following, except
b. On initial recognition, it is part of a portfolio of a. The business model for managing financial
financial assets that are managed together and asset
for which there is evidence of a recent actual b. Whether the financial asset is a debt or an
pattern of short-term profit taking. equity investment.
c. It is a derivative that is not designated as an c. The contractual cash flow characteristics of the
effective hedging instrument. financial asset.
d. It is a derivative that is designated as an d. All of the choices are required.
effective hedging instrument.
30. Debt investments that meet the business model and
24. All of the following financial assets shall be contractual cash flow tests are reported at
measured at FVPL, except a. Net realizable value
a. Financial assets held for trading b. Fair value
b. Financial assets designated on initial c. Amortized cost
recognition as FVPL d. The lower of amortized cost and fair value
c. Investments in quoted equity instruments 31. Debt investment not held for collection are
d. Financial assets at amortized cost reported at
a. Amortized cost
25. A debt instrument shall be measured subsequently b. Fair value
at amortized cost c. The lower of amortized cost and fair value
a. By irrevocable election d. Net realizable value
b. When the debt instrument is managed and
evaluated on a document risk-management 32. Debt investments reported at amortized cost are
strategy a. Managed and evaluated based on documented
c. When the debt instrument is held for trading risk management strategy
d. When the business model is to collect b. Trading debt investments
contractual cash flows that are solely payments c. Held for collection debt investments
of principal and interest d. All of these are correct

26. The irrevocable election to present subsequent 33. Equity investments irrevocably accounted for at
changes in fair value in other comprehensive fair value through other comprehensive income are
income is applicable only to a. Nontrading investments of less than 20%
a. Investment in equity instrument that is not held b. Trading investments of less than 20%
for trading c. Investments of between 20% and 50%
b. Investment in equity instrument that is held for d. Investments of more than 50%
trading
c. Financial asset measured at amortized cost 34. What financial assets are assessed for impairment?
d. Financial asset measured at fair value a. Equity investments at FVPL
b. Equity investments at FVOCI
27. A debt instrument shall be measured at FVOCI c. Debt investments at FVPL
a. When the debt investment is held for trading d. Debt investments at amortized cost and debt
b. When the debt investment is not held for investment at FVOCI
trading
c. By irrevocable designation 35. Impairment of debt investments are
d. When the business model is to collect a. Based on discounted contractual cash flows.
contractual cash flows that are solely payments b. Recognized as component of other
of principal and interest and also to sell the comprehensive income.
financial asset c. Based on fair value for nontrading investments
and on negotiated value for held for collection
28. Under IFRS, the presumption is that equity investments.
investments are d. Evaluated at each reporting date for every held
a. Held for trading for collection investment.
b. Held to profit from price changes
c. Held for trading and held to profit from price 36. An impairment loss is the excess of the carrying
changes amount of the investment over the
a. Expected cash flows

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b. Present value of the expected cash flows 43. Which statement is true when a financial asset at
c. Contractual cash flows FVOCI is reclassified to FVPL?
d. Present value of the contractual cash flows a. The financial asset continues to be measured at
fair value.
37. Reclassifications of investments between categories b. The fair value at reclassification date becomes
are accounted for the new carrying amount.
a. Prospectively, at the end of the period after the c. The cumulative gain or loss previously
change in the business mode. recognized in OCI is reclassified to profit or loss.
b. Prospectively, at the beginning of the period d. All of these statements are true.
after the change in the business model.
c. Retrospectively, at the end of the period after PFRS 15
the change in the business model. 44. Fair value of an asset should be based upon
d. Retrospectively, at the beginning of the period a. The replacement cost of an asset.
after the change in the business model. b. The price that would be received to sell the
asset at the measurement date.
38. Transfers of investments between categories c. The original cost of the asset.
a. Result in omitting recognition of fair value in the d. The price that would be paid to acquire the
year of the transfer. asset.
b. Are accounted for at fair value for all transfers.
c. Are not recognized if investments are 45. Which of the following described a principal market
transferred from held for collection to fair value. for establishing fair value of an asset?
d. Should always affect net income. a. The market that has the greatest volume and
level of activity for the asset.
39. When a debt investment at amortized cost is b. Any broker or dealer market
reclassified to FVPL, the difference between the c. The most observable market
previous carrying amount and fair value at d. The market in which the amount received
reclassification date is would be maximized.
a. Recognized in profit or loss
b. Not recognized 46. Which statement is true for measuring an asset at
c. Recognized in other comprehensive income fair value?
d. Included in retained earnings a. The price of the asset should be adjusted for
transaction cost.
40. When a debt instrument at FVPL is reclassified b. The fair value of the asset should be adjusted
to amortized cost, what is the new carrying for cost of disposal.
amount at amortized cost? c. The fair value is based upon an entry price to
a. Fair value at reclassification date purchase the asset.
b. Face amount of the debt instrument d. The price should be adjusted for cost to
c. Present value of the contractual cash flows transport the asset to the principal market.
d. Original carrying amount of the debt
investment 47. Which of the following is an assumption used in fair
value measurement?
41. Which statement is true when a debt investment a. The asset must be in use
at amortized cost is reclassified to FVOCI? b. The asset must be considered in-exchange
a. The debt investment is measured at fair value c. The most conservative estimate must be used
at reclassification date. d. The asset is in the highest and best use
b. The difference between the previous carrying
amount and fair value at reclassification date is 48. Which of the following would meet the
recognized in other comprehensive income. qualifications as market participants?
c. The original effective rate is not adjusted. a. A liquidation market in which sellers are
d. All of these statements are true. compelled to sell.
b. A subsidiary of the reporting unit interested in
42. When a financial asset at FVPL is reclassified to purchasing assets similar to those being valued.
FVOCI, the new carrying amount is equal to c. An independent entity that is knowledgeable
a. Fair value at reclassification date about the asset.
b. Original carrying amount d. A broker or dealer that wishes to establish new
c. Present value of contractual cash flows market for the asset.
d. Present value of contractual cash flows
representing principal 49. The fair value at initial recognition is
a. The price paid to acquire the asset.

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b. The price paid to acquire the asset less
transaction cost. 56. Property dividends are recorded
c. The price paid to transfer or sell the asset. a. As dividend income at carrying amount of the
d. The carrying amount of the asset acquired. property
b. As dividend income at fair value of the property
50. Which of the following is not a valuation technique c. As return of investment and therefore credited
used in fair value measurement? to investment account
a. Income approach d. By means of memorandum entry only
b. Residual value approach
c. Market approach PROBLEMS
d. Cost approach 57. Hillary Inc. has equity securities designated as at
fair value through profit or loss that were purchased
51. Valuation techniques for fair value that include the during 2020. At the end of 2020, the securities had
Black-Scholes formula, a binomial model or total market value of P525,000. As of December
discounted cash flow are examples of which 31, 2021, the records show cost and market values
valuation technique? as follows:
a. Income approach
b. Market approach Investment Cost Market Value
c. Cost approach 1 P100,000 P 90,000
d. Exit value approach 2 190,000 210,000
3 250,000 235,000
52. The market approach for measuring fair value
requires which of the following? The gain or loss that would be reported in profit or
a. Present value of future cash flows. loss as a result of the valuation of the securities at
b. Prices and other relevant information of the end of 2021 is
transactions from identical or comparable a. P5,000 c. P20,000
assets. b. P10,000 d. P25,000
c. The price to replace the service capacity of the
asset
d. The weighted average of the present value of 58. On January 1, 2020, the Pokemon Corp. purchased
future cash flows. marketable equity securities to be held as trading
for P2,000,000. The corporation also paid
53. Which of the following would be considered a Level commission, taxes and other transaction costs
2 input for fair value measurement? amounting to P50,000. The securities had the
a. Quoted market price on a stock exchange for following market values at December 31, 2020 and
an identical asset 2021, respectively: P1,750,000 and P2,100,000.
b. Quoted market price available from a business
broker for a similar asset. No securities were sold during 2020. What amount
c. Historical performance and return on the of unrealized gain or loss should be reported in the
investment 2020 profit or loss section of the statement of
d. All of these would be considered Level 2 input comprehensive income?
for fair value measurement a. P200,000 loss c. P350,000 gain
b. P250,000 loss d. P100,000 gain
54. It is the date on which the stock and transfer book
of the entity is closed for registration. Only those
shareholders registered as of this date are entitled 59. On January 1, 2019, the Pancho Co. purchased
to receive dividends. marketable equity securities for P2,000,000. The
a. Date of declaration company also paid commission, taxes, and other
b. Date of record transaction costs amounting to P50,000. Because
c. Date of payment the securities were acquired not for immediate
d. Date of mailing the dividend check trading, Pancho exercised its option to measure the
change in fair value through other comprehensive
55. At which of the following dates has the shareholder income. The securities had the following market
theoretically realized income from dividend? value at December 2019 and 2020, respectively:
a. The date the dividend is declared P1,750,000 and P2,100,000.
b. The date of record
c. The date the dividend check is mailed by the No securities were sold during 2019 and 2020.
entity What amount of unrealized gain or loss should be
d. The date the dividend check is received by the reported in the December 31, 2020, statement of
shareholder

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financial position as a component of shareholder’s
equity? Lot Date No. of Cost per Total cost
a. P200,000 unrealized loss shares share
b. P250,000 unrealized loss A Jan. 25 800 P560 P448,000
c. P50,000 unrealized gain B Apr. 5 600 600 360,000
d. P100,000 unrealized gain
RFP Co. effected a 20% bonus issue on February
60. Simon Trading made investments in non-trading 14, Year 1. Stock rights on ordinary shares were
securities. The cumulative “Holding gain or loss” issued on October 30, Year 1, entitling holders to
account has a debit balance of P12,900 at purchase one new ordinary shares at P450 for each
December 31, Year 1. An analysis of the ten shares held. On this date, the stock ex-rights
investments on December 31, Year 1 showed the being traded at P620 per share.
following:
On November 8, Year 1, Pan sold 500 rights that
No. of shares pertained to Lot A. Sales price was P20 per right.
or Face The company paid a brokerage fee of P500 on the
Value Cost Fair value sale of stock rights. Pan exercised the remaining
A - ordinary 600 shares P307,500 P270,000
rights on November 11, Year 1. Fair value of each
B - ordinary 225 shares 76,500 90,000
share on December 31 was P650.
C - ordinary 2,000 shares 269,500 280,600
P653,500 P640,600
How many new ordinary shares of RFP were
On July 1, Year 2, the shares of B were sold for acquired by Pan through the exercise of the rights?
P70,000. The balance of the equity pertaining to a. 168 shares
these shares was transferred to the retained b. 140 shares
earnings account. c. 118 shares
d. 106 shares
On December 31, Year 2, A shares were quoted at
P440 per share; C shares were quoted at P138 per 63. Using the same info from previous no. How much
share. total income from investments shall Pan report
during Year 1?
How much is the required debit to other a. P9,500
comprehensive income account at the end of Year b. P18,020
2? c. P27,520
a. P43,500 d. P28,020
b. P37,000
c. P30,600 64. On January 1, 2020, Tate Company acquired
d. P10,600 100,000 ordinary shares of Nestle Company for
P6,000,000. At the date of purchase, Nestle had
61. Billy Jean Co. bought 1,000 shares of PLDT shares 500,000 outstanding ordinary shares and
as equity investments on January 10, Year 2, at shareholder’s equity of P20,000,000. During the
P150 per share and paid P2,250 as brokerage fee. year 2020, Nestle reported profit of P1,000,000 and
The investments are held in the business model of declare and paid cash dividends of P1.50 per share.
collecting contractual cash flows and selling the The fair value of Nestle’s share at December 31,
financial assets. On December 5, Year 1, a P10 2020 was P68.
dividend per share of PLDT had been declared to be
paid on April 30, Year 2 to shareholders of January What amount shall Tate Company recognize in
31, Year 2. There were no other transactions in profit or loss for the year 2020 if it designated the
Year 2 affecting the investments in PLDT. investment as at FVTPL?
a. P150,000
At what amount should the investment in equity b. P200,000
securities be initially recognized on January 10, c. P350,000
Year 2? d. P950,000
a. P142,250
b. P150,000 65. On December 31, Year 1, Ponzi Co. held 1,000
c. P152,250 ordinary shares of X Co. in its portfolio of long-term
d. P162,250 investments in equity securities. The shares were
designated as at fair value through other
62. During Year 1, Pan Co. acquired, as financial assets comprehensive income. The shares had a cost of
at fair value through profit or loss, ordinary shares P150 per share and had a market value of P130 per
of RFP Co. as follows: share at December 31, Year 1. During Year 2, Ponzi

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acquired the following investments, all of which
were designated as at fair value through other
comprehensive income: 900 ordinary shares of Y
Co. for P180 per share and 800 ordinary shares of
Z Co. for P220 per share. At the end of Year 2,
market values per share were: X – P140; Y – P170;
Z – P200.

The adjusting entry on December 31, Year 2 would

a. Increase unrealized loss by P35,000
b. Increase unrealized loss by P15,000
c. Decrease unrealized loss by P20,000
d. Decrease unrealized loss by P15,000

66. On September 1, Year 2, the Law Co. acquired

P1,000,000 face value, 12% bonds of Key Co. at
104. The bonds were dated May 1, Year 2, and
mature on April 30, Year 5, with interest payable
each October 31 and April 30. The company did not
elect to measure securities at fair value.

What entry should Law make to record the

purchase of the bonds on September 1, Year 2?

Debit Credit
a. Debt investments 1,040,000
Interest receivable 40,000
Cash 1,080,000

b. Debt investments 1,080,000

Cash 1,080,000

c. Debt investments 1,080,000

Interest receivable 40,000
Cash 1,040,000

d. Debt investments 1,000,000

Premium on debt inv. 80,000
Cash 1,080,000

67. On July 1, Year 2, May Co. purchased P10 million of

West Co.’s 8% bonds due on July 1, Year 10. Based
on company’s business model for the portfolio of
investments, May designates the bonds as
investments measured at amortized cost. The
bonds, which pay interest semiannually on January
1 and July 1 were purchased for P8,750,000 to yield
10%.

In its statement of comprehensive income for the

year ended Year 2, May Co. should report interest
income of
a. P350,000
b. P400,000
c. P437,500
d. P500,000

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