A3 Assignment Equity and Debt Securities

Kingfisher School of Business and Finance
Accounting 3
PFRS 9 FINANCIAL INSTRUMENTS

1. IFRS requires entities to measure financial assets based on all of the following, except
a. The entity’s business model for managing financial assets.
b. Whether the financial asset is a debt or equity investment
c. The contractual cash flow characteristics of financial asset.
d. All of the choices are PFRS requirements.
2. A financial asset is classified as held for trading if

a. It is acquired principally for the purpose of selling or repurchasing it in the near term.
b. On initial recognition, it is part of a portfolio of identified financial assets that are managed
together and for which there is evidence of a recent actual pattern of the short-term profit taking.
c. It is a derivative except for a derivative that is a financial guarantee or a designated and an
effective hedging instrument.
d. All of these are classified as held for trading.
3. Transaction cost include

a. Fees and commission paid to agent, levies by regulatory authorities and transfer taxes
b. Debt premium or discount
c. Financing costs
d. Internal administrative costs
4. Which of the following is correct in regard to trading investments?

a. Trading investments are held with the intention of selling them in a short period of time.
b. Unrealized holding gains and losses are reported as part of net income.
c. Any discount or premium is not amortized.
d. All of these are correct.
5. An entity may make an irrevocable election to present in other comprehensive income

changes in fair value of
a. An investment in equity instrument that is held for trading.
b. An investment in equity instrument that is not held for trading
c. A financial asset measured at amortized cost
d. A financial asset measured at fair value through profit or loss.
6. A debt investment asset shall be measured subsequently at amortized cost

a. By irrevocable designation
b. When the debt investment is managed and evaluated on a document risk-management
strategy.
c. When the debt investment is held for trading
d. When the business model is to collect contractual cash flows that are solely payments of
principal and interest.
Accounting 3
7. A debt investment shall be measured at fair value through other comprehensive income
a. When the debt investment is held for trading
b. When the debt investment is not held for trading.
c. By irrevocable designation
d. When the business model is to collect is to collect contractual cash flows that are solely
payments of principal and interest and also to sell the financial asset.
8. Amortized cost is the initial recognition amount of investment minus

a. Repayments and net of any reduction for uncollectibility.
b. Cumulative amortization and net of any reduction of any reduction for uncollectibility
c. Repayments plus or minus cumulative amortization and net of any reduction for
uncollectibility.
d. Repayments plus or minus cumulative amortization.
9. Which statement is correct about the effective interest method of amortization?

a. The effective-interest method applied to debt investment is different from that applied to
bonds payable
b. Amortization of discount decreases from period to period
c. Amortization of premium decreases from period to period.
d. The effective interest method applies the effective interest rate to the beginning carrying
amount for each interest period.
10. Under the fair value option, an entity may

a. Irrevocably designate a financial asset as measured at fair value through profit or loss even if
the amortized cost
measurement is satisfied.
b. Irrevocably designate a financial asset measured at fair value through other comprehensive
income
c. Revocably designate a financial asset measured at fair value through profit or loss even if the
amortized cost
measurement is satisfied.
d. Designate all instruments as measured at fair value through profit or loss.
11. The fair value option allows an entity to

a. Record income when the fair value of investment increases.
b. Measure debt investments at fair value in some years but not other years.
c. Report most financial instruments at fair value by recording gains and losses as a component
of other comprehensive income.
d. All of these are true regarding the fair value option
12. Equity investments acquired by an entity which are accounted for by recognizing unrealized
holding gains or losses as component of other comprehensive income are
a. Non-trading where an entity has holdings of less than 20%.
Accounting 3
b. Trading investments where an entity has holdings of less than 20%.

c. Investments where an entity has holdings of between 20%-50%.
d. Investments where an entity has holdings of more than 50%
13. Entities account for transfers of investments between categories

a. Prospectively, at the end of the period after the change in the business model.
b. Prospectively, at the beginning of the period after change in the business model.
c. Retroactively, at the end of the period after the change in the business model.
d. Retroactively, at the beginning of the period after change in the business model.
PROBLEM
1. Ronalyn Company provided the following data pertaining to dividends on ordinary share
investments for the current year:
• On October 1, the entity received P600,000 liquidating dividend from A Company. The
entity owned a 10% interest in A Company.
• The entity owned a 20% interest in B Company which declared and paid a P4,000,000
cash dividend to shareholders on December 31.
• On December 1, the entity received from C Company a dividend in kind of one share of
D Company for every 4 C Company shares held. The entity had 100,000 C Company
shares which have a market price of P50 per share on December 1. The market price of
D Company share was P10.
What amount should be reported as dividend income for the current year?
a. 1,650,000 b. 1,050,000 c. 850,000 d. 250,000
2. Amor Company owned 50,000 shares of another entity. These 50,000 shares were
originally purchased for P100 per share. On October 1, 2015, the investee distributed
50,000 rights to the entity. The entity was entitled to buy one new share for P140 and
five of these rights. On October 1, 2015, each share had a market value of P150 and
each right had market value of P10. On December 31, 2015, the entity exercised all
rights. The stock rights are accounted for separately and measured initially at fair value.
What total cost should be recorded for the new shares that are acquired by exercising
the rights?
a. 1,400,000 b. 1,900,000 c. 1,650,000 d. 1,000,000
3. Aira Company issued rights to subscribe to its stock, the ownership of 4 shares entitling
the shareholders to subscribe for 1 share at P100. An investor owned 50,000 shares
with total cost of P5,000,000. The share is quoted right-on at 125. The stock rights are
accounted for separately and measured initially at fair value. What is the cost of the new
investment assuming all of the stock rights are exercised by the investor?
a. 1,500,000 b. 1,250,000 c. 1,562,500 d. 1,450,000
4. On January 1, 2015, Diane Company purchased 12% bonds with face amount of
P5,000,000 for P5,500,000 including transaction cost of P100,000. The bonds provide
Accounting 3
an effective yield of 10%. The bonds are dated January 1, 2015, mature on January
1,2020 and pay interest annually on December 31 each year. The bonds are quoted at
115 on December 31, 2015. The entity has irrevocably elected to use the fair value
option.
1. What amount of gain from change in fair value should be reported for 2015?
a. 750,000 b. 250,000 c. 350,000 d. 0
2. What amount of interest income should be reported for 2015?

a. 600,000 b. 550,000 c. 660,000 d. 540,000
5. On January 1, 2015, Jenica Company purchased 9% bonds with face amount of

P4,000,000 for P3,756,000 to yield 10%. The bonds are dated January 1, 2015, mature
on December 31, 2024 and pay interest annually on December 31. The interest method
of amortization is used.
1. What is the interest income for 2016?
a. 400,000 b. 375,000 c. 360,000 d. 377,160
2. What is the carrying amount of the bond investment on December 31, 2016?
a. 4,000,000 b. 3,756,000 c. 3,771,600 d. 3,788,760
6. On July 1, 2015 Jobelle Company purchased as a long-term investment P1,000,000

face value 8% bonds for P946,000 including accrued interest of P40,000. The bonds
were purchased to yield 10% interest. The bonds pay interest annually on December 31.
The effective interest method of amortization is used. What is the carrying amount of the
investment in bonds on December 31, 2015?
a. 911,300 b. 916,600 c. 953,300 d. 960,600
7. On January 1, 2015, Jennifer Company purchased bonds with face amount of

P8,000,000 for P7,679,000 to be held to maturity. The stated rate on the bonds is 10%
but the bonds are acquired to yield 12%. The bonds mature at the rate of P2,000,000
annually every December 31 and the interest is payable annually also every December
31. The entity used the effective interest method of amortizing discount.
1. What is the carrying amount of the bond investment on December 31, 2015?
a. 5,759,250 b. 7,759,250 c. 7,800,480 d. 5,800,480
2. What amount should be reported as interest revenue for 2015?

a. 921,480 b. 800,000 c. 696,058 d. 767,900
8. On January 1, 2015, Nikka Company purchased bonds with face amount of P5,000,000.
The entity paid P4,600,000 plus transaction cost of P142,000. The bonds mature on
December 31, 2017 and pay 6% interest annually on December 31 of each year with 8%
effective yield. The bonds were quoted at 105 on December 31, 2015 and 110 on
Accounting 3
December 31, 2016. The bonds were sold at 120 plus accrued interest on June 30,
2017. The business model in managing the financial asset is to collect contractual cash
flows that are solely payments of principal and interest and also to sell the bonds in the
open market.
1. What amount of unrealized gain should be reported as component of other
comprehensive income in the statement of comprehensive income for 2015?
a. 250,000 b. 400,000 c. 428,640 d. 0
2. What amount of cumulative unrealized gain should be reported as component of other

comprehensive income in the statement of changes in equity for 2016?
a. 500,000 b. 592,931 c. 164,291 d. 0
3. What is the interest income for 2016?

a. 300,000 b. 379,360 c. 385,709 d. 392,931
4. What amount of gain on sale of bond investment should be reported in the income
statement for 2017?
a. 1,046,465 b. 1,000,000 c. 453,534 d. 0

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Kingfisher School of Business and Finance

PFRS 9 FINANCIAL INSTRUMENTS

2. A financial asset is classified as held for trading if

3. Transaction cost include

4. Which of the following is correct in regard to trading investments?

5. An entity may make an irrevocable election to present in other comprehensive income

6. A debt investment asset shall be measured subsequently at amortized cost

8. Amortized cost is the initial recognition amount of investment minus

9. Which statement is correct about the effective interest method of amortization?

10. Under the fair value option, an entity may

11. The fair value option allows an entity to

b. Trading investments where an entity has holdings of less than 20%.

13. Entities account for transfers of investments between categories

2. What amount of interest income should be reported for 2015?

5. On January 1, 2015, Jenica Company purchased 9% bonds with face amount of

6. On July 1, 2015 Jobelle Company purchased as a long-term investment P1,000,000

7. On January 1, 2015, Jennifer Company purchased bonds with face amount of

2. What amount should be reported as interest revenue for 2015?

2. What amount of cumulative unrealized gain should be reported as component of other

3. What is the interest income for 2016?

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