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ACTIVITY 1 PROBLEM 2: MULTIPLE CHOICE - THEORY 1. According to PFRS 9, the amortized cost of a financial instrument is calculated using a. the effective interest method. b. the straight line method. c. (a) or (b) d. Choice (a); however, the straight line method can be used in some circumstances. 2. The amortization of a discount on an investment in bonds measured at amortized cost a. increases the carrying amount of the investment. b. is the excess of interest income over interest received or receivable. c. is recorded directly to the investment account. d. all of these 3. Which of the following statements is correct for an investment in term bonds that was acquired at a premium? a. The amortized cost of the bonds increases annually. b. The current and noncurrent portions of the bonds as of the reporting date are reported separately. c. The interest income recognized each year is higher than the amount of interest received/receivable. d. The effective interest rate is lower than the stated rate of the bonds. 4. The rate used in computing for interest receivable on debt instruments measured at amortized cost is the a. nominal rate. c. yield rate. b. effective interest rate. d. celeb rate. 5. The transaction costs of acquiring an investment measured at amortized cost are a. included in the initial measurement of the investment and amortized to profit or loss using the effective interest method. b. initially deferred and recognized in profit or loss only when the asset is derecognized or becomes impaired. 552 Chapter 10 c. initially deferred and recognized directly in equity when the asset is derecognized or becomes impaired. d. expensed immediately on acquisition date.UNIT 4 ACCOUNTING FOR INVESTMENTS Topic 2 - Investment in Debt Securities PRETEST 550 Chapter 10 PROBLEMS PROBLEM 1: TRUE OR FALSE 1. According to PFRS 9, amortized cost financial assets are initially measured at fair value. 2. Investments in ordinary shares can be classified as financial assets measured at amortized cost. 3. Subsequent changes in the fair value of a financial asset measured at amortized cost are normally ignored. 4. Investments in preference shares with mandatory redemption can be classified as financial assets measured at amortized cost. 5. Entity A acquired bonds with face amount of PIM for P976,231. The effective interest rate on the bonds must be lower than the stated rate. 6. The amortized cost of an investment in term bonds that is acquired at a discount decreases each year. 7. Whether an investment in debt securities is measured at amortized cost or FVOCI, the total effect of the investment in profit or loss would be the same. 8. Entity B acquired bonds at a discount and classified them as FVOCI. The amount of interest income for the period would be higher if the bonds were classified as amortized cost asset. 9. Discount or premium amortization is unnecessary if investments in bonds are measured at FVOCI. 10. Entity C acquired bonds and classified them as FVOCI. Subsequently, the bonds were sold at P100. The bonds were reported at a fair value of P90 in the latest annual financial statements. The bonds have an amortized cost of P80 as at the date of sale. Entity C would probably recognize a gain of P20 in profit or loss at the date of sale