Theory:

1.

Under IFRS, the fair value option

A.Must be applied to all instruments the company holds.

B.May be selected as a valuation method by the company at any time during the first 2 years of ownership.

C.Reports all gains and losses in income.

D.All of the choices are correct.

2.

Equity investments acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of equity are

A.non-trading where a company has holdings of less than 20%.

B.trading investments where a company has holdings of less than 20%.

C.investments where a company has holdings of between 20% and 50%.

D.investments where a company has holdings of more than 50%.

3.

When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment

A.by using the equity method.

B.by using the fair value method.

C.by using the effective interest method.

D.by consolidation

4.

Unrealized holding gains or losses on trading investments are reported in

A.equity.

B.net income.

C.other comprehensive income.

D.accumulated other comprehensive income.

5.

When a company holds between 20% and 50% of the outstanding ordinary shares of an investee, which of the following statements applies?

A.The investor should always use the equity method to account for its investment.

B.The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.

C.The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.

D.The investor should always use the fair value method to account for its investment.

6.

Koehn Corporation accounts for its investment in the ordinary shares of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as

A.a reduction of the carrying value of the investment.

B.share premium.

C.an addition to the carrying value of the investment.

D.dividend income.

7.

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

A.investor sells the investment.

B.investee declares a dividend.

C.investee pays a dividend.

D.earnings are reported by the investee in its financial statements.

8.

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2012, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

A.Understate, overstate, overstate

B.Overstate, understate, understate

C.Overstate, overstate, overstate

D.Understate, understate, understate

9.

An impairment loss is the difference between the recorded investment and the

A.expected cash flows .

B.present value of the expected cash flows.

C.contractual cash flows.

D.present value of the contractual cash flows.

10.

Companies 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 the 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 the change in the business model.

11.

Which of the following statements is false?

A.The IASB requires that companies classify financial assets into two measurement categories - amortized cost and fair value.

B.The Unrealized Holding Gain/LossEquity account is reported as a part of other comprehensive income.

C.An investment of more than 50 percent of the voting stock of an investee should lead to a presumption of significant influence over an investee.

D.All dividends received by an investor from the investee decrease the investment's carrying value under the equity method.

12.

If the assets of the investee are fairly valued, the excess of acquisition cost over the carrying amount of the net assets is attributed to

A.Depreciable asset

B.Non-depreciable asset

C.Goodwill

D.All of the above

13.

If there is an excess of cost over carrying amount of the net assets of the investee, the excess may be attributable to

A.Depreciable assets

B.Non-depreciable assets

C.Goodwill

D.All of the above

14.

If the excess of cost over the carrying amount of the net assets of the investee is attributable to land

A.It is not amortized but expensed when the land is sold

B.It is amortized and recognized as expense regardless of when sold

C.It is amortized and expensed when revalued.

D.None of the above

15.

Any excess of the investor's share of the net fair value of the associate's identifiable assets and liabilities over the cost of the investment is

A.Excluded as income in the determination of the investor's share of the associate's profit or loss in the period in which the investment is acquired.

B.Included as income in the determination of the investor's share of the associate's profit or loss in the period in which the investment is acquired.

C.Not recorded nor amortized in the accounting books of the investor.

D.None of the above

Problems:

1.

Nightmare Company provided the following information on December 31, 2020 regarding the portfolio of equity securities:

Aggregate cost 1,700,000

Unrealized gain 40,000

Unrealized losses 260,000

Net realized gains during the current year 300,000

The equity investments are measured at fair value through other comprehensive income.

On January 1, 2020, the entity reported unrealized loss of P 15,000 to reduce investment to market on a portfolio basis.

In the December 31, 2020 statement of changes in equity, what amount of unrealized loss should be reported?

A.P 260,000

B.P 220,000

C.P 205,000

D.P0

2.

During 2020, Opulence Company purchased marketable equity securities as short-term investment to be measured at fair value through other comprehensive income. The cost and market value on December 31, 2020 were:

Security Cost Market

A 1,000 shares 300,000 350,000

B 10,000 shares 1,700,000 1,550,000

C 20,000 shares 3,150,0000 2,950,000

The entity sold 10,000 shares of B on January 5, 2021 for P 1,450,000.

What total amount should be charged to retained earnings as a result of the sale of equity securities?

A.P 200,000

B.P 100,000

C.P 250,000

D.P50,000

3.

Temporal Company owned 50,000 shares held for trading. These 50,000 shares were purchased for P 120 per share. During the year, the investee distributed 50,000 share rights to the investor.

The investor was entitled to buy one new share for P 90 cash and two of these rights.

Each share had a market value of P 130 and each right had a market value of P 20 on the date of issue

What total cost should be recorded for the new shares that are acquired by exercising the rights?

A.P 2,250,000

B.P 3,250,000

C.P 3,050,000

D.P 5,500,000

4.

Haste Company invested in shares of another entity.

Year Number of shares Cost

2018 20,000 shares P 2,000,000

2019 40,000 shares 3,500,000

In 2020, the entity received 60,000 rights to purchase one share at P 80

Five rights are required to purchase the share. At issuance date, rights had a market value of P 15 each.

The entity used rights to purchase 10,000 additional shares of the investee and allowed the rights no exercised to lapse.

What amount was debited to investment account for the purchase of the additional investment?

A.P 1,100,000

B.P 1,050,000

C.P800,000

D.P900,000

5.

On April 1, 2020, August Company purchased 40% of the outstanding shares of an associate for P 4,000,000.

On this date, the investee's net assets totaled P 8,000,000 and August Company cannot attribute the excess of cost of the investment over the equity in the investee's net assets to any particular factor. The investee reported net income of P 1,000,000 for the current year.

What is the maximum amount which could be included in August Company's income before tax to reflect its "equity in earnings of the investee" for the current year?

A.P 270,000

B.P 360,000

C.P 300,000

D.P 400,000

6.

Norm Company owned 20% of Love Company's preference share capital and 50% of the ordinary share capital.

Love Company's share capital outstanding on December 31, 2020 is as follows:

10% cumulative preference share capital 2,000,000

Ordinary share capital 7,000,000

Love Company reported net income of P 5,000,000 for the year ended December 31, 2020.

What amount should be reported as investment income for the year ended December 31, 2020?

A.P 2,400,000

B.P 2,500,000

C.P 2,600,000

D.P 2,700,000

7.

On January 1, 2020, Small Company purchased 25% of Big Company. NO "excess" resulted from the purchase.

Small Company appropriately carried this investment at equity and the carrying amount of the investment was P 1,900,000 on December 31, 2020.

Big Company reported net income of P 1,200,000 for the current year and paid cash dividend of P 480,000 on December 31, 2020.

What amount did small Company pay for the 25% interest in Big Company?

A.P 2,320,000

B.P 2,020,000

C.P 2,080,000

D.P 1,720,000

8.

On January 1, 2020, Mega Company acquired 10% of the outstanding ordinary shares of Penny Company for P 4,000,000. The investment was appropriately accounted for under cost method.

On January 1,2021, Mega gained the ability to exercise significant influence over financial and operating control of Penny by acquiring an additional 20% of Penny's outstanding ordinary shares for P 10,000,000.

The fair value Penny's net assets equaled carrying amount. The fair value of the 10% interest in January 1, 2021 was P 6,000,000.

For the years ended December 31, 2020 and 2021, the investee reported the following:

2019 2020

Dividends paid 2,000,000 3,000,000

Net income 6,000,000 6,500,000

What is the investment income in 2020?

A.P 200,000

B.P 400,000

C.P 600,000

D.P 300,000

9.

Using the same information in number (8), what is the investment income in 2021?

A.P 1,300,000

B.P 1,950,000

C.P 1,000,000

D.P 1,900,000

10.

Using the same information in number (8), what is the carrying amount of the investment in associate on December 31, 2021?

A.P 16,000,000

B.P 17,050,000

C.P 15,050,000

D.P 16,700,000