Pdfcoffee - financial asset answer key PDF

Preview

Summary

FINANCIAL ASSET AT FAIR VALUE ( MARTIN AND SALIPADA)THEORIES 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 ar...

Description

FINANCIAL ASSET AT FAIR VALUE ( MARTIN AND SALIPADA) THEORIES 1. 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 shortterm 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 Answer: d 2. What is the best evidence of the fair value of a financial asset? a. The cost, including transaction cost b. The estimated value determines using discounted cash flow technique or option pricing model c. The quoted price, if an active market exists for the financial asset d. The present value of the contractual cash flow Answer: c 3. An entity purchased equity shares of another entity not for the purpose of selling and repurchasing but to be held as long-term investment. The most appropriate classification of this equity investment is a. Financial asset at fair value through profit or loss b. Financial asset held for trading c. Financial asset at fair value through other comprehensive income d. Amortized cost Answer: a 4. The business model in managing financial assets is to collect contractual cash flows that are solely payments of principal an interest. Which of the following is the most appropriate classification for the financial assets? a. Held for trading b. At fair value through profit or loss c. At amortized cost d. At fair value through other comprehensive income Answer: c

5. Which statement is true when a debt investment at amortized cost is reclassified to FVOCI? a. The debt investment is measured at fair value at reclassification date. b. The difference between the previous carrying amount and fair value at reclassification date is recognized in other comprehensive income. c. The original effective rate is not adjusted. d. All of these statements are true. Answer: d 6. Which statement is true when a debt investment at FVOCI is reclassified to amortized cost? a. The fair value at reclassification date becomes the new carrying amount. b. The cumulative gain or loss previously recognized in OCI is removed from equity and adjusted against the fair value at reclassification date. c. The original effective rate is not adjusted. d. All of these statements are true. Answer: d 7. When a financial asset at FVPL is reclassified to FVOCI, the new carrying amount is equal to a. Fair value at reclassification date b. Original carrying amount c. Present value of contractual cash flows d. Present value of expected cash flows Answer: a 8. Which statement is true when a financial asset at FVOCI is reclassified to FVPL? a. The financial asset continues to be measured at fair value. b. The fair value at reclassification date becomes the new carrying amount. c. The cumulative gain or loss previously recognized in OCI is reclassified to profit or loss d. All of these statements are true. Answer: d

9. Reclassifications of investments between categories are recognized a. Prospectively, at the end of the period after the change in the business model.

a. Prospectively, at the beginning of the period after the change in the business model. b. Retroactively, at the end of the prior period. c. Currently, at the date of change in business model. Answer: b 10. Transfers of investments between categories a. Result in omitting recognition of fair value. b. Are accounted for at fair value for all transfers. c. Are unrecognized. d. Should always result in an impact on net income. Answer: b 11. When a debt investment at amortized cost is reclassified to FVPL, the difference between the previous carrying amount and fair value at reclassification date is a. Recognized in profit or loss b. Not recognized c. Recognized in other comprehensive income d. Included in retained earnings Answer: a 12. When a debt investment at FVPL is reclassified to amortized cost, what is the new carrying amount at amortized cost? a. Fair value at reclassification date b. Face amount of the debt investment c. Present value of the contractual cash flows d. Present value of expected cash flows Answer: a 13. Equity investments irrevocably accounted for at fair value through other comprehensive income are a. Nontrading investments of less than 20%. b. Trading investments of less than 20%. c. Investments of between 20% and 50%. d. Investments of more than 50%. Answer: a

14. What financial assets are assessed for impairment? a. Equity investments at FVPL b. Equity investments at FVOCI c. Debt investments at FVPL d. Debt investments at amortized cost and debt investments at FVOCI Answer: d 15. Impairments of debt investments are a. Based on discounted contractualy cash flows. b. Recognized as component of other comprehensive income. c. Based on negotiated value for held for collection investments. d. Evaluated at each reporting date for every held for collection investment. Answer: d 16. An impairment loss is the excess of the carrying amount of the debt investment over the a. Excpected cash flows b. Present value of the expected cash flows c. Contractual cash flows d. Present value of the contractual cash flows Answer: b 17. Under IFRS, an entity a. Should evaluate every investment for impairment. b. Accounts for an impairment as an unrealized loss as a component of other comprehensive income. c. Calculates the impairment loss on debt investments as the difference between the carrying amount plus accrued interest and the expected discounted future cash flows. d. All of the choices are correct. Answer: c

18. Entities are required to measure financial asset based on all of the following, except a. The business model for managing financial asset

b. Whether the financial asset is a debt or an equity c. The contractual cash flow characteristics d. All of the choices are required. Answer: b 19. Debt investments that meet the business model and contractual cash flow tests are reported at a. Net realizable value b. Fair value c. Amortized cost d. The lower of amortized cost and fair value Answer: c 20. Under IFRS, the presumption is that equity investments are a. Held for trading b. Held to profit from price changes c. Held for trading and held to profit from price changes d. Held as financial assets at fair value through other comprehensive income Answer: c 21. Debt investments not held for collection are reported at a. Amortized cost b. Fair value c. The lower of amortized cost and fair value d. Net realizable value Answer: b 22. Debt investments that are reported at amortized cost are a. Managed and evaluated based on a documented risk –management strategy b. Trading debt investments c. Held for collection debt investments d. All of these are correct Answer: c 23. Unrealized gains and losses on trading investments are reported in a. Equity

b. Net income c. Other comprehensive income d. Retained earnings Answer: b 24. The irrevocable election to present changes in fair value in other comprehensive income is applicable only to a. Equity instrument that is not held for trading. b. Equity instrument that is held for trading. c. Financial asset measured at amortized cost. d. Financial asset measured at fair value. Answer: a 25. Gain or loss on disposal of equity investment measured at fair value through comprehensive income is recognized in a. Profit or loss b. Other comprehensive income c. Retained earnings d. Part retained earnings and part profit or loss Answer: c PROBLEM SOLVING 1. At year-end, Rim Company held several investments with the intent of selling them in the near term. The investments consisted of P1,000,000 8% five-year bonds purchased for P920,000 and equity securities purchased for P350,000. At year-end, the bonds were selling on the open market for P1,050,000 and the equity securities had market value of P500,000. What amount should be reported as trading securities at year-end? A. 1,270,000 B. 1,420,000 C. 1,550,000 D. 500,000 Question #1 Answer C Bond investment Equity investment Total market value

1,050,000 500,000 1,550,000

2. Judicious Company acquired an equity investment a number of years ago for P3,000,000 and classified it as at fair value through other comprehensive income. On December 31, 2016, the cumulative loss recognized in other comprehensive income was P400,000 and the carrying amount of the investment was P2,600,000. On December 31, 2017, the issuer of the equity instrument was in severe financial difficulty and the fair value of the equity investment had fallen to P1,200,000. What cumulative amount of unrealized loss should be reported as component of other comprehensive income in the statement of changes in equity for the year ended December 31, 2017? A. 1,400,000 B. 1,800,000 C. 1,000,000 D. 0 Question #2 Answer B Under PFRS 9, there is no more impairment loss on equity investment measured at fair value, whether through profit or loss, or through other comprehensive income. The cumulative unrealized loss of P1,800,000 would continue to be reported as component of OCI. 3. During 2016, Knickknack Company purchased marketable equity securities to be measured at fair value through other comprehensive income. On December 31, 2016, the balance in the unrealized loss on these securities was P200,000. There were no security transactions during 2017, Pertinent data on December 31, 2017 are as follows: Security

Cost

Market value

X Y Z

2,100,000 1,850,000 1,050,000

1,600,000 2,000,000 900,000

In the statement of changes in equity for 2020, what amount should be included as cumulative unrealized loss as component of other comprehensive income? A. 500,000 B. 300,000 C. 200,000 D. 0 Question #3 Answer A

Total market value – December 31, 2017 Total market value – December 31, 2016 Unrealized loss in 2017 Unrealized loss – December 31, 2016 Total unrealized loss – December 31, 2017

4,500,000 4,800,000 ( 300,000) ( 200,000) ( 500,000)

4. At the beginning of current year, Laudable Company acquired 200,000 ordinary shares of an investee for P9,000,000. The investment is measured at fair value through other comprehensive income. At the time of purchase, the investee of outstanding 800,000 shares with a carrying amount of P36,000,000. The following events took place during the year:  The investee reported net income of P1,800,000.  Laudable Company received from the investee a dividend of P0.75 per ordinary share.  The market value of the investee’s share had declined to P40 at year-end. What is the carrying amount of the investment at year-end? A. B. C. D.

9,000,000 8,000,000 9,300,000 9,450,000

Question #4 Answer B (200,000 x 40)

8,000,000

5. At the beginning of current year, Manifold Company began operations. The following information related to the portfolio of equity securities held for trading at year-end: Aggregate cost Aggregate fair value Aggregate lower of cost or market value applied to each security in the portfolio

Trading 360,000 320,000

Nontrading 550,000 450,000

304,000

420,000

The nontrading investments are measured at fair value through other comprehensive income. The fair value declines are judged to be nontemporary. What amount should be reported as unrealized loss in the income statement for the current year? A. B. C. D.

140,000 186,000 40,000 56,000

Question #5 Answer C

(360,000 - 320,000)

40,000

6. Trinidad Company provided the following portfolio of equity investments measured at fair value through other comprehensive income: Aggregate cost Unrealized gains Unrealized losses Net realized gains during the current year

1,700,000 40,000 260,000 300,000

On January 1, 2015, the entity reported an unrealized loss of P15,000 as a component of other comprehensive income. In the 2015 statement of changes in equity, what cumulative amount should be reported as unrealized loss on these securities? A. 260,000 B. 220,000 C. 205,000 D. 0 Question #6 Answer B Unrealized loss Unrealized gain Cumulative net unrealized loss – December 31, 2015 Unrealized loss – January 1, 2015 Increased in unrealized loss

260,000 40,000 220,000 ( 15,000) 205,000

For Questions 7 & 8 Use the following information Inspiration Company had trading and nontrading investments held throughout 2016 and 2017. The nontrading investments are measured at fair value through other comprehensive income. The investments had a cost of P3,000,000 for trading and P3,000,000 for nontrading. The investments had the following fair value at year-end: December 31, 2016 December 31, 2017 Trading 4,000,000 3,800,000 Nontrading 3,200,000 3,700,000

7. What amount of unrealized gain or loss should be reported in the income statement for 2017? A. 200,000 gain B. 200,000 loss

C. 300,000 gain D. 300,000 loss Question #7 Answer B Trading fair value – 12/31/2017 Trading fair value – 12/31/2016 Unrealized loss for 2017

3,800,000 (4,000,000) (200,000)

8. What amount of cumulative unrealized gain or loss should be reported as component of other comprehensive income in the statement of changes in equity on December 31, 2017? A. B. C. D.

500,000 gain 500,000 loss 700,000 gain 700,000 loss

Question #8 Answer C Nontrading fair value – 12/31/2017 Historical cost Cumulative unrealized gain – 12/31/2017

3,700,000 (3,000,000) 700,000

9. During 2016, 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, 2016 were as follows: Security A 1,000 shares B 10,000 shares C 20,000 shares

Cost 300,000 1,700,000 3,150,000

Market value 350,000 1,550,000 2,950,000

The entity sold 10,000 shares of B on January 5, 2017 for P1,450,000. What total amount should be charged to retained earnings as a result of the sale of equity securities in 2017? A. B. C. D.

200,000 100,000 250,000 50,000

Question #9 Answer C Sale price Less: Carrying amount of B Loss on sale debited to retained earnings

1,450,000 1,550,000 100,000

Cash Retained earnings Financial asset – FVOCI

1,450,000 100,000 1,350,000

10. On January 1, 2016, Jerome Company purchased nontrading equity investments which are irrevocably designated at FVOCI: Purchase price Security A 1,000,000 Security B 2,000,000 Security C 4,000,000

Transaction cost 100,000 200,000 400,000

Market value December 31, 2016 1,500,000 2,400,000 4,700,000

On July 1, 2017, the entity sold Security C for P5,200,000. What amount of gain on sale should be recognized in the income statement for 2017? A. 800,000 B. 500,000 C. 300,000 D. 0 Question #10 Answer D Zero 11. Quondam Company held the following securities as trading investments on December 31, 2016: 100,000 shares of Company A nonredeemable preference share capital, par value P75 7,000 shares of Company B preference share capital, par value P100, subject to mandatory redemption by the issuer at par on December 31, 2017

Cost

Market value

775,000

825,000

690,000

625,000

What is the carrying amount of the trading investments on December 31, 2016? A. B. C. D.

1,400,000 1,450,000 1,465,000 1,475,000

Question #11 Answer B

The nonredeemable preference share is an equity security. The redeemable preference share is a debt security. Whether equity or debt security, trading securities are carried at market value. 12. Desno Company reported on a calendar-year basis. The December 31, 2015 financial statements were issued on February 15, 2016. The auditor’s report was dated January 31, 2016. The following information pertains to aggregate marketable equity securities portfolio held for trading: Cost Market value December 31, 2015 Market value January 31, 2016 Market value February 15, 2016

5,000,000 4,000,000 3,500,000 3,000,000

What amount should be reported on December 31, 2015 for trading securities? A. B. C. D.

3,500,000 4,000,000 3,000,000 5,000,000

Question #12 Answer B Market value – December 31, 2015

4,000,000

Trading investments are measured at fair value at year-end on a portfolio basis. Any change in fair value after the end of reporting period is a nonadjusting event but should be disclosed only. 13. During 2015, Garr Company purchased marketable equity securities as a trading investment. For the year ended December 31, 2015, the entity recognized an unrealized loss of P230,000. There were no security transactions during 2016. The entity provided the following information on December 31, 2016: Security A B

Cost 2,450,000 1,800,000 4,250,000

Market value 2,300,000 1,820,000 4,120,000

In the 2016, income statement, what amount should be reported as unrealized gain or loss? A. B. C. D.

Unrealized gain P100,000 Unrealized loss P100,000 Unrealized loss P130,000 Unrealized gain P130,000

Question #13 Answer A Market value – December 31, 2016 Carrying amount equal to market value on December 31, 2015 Unrealized gain in 2016

(4,020,000) 100,000

Cost Unrealized loss – 2015 Market value – December 31, 2015

4,250,000 ( 230,000) 4,020,000

4,120,000

Trading securities are measured at FVPL on a portfolio basis. 14. Carmela Company acquired an equity instrument for P4,000,000 on March 31, 2015. The equity instrument in classified as financial asset at fair value through other comprehensive income. The transaction cost incurred amounted to P700,000. On December 31, 2015, the fair value of the instrument was P5,500,000 and the transaction cost that would be incurred on the sale of the investment is estimated at P600,000. What amount of gain should be recognized in other comprehensive income for the year ended December 31, 2015? A. 200,000 B. 900,000 C. 800,000 D. 0 Question #14 Answer C Fair value – December 31, 2015 Acquisition cost Unrealized gain – OCI

5,500,000 (4,700,000) 800,000

Acquisition price Transaction cost Total cost of investment

4,000,000 700,000 4,700,000

Under PRFS 9, any transaction cost is included as part of the initial measurement of a financial asset measured at FVOCI. The transaction cost that would be incurred on the sale of the investment is ignored because the equity investment at fair value through other comprehensive is measured at fair value not fair value less cost of disposal.

For questions 15 & 16 Use the following information Lagoon Company purchased the following securities during 2015:

Security A Security B

Classification Trading Trading

Cost 900,000 1,000,000

Market value December 31, 2015 1,000,000 1,600,000

On July 31, 2016, the entity sold all of the shares of Security B for P1,100,000. On December 31, 2016, the shares of Security A had a market value of P1,200,000. No other activity occurred during 2016 in relation to the trading security portfolio. 15. What amount of unrealized gain or loss should be reported in the income statement for 2016? A. B. C. D.

200,000 loss 200,000 gain 300,000 loss 300,000 gain

Question #15 Answer B Market value – Security A December 31, 2016 Market value – Security A December 31, 2015 Unrealized gain in 2016

1,200,000 1,000,000 200,000

16. What is the gain or loss on the sale of Security B on July 31, 2016? A. B. C. D.

500,000 gain 500,000 loss 100,000 gain 100,000 loss

Question #16...