ST.

VINCENT COLLEGE

AUD 2 INVESTMENTS

EXERCISE

FINANCIAL ASSETS AT FAIR VALUE

1. On December 31, 2019, Power Company had investments in trading securities / fair value
through profit or loss as follows:

Cost Market value

X Co. 2,000,000 2,300,000
Y, Inc. 1,000,000 1,100,000
Z Corp. 1,500,000 1,200,000
4,500,000 4,600,000

Power’s December 31, 2019 statement of financial position should report the trading
securities / financial asset at fair value through profit or loss at

a. 4,200,000 c. 4,600,000
b. 4,500,000 d. 4,300,000

2. Microtek, Inc. began operations on January 1, 2019. The following information pertains to
Microtek’s December 31, 2019 portfolio of marketable equity securities:

Trading Available for sale

Aggregate cost 4,600,000 6,500,000
Aggregate market value 4,200,000 5,500,000
Aggregate lower of cost or market value applied to each security in the portfolio
4,040,000 5,200,000

If the market declines are judged to be temporary, what amounts should Microtek report as
financial assets at fair value in its December 31, 2019 statement of financial position?

Trading Available for sale

a. 4,200,000 6,500,000
b. 4,600,000 6,500,000
c. 4,040,000 5,200,000
d. 4,200,000 5,500,000
3. Natural Corporation was organized on January 1, 2019. At December 31, 2019, Natural had the
following investment portfolio of marketable equity securities:

Trading Available for sale

Aggregate cost 4,000,000 5,500,000
Aggregate market value 3,500,000 4,600,000
Net unrealized loss 500,000 900,000

All of the declines are judged to be temporary. What amount of unrealized loss should be
shown as component of profit or loss and other comprehensive income?

Other Comprehensive
Profit/Loss Income
a. 0 1,400,000
b. 900,000 500,000
c. 500,000 900,000
d. 1,400,000 0

4. On its December 31, 2018 statement of financial position, Nokia Company Appropriately
reported a P100,000 unrealized loss. There was no change during 2019 in the composition of
Nokia’s portfolio of marketable equity securities held as “available for sale / financial asset at fair
value through other comprehensive income”. Pertinent data are as follows:

Market value at
Security Cost 12/31/2019
A 2,100,000 2,300,000
B 1,900,000 1,500,000
C 1,700,000 1,600,000
5,700,000 5,400,000

What amount of loss on these securities should be included as component of other

comprehensive income for the year ended December 31, 2019?

a. 100,000 c. 200,000
b. 300,000 d. 0
5. During 2018 Mineral Company purchased marketable equity securities as a trading investment /
financial asset at fair value through profit or loss. At December 31, 2018, the company
recognized an unrealized loss of P250,000. There were no security transactions during 2018.
Pertinent information at December 31, 2019 is as follows:

Security Cost Market value

A 450,000 3,300,000
B 2,800,000 2,840,000
6,250,000 6,140,000

In its 2019 income statement, Mineral should report

a. Unrealized gain of P110,000 c. Unrealized loss of P140,000

b. Unrealized loss of P 110,000 d. Unrealized gain of P140,000

6. The following information was extracted from December 31, 2019 statement of financial position
of XYZ Company:

Noncurrent assets:
Available for sale securities / financial asset at fair value through other comprehensive
income(carried at market) 4,400,000
Stockholders’ equity:
Unrealized loss on available for sale securities / financial asset at fair value through
other comprehensive income ( 600,000)

Historical cost of the long-term investment in available for sale securities was

a. 3,800,000 c. 5,000,000
b. 4,400,000 d. 5,600,000

7. Data regarding USB Company’s trading securities follow:

 Cost Market
December 31, 2018 6,000,000 5,600,000
December 31, 2019 6,000,000 6,500,000

Differences between cost and market value are considered temporary. The profit or loss
statement for 2019 should report unrealized gain on these securities at

a. 500,000 c. 400,000
b. 900,000 d. 0

8. Data regarding Metro Company’s available for sale securities follow:

Market
December 31, 2018 5 4,500,000
December 31, 2019 5,000,000 4,300,000

Differences between cost and market value are considered temporary. The unrealized loss as
component of other comprehensive income is

a. 700,000 c. 500,000
b. 200,000 d. 0

9. Data regarding RST Company’s available for sale securities follow:

Market Cost
December 31, 2018 6,000,000 6,200,000
December 31, 2019 6,000,000 7,000,000

Differences between cost and market value are considered temporary. The unrealized gain as
component of other comprehensive income is

a. 800,000 c. 200,000
b. 1,000,000 d. 0

10. L Corporation purchased the following securities during 2018:

Market Value
 Classification
Security A Trading 1,
Security B Trading 2,000,000 2,500,000

On July 31, 2019, the entity sold all of the shares of Security B for a total of P2,200,000. On
December 31, 2019, the shares of security A had a market value of P1,600,000. No other
activity occurred during 2019 in relation to the trading security portfolio. What is the gain or
loss on the sale of Security B on July 31, 2019?

a. 200,000 gain c. 300,000 gain

b. 200,000 loss d. 300,000 loss

11. On January 1, 2018, l Company purchased equity securities to be held as “fair value through
other comprehensive income”. On December 31, 2018, the cost and market value were:

Cost Market
Security X 3,000,000 3,300,000
Security Y 4,000,000 4,500,000
Security Z 6,000,000 5,900,000

On July 1, 2019, L Company sold Security X for P3,400,000.

What amount of gain on sale of financial asset should be reported in the 2019 income
statement?

a. 300,000 c. 400,000
b. 100,000 d. None of these

INVESTMENT IN EQUITY SECURITIES

12. On January 2, 2019, ABC Company purchased 5,000 shares of RST stock at P100 per share.
Brokerage fees amounted to P10,000. A P5 dividend per share of RST stock had been declared
 on December 15, 2018, to be paid on March 31, 2019 to stockholders of record on January 31,
2019. No other transactions occurred in 2019 affecting the investment in RST stock. The
balance of the investment on December 31, 2019 is

a. 510,000 c. 500,000
b. 485,000 d. 475,000

13. Edes Company purchased 100,000 shares (5% ownership) of Rona Company on January 15,
2019. Edes received a stock dividend of 20% on March 31, 2019 when the market price of the
share is P40. Rona paid a cash dividend of P6 per share on December 15, 2019. In the
income statement for the year ended December 31, 2019, what amount should Edes
report as dividend income?

a. 720,000 c. 750,000
b. 360,000 d. 800,000

14. Myra Company purchased 10,000 shares of Cris Corporation ordinary shares on March 1, 2019,
for P360,000. Myra received a P50,000 cash dividend on the Cris stock on July 1, 2019. Cris
declared a 10% stock dividend on December 1, 2019, to stockholders of record as of December
31, 2019. The dividend was distributed on January 31, 2020. The market price of the stock was
P38 on December 1, 2019, P40 on December 31, 2019 and P42 on January 31, 2020. What
amount should Myra record as dividend revenue for the year ended December 31, 2019?

a. 88,000 c. 92,000
b. 90,000 d. 50,000

15. Clay Company owned 20,000 ordinary shares Dart Corporation purchased in January 2019 for
P1,800,000. On December 31, 2019, Clay declared a property dividend of one share of Dart for
every five shares of Clay held by a stockholder. On that date there were 100,000 ordinary
shares of Clay outstanding, and the market price of Dart shares was P100 per share and the
 par value was P50. An investor owning 10,000 ordinary shares of Clay will report dividend
revenue of

a. 200,000 c. 100,000
b. 50,000 d. 0

16. On January 2, 2019 Mega Company purchased 20,000 ordinary shares of Roma Company at
P90 per share. On December 31, 2019, Mega received 1,000 ordinary shares of Roma in lieu of
cash dividend of Pl0 per share. On this date, the Roma ordinary share has a quoted market
price of P50 per share. In its current year income statement, Mega should report dividend
income at

a. 40,000 c. 10,000
b. 50,000 d. 0

17. On March 1, 2019, E Company purchased 20,000 ordinary shares of XYZ at P70 per share. On
September 30, 2019, E received 20,000 stock rights to purchase an additional 20,000 shares at
P80 per share. The stock rights had an expiration date on February 1, 2020. On September
30, 2019, XYZ’s share had a market value P95 and the stock right had a market value of P5.
What amount should E report in its September 30, 2019 statement of financial position
for investment in stock rights?

a. 200,000 c. 300,000
b. 100,000 d. 150,000

18. R Company owns 20,000 ordinary shares of W Company acquired on July 31, 2019, at a total
cost of P1,000,000. On December 31, 2019, R received 20,000 stock rights from W. Each right
entitles the holder to acquire one share at P45. The market price of W’s share on this date was
P50 and the market price of each right was P10. R sold its rights on December 31, 2019 for
 P350,000 less a P15,000 commission. What should be reported as gain from the sale of the
rights?

a. 135,000 c. 235,000
b. 150,000 d. 250,000

19. A Company owns 40,000 ordinary shares of B Company, which has several hundred thousand
shares publicly traded. These 40,000 shares were purchased by A in 2018 for P120 per share.
On August 30, 2019, B distributed 40,000 stock rights to A. A was entitled to buy one new share
of B Company for P90 cash and two of these rights. On August 30, 2019, each share had a
market value of P130 and each right had a market value of P20. What total cost should be
recorded for the new shares that A acquired by exercising the rights?

a. 1,800,000 c. 3,600,000
b. 2,200,000 d. 2,600,000

20. E Company issued rights to subscribe to its stock, the ownership of 4 shares entitling the
shareholders to subscribe for 1 share at P100. J Company owns 50,000 shares of E Company
with a total cost of P5,000,000. The share is quoted right-on at 120. The stock rights are
accounted for separately and measured initially at fair value. What is the cost of the new
investment if all of the stock rights are exercised by J Company?

a. 1,250,000 c. 1,050,000
b. 1,450,000 d. 1,500,000

21. On January 1, 2019, M Company purchased 50,000 shares of another entity for P3,750,000.
On October 1, 2019, M received 50,000 stock rights from the investee. Each right entitles the
shareholder to acquire one share for P80. The market price of the investee’s share was P100
immediately before the rights were issued and P90 immediately after the rights were issued. On
December 1, 2019, M exercised all stock rights. On December 31, 2019, M sold 20,000 shares
 at P90 per share. The stock rights are not accounted for separately. If the FIFO approach is
used, what is the gain on the sale of investment that should be recognized in 2019?

a. 450,000 c. 300,000
b. 200,000 d. 0

INVESTMENT IN ASSOCIATE

22. On January 1, 2019, S Company purchased 20% of L Company’s ordinary shares outstanding
for P5,000,000. The acquisition cost is equal to the book value of the net assets acquired.
During 2019, L reported net income of P6,000,000 and paid cash dividend of P3,000,000. What
is the balance in the investment in L Company on December 31, 2019?

a. 5,000,000 c. 4,400,000
b. 5,600,000 d. 6,200,000

23. On January 1, 2018, W Company bought 15% Of P Company’s ordinary shares outstanding for
P5,000,000. W appropriately accounts for this investment by the cost method. The following
data concerning P are available for the years ended December 31, 2018 and 2019:

Net income 3 10
Cash dividend paid None 12,000,000

In its income statement for the year ended December 31, 2019, how much should W
report as income from this investment?

a. 1,050,000 c. 1,800,000
b. 2,100,000 d. 300,000

24. On January 1, 2018, W Company bought 15% of P Company’s ordinary shares outstanding for
P6,000,000. W appropriately accounts for this investment by the cost method. The following
data concerning P are available for the years ended December 31, 2018 and 2019.

Net income
Cash dividend paid None 15,000,000
 In its income statement for the year ended December 31, 2019, how much should W
report as income from this investment?

a. 1,350,000 c. 1,800,000
b. 2,250,000 d. 450,000

25. On January 1, 2019, D Company paid P20,000,000 for 50,000 ordinary shares of C Company
which represent a 25% interest in the nest assets of C. The acquisition cost is equal to the book
value of the net assets acquired. D has the ability to exercise significant influence over C. D
received a dividend of P30 per share from C in 2019. C reported net income of P10,000,000 for
the year ended December 31, 2019. In the December 31, 2019 statement of financial position,
what should be reported as investment in C Company?

a. 21,000,000 c. 19,000,000
b. 24,000,000 d. 22,500,000

26. On April 1, 2019, B Company purchased 40% of the outstanding ordinary shares of C Company
for P12,000,000. On that date, C’s net assets were P24,000,000 and B cannot attribute the
excess of the cost of its investment in C over its equity in C’s net assets to any particular factor.
C’s 2019 net income is P6,000,000. B plans to retain its investment in C indefinitely. B
accounts for its investment in C by the equity method. What is the maximum amount which
could be included in B’s 2019 income before tax to reflect the “equity in net income of
C”?

a. 2,400,000 c. 2,000,000
b. 1,200,000 d. 1,800,000

27. On January 2, 2019, A Company purchased 20% of the outstanding ordinary shares of D
Company for P5,000,000, of which P1,000,000 was paid in cash and P4,000,000 is payable
with 12% annual interest on December 31, 2020. A also paid P500,000 to a business broker
who helped find a suitable business and negotiated purchase.

At the time of acquisition, the fair value of D’s identifiable assets and liabilities were equal to
their carrying values except for an office building which had a fair value in excess of book value
 of P3,000,000 and an estimated life of 10 years. D’s shareholders’ equity on January 1, 2019
was P14,000,000.

During 2019, D Company reported net income of P6,000,000 and paid dividend of P2,500,000.

What amount of income should A Company report for 2019 as a result of the investment?

a. 1,140,000 c. 700,000
b. 1,640,000 d. 1,700,000

28. On January 3, 2019, Mill Company acquired 20% of the outstanding ordinary shares of Nash
Company for P8,000,000. This investment gave Mill the ability to exercise significant influence
over Nash. The book value of the acquired shares was P7,000,000. The excess of cost over
book value was attributed to an identifiable intangible asset which was undervalued on Nash’s
statement of financial position and which had a remaining useful life of ten years. For the year
ended December 31, 2019, Nash reported net income of P2,000,000 and paid cash dividends of
P500,000 on its ordinary shares. At December 31, 2019, the carrying value of Mill’s
investment in Nash should be

a. 8,600,000 c. 8,300,000
b. 8,400,000 d. 8,200,000

29. P Company purchased 10% of T Company’s 100,000 outstanding ordinary shares on January 1,
2019 for P600,000.

On December 31, 2019, P purchased an additional 20,000 shares of T for P1,400,000. T had
not issued any additional shares during 2019.

The investee reported earnings of P2,500,000 for 2019.

The fair value of the 10% interest is P800,000 on December 31, 2019.

What is the carrying amount of the investment in associate on December 31, 2019?

a. 2,250,000 c. 2,800,000
b. 2,000,000 d. 2,200,000

FINANCIAL ASSETS AT AMORTIZED COST

30. On January 1, 2019, Jake Company purchased P4,000,000 face value bonds with stated 12%
interest. The bonds mature in 10 years and pay interest annually every December 31. The
bonds are acquired to yield a 14% interest. The pertinent present value factors for an ordinary
annuity of 1 are:

For 10 periods at 12% 5.605

 For 10 periods at 14% 5.216

What is the purchase price of the bonds?

a. 3,978,280 c. 3,582,640
b. 3,769,360 d. 3,791,560

31. The bonds were purchased on January 1, 2019:

Face value of the bonds P2,000,000

Date of issue of bonds January 1, 2019
Nominal rate 6%
Effective rate 8%
Interest payable annually December 31
Date of maturity January 1, 2022

The purchase price of the bonds is

a. P2,000,000 c. P1,908,420
b. P1,896,912 d. P2,103,088

32. On January 1, 2019, T Company purchased bonds with face value of P3,000,000. The bonds
are dated January 1, 2019 and mature on January 1, 2023. The interest on the bonds is 10%
payable semiannually every June 30 and December 31. The prevailing market rate of interest
on the bonds is 12%. The present value of 1 at 6% for 8 periods is .63, and the present value of
an ordinary annuity of 1 at 6% for 8 periods is 6.21. What is the present value of the bonds on
January 1, 2019?

a. 2,821,500 c. 2,820,000
b. 2,700,000 d. 2,340,000

33. On July 1, 2019 Haze Company purchased as a long term investment in Essex Company’s 10-
year 12% bonds, with face value of P3,000,000 for P2,800,000. Interest is payable semiannually
on January 1 and July 1. The bonds mature on July 1, 2024. Haze uses the straight line
amortization method. What is the amount of interest income that Haze should report in its
income statement for the year 2019?

a. 180,000 c. 200,000
b. 160,000 d. 220,000
34. On July 1, 2019, Glee Company purchased Bell Corporation 10-year, 10% bonds with a face
value of P3,000,000, for P3,300,000, which included P100,000 of accrued interest. The bonds,
which mature on March 1, 2026 pay interest semiannually on March 1 and September 1. Glee
uses the straight line method of amortization. The amount of income Glee should report for the
calendar year 2019 as a result of the above long term investment would be

a. 135,000 c. 150,000
b. 165,000 d. 265,000

35. Simple Company acquired P5,000,000 face value 12% bonds on July 1, 2017 for P4,700,000,
excluding brokerage of P120,000. The bonds pay interest semiannually on April 1 and October
1. The remaining life of the bonds on the date of acquisition is 3 years. Straight line amortization
is employed. On December 31, 2019, the bonds were sold for P5,300,000 plus accrued interest.
The gain on the sale of the bonds is

a. 330,000 c. 350,000
b. 355,000 d. 370,000

36. Jen Corporation purchased bonds at a discount of P80,000. Subsequently, Jen sold these
bonds at a premium of P150,000. During the period that Jen held this investment, amortization
of the discount amounted to P20,000. What amount should Jen report as gain on the sale of
bonds?

a. 130,000 c. 210,000
b. 170,000 d. 250,000

37. On January 1, 2016 ABC Company purchased P5,000,000 face value bonds of XYZ
Corporation at 110. The interest of 12% is payable semiannually on January 1 and July 1.
Bonds mature on January 1, 2025, but may be redeemed by the issuing company at earlier
dates as follows:

January 1, 2019 to December 31, 2023 at 104

January 1, 2023 to December 31, 2025 at 101

Following the accelerated method, what is the interest revenue to be recognized for the year
2019?
 a. 600,000 c. 500,000
b. 562,500 d. 637,500

38. Investor Company purchased 10% serial bonds on April 1, 2018 for P4,700,000. The bonds
have face value of P5,000,000 and mature in P1,000,000 lots on April 1 of each of the following
years. The investor follows the calendar year and the bond outstanding method of amortizing
discount. What is the interest income to be reported for the calendar year 2019?

a. 425,000 c. 525,000
b. 510,000 d. 500,000

39. On July 1, 2019, Lean Company purchased as a long term investment P1,000,000 face amount,
8% bonds of Band Corporation for P875,480 to yield 10% per year. The bonds pay interest
semiannually on January 1 and July 1. In its December 31, 2019 statement of financial position,
Lean should report interest receivable of

a. 40,000 c. 87,548
b. 80,000 d. 43,774

40. On July 1, 2019, Ward Company purchased 4,000 of the P1,000 face value, 8% bonds of Jury
Corporation for P3,691,000 to yield 10% per annum. The bonds, which mature on July 1, 2024,
pay interest semiannually on January 1 and July 1. Ward uses the interest method of
amortization and the bonds are appropriately recorded as a long term investment. The bonds
should be reported on Ward’s December 31, 2019 statement of financial position at

a. 3,715,550 c. 3,851,000
b. 3,875,550 d. 3,975,450

INVESTMENT PROPERTY

Nos. 41 and 42 are based on the following information:

G Company ventured into construction of a condominium in Iloilo City which is rated as the largest
state of the art structure. The entity’s board of directors decided that instead of selling the
condominium, the entity would hold this property for purposes of earning rentals by letting out
space to business executives in the area.

The construction of the condominium was completed and the property was placed in service on
January 1, 2019. The cost of the construction was P40,000,000. The useful life of the
 condominium is 25 years and its residual value is P3,000,000. An independent valuation expert
provided the following fair value at each subsequent year-end:

December 31, 2019 46,000,000

December 31, 2020 43,000,000
December 31, 2021 50,000,000

41. Under the cost model, what amount should G Company report as depreciation of investment
property for 2019?

a. 1,600,000 c. 1,800,000
b. 1,480,000 d. 0

42. Under the fair value model, what amount should G Company recognize as gain from change in
fair value in 2019?

a. 9,000,000 c. 6,000,000
b. 3,000,000 d. 0

43. XYZ Company and its subsidiaries own the following properties that are accounted for in
accordance with PAS 40:

Land held by XYZ for undetermined use 6,000,000

A vacant building owned by XYZ and to be lease out
under an operating lease 2,000,000
Property held by a subsidiary of XYZ, a real estate
firm, in the ordinary course of business 1,000,000
Property held by XYZ for use in production 5,000,000
Building owned by a subsidiary of XYZ and for which
the subsidiary provides security and maintenance
services to the lessees 2,500,000
Land leased by XYZ to a subsidiary under an operating
 lease 3,500,000
Property under construction for use as investment
property 7,000,000
Land held for future factory site 2,500,000
Machinery leased out by XYZ to an unrelated party
under an operating lease 1,500,000

What is the total investment property that should be shown in the consolidated statement of
financial position of the parent and its subsidiaries?

a. 12,500,000 c. 17,500,000
b. 15,500,000 d. 15,000,000

44. Bona Company purchased an investment property on January 1, 2016 for P2,500,000. The
property had a useful life of 40 years and on December 31, 2018 had a fair value of
P3,200,000. On January 1, 2019, the property was sold for net proceeds of P3,000,000. Bona
uses the cost model to account for the investment property.

What is the gain or loss to be recognized for the year ended December 31, 2019 regarding the
disposal of the property?

a. 625,000 gain c. 200,000 loss

b. 687,500 gain d. 500,000 gain

45. P Company’s policy with respect to investment properties is to measure them at fair value at the
end of each reporting period. One of its investment properties was measured at P9,000,000 on
December 31, 2019.

The property had been acquired on January 1, 2019 for a total of P8,500,000, made up of
P7,500,000 paid to the vendor, P400,000 paid to the local authority as property tax and
P600,000 paid to professional advisers. The useful life of the property is 40 years.

What is the amount of gain to be recognized in profit or loss for the year ended December 31,
2019 in respect of the investment property?

a. 712,500 c. 1,100,000
b. 900,000 d. 500,000

OTHER INVESTMENTS

46. On January 1, 2019, Diamond Company adopted a plan to accumulate P7,000,000 by

December 31, 2022. Diamond plans to make four equal annual deposits to a fund that will earn
interest at 12% compounded annually. The first deposit was made on December 31, 2019.
Future amount factors are:

Future amount of an ordinary annuity of 1 at 12%

for 4 periods 4.7793
Future amount of an annuity in advance of 1 at
12% for 4 periods 5.3528

What is the required annual deposit to the fund?

 a. 1,307,727 c. 1,750,000
b. 1,464,650 d. 1,400,000

47. On January 1, 2019, Vain Company adopted a plan to accumulate funds for a new plant building
to be erected beginning January 1, 2024, at an estimated cost of P6,000,000. Vain intends to
make five equal annual deposits in a fund that will earn interest at 8% compounded annually.
The first deposit is made on January 1, 2019. Present value and future amount factors are as
follows:

Present value of ordinary annuity of 1 at 8%

for 5 periods 3.9927
Future amount of ordinary annuity of 1 at 8%
for 5 periods 5.8666
Future amount of annuity in advance of 1 at
8% for 5 periods 6.3359

Vain should make five annual deposits of

a. 1,022,739 c. 1,502,743
b. 946,985 d. 1,200,000

48. The following information relates to noncurrent investment that Fall Corporation placed in trust
as required by the underwriter of its bonds:

Bonding sinking fund balance, January 1, 2019 500,000

2019 additional investment 100,000
Dividends on investment 10,000
Interest revenue 40,000
Administration costs 5,000
Carrying amount of bonds payable 1,020,000

What amount should Fall report in its December 31, 2019 statement of financial position related
to its noncurrent investment for bond sinking fund requirements?

a. 645,000 c. 655,000
b. 650,000 d. 610,000
49. On January 1, 2015, Mall Company purchased a P2,000,000 ordinary life insurance policy on its
president. The policy year and Mall’s life accounting year coincide. Additional data are
available for the year ended December 31, 2020:

Cash surrender value, January 1, 2020 64,000

Cash surrender value, December 31, 2020 71,000
Annual advance premium paid-January 1, 2020 30,000
Dividend received-July 1, 2020 9,000

Mall is the beneficiary under the life insurance policy. The insured died on January 2, 2021,
after the payment of annual premium of P30,000 on January 1, 2021. What is the life insurance
expense for 2020?

a. 30,000 c. 21,000
b. 14,000 d. 28,000

50. In 2015 Chain Company purchased a P1,500,000 life insurance policy on its president; of which
Chain is the beneficiary. Information regarding the policy for the year ended December 31,
2020 follows:

Cash surrender value, January 1, 2020 92,000

Cash surrender value, December 31, 2020 114,000
Annual advance premium paid January 1, 2020 50,000

During 2020, dividends of P7,000 were applied to increase the cash surrender value of the
policy. What amount should Chain report as life insurance expense for 2020?

a. 50,000 c. 35,000
b. 28,000 d. 15,000
 BASIC DERIVATIVES

Nos. 51 and 52 are based on the following information:

X Company received a two-year variable interest rate loan of P4,000,000 on January 1, 2018.
The interest on the loan is payable on December 31, of each year and the principal is to be
repaid on December 31, 2019.

On January 1, 2018, X Company entered into a “receive variable, pay fixed” interest rate swap
agreement with a speculator bank designated as a cash flow hedge.

The interest rate for 2018 is the prevailing interest rate of 9% and the rate in 2019 is equal to the
prevailing rate on January 1, 2019.

The market rate of interest on January 1, 2019 is 6% and the present value of 1 at 6% for one
period is .943.

51. What amount should be reported as interest rate swap payable on December 31, 2018?

a. 113,160 c. 80,000
b. 120,000 d. 0

52. What amount should be reported as interest expense for 2019?

a. 246,840 c. 120,000
b. 360,000 d. 353,160

Nos. 53 to 55 are based on the following information:

On January 1, 2018, A Company received a four-year P5,000,000 loan with interest payments
occurring at the end of each year and the principal to be repaid on December 31, 2021.

The interest for 2018 is the prevailing market rate of 10% on January 1, 2018, and the market
interest rate every January 1 resets the variable rate on interest for that year. The “underlying”
fixed interest rate is 10%.

In conjunction with the loan, the entity entered into a “receive variable, pay fixed” interest rate
swap agreement with a financial institution as cash flow hedge. The interest swap payment will
be made on December 31 of each year.

The market rate of interest is 7% on January 1, 2019 and 9% on January 1, 2020.

 The PV of an ordinary annuity of 1 at 7% for three periods is 2.62 and the PV of an ordinary
annuity of 1 at 9% for two periods is 1.76.

53. What is the derivative asset or liability on December 31, 2018?

a. 393,000 asset c. 350,000 asset

b. 393,000 liability d. 350,000 liability

54. What is the derivative asset or liability on December 31, 2019?

a. 131,000 asset c. 88,000 asset

b. 131,000 liability d. 88,000 liability

55. What amount of interest expense should be reported for 2019?

a. 450,000 c. 500,000
b. 350,000 d. 412,000

56. Carmona, Grill operates a chain of seafood restaurants. On January 1, 2019, the entity
determined that it will need to purchase 70,000 kilos of tuna fish on February 1, 2020.

Because of the volatile fluctuation in the price of tuna fish, on January 1, 2019, the entity
negotiated a forward contract with a reputable financial institution to purchase 70,000 kilos of
tuna fish on February 1, 2020 at a price of P7,000,000 or P100 per kilo. This forward contract
was designated as a cash flow hedge.

On December 31, 2019 and February 1, 2020, the market price of tuna fish per kilo is P90. The
market rate of interest is 8% and the present value of 1 at 8% is .926 for one period.

What amount should be recognized as derivative asset or liability on December 31, 2019?

a. 648,200 asset c. 648,200 liability

b. 700,000 asset d. 700,000 liability
57. Y Company requires 50,000 kilos of soya beans each month in its operations.

To eliminate the price risk associated with the purchase of soya beans, on December 1, 2019,
the entity entered into a futures contract as a cash flow hedge to buy 50,000 kilos of soya beans
at P120 per kilo on March 1, 2020.

The market price on December 31, 2019 and March 1, 2020 is P135 per kilo. The market rate of
interest is 7% and the present value of 1 at 7% is .935 for one period.

What amount should be recognized on December 31, 2019 as derivative asset or liability?

a. 701,250 asset c. 750,000 asset

b. 701,250 liability d. 750,000
liability

Nos. 58 to 60 are based on the following information:

L Company produces colorful 100% cotton shirts and the entity needs 40,000 kilos of raw
materials in the production process.

On December 1, 2019, the entity purchased a call option as a cash flow hedge to buy 40,000
kilos on July 1, 2020.

The option strike price is P80 per kilo. The entity paid P40,000 for the call option.

This derivative option contract means that if the market price is higher than P80, the entity can
exercise the option and buy the asset at the strike option price of P80.

If the market price is lower than P80, the entity can throw away the option and buy the asset at
the cheaper price.

The market price per kilo is P90 on December 31, 2019 and P95 on July 1, 2020.
 58. What is the derivative asset on December 31, 2019?

a. 360,000 c. 560,000
b. 400,000 d. 600,000

59. What is the cash settlement from the speculator on July 1, 2020?

a. 360,000 c. 400,000
b. 560,000 d. 600,000

60. What is the cost of purchase on July 1,

2020?

a. 3,800,000 c.
3,200,000
b. 3,240,000 d. 3,600,000

Answer Key

Investments

1. C 6. C 11. D 16. B 21. C 26. D

2. D 7. B 12. B 17. B 22. B 27. A
3. C 8. B 13. A 18. A 23. C 28. D
4. C 9. A 14. D 19. D 24. B 29. D
5. D 10. D 15. A 20. B 25. A 30. C

31. B 36. C 41. B 46. B 51. A 56. D

32. A 37. B 42. C 47. B 52. B 57. C
33. C 38. B 43. C 48. A 53. B 58. B
34. A 39. A 44. B 49. B 54. D 59. D
35. B 40. A 45. D 50. B 55. C 60. B