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 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

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 1,050,000

Equity investment 500,000
Total market value 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 2,100,000 1,600,000
Y 1,850,000 2,000,000
Z 1,050,000 900,000

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 4,500,000
Total market value – December 31, 2016 4,800,000
Unrealized loss in 2017 ( 300,000)
Unrealized loss – December 31, 2016 ( 200,000)
Total unrealized loss – December 31, 2017 ( 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. 9,000,000
B. 8,000,000
C. 9,300,000
D. 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:
Trading Nontrading
Aggregate cost 360,000 550,000
Aggregate fair value 320,000 450,000
Aggregate lower of cost or market
value applied to each security
in the portfolio 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. 140,000
B. 186,000
C. 40,000
D. 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 1,700,000

Unrealized gains 40,000
Unrealized losses 260,000
Net realized gains during the current year 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 260,000

Unrealized gain 40,000
Cumulative net unrealized loss – December 31, 2015 220,000
Unrealized loss – January 1, 2015 ( 15,000)
Increased in unrealized loss 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 3,800,000

Trading fair value – 12/31/2016 (4,000,000)
Unrealized loss for 2017 (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. 500,000 gain
B. 500,000 loss
C. 700,000 gain
D. 700,000 loss
Question #8 Answer C

Nontrading fair value – 12/31/2017 3,700,000

Historical cost (3,000,000)
Cumulative unrealized gain – 12/31/2017 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 Cost Market value

A 1,000 shares 300,000 350,000
B 10,000 shares 1,700,000 1,550,000
C 20,000 shares 3,150,000 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. 200,000
B. 100,000
C. 250,000
D. 50,000
Question #9 Answer C

Sale price 1,450,000

Less: Carrying amount of B 1,550,000
Loss on sale debited to retained earnings 100,000
 Cash 1,450,000
Retained earnings 100,000
Financial asset – FVOCI 1,350,000

10. On January 1, 2016, Jerome Company purchased nontrading equity investments which are
irrevocably designated at FVOCI:

Purchase price Transaction cost Market value December 31, 2016

Security A 1,000,000 100,000 1,500,000
Security B 2,000,000 200,000 2,400,000
Security C 4,000,000 400,000 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 Cost Market value

nonredeemable preference
share capital, par value P75 775,000 825,000
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 690,000 625,000

What is the carrying amount of the trading investments on December 31, 2016?

A. 1,400,000
B. 1,450,000
C. 1,465,000
D. 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 5,000,000
Market value December 31, 2015 4,000,000
Market value January 31, 2016 3,500,000
Market value February 15, 2016 3,000,000

What amount should be reported on December 31, 2015 for trading securities?

A. 3,500,000
B. 4,000,000
C. 3,000,000
D. 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 Cost Market value

A 2,450,000 2,300,000
B 1,800,000 1,820,000
4,250,000 4,120,000

In the 2016, income statement, what amount should be reported as unrealized gain or loss?

A. Unrealized gain P100,000

B. Unrealized loss P100,000
C. Unrealized loss P130,000
D. Unrealized gain P130,000
 Question #13 Answer A

Market value – December 31, 2016 4,120,000

Carrying amount equal to market value
on December 31, 2015 (4,020,000)
Unrealized gain in 2016 100,000

Cost 4,250,000
Unrealized loss – 2015 ( 230,000)
Market value – December 31, 2015 4,020,000

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 5,500,000

Acquisition cost (4,700,000)
Unrealized gain – OCI 800,000

Acquisition price 4,000,000

Transaction cost 700,000
Total cost of investment 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:

Market value
Classification Cost December 31, 2015
Security A Trading 900,000 1,000,000
Security B Trading 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. 200,000 loss
B. 200,000 gain
C. 300,000 loss
D. 300,000 gain
Question #15 Answer B

Market value – Security A December 31, 2016 1,200,000

Market value – Security A December 31, 2015 1,000,000
Unrealized gain in 2016 200,000

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

A. 500,000 gain
B. 500,000 loss
C. 100,000 gain
D. 100,000 loss
Question #16 Answer B

Sale price of Security B 1,100,000

Carrying amount of Security B – December 31, 2015 1,600,000
Loss on sale of trading securities ( 500,000)

For questions 17 & 18 Use the following information

On January 1, 2015, Caraga Company purchased equity securities to be held as financial
assets measured at fair value through other comprehensive income.
Cost Market – 12/31/2015 Market – 12/31/2016
 Security R 3,000,000 3,200,000 -─
Security S 4,000,000 3,500,000 3,700,000
Security T 5,000,000 4,600,000 4,700,000

On January 31, 2016, the entity sold Security R for P 3,500,000.

17. What amount should be recognized directly in retained earnings as a result of the sale of
investment in 2016?

A. 500,000
B. 300,000
C. 200,000
D. 0
Question #17 Answer A

Sale price – Security R 3,500,000

Historical cost – Security R (3,000,000)
Cumulative credit to retained earnings ( 500,000)

18. What cumulative unrealized gain or loss on the remaining financial assets should be reported
in the statement of changes in equity for 2016?

A. 600,000 gain
B. 600,000 loss
C. 300,000 gain
D. 300,000 loss
Question #18 Answer B

Market value Security S – December 31, 2016 3,700,000

Market value Security T – December 31, 2016 4,700,000
Total market value 8,400,000
Historical cost S and T (4,000,000 + 5,000,000) (9,000,000)
Cumulative unrealized loss – December 31, 2016 ( 600,000)

19. Gil Company provided the following information on December 31, 2015 regarding equity
investment:

Noncurrent assets:
Financial asset – FVOCI 3,700,,000
Shareholders’ equity:
Unrealized loss – OCI ( 300,000 )

The entity paid transaction cost of P100,000 related to the acquisition of the investment. This
amount is capitalized as part of the cost of the investment. The entity elected to measure the
equity investment at fair value through other comprehensive income.
 What was the historical cost of the financial asset?

A. 3,700,000
B. 3,400,000
C. 3,900,000
D. 4,000,000
Question #19 Answer D

Historical cost (3,700,000 + 300,000) 4,000,000

20. On July 1, 2015, Bellirose Company purchased P1,000,000 face value 8% bonds for P910,000
plus accrued interest to yield 10%. The bonds mature on January 1, 2020, pay interest annually
on January 1, and are classified as trading securities. On December 31, 2015, the bonds had a
market value of P945,000. On February 15, 2016, the entity sold the bonds for P920,000.

On December 31, 2015, what amount should be reported for trading debt securities?

A. 910,000
B. 920,000
C. 945,000
D. 950,000
Question #20 Answer C

Financial asset held for trading – FVPL 945,000

For 21-22 Use the following information

During the current year, Magic Company purchased 80,000 shares at P60 per share. The
investment was classified as trading. During the year, the entity sold 20,000 shares at P70 per
share. At year-end, the market price per share is P55.

21. What amount of gain on sale of investment should be reported in the income statement for the
current year?

A. 200,000
B. 800,000
C. 600,000
D. 0
 Question #21 Answer A

Sale price (20,000 x 70) 1,400,000

Cost of shares sold (20,000 x 60) (1,200,000)
Gain on sale of investment 200,000

22. What amount should be reported as unrealized loss in the income statement for the current
year?

A. 100,000
B. 300,000
C. 540,000
D. 0
Question #22 Answer B

Market value of remaining shares (60,000 x 55) 3,300,000

Carrying amount (60,000 x 60) (3,600,000)
Unrealized loss from change in fair value ( 300,000)

Gain on sale of investment 200,000

Unrealized loss from change in fair value ( 300,000)
Net amount of loss ( 100,000)

23. At the beginning of current year, Gala Company purchased marketable equity securities to be
held as “trading” for P5,000,000. The entity also paid commission, taxes and other transaction
costs amounting to P200,000.

The securities had a market value of P5,000,000 at year-end. No securities were sold during
the year. The transaction costs that would be incurred on the disposal of the investment are
estimated at P100,000.

What amount of unrealized gain or loss on these securities should be reported in the income
statement for the current year?

A. 500,000 unrealized gain

B. 500,000 unrealized loss
C. 400,000 unrealized gain
D. 400,000 unrealized loss
Question #23 Answer A

Fair value P5,500,000

Acquisition cost (5,000,000)
Unrealized gain 500,000
For questions 24-25 Use the following information
During 2015, Latvia Company purchased trading securities with the following cost and market
value on December 31, 2015:
Security Cost Market value
A – 1,000 shares 200,000 300,000
B – 10,000 shares 1,700,000 1,600,000
C – 20,000 shares 3,100,000 2,900,000
5,000,000 4,800,000

The entity sold 10,000 shares of Security B on January 15, 2016, for P150 per share.
24. What amount of unrealized gain or loss should be reported in the income statement for 2015?

A. 200,000 loss
B. 200,000 gain
C. 300,000 loss
D. 300,000 gain
Question #24 Answer A

Total market value – December 31, 2015 4,800,000

Total cost – December 31, 2015 (5,000,000)
Unrealized loss in 2015 ( 200,000)

25. What amount should be reported as loss on sale of trading investment in 2016?

A. 200,000 gain
B. 200,000 loss
C. 100,000 gain
D. 100,000 loss
Question #25 Answer D

Sale price (10,000 x P150) 1,500,000

Carrying amount of B shares on December 31, 2015 (1,600,000)
Loss on sale of trading investment ( 100,000)