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FINANCIAL ACCOUNTING AND REPORTING

DERIVATIVES, INVESTMENT PROPERTY AND OTHER INVESTMENTS

DERIVATIVES

1. On January 1, 2019, an entity borrowed P5,000,000 from a bank at a variable rate of interest for 2 years. Interest
will be paid annually to the bank on December 31 and the principal is due on December 31, 2020.

Under the agreement, the market rate of interest every January 1 resets the variable rate for that period and the
amount of interest to be paid on December 31.

In conjunction with the loan, the entity entered into a “receive variable, pay fixed” interest rate swap agreement
with another bank speculator as a cash flow hedge.

The market rates of interest are 10% on January 1, 2019 and 12% on January 1, 2020. The “underlying” fixed
interest rate is 10%. The PV of 1 at 10% for one period is .91 and the PV of 1 at 12% for one period is .89.

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

a. 89,000 asset
b. 89,000 liability
c. 91,000 asset
d. 91,000 liability
2. What amount should be reported as interest expense for 2020?
a. 600,000
b. 500,000
c. 511,000
d. 700,000

2. On January 1, 2019, an entity 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, 2022. The interest for 2019 is the prevailing market rate
of 10% on January 1, 2019, and the market interest rate every January 1 resets the variable rate of 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 as cash flow hedge. The interest rate swap payment will be made on
December 31 of each year.

The market rate of interest is 6% on January 1, 2020 and 8% on January 1, 2021. The PV of an ordinary annuity
of 1 at 6% for three periods is 2.67 and the PV of an ordinary annuity of 1 at 8% for two periods is 1.78.

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

a. 600,000 asset
b. 600,000 liability
c. 534,000 asset
d. 534,000 liability
2. What is the derivative asset or liability on December 31, 2020?
a. 178,000 asset
b. 178,000 liability
c. 334,000 asset
d. 334,000 liability
3. What amount of interest expense should be reported for 2020?
a. 500,000
b. 300,000
c. 400,000
d. 156,000

3. An entity operates a chain of seafood restaurants. On July 1, 2019, the entity determined that it will need to purchase
50,000 kilos of deluxe fish on July 1, 2020. Because of volatile fluctuation in the price of deluxe fish, on July 1,
2019, the entity negotiated a forward contract as a cash flow hedge with a reputable bank to purchase 50,000 kilos
of deluxe fish on July 1, 2020 at a strike price of P50 per kilo or P2,500,000.

This derivative forward contract provides that if the market price of deluxe fish on July 1, 2020 is more than P50,
the difference is paid by the bank to the entity.

On the other hand, if the market price on July 1, 2020 is less than P50, the entity will pay the difference to the bank.

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The market price per kilo of the deluxe fish is P55 on December 31, 2019 and P52 on July 1, 2020. What is the
derivative asset or liability on December 31, 2019?

a. 100,000 asset
b. 100,000 liability
c. 250,000 asset
d. 250,000 liability

4. An entity produces colorful 100% cotton shirts and the entity needs 50,000 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 50,000 kilos on July
1, 2020. The option strike price is P100 per kilo. The entity paid P50,000 for the call option.

This derivative option contract means that if the market price is higher than P100, the entity can exercise the option
and buy the asset at the strike option price of P100.

If the market price is lower than P100, the entity can throw away the option and buy the asset at the cheaper price.

The market price per kilo is P110 on December 31, 2019 and P115 on July 1, 2020.

1. What is the derivative asset on December 31, 2019?

a. 500,000
b. 450,000
c. 750,000
d. 700,000
2. What is the cash settlement from the speculator on July 1, 2020?
a. 750,000
b. 700,000
c. 500,000
d. 450,000
3. What is the cost of purchases on July 1, 2020?
a. 5,750,000
b. 5,000,000
c. 5,050,000
d. 5,300,000
4. Assume the market price is P110 on December 31, 2019 and P90 on July 1, 2020. What amount should be
recognized as loss on call option in 2020?
a. 500,000
b. 450,000
c. 50,000
d. 0
5. Assume the market price is P110 on December 31, 2019 and P90 on July 1, 2020. What is the derivative
liability on July 1, 2020?
a. 500,000
b. 250,000
c. 450,000
d. 0

INVESTMENT PROPERTY AND OTHER INVESTMENT

5. A parent entity and its subsidiaries provided the following properties owned by the group.

Land held for undetermined future use 1,000,000

Vacant building to be leased out under an operating lease 2,000,000
Property held for use in production 4,000,000
Property held by a subsidiary, a real estate firm, in the ordinary course of business 3,000,000
Building owned by subsidiary and for which the subsidiary provides
2,500,000
security and maintenance services to the lessees
Land leased to a subsidiary under an operating lease 1,500,000
Equipment leased to an unrelated party under an operating lease 500,000
Building under construction for use as investment property 3,500,000

1. In the consolidated statement of financial position of the parent and its subsidiaries, what total amount should
be reported as investment property?
a. 6,500,000
b. 5,500,000

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c. 8,000,000
d. 9,000,000
2. What total amount should be included in property, plant and equipment in the consolidated statement of
financial position of the parent and its subsidiaries?
a. 9,500,000
b. 4,000,000
c. 6,000,000
d. 4,500,000

6. An entity purchased an investment property on January 1, 2017 at a cost of P2,200,000. The property had a useful
life of 40 years and on December 31, 2019 had a fair value of P3,000,000.

On December 31, 2019, the property was sold for net proceeds of P2,900,000. The entity used the cost model to
account for investment property. What is gain to be recognized for 2019 regarding the disposal of the property?

a. 865,000
b. 810,000
c. 100,000
d. 700,000

7. On January 1, 2019, an entity acquired three investment properties.

Fair value Fair value

Initial cost
December 31, 2019 December 31, 2020
Property 1 2,700,000 3,200,000 3,500,000
Property 2 3,450,000 3,000,000 2,800,000
Property 3 3,300,000 3,900,000 3,400,000

Each property had an estimated useful life of 50 years. The accounting policy is to use the fair value model for
investment property. What is the gain or loss to be recognized for the year ended December 31, 2020?

a. 250,000 loss
b. 400,000 loss
c. 300,000 gain
d. 700,000 loss

8. On January 1, 2019, an entity adopted a plan to accumulate funds for a new building to be erected beginning January
1, 2023 at an estimated cost of P20,000,000.

The entity intends to make four equal annual deposits in a fund beginning December 31, 2019 that will earn interest
at 12% compounded annually.

The future value of an ordinary annuity of 1 at 12% for 4 periods is 4.78, and the future value of an annuity of 1 in
advance at 12% for 4 periods is 5.35.

What is the annual deposit to the fund?

a. 5,000,000
b. 4,184,100
c. 3,738,318
d. 3,149,606

9. An entity purchased P2,000,000 ordinary life policy on its president. The entity is the beneficiary under the life
insurance policy. The entity reported the following data for the current year:

Cash surrender value, January 1 50,000

Cash surrender value, December 31 60,000
Annual advance premium paid on January 1 100,000
Dividend received on July 1 5,000

What amount should be reported as life insurance expense for the current year?

a. 100,000
b. 95,000
c. 85,000
d. 90,000

10. An entity purchased P2,000,000 ordinary life policy on its president and the entity is the beneficiary. The entity
provided the following data for the current year:

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Cash surrender value – January 1 180,000

Cash surrender value – December 31 220,000
Annual advance premium paid – January 1 90,000

During the current year, dividend of P10,000 was applied to increase the cash surrender value. What amount should
be reported as life insurance expense for the current year?

a. 90,000
b. 50,000
c. 40,000
d. 60,000

11. A entity insured the life of its president for P2,000,000, the entity being the beneficiary under the life insurance
policy. The entity reported the following data for 2019:

Cash surrender value – January 1 75,000

Cash surrender value – December 31 95,000
Annual premium paid on January 1 160,000

The president died on October 1, 2019 and the policy was settled on December 31, 2019.

1. What amount should be reported as life insurance expense for 2019?

a. 120,000
b. 100,000
c. 100,000
d. 105,000
2. What amount should be reported as gain on life insurance settlement for 2019?
a. 2,000,000
b. 1,870,000
c. 1,910,000
d. 1,965,000

Theory

1. The characteristics of a derivative include all of the following, except

a. The value changes in response to the change in a specified underlying.
b. It requires a large investment at the inception of the contract.
c. It is settled at a future date.
d. All of these are characteristics
2. Which of the following statements regarding derivatives is not true?
a. The derivatives should be recognized as assets and liabilities.
b. The derivatives should be reported at fair value.
c. Gains and losses resulting from speculation should be deferred.
d. Gains and losses resulting from fair value hedge are reported immediately.
3. An embedded derivative shall be “bifurcated” from the host contract when all of the following conditions are
satisfied, except
a. The economic characteristics and risks of the host contract and the embedded derivative are not closely
related.
b. A separate instrument with the same terms as the embedded feature would meet the definition of a derivative
c. The host contract is measured at fair value through other comprehensive income.
d. The host contract is measured at fair value through profit or loss.
4. An option to convert a convertible bond into ordinary shares is
a. Embedded derivative
b. Host security
c. Hybrid security
d. Fair value hedge
5. Which of the following statements best describes investment property?
a. Property held for sale in the ordinary course of business
b. Property held for use in the production and supply of goods or services and property held for administrative
purposes
c. Property held to earn rentals or for capital appreciation
d. Property held for capital appreciation

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6. The applicable standard for a property being constructed or developed for future use as investment property is
a. IAS 2 Inventories
b. IAS 40 Investment property
c. IAS 16 Property, plant and equipment
d. IAS 38 Intangible assets
7. Which statement is true about measurement of investment property using fair value method?
a. The investment property is shown at cost less accumulated depreciation.
b. The increase in fair value is recognized in other comprehensive income
c. The investment property is depreciated using the normal depreciation policy.
d. The investment property is not depreciated.
8. Which of the following statements regarding investment property is correct?
a. If the entity elects the fair value method, no depreciation expense is taken.
b. Gains and losses from fair value adjustments are reported in the income statement.
c. If the entity elects the cost model, depreciation should be recognized.
d. All of these statements are correct regarding investment property.
9. Which of the following additional disclosures must be made when an entity chooses the cost model as its accounting
policy for investment property?
a. The fair value of the property
b. The present value of the property
c. The value in use of the property
d. The net realizable value of the property
10. Which of the following disclosures should be made when the fair value model has been adopted for investment
property?
a. Depreciation method used
b. The amount of impairment loss recognized
c. Useful life or depreciation rate used
d. Net gains or losses from fair value adjustments
11. Transfers from investment property to property, plant and equipment are appropriate
a. When there is change of use.
b. Based on the entity’s discretion.
c. Only when the entity adopts the fair value model.
d. The entity can never transfer property into another classification once it is classified as investment property.
12. An investment property is derecognized when
a. It is disposed of to a third party.
b. It is permanently withdrawn from use.
c. No future economic benefits are expected from its disposal
d. In all of the above cases

END

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