Reviewer in Intermediate Accounting I

(For Midterm Examination)

Investments
True or False
1. Equity investments at FVOCI can be classified as current or noncurrent depending in management’s
intent. (True)
2. In regard with the effective interest method of amortization. Amortization of premium decreases from
period to period. (True)
3. Investment property includes property held for sale in the ordinary course of business or in the process
of construction for such sale. (False)
4. Directly attributable expenditures related to investment property include professional fees for legal
services, property transfer taxes and other transaction costs. (True)
Terminologies
Investment are classified as temporary when
-the investments are readily marketable and intended to meet working capital requirements
Equity Securities at FV through Profit or loss are valued at
-fair market value
These are incremental costs directly attributable to the acquisition of financial assets and issue of financial
liabilities
-acquisition costs
The test of marketability must be met before investments in equity securities can be properly classified as
-Equity investment at FVPL or Equity investments at FVOCI
Cost of the securities acquired by exchanging another asset
-fair value of the asset given up
Cash dividend received by an investor in Equity investments at Fair value from the investee should be
accounted for as
-investment revenue
Way on how the investor in Equity investment at FVOCI account for investee’s earnings
-given no recognition on the investor’s accounting records
The unrealized loss on security investment account for FVOCI should be reported as a component of
-stockholders’ equity
When the equity method is used to account for investment in ordinary shares, where does it affects the
investor’s reported investment income?
-Yes (Good will amortization related to purchase); No (Cash dividends from investee)
How should it report unrealized gains and losses from securities that are not intended to be sold in the near
term?
- Equity investment at Separate component of other FVOCI comprehensive income
Share bonus on ordinary shares should be recorded at their fair market value by the investor when the
related investment is accounted for under the classification
-No (Equity Investment at FVPL); No (Equity Investment at FVOCI)
How would the receipt of additional ordinary shares as a result of a 20% share bonus affect each of the
following accounts on the books of the investors?
-No effect (Investment Account); No effect (Retained Earnings)
If the investor is required to use equity method to account for an investment and the investor fails to accrue
its proportionate share of the investee’s income, the investor’s investment account will be
-understated
How should the value of the stock rights received by an existing investor as a result of a preemptive right be
accounted for at the time the stock rights are received?
-no value should be assigned to the stock right
The market value of the Equity investment at FVPL owned by Alpha Company is less than the cost. The
difference should be accounted for by
-reporting an unrealized loss in security investments in the income statement
Effect of stock split up is it
-increases in number of shares and decreases in cost per share
Securities that are purchased with the intent of selling them in the near future
-Equity investments at FVPL
When an investor uses the cost method to account for investments in ordinary shares, cash dividends
received by the investor from the investee should normally be recorded as
-dividend revenue
When an investor purchased investment in associates, the investment will be increased when the investor
recognizes
-proportionate share of the net income of the investee
A correct valuation is
-Equity Investment at FVOCI at market value
The equity method of accounting for investment in associates should be used when the investment
-enables the investor to exercise significant influence over the investee
A credit balance in the account Unrealized Gain/Loss-Equity Investment at FVOCI at the end of the year
should be interpreted as
-the net unrealized holding gain to date
For which type of investments would unrealized holding gain or loss be recorded directly in an owner’s
equity account?
-Equity investment at FVOCI
Examples of long-term investment
-land held as future plant site
-stock of an unconsolidated subsidiary of a bank
-cash sinking fund for retirement of bonds
If the combined market value of Equity investments at FVPL at the end of the year is less than the market
value of the same portfolio of Equity investments at FVPL at the beginning of the year, the difference should
be accounted for by
-reporting an unrealized loss in security investments in the income statement
If the combined market value of Equity investment at FVOCI at the end of the year is less than the market
value of the same portfolio Equity investment at FVOCI at the beginning of the year, the difference should
be accounted for by
-reporting an unrealized loss in security investments in the stockholders’ equity of the balance sheet
When an investor classifies investments as to Investment in Associates, cash dividends received by the
investor from the investee should be recorded as
-a deduction from the investment account
At the beginning of the year a company had a credit balance in the account Unrealized Gain/Loss-equity
investment at FVOCI. During the year the company did not buy or sell any securities, but at the end of the
year the related Unrealized Gain/Loss account had a debit balance. The change indicates that
-the value of the investment account decreased
If an investment in Equity investments at FVOCI is reclassified to investment in associates, the investment
should be recorded on the date it is reclassified at the
-market value at the date of reclassification
Debt Investment in should be recorded at
-face value plus brokerage fees and other costs incidents to the purchase
How is the premium or discount on bonds purchased as Debt Investment at amortized cost generally reported
in financial statements
-as an integral part of the cost of the asset acquired until such time as the investment is sold
An investor purchased a bond as a long term investment in between interest dates at a premium. At the
purchase date, the cash paid to the seller is
-more than the face amount of the bond
An investor purchased a bond as a long term investment on January 1. Annual interest was received on
December 31. The investor’s interest for the year would be higher if the bond was purchased at
-a discount
Regarding amortization of a premium or discount on a debt security, the
-effective interest method of allocation should be used but other methods can be applied if there is no material
difference in the results obtained
Category that includes debt securities
-Debt investment at amortized cost
It is defined as property (land or building or part of building or both) by an owner or finance lease to earn
rentals or capital appreciation or both
-investment property
Investment property includes the following
-land held for long-term capital appreciation
-land held for currently undetermined use
-building owned by the reporting enterprise or held by a finance lease leased out under one or more operating
leases
Computations
1. Dickinson Company acquired the following portfolio of trading securities during 2020 and reported the
following balances at December 31, 2020. No sales occurred during 2020. All declines are considered to
be temporary:
Security Cost 12/31/20 Market value
BPI P 700,000 P 720,000
BDO 850,000 800,000
PSB 1,050,000 1,280,000
What is the carrying value of the securities on December 31, 2020 on Dickinson’s balance sheet?
Answer: P 2,800,000

2. On January 1, 2020, Dallas Enterprises acquired 1,000 shares of P5 par value ordinary shares, along
with 250 shares of P25 par value preference shares, of Ford Company in a single transaction for P
52,000. Currently, Ford Company’s ordinary shares and preference shares are trading for P35 per share
and P84 per share respectively. On January 2, Dallas should allocate the cost of the investment in Ford’s
ordinary and preference Sl shares as follows:
Ordinary shares Preference shares
Answer: 32,500; 19,500

3. Dutch Company has 60,000 ordinary shares of Grand Company as investment in available for sale
securities. These securities were acquired at fair market value, which was P80/share on May 2, 2019. On
December 20, 2020, the market value of these shares is P90/share. On December 22, 2020, Dutch
Company sold 42,000 shares of its investment in Grand Company for P91/share and incurred
commission expense of P 8,000. Market value of Grand’s stock has yet to change; it remained at
P90/share. What amount of realized gain or loss should Dutch Company recognize in selling these
shares?
Answer: 454,000
4. On January 2, 2020, Dove, Inc. acquired a 25% interest in the outstanding voting ordinary shares of
Cabot Enterprises for a cost of P 900,000. This investment provides Dove with the ability to exercise
significant influence over Cabot and classified the investment as investment in associates. The
acquisition cost of the investment is in excess of the book value by P 140,000; the excess is attributable
to goodwill which is to be amortized over 20 year. During 2020, Cabot Enterprises reported net income
of P 312,000 and paid total cash dividends of P 220,000. At December 31, 2020, the balance account
Investment in Associates in Cabot should have a carrying value of
Answer: 916,000

5. Darwin, Inc. acquired 30% of Sonnet Company’s voting stock for P 200,000 on January 2, 2018.
Darwin’s 30% interest is Sonnet gave Darwin the ability to exercise significant influence over Sonnet’s
operating and financial policies. During 2019, Sonnet earned P 80,000 and paid dividends of P 50,000.
Sonnet reported earnings of P 100,000 for the 6 months ended June 30, 2020 and P 200,000 for the year
ended December 31, 2020. On July 1, 2012, Darwin sold half of its stock in Sonnet for P 150,000 cash.
Sonnet paid dividends of P 60,000 on October 1, 2020. Before income taxes, what amount should
Darwin include in its 2019 income statement as a result of this investment?
Answer: 24,000

6. On January 1, 2019, Dania Corp. acquired 10% of the outstanding stock of Penny, Inc. On January 2,
2020, Dania gained the ability to exercise significant influence over financial and operating control of
Penny by acquiring an additional 20% of Penny’s outstanding stock. The two purchases were made at
prices proportionate to the value assigned to Penny’s net assets, which equaled their carrying amounts.
For the years ended December 31, 2019, and 2020, Penny reported the following:
2019 2020
Dividends P 200,000 P 300,000
Net income 600,000 650,000
In 2020, what amount should Dania report as current year investment income and an adjustment, before
income taxes to 2019 investment income?
2020 Investment Income Adj. to 2019 Investment Income
Answer: 195,000; -0-

7. On January 2, 2020, Damp Company purchased 20% of Pilot Company’s ordinary shares for P
4,500,000. During 2020, Pilot reported net income of P 4,000,000 and paid cash dividends of P
3,000,000 on its ordinary share. What is the balance in Damp’s “Investment in Pilot” account and the
amount of income from investment on December 31, 2020, respectively?
Answer: P 4,700,000 and P 800,000

8. On March 4, 2020, Dale Co. purchased 1,000 ordinary shares of LCD at P80 per share. On September
26, 2020, Dale received 1,000 stock rights to purchase an additional 1,000 shares at P90 per share. The
stock rights had an expiration date of February 1, 2021 On September 30, 2020, LCD’s ordinary share
had market value ex-rights of P95 each and the stock rights had a market value of P5 each. What amount
should Dale report on its September 30, 2020 balance sheet as the cost of the investment in stock rights?
Answer: -0-

9. On January 3, 2018, Dart Co. purchased 500 shares of Mina Corp. ordinary shares for P 36,000. On
December 2, 2019, Dart received 500 stock rights from Mina. Each right entitles the holder to acquire
one share of stock for P85. The market price of Mina’s stock was P100 a share immediately before the
right were issued, and P90 a share immediately after the rights were issued. Dart sold its rights on
December 31, 2020, for P10 a right. Dart’s gain from the sale of right is
Answer: -0-
 10. On April 1, 2020, Darius acquired 2,000 ordinary shares at P48 per share in Alan Enterprises and
classified the Equity investment FVOCI. In addition, the broker’s commissions for this transaction were
P 2,400. During 2020, Darius received P 7,200 in cash dividends, and on July 1, 2020, a 5% stock
dividend was issued. On December 1, Alan issued a 2-for-1- stock split. At December 31, 2020, the
book value per ordinary share held by Darius is?
Answer: P 23.43

Inventories
True or False
1. IAS 2 Inventories applies to biological assets related to agricultural activity. (False)
2. The first-in, first-out (FIFO) method assumes that items remaining in inventory at the end of the period
are those most recently purchased or produced. (True)
3. In periods where production costs or purchase prices of inventory items do not change, it does not matter
which inventory method is adopted as this would generate the same value for cost of goods sold and
ending inventory. (True)
4. FIFO method is an income decreasing inventory cost flow method in periods of rising prices. (False)
5. Reversal of a previous inventory write down is not advocated in IAS 2. (False)
6. Upward revaluation of inventory is permitted for as long as all assets in same inventory class are
revalued. (False)
7. Some biological assets may be covered by IAS 2 Inventories. (True)
8. The definition of inventories includes assets in the form of materials or supplies to be consumed in the
production process or in rendering of services. (True)
9. IAS 2 provides that inventories must be valued at the lower of cost and net realizable value for groups of
homogeneous items where it is impracticable to measure them on an item-by-item basis. (True)
10. IAS 2 applies to all inventories including work in progress under construction contracts. (False)
11. The cost of sub-contracted work is not included in costs of conversion for the purposes of calculating the
cost of inventory. (False)
12. IAS 2 requires that fixed manufacturing costs be excluded from the cost of inventories, as they cannot be
allocated accurately. (False)
13. Standard costs may be used to arrive at the cost of inventory only where standards are set at ideal levels
and any costs arising from exceptional wastage are excluded from the cost of inventories. (False)
14. The value of inventory reported in the financial statements under IAS 2 may be reported at an amount
lower than its original cost. (True)
15. The cost-flow assumption selected for inventory costing purposes should always reflect the physical
flow of goods out of inventory. (False)
16. A company engaged in buying and selling equity securities should consider this asset as inventory and
should be accounted for in accordance with IAS 2. (False)
17. The measurement of inventories is no different for not-for-profit entities. (False)
18. Perpetual inventory system is also known as the physical inventory method. (False)
19. When reversing a previous period inventory write down, this would result in a debit entry to the
inventory account. (True)
Terminologies
Definition of Inventories in IAS 2
-Assets in the form of materials or supplies to be consumed in the production process
-Assets in the process of production for sale
-Assets held for sale in the ordinary course of business
IAS 2 on Inventories Applies to
-trees held for sale as part of forestry operations
-agricultural produce of a biological asset
According to IAS 2 Inventories include Assets
-held in the process of production, preparation or conversion for sale
IAS 2 requires that inventory is valued at
-the lower of cost and net realizable value, on an item-by-item basis where practicable
IAS 2 provides that not-for-profit entities
-will record the inventories at the lower of cost or current replacement cost
The cost of inventory is defined by IAS 2 as including
-the cost of purchase and conversion
-duties and taxes on purchase of goods or services for sale
-the cost incurred in the normal course of operations to bring the inventories to their present location and
condition
Fixed production costs are those that, within normal operating limits
-remain a constant amount at varying production volume levels
The two main methods for dealing with fixed costs in relation to the production of inventory are
-absorption costing and direct costing
Correct statement in relation to the costing of inventories
-Direct costing treats fixed production costs as an expense of the period and is not permitted as a method for
valuing inventories under IAS 2.
Standard costs are able to be used under IAS 2 where
-they are realistically attainable and are reviewed regularly
Under IAS 2 revaluations are permitted
-only in the form of a write-down
According to IAS 2, one or more of which set of methods should be used to apply the costs of inventories to
particular items of inventory
-FIFO, specific identification or weighted average cost
IAS 2 requires that the specific identification method of assigning cost to items of inventory be applied
-to items of inventory that are not ordinarily interchangeable or are produced and segregated for specific
projects
True about rising prices for inventory
-LIFO adopters would report higher cost of goods sold and lower ending inventory than FIFO adopters.
Use of the LIFO method has been deemed unacceptable under IAS 2 because
-This method allows profits to be manipulated by purchasing items at year's end even though they have not been
sold.
Systems commonly in use for recording the movement of inventory
-periodic and perpetual
The periodic inventory system operates by
-counting inventory at regular intervals to establish how much of each item is on hand
Using the periodic system of inventory
-gives the same results as a perpetual system when FIFO is applied but without some of the extra detail
According to IAS 2 material information relating to this must be disclosed
-the carrying amount of inventories classified as non-current assets
The valuation of inventories may be on the basis of
-the lower of cost and net realizable value
IAS 2 requires, among others, disclosure of the following pieces of information
-accounting policy adopted for measuring inventories
-carrying amount of inventories for each classification of inventory appropriate to the entity
-amount of any write-down during the period
Consistent with positive accounting theory, an entity close to breaching their debt covenant will
-prefer FIFO method over LIFO method
Accounting policy for manufacturing fixed costs is likely to favor managers whose firms are subject to
political scrutiny
-absorption costing
According to the positive accounting theory
-Managers of firms with bonus-based contracts prefer FIFO method of valuation basis
Las Vegas Ltd sells second hand luxury cars of various makes and models, and uses the FIFO cost flow
assumption to ascertain the cost of ending inventory. This would be incorrect because
-this method will not capture unique characteristics of items held in inventory
Costs to be excluded when calculating the cost of inventory in IAS 2
-abnormal amounts of wasted materials
-selling costs
-administrative overheads
IAS 2 requires that inventories be reinstated to the extent that the new carrying amount does not
-exceed the lower of the original cost or the net realizable value in the current period
Weighted-average cost will generate results that are
-in between LIFO and FIFO
Computations
1. Kensington Ltd is an importer and retailer of European made glass crystals. For the year ended 30 June
2008, Kensington Ltd still holds 30 units of an item originally purchased for $10 000 each and a net
realizable value of $8000. On 1 June 2009 the TV show Home Improvement featured a similar item
prompting an increase in demand for this glass crystal. Management believes that the net realizable
value of this item is now $15 000. All 30 items remain unsold on 30 June 2009. What is the effect of
holding this inventory on the statement of comprehensive income of Kensington Ltd for the years ended
30 June 2008 and 2009?
Answer: Decrease profit by $60 000 in 2008; increase profit by $60 000 in 2009.

2. Paris Merchandising Ltd sells ladies skirts. The opening stock consisted of 300 skirts with purchase
price of $50 each. Subsequent purchases during the period include: 400 at $60 each and another 200 for
$70 each. A total of 700 skirts were sold during the period. What is ending inventory using FIFO
method?
Answer: $14,000

3. Phoenix Ltd sells hard disks of similar make and model and reports an opening inventory on 1 July 2012
of 20 units purchased at $60. Its purchases during are as follows: September 90 units @ $70 November
110 units @ $75 March 70 units @ $80 Phoenix Ltd sold 260 units during the year. What is the cost of
ending inventory using FIFO and weighted average method respectively (rounded to the nearest dollar)?
Answer: $2,400; $2209
Biological Assets
Terminologies
1. All living animals and plants
2. Should be measured initially and at each reporting period at its fair value estimated cost to sell.
3. Change in fair value less cost to sell of a biological asset is taken to profit or loss in the period where the
change arises.
4. All costs related to biological assets are measured at fair value when incurred, except for the cost of
purchase.
Example
1. 5 Carabaos at Php 100,000 each Journal Entry: Biological Asset 750,000
Fair Market Value: Php 150,000 Cash 500,000
Gain from Initial Recognition 250,000
Price Change
-same age different dates
Physical Change
-same date different age
Example
1. Pyramid Farm Corporation produces milk on its farms located in Bukidnon. At December 31, 2022 the
herd of cows are as follows:
4,000 cows (3 years old) all purchased in prior years
1,000 cows (1.5 years old) purchased on June 30, 2022
500 heifers (2 years old) purchased on December 31, 2022
Note: No animals were born or sold during the year 2023.
The unit less estimated cost to sell was as follows:
1 year old animal at December 31, 2022 Php 25,000
1.5 year old animal at December 31, 2022 29,000
2 year old animal at December 31, 2022 35,000
3 year old animal at December 31, 2022 44,000
1 year old animal at December 31, 2023 26,500
1.5 year old animal at June 30, 2023 30,000
2 year old animal at December 31, 2023 37,500
3 year old animal at December 31, 2023 47,000
4 year old animal at December 31, 2023 55,000
Answer:
Price Change
3 years old= 2,000 × (47,000 - 44,000) Php 6,000,000
2 years old= 1,500 × (37,500 – 35,000) 3,750,000
Php 9,750,000
Physical Change
4 years old= 2,000 × (55,000 – 47,000) Php 16,000,000
3 years old= 1,500 × (47,000 – 37,500) 14,250,000
Php 30,250,000
Php 40,000,000
Journal Entry:
Biological Asset 40,000,000
Gain Arising from Change in FV Due to Price Change 9,750,000
Gain Arising from Change in FV Due to Physical Change 30,250,000

Beginning Balance
3 years old (2,000 × 44,000) Php 88,000,000
 2 years old (1,500 × 35,000) 52,500,000
Price Change 9,750,000
Physical Change 30,250,000
Ending Balance Php 180,500,000

2. A group of twenty 2 year old cows were held on January 1, 2022. Five 2 year old cattle were purchased
on January 1, 2022 for Php 26,000 each and 5 heifers were born on January 1, 2022, no cows or heifers
were disposed during the period. Per unit fair value less point of sale cost were as follows:
January 1, 2022 December 31, 2022
2 year old Php 24,000 3 year old Php 30,000
New born 8,000 2 year old 26,000
1 year old 14,000
New born 10,000
Determine the following:
a. Gain or loss on initial recognition.
(26,000 – 24,000) × 5= 10,000
Journal Entry:
Biological Asset 120,000
Loss from Initial Recognition 10,000
Cash 130,000

b. Amount taken to profit or loss arising from change in fair value less point of sale cost due to physical
change.
3 years old= 25 × (30,000 – 26,000) 100,000
1 year old= 5 × (14,000 – 10,000) 20,000
New born= 5 × 8,000 40,000
160,000

c. Amount taken to profit or loss arising from change in fair value less point of sale cost due to price
change.
2 years old= 25 × (26,000 – 24,000) 50,000
New born= 5 × (10,000 – 8,000) 10,000
60,000

d. Amount presented to financial statement as Biological Asset.

3 years old= 25 × 30,000 750,000
1 year old= 5 × 14,000 70,000
820,000

e. Gross income to be reported to profit or loss.

Physical Change 160,000
Price Change 60,000
220,000