Mindanao State University

College of Business Administration and Accountancy

Department of Accountancy
Marawi City

ACT112 – Intermediate Accounting I

Second Midterm Quiz (Assignment)
Investment Property, Cash Surrender Value, and Derivatives

QUESTIONNAIRE

Name: Score:
Instructor: Norhanimah M. Mangondato Date: May 30/31, 2022

Part I. Theories
Instruction: Select the answer that best relates to the statement being described. Write all
your answers in the Google Form link provided.

1. Which of the following would not be reported as investment property?

a. Property owned by the entity and leased out under one or more operating leases.
b. Property held by the entity to be leased out under one or more operating leases
c. Real estate held for an undetermined future use.
d. Property owned by the entity and leased out to another entity under a finance lease.

2. A property is classified as investment property if

a. it is leased out under a finance lease.
b. the owner-occupied portion of the property is significant.
c. the entity provides relatively insignificant ancillary services (e.g., security, janitorial
services, and the like) to the occupants of the property.
d. it is rented between a parent entity and a subsidiary and consolidated financial
statements are prepared for the group.

3. All of the following do not qualify as investment property, except

a. Machineries that are held for lease
b. Hotels or motels
c. Agricultural land purchased for appreciation purposes
d. Equipment purchased for an indeterminate purpose

4. How does the fair value model differ from the revaluation model?
a. Increases in carrying amount above a cost-based measure are recognized in equity
b. Changes in fair value are recognized in profit or loss
c. a and b
d. neither a nor b

5. Select the correct statement.

a. A leasing company should treat all its assets used in providing lease services as
investment property.
b. Investment properties that are to be disposed of without further development are
treated as investment property until they are derecognized.
c. All investment properties held for capital appreciation will be classified as held for sale
in the long run.
d. Investment properties being re-developed as investment properties on behalf of third
parties are investment properties.

6. Which of the following generally provides the best evidence of fair value of an
investment property?
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 a. Discounted cash flow projections based on reliable estimates of future cash flows.
b. Recent prices on less active markets with adjustments to reflect changes in economic
conditions.
c. Current prices for properties of a different nature or subject to different conditions.
d. Current prices on an active market for similar property in the same location and
condition.

7. Which of the following may be classified as “other long-term investments?”

a. Shares of stocks purchased as long-term investment and irrevocably elected to be
measured at fair value through other comprehensive income.
b. Long-term investment in bonds held under a ‘hold to collect’ business model.
c. Treasury shares acquired at a deep discount and expected to be reissued at a future
date that extends beyond 12 months from the end of the reporting period.
d. Shares of stocks and bonds purchased using funds earmarked for the retirement of
bonds payable.

8. On March 1, 2001, a company established a sinking fund in connection with an issue of

bonds due in 2013. At December 31, 2003, the independent trustee held cash in the
sinking fund account representing the annual deposits to the fund and the interest
earned on those deposits. How should the sinking fund be reported in the company’s
balance sheet at December 31, 2003?
a. The cash in the sinking fund should appear as a current asset.
b. Only the accumulated deposits should appear as a noncurrent asset.
c. The entire balance in the sinking fund account should appear as a current asset.
d. The entire balance in the sinking fund account should appear as a noncurrent asset.

9. Which of the following statements is correct regarding the accounting for sinking fund?
a. Sinking fund that is expected to be used in settling a currently maturing obligation is
presented as part of cash even if the sinking fund includes investments in stocks and
bonds.
b. Sinking fund is always presented as noncurrent asset.
c. The classification of a sinking fund as either current or noncurrent asset parallels the
classification of the related obligation for which the sinking fund was established.
d. The investment income earned by the sinking fund is recognized in other
comprehensive income.

10. It is a financial instrument or other contract that derives its value from the changes in
value of some other underlying asset or other instrument.
a. embedded derivative
b. derivative
c. financial asset
d. all of these

11. Which of the following is not among the characteristics of a derivative?

a. it must have at least two or more notional amounts
b. its value changes in response to the change in an underlying
c. it requires no initial net investment or only a very minimal initial net investment
d. it is settled at a future date

12. Which of the following can be a notional amount for a derivative?

a. share price
b. number of currency units
c. interest rate
d. exchange rate

13. In which of the following derivative contracts would the investor most likely pay a
marginal deposit, which is treated as receivable, at the inception of the contract?

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 a. Forward contract
b. Futures contract
c. Call option
d. Put option

14. These are options that can be exercised only at expiration time.
a. American options
b. European options
c. Bermudan options
d. Expired options

15. Jack Co. purchased a foreign currency option to purchase 1,000,000 units of a
specified currency at 47 per unit. Jackhammer Co. paid 7,500 for the option. The
option referred to is a
a. call option.
b. text option.
c. put option.
d. remove option.

Part II. Problems

Instruction: Write your answers in the Google Form link provided. In addition, you are
required to show your corresponding solution for each problem in a separate sheet of
paper. Said Solution Sheet need not be encoded, just take a picture of the same, attach in
the assigned classwork in your google classroom, and submit on time.

Cedric Co. has the following assets.

Vacant building to be leased out under operating lease 4,000,000
Building being constructed for TO ADJUST, Inc. 800,000
Building under construction to be used as office 1,600,000
Building under construction to be rented out under operating lease 400,000
Building rented out to Cedric’s employees
who pay rent at market rates 3,200,000
Office building awaiting disposal 200,000

16. How much is the total investment property?

a. 4,200,000
b. 4,400,000
c. 4,600,000
d. 7,600,000

17. On January 1, 2021, Zester Co. acquired a building with an estimated useful life of 10
years and residual value of 400,000 for a total cost of 4,000,000. The fair value of the
building on January 1, 2021 is 4,800,000 while the fair value on December 31, 2021 is
5,200,000. Zester estimates that if the building is sold currently on December 31, 2021,
costs to sell amount to 200,000. NURTURE uses the straight line method in depreciating its
PPE. NURTURE uses the fair value model for its investment properties. The year-end
adjusting entry will include
a. 360,000 depreciation
b. 400,000 unrealized gain
c. 200,000 unrealized gain
d. 1,200,000 unrealized gain

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18. On December 31, 2021, Kartazen Co. decided to lease out under operating lease one
of its buildings that was previously used as office space. The building has an original cost
of 12,000,000 and accumulated depreciation of 8,000,000 as of January 1, 2021. Annual
depreciation is 400,000. Kartazen Co. uses the fair value model for investment property.
The fair value of the building on December 31, 2021 is 6,000,000. The entry to record the
transfer of the building to investment property includes a
a. credit to gain on reclassification for 2,000,000.
b. credit to revaluation surplus for 2,000,000.
c. debit to building for 12,000,000.
d. credit to revaluation surplus for 2,400,000.

19. Callisto Co. acquired a building on January 1, 2021 for a total cost of 24,000,000 and
classified it as investment property. Callisto Co. uses the fair value model for its investment
property. On January 1, 2025, when the carrying amount of the building is 16,000,000,
the elevator in the building was replaced for a total cost of 3,200,000. It is impracticable
to determine the fair value of the replaced part. The fair value of the building on
December 31, 2025 is 17,200,000. How much is the loss recognized during the year?
a. 3,200,000
b. 2,000,000
c. no loss
d. indeterminable

On January 1, 2021, Ishid Co. insured the life of one of its key management personnel for
10,000,000. Ishid Co. is the beneficiary. The insurance policy requires annual payments of
280,000 at the start of each year. Information on the cash surrender value is shown below:
Policy year Cash surrender value
Dec. 31, 2021 -
Dec. 31, 2022 -
Dec. 31, 2023 180,000
Dec. 31, 2024 216,000
Dec. 31, 2025 260,000

Additional information:
• Ishid Co. received 4,000 cash dividend from the life insurance on April 1, 2024.
• The key employee died on October 1, 2025.

20. What amount of insurance expense is recognized in 2024?

a. 280,000
b. 276,000
c. 244,000
d. 240,000

21. How much is the gain on the settlement of the life insurance in 2025?
a. 9,681,000
b. 9,882,000
c. 10,000,000
d. 10,021,000

Abel Co. expects the value of the yen to decrease in the next 30 days. Accordingly, on
Dec. 15, 2021, Abel Co. enters into a 30-day forward contract to sell 1,000,000 yens at a
forward rate of 0.47. The forward rate on Dec. 31, 2021 is 0.45, while the spot rate on Jan.
15, 2022 is 0.48.

22. What amounts of derivative asset (liability) should Abel Co. recognize on Dec. 15, 2021
and Dec. 31, 2021, respectively?
a. 0; 20,000
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 b. 0; (20,000)
c. 10,000; 20,000
d. (10,000); (20,000)

23. <List A> If the contract is settled on a net cash basis, how much is Abel Co.’s net cash
receipt or payment? <List B> If the contract is settled by the actual sale of yens, what
amount of gain (loss) should Abel Co. recognize on settlement date?
<List A> <List B>
a. net receipt of 10,000 30,000 gain
b. net payment of 10,000 30,000 loss
c. net receipt of 30,000 10,000 gain
d. net payment of 30,000 10,000 loss

On Dec. 1, 2021, Vicente Co. enters into a futures contract to purchase 1,000 kilos of
coffee beans on February 1, 2022 for 200 per kilo. The broker requires an initial margin
deposit of 20,000. The market prices per kilo of coffee beans are: 200 on Dec. 1, 2021; 205
on Dec. 31, 2021; and 215 on Feb. 1, 2022.

24. What amounts of derivative asset (liability) should Vicente Co. recognize on Dec. 1, 2021
and Dec. 31, 2021, respectively?
a. 20,000; 15,000
b. (20,000); (15,000)
c. 0; 5,000
d. 0; (5,000)

25. <List A> How much net cash did Vicente Co. receive from or pay to the broker on
settlement date? <List B> How much gain (loss) did Vicente Co. recognize on settlement
date?
<List A> <List B>
a. 5,000 10,000
b. (5,000) (10,000)
c. 15,000 5,000
d. 35,000 10,000

On April 1, 2021, Caitel Co. acquired a put option on 1,000 shares of Pinewoods Co. The
strike price is 100 per share. The option expires on July 1, 2021. Caitel paid 600 for the
option. Information on current prices is as follows:

April 1, 2021 June 30, 2021 July 1, 2021

Share prices 100/sh. 106/sh. 106/sh.
Time value of option 600 400 0

26. How much is the carrying amount of the option in Caitel’s June 30, 2021 statement of
financial position?
a. 6,000 asset
b. 6,000 liability
c. 5,800 liability
d. 400 asset

27. How much gain (loss) did Caitel recognize on July 1, 2021?
a. 5,800 gain
b. 5,800 loss
c. 400 loss
d. 200 loss

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On January 1, 2021, Raf Co. enters into an interest rate swap on a 2,000,000 loan. Under
the swap agreement, Safe agrees to pay fixed interest of 8% and receive interest based
on whatever the current market rate is at the start of each year. Swap payment shall be
made on Dec. 31, 2022. The following are the current market rates:
Jan. 1, 2021 8%
Jan. 1, 2022 10%

28. What amounts of derivative asset (liability) should Safe recognize on Jan. 1, 2021 and
Dec. 31, 2021, respectively?
a. 0; 40,000
b. 0; (40,000)
c. 40,000; 36,364
d. 0; 36,364

29. What amount gain (loss) should Raf recognize on Dec. 31, 2022?
a. 3,636
b. (3,636)
c. (2,724)
d. 2,724

On Jan. 1, 2021, Knoxx Co. enters into an interest rate swap on a 2,000,000 loan whereby
Knoxx Co. agrees to receive variable interest and pay fixed interest of 9%. Swap payments
shall be made every Dec. 31 in the next three years. The following are the current market
rates:
Jan. 1, 2021 9%
Jan. 1, 2022 8%
Jan. 1, 2023 12%

30. What amount of derivative asset (liability) should Knoxx Co. recognize on Dec. 31, 2021?
a. (17,147)
b. 17,147
c. (35,665)
d. 35,665

31. What amount of gain (loss) should Knoxx Co. recognize on Dec. 31, 2022?
a. 53,571
b. (53,571)
c. 69,236
d. 37,906

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