REV1 Midterm Exam

A financial instrument is any contract that gives rise to

• A financial asset

• A financial liability

• A financial asset of one entity and a financial liability of another entity

• A financial asset of one entity and a financial liability or equity instrument of another entity

When bonds are acquired at premium and the effective interest method is used, at each interest payment date, the interest income:

• Remains constant

• Is equal to the change in book value

• Increases

• Decreases

Financial assets include all the following, except

• Prepaid expenses

• Cash in bank

• Trade accounts receivable

• Loans receivable

An investor owns 10% of the ordinary shares of an investee throughout the year. The investee has no preference shares outstanding. What is the right of the investor?

• To be paid 10% of the investee’s net income in cash each year.

• To receive dividend equal to 10% of the par value each year.

• To receive dividend equal to 10% of the total dividend paid by the investee for the year to shareholders.

• To keep investee from issuing any additional shares unless the investor is willing to buy 10% of the newly issued shares.

Which statement is true concerning significant influence?

• If an investor holds, directly or indirectly, less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated.

• If an investor holds, directly or indirectly, 20% or more of the voting power of the investee, it is presumed that the investor does have significant influence, unless it can be clearly demonstrated that this is not the case.

• A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.

• All of these statements are true about significant influence.

Which statement is incorrect concerning the equity method?

• The investment account is initially recorded at cost.

• The investment in associate is increased or decreased by the investor’s share of profit or loss of the investee after the date of acquisition

• The investor’s share of the profit or loss of the investee is recognized in the investor’s profit or loss.

• Distributions received from the investee are accounted for as dividend income.

On January 1 of the current year, an entity purchased 10% of another entity’s ordinary shares. The entity purchased additional shares bringing the ownership up to 40% of the investee’s ordinary shares outstanding on August 1 of the current year. During October of the current year,

the investee declared and paid a cash dividend on all of the outstanding ordinary shares. How much income from the investment should be reported for the year?

• 10% of the investee’s income from January 1 to December 31, plus 40% of investee’s income from August 1 to December 31.

• 40% of the investee’s income from August 1 to December 31 only.

• 40% of investee’s income for the current year.

• Amount equal to dividends received from the investee.

Accrued interest on bonds that are purchased between interest dates

• Is ignored by both the seller and the buyer.

• Increases the amount a buyer must pay.

• Is recorded as a loss on the sale of the bonds.

• Decreases the amount a buyer must pay.

Bonds usually sell at a discount when investors are willing to invest in bonds

• At the stated interest rate

• At rate lower than the stated interest rate

• At rate higher than the stated interest rate

• Because a capital gain is expected

Bond investment through OCI is governed by which standard?

• PFRS 3

• PFRS 9

• PFRS 8

• PFRS 5