PAS 32

Question 1

1. Depending on the business model for managing financial assets, an entity shall classify financial assets subsequent to initial recognition at

a. Fair value through profit or loss
b. Amortized cost
c. Fair value through other comprehensive income
d. All of these are used in measuring financial assets

Answer 1

d. All of these are used in measuring financial assets

Question 2

2. A debt investment is measured at amortized cost

a. By irrevocable election
b. When the debt investment is managed and evaluated on a document risk-management strategy.
c. When the debt investment is held for trading
d. When the business model is to collect contractual cash flows that are solely payments of principal and interest.

Answer 2

d. When the business model is to collect contractual cash flows that are solely payments of principal and interest.

Question 3

3. The irrevocable election to present subsequent changes in fair value in other comprehensive income is applicable only to

a. Investment in equity instrument not held for trading.
b. Investment in equity instrument held for trading.
c. Financial asset measured at amortized cost.
d. Financial asset measured at fair value.

Answer 3

a. Investment in equity instrument not held for trading.

Question 4

4. A debt investment shall be measured at fair value through other comprehensive income

a. When the debt investment is held for trading.
b. When the debt investment is not held for trading.
c. By irrevocable designation
d. When the business model is to collect contractual cash flows and also to sell the financial asset

Answer 4

d. When the business model is to collect contractual cash flows and also to sell the financial asset

Question 5

5. Which is not a category of financial assets?

a. Financial assets at fair value through profit or loss
b. Financial assets at fair value through other comprehensive income
c. Financial assets at amortized cost
d. Financial assets held for sale

Answer 5

d. Financial assets held for sale

Question 6

1. Under IFRS, 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 6

c. Held for trading and held to profit from price changes

Question 7

2. 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 investment.
c. The contractual cash flow characteristics of the financial asset.
d. All of the choices are required.

Answer 7

b. Whether the financial asset is a debt or an equity investment.

Question 8

3. 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 8

c. Amortized cost

Question 9

4. 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 9

**b. Fair value*”

Question 10

5. Debt investments 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 10

c. Held for collection debt investments

Question 11

6. Equity investments irrevocably accounted for at FVOCI 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 11

a. Nontrading investments of less than 20%.

Question 12

7. 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 12

d. Debt investments at amortized cost and debt investments at FVOCI

Question 13

8. Impairments of debt investments at amortized cost are

a. Based on discounted contractual cash flows.
b. Recognized as component of OCI.
c. Based on fair value for nontrading investments.
d. Evaluated at each reporting date.

Answer 13

d. Evaluated at each reporting date.

Question 14

9. An impairment loss is the excess of the carrying amount of the debt investment over

a. Expected cash flows
b. Present value of the expected cash flows
c. Contractual cash flows
d. Present value of the contractual cash flows

Answer 14

b. Present value of the expected cash flows

Question 15

10. Under IFRS, an entity

a. Should evaluate every investment for impairment.
b. Accounts for an impairment as component of OCI.
c. Calculates the impairment loss on debt investment as the excess of carrying amount over the expected discounted future cash flow.
d. All of the choices are correct

Answer 15

c. Calculates the impairment loss on debt investment as the excess of carrying amount over the expected discounted future cash flow.

Question 16

1. Reclassifications of investments between categories are accounted for

a. Prospectively, at the end of the period after the change in the business model.
b. Prospectively, at the beginning of the period after the change in the business model.
c. Retrospectively, at the end of the period after the change in the business model.
d. Retrospectively, at the beginning of the period after the change in the business model.

Answer 16

b. Prospectively, at the beginning of the period after the change in the business model.

Question 17

2. Transfers of investments between categories

a. Result in omitting recognition of fair value in the year of the transfer.
b. Are accounted for at fair value for all transfers.
c. Are not recognized if investments are transferred from held for collection to fair value.
d. Should always affect net income.

Answer 17

b. Are accounted for at fair value for all transfers.

Question 18

3. 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 18

a. Recognized in profit or loss

Question 19

4. 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. Original carrying amount of the debt investment

Answer 19

a. Fair value at reclassification date

Question 20

5. Which statement is true when a debt amortized investment at cost is reclassified to FVOCI?

a. The debt investment is measured at fair value at reolassification 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 20

d. All of these statements are true.

Question 21

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 21

d. All of these statements are true.

Question 22

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 contractual cash flows representing principal

Answer 22

a. Fair value at reclassification date

Question 23

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 23

d. All of these statements are true.

Question 24

1. It is the date on which the stock and transfer book of the entity is closed for registration.

a. Date of declaration
b. Date of record
c. Date of payment
d. Date of mailing the dividend check

Answer 24

b. Date of record

Question 25

2. At which of the following dates has the shareholder theoretically realized income from dividend? a. The date the dividend is declared b. The date of record c. The date the dividend check is mailed by the entity d. The date the dividend check is received

Answer 25

**a. The date the dividend is declared**

Question 26

3. Property dividends are recorded a. As dividend income at carrying amount of the property b. As dividend income at fair value of the property c. As return of investment d. By means of memorandum only

Answer 26

**b. As dividend income at fair value of the property**

Question 27

4. Liquidating dividends are credited to a. Income b. Retained earnings c. Investment account d. Share capital

Answer 27

**c. Investment account**

Question 28

5. An investor that owns 10% of the ordinary shares has the right to a. Be paid 10% of the investee's profit in cash each year. b. Receive dividend equal to 10% of the par each year. c. Receive dividend equal to 10% of the total dividend paid by the investee for the year to shareholders. d. Keep investee from issuing any new shares unless the investor is willing to buy 10% of the new shares.

Answer 28

**c. Receive dividend equal to 10% of the total dividend paid by the investee for the year to shareholders.**

Question 29

6. What is the effect of share dividend of the same class? a. Increase in investment and increase in cost per share. b. Decrease in investment and decrease in cost per share. c. No effect on investment but decrease in cost per share. d. No effect on investment but increase in cost per share.

Answer 29

**c. No effect on investment but decrease in cost per share.**

Question 30

7. When share dividends of different class are received a. No formal entry is made but only a memorandum b. Cash is debited and dividend income is credited c. A new investment account is debited and dividend income is credited d. A new investment account is debited and the original investment account is credited

Answer 30

**d. A new investment account is debited and the original investment account is credited**

Question 31

8. **Shares received** in lieu of cash dividend are recorded as a. Income at fair value of the shares received b. Income at par value of the shares received c. Income at the cash dividend that would have been received d. Share dividends

Answer 31

**a. Income at fair value of the shares received**

Question 32

9. **Cash received** in lieu of share dividends is recorded as a. Dividend income b. Return of investment c. Partly income and partly return of investment d. If the share dividends are received and subsequently sold at the cash received and gain or loss is recognized

Answer 32

**d. If the share dividends are received and subsequently sold at the cash received and gain or loss is recognized**

Question 33

10. What is the effect of share split up? a. Increase in number of shares and increase in cost per share b. Decrease in number of shares and decrease in cost per share c. Increase in number of shares and decrease in cost per share d. Decrease in number of shares and increase in cost per share

Answer 33

**c. Increase in number of shares and decrease in cost per share**

Question 34

1. What is the principal accounting for a compound financial instrument? a. The issuer shall classify a compound instrument as either liability or equity. b. The issuer shall classify the liability and equity components of a compound instrument separately as liability or equity instrument. c. The issuer shall classify a compound instrument as a liability in its entirety, until converted into equity. d. The issuer shall classify a compound instrument as a liability in its entirety.

Answer 34

**b. The issuer shall classify the liability and equity components of a compound instrument separately as liability or equity instrument.**

Question 35

2. How are the proceeds from issuing a compound instrument allocated between the liability and equity? a. The liability component is measured at fair value and the remainder of the proceeds is allocated to the equity component. b. The proceeds are allocated to the liability and equity based on fair value. c. The proceeds are allocated to the liability and equity based on carrying amount. d. The proceeds are not allocated because the compound instrument is accounted for either as liability or equity.

Answer 35

**a. The liability component is measured at fair value and the remainder of the proceeds is allocated to the equity component.**

Question 36

3. The proceeds from an issue of bonds with share warrants should not be allocated between the liability and equity components when a. The fair value of the warrants is not readily available. b. The exercise of the warrants within the next reporting period seems remote. c. The warrants issued are nondetachable. d. The proceeds should be allocated between liability and equity under all of these circumstances.

Answer 36

**d. The proceeds should be allocated between liability and equity under all of these circumstances.**

Question 37

4. When the cash proceeds from bonds issued with share warrants exceed the fair value of the bonds without the warrants, the excess should be credited to a. Share premium - ordinary b. Retained earnings c. Liability account d. Share premium - share warrants

Answer 37

**d. Share premium - share warrants**

Question 38

5. When bonds are issued with share warrants, the equity component is equal to a. Zero b. The excess of the proceeds over the face amount of the bonds. c. The market value of the share warrants. d. The excess of the proceeds over the fair value of the bonds without the share warrants.

Answer 38

**d. The excess of the proceeds over the fair value of the bonds without the share warrants.**

Question 39

1. A bond convertible by the holder into a fixed number of ordinary shares of the issuer is a. A compound financial instrument b. A primary financial instrument c. A derivative financial instrument d. An equity instrument

Answer 39

**a. A compound financial instrument**

Question 40

2. Convertible bonds a. Have priority over other indebtedness. b. Are usually secured by a mortgage. c. Pay interest only in the event net income is sufficient to cover the interest. d. May be exchanged for equity shares.

Answer 40

**d. May be exchanged for equity shares.**

Question 41

3. What is the main reason for issuing convertible bond? a. The ease with which convertible bond is sold even if the entity has a poor credit rating. b. The fact that equity capital has issue cost and convertible bond has none. c. Entities can obtain financing at lower rate. d. Convertible bond will always sell at a premium.

Answer 41

**c. Entities can obtain financing at lower rate.**

Question 42

4. The major difference between convertible bonds payable and bonds payable issued with share warrants is that upon exercise of the warrants a. The shares are held by the issuer for a certain period before they are issued to the warrant holder. b. The holder has to pay a certain amount to obtain the shares. c. The shares involved are restricted. d. No share premium can be part of the transaction.

Answer 42

**b. The holder has to pay a certain amount to obtain the shares.**

Question 43

5. Convertible bonds a. Are separated into the liability component and the expense component. b. Allow an entity to issue debt financing at lower rate. c. Are separated into liability and equity components based on fair value. d. All of the choices are correct.

Answer 43

**b. Allow an entity to issue debt financing at lower rate.**

Question 44

6. What is the accounting for issued convertible bond? a. The instrument is recorded solely as bond. b. The instrument is recorded as either bond or equity. c. The instrument is recorded solely as equity. d. The instrument is recorded as part bond and part equity.

Answer 44

**d. The instrument is recorded as part bond and part equity.**

Question 45

7. Issued convertible bonds are a. Separated into liability and equity components with the liability component recorded at fair value and the residual assigned to the equity component b. Always recorded using the fair value option c. Recorded at face amount for the liability d. Recorded at par value of shares

Answer 45

**a. Separated into liability and equity components with the liability component recorded at fair value and the residual assigned to the equity component**

Question 46

8. The carrying amount of bonds payable was greater than the par value of the shares issued. Which correctly states an effect of the conversion? a. Shareholders' equity is increased b. Share premium is decreased c. Retained earnings account increased d. A loss is recognized

Answer 46

**a. Shareholders' equity is increased**

Question 47

9. The conversion of bonds payable is recorded by a. Incremental method b. Proportional method c. Fair value method d. Book value or carrying amount method

Answer 47

**d. Book value or carrying amount method**

Question 48

10. When convertible bond is not converted but paid at maturity a. A gain or loss is recorded for the difference between the carrying amount of the bond and the present value. b. The amount allocated to equity is recorded as a gain. c. The amount allocated to equity is recorded as a loss. d. The carrying amount of the bond equal to face amount is derecognized.

Answer 48

**d. The carrying amount of the bond equal to face amount is derecognized.**