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uit date of sale. PROBLEM 2: MULTIPLE CHOICE - THEORY 1 According to PFRS 9, the amortized cost of a financial instrument is calculated usingInvestments in Debt Securities 551 a. the effective interest method. b. the straight line method. c. (a) or (b) d. Choice (a); however, the straight line method can be used in some circumstances. 2. The amortization of a discount on an investment in bonds measured at amortized cost a. increases the carrying amount of the investment. b. is the excess of interest income over interest received or receivable. c. is recorded directly to the investment account. d. all of these 3. Which of the following statements is correct for an investment in term bonds that was acquired at a premium? a. The amortized cost of the bonds increases annually b. The current and noncurrent portions of the bonds as of the reporting date are reported separately. c. The interest income recognized each year is higher than the amount of interest received/receivable. d. The effective interest rate is lower than the stated rate of the bonds. 4. The rate used in computing for interest receivable on debt instruments measured at amortized cost is the a. . nominal rate. c. yield rate. b. effective interest rate. d. celeb rate. 5. The transaction costs of acquiring an investment measured at amortized cost are a. included in the initial measurement of the investment and amortized to profit or loss using the effective interest method. b. initially deferred and recognized in profit or loss only when the asset is derecognized or becomes impaired.Investments in Debt Securities 553 c. the ending valuation allowance account balance will depend on the ending market value and original cost adjusted for premium amortization. d. the carrying amount of the bonds decreases over the term of the bonds. 10. Chicken Pork Adobo (CPA) Co. is preparing the electronic spreadsheet below to amortize the discount on its 10-year, 6%, P100,000 face amount investment in bonds. The bonds were acquired on December 31 at a price that reflects a yield rate of 8%. Interest is paid annually. A B C D E Year Cash received Interest income Amortization Carrying amount P86,580 1 2 P6,000 Which formula should CPA use in cell E3 to calculate the investment's carrying amount at the end of year 2? a. E2 + D3 c. E2 + C3 d. E2 - C3 b. E2 - D3 (AICPA - adapted)10 552 C. initially deferred and recognized directly in equity when the asset is derecognized or becomes impaired. d. expensed immediately on acquisition date. 6. An entity acquired 10-year bonds at a premium. The investment is measured at amortized cost. Seven years after the acquisition, the entity sold 90% of the bonds at a discount. Which of the following is true? a. Gain is realized on the sale. b. The remaining 10% should be reclassified out of the amortized cost measurement category. c. Loss is realized on the sale d. band c 7. There are no payments made during the life of this type of bond; both the principal and interest (computed on a compounded basis) are payable only at maturity date. a. zero coupon or strip bonds c. junk bond b. no sufficient funds bonds d. retractable bond 8. Jackhammer Co. calculates the interest income on an investment in debt securities using the effective interest method but reports the investment at fair value. Jackhammer Co.'s investment must have been classified as a. amortized cost asset. c. FVOCI asset. b. FVPL asset. d. fair value asset. 9. An entity purchased bonds at a premium. The bonds are measured at amortized cost. Assume the fair value of the bonds is volatile. Therefore, a. less cash interest is received each year than interest revenue. b. the ending valuation allowance account balance will depend on the ending market value and original cost