CHAPTER
12
SUBSTANTIVE TESTS OF INVESTMENTS
12-1.
The CPAs would accept a confirmation of the securities on hand from the custodian in lieu of their personal inspection of the securities after they had investigated and satisfied themselves as to the standing of the custodian. The CPAs would probably be satisfied if they found the custodian to be a well-known, reliable financial institution, completely independent of the client and with resources substantially larger in amount than the securities of the CPAs’ client that are on deposit.
12-2.
The auditors can make an independent computations of dividends earned during the year by reference to dividend record books published by investment advisory services.
12-3.
Securities owned by the client may not be on hand at the balance sheet date because they are held by others for safekeeping, pledged as collateral for loans, deposited as assurance of performance under contracts, or in the hands of brokers or others for transfer.
12-4.
When the inspection of securities cannot be made for two weeks after the balance sheet date, the client at the auditors’ suggestion may instruct the bank that the safe deposit box is not to be opened until the time of the auditors’ inspection. A letter may be obtained from the bank stating that the box has not been opened between the balance sheet date and the auditors’ arrival. If the securities are in the client’s office, it will be necessary to verify any security transactions between the date of inspection and the balance sheet date and to reconcile the results of the inspection with the securities owned at the balance sheet date. The count of cash and other negotiable assets should be coordinated with the inspection of securities.
12-5.
Pink Corporation (a) Instructions to be given to the assistant regarding the examination of the securities kept in the safe deposit box include the following: (1) A copy of the client’s record of the contents of the box should be obtained and used in connection with the inspection of the securities. Comparing the contents of the box and the record will provide assurance that all securities listed in the record are on hand. (The validity of the record will be determined by examination of the transactions pertaining to investments.) The copy of the record, after being verified, should be added to the auditors’ working papers as evidence of work performed.
12-2
Applied Auditing 2014 Edition Solutions Manual (2) The bank’s record of persons entering the deposit box should be examined to determine that only authorized persons have had access to the box and that there was no entry to the box between December 31 and January 11. Entry to the box between those dates may be an indication that a security was returned to safekeeping after being “borrowed” at year-end. The security may have been “borrowed” and used as collateral to obtain cash to cover a shortage at December 31. (3) The assistant should be instructed to insist that the treasurer be present while the securities are being examined. Most auditors prefer to obtain a signed statement that all investments inspected were returned at the completion of the inspection made in the presence of the custodian. In any event, the working papers should note the date of the inspection and the name of the witness to the inspection. (4) The following details of the securities should be examined: a) The name of the registered owner appearing on each security other than bearer bonds should be noted to determine that Pink Corporation is a registered owner and that securities belonging to another owner have not been substituted. b) The name of the corporation issuing the security and the class of the security (Class A, Par Value, 1st Preference, etc.) should be noted for assurance that a lower priced security (perhaps somewhat similar in corporate name or a different security of the issuing corporation) has not been substituted for a higher priced security. c) The face value of bonds and the number of shares represented by each share certificate should be compared with the client record to determine that the entire amount of the corporation’s holdings of each security is on hand. d) The serial numbers of the securities should be compared with those on the record and, for those securities carried over from the prior year, compared with the serial numbers of securities listed in the prior year’s working papers. A change in serial numbers that cannot be properly explained may be an indication of manipulation of the securities. Verification of serial numbers also helps establish the cost of securities sold under either the FIFO or specific identification cost method. e) The certificates should be read to ascertain the interest rates and payment dates for bonds and the dividend rates and payment dates, if given, for preference shares. This information may be used later in the verification of investment revenue. f) Bonds should be examined to determine maturity dates. Maturity dates are needed for verifying the computation of the amortization of bond premiums or discounts. In addition, the maturity dates will disclose whether any bonds on hand have matured. The presence of matured bonds may be a sign of internal control weakness or may indicate that the bonds are in default.
Substantive Tests of Investments
12-3
g) Coupon bonds should be inspected to determine that no past-due interest coupons are unclipped and all future interest coupons are attached. The presence of past-due coupons may be caused by poor internal control and may indicate an understatement of interest revenue. On the other hand, past-due coupons may indicate the interest is in default and that the principal is uncollectible. Missing future interest coupons may be an indication of an irregularity. h) The auditors should be alert for any obvious alterations to securities or forged certificates. Although auditors usually are not held responsible for the genuineness of the certificates, any apparent forgeries (or exceptions noted in the foregoing audit procedures) may point out the need for obtaining confirmations from the corporations issuing the certificates. (b) The treasurer’s entry into the safe deposit box on January 4 has violated the auditors’ control over negotiable assets which must be inspected or counted simultaneously or kept under control until counted to avoid the substitution of a counted asset for an uncounted asset in an attempt to conceal a shortage. The auditors would probably apply the following additional procedures: (1) Reconcile bank balances at both year-end and at the date of inspecting securities. (2) Obtain a bank confirmation as of the inspection date. (3) Examine cash journals between year-end and the inspection date for any unusual entries. (4) Examine all investment transactions taking place between the balance sheet date and the inspection date to verify the amount of the investment at the balance sheet date. (5) If the client keeps a large fund of cash on hand, make a surprise count of the cash fund. (6) Review the transactions since year-end relating to any other negotiable assets, such as notes receivable, to determine if any substitutions have been made. 12-6.
(a) (4) Having the securities held in safekeeping by a bank provides strong internal control because the bank has no direct contact with the employees responsible for maintaining the accounting record of the securities and that individual has no access to the securities. Thus the separation of the custody of securities from the accounting function is complete. (b) (1) The investment committee of the board of directors is not involved in the routine of making buy and sell decisions and can therefore review the transactions objectively. On the other hand, the chief operating officer, the controller, and the treasurer may be closely associated on a daily basis with the financial executive responsible for the investment decisions.
12-4
Applied Auditing 2014 Edition Solutions Manual
12-7.
Voltron Company Voltron Company Marketable Securities 12.31.15 Balance, 1.1.15 Lie Company, 25 shares @ P42 Lipay Company, 20 shares @ P65 Add: Purchase of Lambing Co., 5% bonds, 5 shares Total Less: Sale of 10 shares of Lipay Co., stocks Sale of 5 shares of Lambing Co., bonds Balance per ledger, 12.31.15 Add (Deduct) Adjustment(s) AJE (1) To correct error in recording purchase of Lambing Co., bonds (2) To correct error in recording sale of Lipay Co., stocks (3) To correct error in recording sale of Lambing Co., bonds Net Balance as adjusted Lie Co., 25 shares @ P42 Lipay Co., 15 shares @ P52
P2,350.00
4,762.50 P7,112.50 P 650.00 4,762.50
5,415.50 P1,700.00
( 62.50) 130.00 62.50 130.00 P1,830.00 P1,050.00 780.00 P1,830.00
Adjusting Journal Entries: (1) Interest income Marketable securities – Trading (2) Marketable securities – Trading Gain on sale of marketable securities Proceeds ( 10 x P65 ) Cost: ( 10 x P1,300 ) 25 Gain (3) Marketable securities – Trading Interest income (4) Securities fair valued adjusted – Trading Unrealized gain on trading securities (P/L) Lie Co. (P45 – P42) (25 shares) Lipay Co. (P55 – P52) (15 shares)
62.50 62.50 130.00 130.00 P 650.00 520.00 P 130.00 62.50 62.50 120.00 120.00 P 75 45 P120
Substantive Tests of Investments 12-8.
10-5
Color Company
Requirement (a) COLOR COMPANY Investment 12.31.15
Description Red Company, ordinary Purchased in June 1997 @ P20 Purchased in Aug. 2000 @ P16 Purchased in May, 2013 @ P22 White Company, ordinary Purchased in Jan., 2013 @ P33 Purchased in March, 2015 Blue Company, ordinary Purchased in Aug., 1999 @ P13 Green Company, 15% bonds Purchased in July, 2002 Total
Balance 1.1.15 No. of Shares Amount
1,000 2,000 1,500
P 20,000 32,000 33,000 85,000
2,000
66,000 ________ 66,000
100 20
7,300 20,000 P178,300
Changes during the year No. of Shares Amount Acquired
Sold
Acquired
1,000
500 100 SD
Sold
P 21,364
P12,125 100
10,000
20
8,750 22,500
P 22,125
P 52,614
Balance 12.31.15 No. of Shares Amount
1,000 2,000 500
P 20,000 32,000 11,636
2,000 500
66,000 12,125
100
8,550 ( 2,500) P147,811
Adjustments
Balance
Dr (Cr)
As Adjusted
(1)
( 636)
P 20,000 32,000 11,000 63,000 66,000 12,125 78,125
(2) (10,000) (3) 5,100 (4)
2,500 P(3,036)
3,650 P 144,775
10-6
Applied Auditing 2014 Edition Solutions Manual
12-8.
Color Company (continued. . . . .) Requirement (b) Adjusting Journal Entries AJE (1)
(2)
(3)
(4)
(5)
Loss on sale of investment Investment Dividend income Investment
636 636 10,000 10,000
Accounts receivable - President Investment Gain on sale of investment
3,750 5,100
Investment Gain on sale of investment Interest income
2,500
Securities fair value adjusted – Trading Unrealized gain in trading securities – (P/L)
5,225
8,850
2,000 500
5,225
Substantive Tests of Investments 12-9.
10-7
Kalayaan Corporation The Kalayaan Corporation Investments December 31, 2015
Per Books Date 2015 Jan. 3 5
Transactions
Dr
Purchased 100 shares, National Motors Purchased 100 shares, Major Electronics
P 4,500 500
Mar. 31
Cash dividend, National Motors
Apr. 5 6 6
Sold 100 shares, National Motors Purchased 100 shares, Ace Investment Purchased 100 shares, General Utility
May 1 July
I N V E S T M E N T Adjustments Cr Dr Cr
As Adjusted Dr (Cr)
(13) 500 P
50
(1)
50
4,800
(2)
300
-
2,300 2,400
(3)
120
Received 100 rights issues, General Utility
100
(4)
100
2 15 18
Purchased 10 shares, General Utility Purchased 50 shares, Acme Laboratories Purchased 20 shares, The Kalayaan Corp.
130 1,900 3,000
Aug. 15
Sold 10 shares, The Kalayaan Corporation
Dec. 8
Received 2 shares, Acme Laboratories
8 15 31
Balance
60
(7) 1,550
80
(8) 20
(9)
2
90
(10)
80
120
_______ 15,030 P 15,030
(4,500) 2,300 2,280
(6) 3,000 1,550
Cash dividend, Acme Laboratories Cash dividend, Ace Investment Cash dividend, General Utility
(5)
P 4,500 -
80
_______ 6,510
________ 2,042
8,520
1,878
P 15,030
P 3,920
Loss on investment on Major Electronics Dividend income
(1)
Gain on sale of investment
-
Miscellaneous income
(4) 100
190 1,900 -
Investment in rights issues
-
Treasury shares
-
Additional paid on Capital TS trans. Gain on sale of fractional shares Dividend income Miscellaneous income Dividends receivable Dividend income Loss on expiration of rights issues Investment in rights issues
18)
(
10) -
________ 3,920
________
P
P 6,642
50
(2) 300 (3) 120
Treasury shares
Cr
(13) 500
Investment in rights issues
( (11) 120
Adjustments to Other Accounts Name of Account Dr
(5)
60
(6) 3,000 (7) 1,500 (7) (9)
50 2
(10) 80 (11) 120 (12) 110 (12) 110 (14) 60 (14) 60
Adjusting Journal Entry Unrealized holding loss on
3,920
SAS (Equity) Securities Fair Value Adjustment – SAS
(15) 1,142 (15) 1,142
10-8
Applied Auditing 2014 Edition Solutions Manual
12-10.
Canada Corporation Note to Instructor: This problem contains petty cash journal entries and a bank reconciliation, previously covered in Chapter 9 – Substantive audit of cash. Requirement (1) 2014 Jan. 1
Feb. 1
1 28 28
28
Investment in Available-for-Sale Securities [(150 x P20)] + (200 x P30) + (100 x P25)] Cash Investment in Available-for-Sale Securities (P20,000 + P12,000) Interest Revenue [(P20,000 x 0.12 x 5/12) + (P12,000 x 0.10 x 4/12)] Cash Petty Cash Cash Cash Interest Revenue [P20,000 x 0.12 x 6/12] Postage Expense Office Supplies Expense Transportation Expense Miscellaneous Expense Cash Cash Short and Over Cash a
Mar. 31
31
31
11,500.00 32,000.00 1,400.00 33,400.00 500.00 500.00 1,200.00 1,200.00 110.00 170.65 45.00 43.50 369.15 5.35
a
5.35
P125.50 – (P500.00 – P369.15)
Cash (P1,500 + P600) Interest Receivable (P20,000 x 0.12 x 1/12; A Co. bonds) Dividend Revenue Interest Revenue [(P12,000 x 0.10 x 6/12) + (P20,000 x 0.12 x 1/12)] Unrealized Increase/Decrease in Value of Available-for-Sale Securities Allowance for Change in Value of Investment b
11,500.00
2,100 200 1,500 800 900.00 900b
P42,600 – (P11,500 – P32,000)
Postage Expense Office Supplies Expense Miscellaneous Expense Cash
140.00 75.30 54.20 269.50
Substantive Tests of Investments
12-9
Requirement (2) CANADA CORPORATION Bank Reconciliation March 31, 2014 Balance per bank statement Add: Deposits in transit
P13,459.75 2,100.00 P15,559.75 (2,365.40) P13,194.35
Deduct: Outstanding checks Adjusted cash balance Balance per company records Add: Note collected by bank Interest on note Deduct: Bank service charge NSF check returned Adjusted cash balance
P11,689.95 P1,500.00 100.00 P
20.00 75.60
1,600.00 P13,289.95 (95.60) P13,194.35
Requirement (3) 2014 Mar. 31
31
12-11.
Cash Notes Receivable Interest Revenue Miscellaneous Expense Accounts Receivable Cash
1,600.00 1,500.00 100.00 20.00 75.60 95.60
Patrick Company 1. P10,000 P30,000 P630,000
dividend revenue for 2014 (10,000 shares x P1.00) 12/31/14 unrealized increase in value of available-for-sale securities [10,000 x (P63 – P60)] 12/31/05 carrying value of investment (10,000 shares x P63 market price)
2. P40,000 P110,000 P2,626,000
investment income for 2014 (P400,000 net income x 0.10 ownership) investment income for 2015 [(P300,000 x 0.10) + (P200,000 x 0.40)] 12/31/15 carrying value [P650,000 a + P1,950,000 cost + P80,000 investment income for second half of 2015 – P54,000 dividends (40,000 x P1.35; 10/1/15)] a
P1,950,000 30,000 shares = P65 P65 x 10,000 = P650,000
12-10
Applied Auditing 2014 Edition Solutions Manual
12-12.
Belle Manufacturing Corporation a.
The auditing objectives and procedures relative to the Laribee Investment account are as follows: (1) Objective: Ascertain that the shares exist and are owned by Belle. Procedures: Examine the shares for existence and ownership. (2) Objective: Establish correctness of beginning balance in investment account. Procedures: Examine last year’s audit work papers. (3) Objective: Determine proper approval of the 2015 purchase. Procedures: Examine directors’ minutes authorizing the transaction. (4) Objective: Establish the cost of shares purchased in 2015. Procedures: Examine brokers’ advice and canceled check. (5) Objective: Determine that the proper amount of dividends were received, properly recorded as a decrease in the investment carrying value, and deposited in the bank. Procedures: Refer to a dividend reporter (e.g., Standard and Poors), recalculate Belle’s share of the dividend, trace to remittance advice and bank statement, and examine journal entry for proper recording. (6) Objective: Ascertain in that Belle has properly recorded its shares of Laribee income as an increase in the investment account. Procedures: Examine Laribee’s income statement and Belle’s journal entry, if any, to record its share of the income.
b.
If this investment is significant in relation to Belle’s total assets, and/or its share of Laribee income is significant relative to Belle’s total income, Flores must insist that the financial statements of Laribee be audited, either by Castro & Horario, or by other independent CPAs.
c. Belle Manufacturing Company Investment in Laribee Industries December 31, 2015 No. of Shares 12/31/15: 1/2/16:
Final balance - 1,000 shares Purchased 1,500 shares
P 50,000 75,000
12/31/16:
Ledger balance AJE No. 1
125,000 210,000
12/31/16:
Audited balance
P335,000 To WP–H
< * @
1,000 1,500 2,500 _____ 2,500 &
Substantive Tests of Investments AJE 1 Investment in Laribee Ordinary P210,000 Dividend Revenue 40,000 Equity in Income of Unconsolidated Subsidiary To adjust investment account for excess of Belle’s share of Laribee income over Laribee dividends. Dividends: 4/1/16 7/1/16 10/1/16 Income: 25% of P1 million
< * & “ # X d.
12-11
P250,000
(P (P (P (P
12,500) “ # 12,500) “ # 15,000) “ # 40,000)
P250,000 X P210,000
Compared with 12/31/15 work papers. Vouched to broker’s advice and canceled check. Examined minutes for directors’ authorization. Recalculated. Traced to remittance advice, cash receipts record, and bank statement. Examined audited income statement.
Flores should be aware of the possible existence of related party transactions between Belle and Laribee. In this regard, she should be particularly alert to possible disparities between the legal form of transactions and their economic substance. For example, Belle manufactures earth moving equipment and Laribee is a leasing company. Significant sale and leaseback transactions may have occurred given the nature and relationship of the respective companies. If these transactions did take place, Flores must ascertain that any gains on sale of equipment have been deferred. Also, given the equity method of accounting, Flores must determine that any intercompany profits resulting from transactions between Belle and Laribee have been eliminated. Finally, cases abound in which parent companies have “manufactured” earnings by fabricating or misrepresenting transactions with subsidiaries. For this reason, Flores must be alert to this possibility, and should carefully audit all significant transactions between the two companies.
12-12 12-13.
Applied Auditing 2014 Edition Solutions Manual Analen, Inc. Requirement (1) Analen, Inc. Income Before Income Taxes from Investment in Bel Company For the Year Ended December 31, 2015 October 1, 2015: Dividends received from Bel Company (10,000 shares x P0.90)
P 9,000
Requirement (2) Analen, Inc. Income Before Income Taxes From Investment in Bel Company For the Years Ended December 31, 2016, and 2015, Restated
Equity in earnings of Bel Company (Schedule 1)
12-14.
2016 P110,000
2015 Restated P 40,000
Schedule 1: Equity in Earnings of Bel Company Year ended December 31, 2015 (P400,000 x 10%)
P 40,000
Year ended December 31, 2016 Six months ended June 30, 2016 [P300,000 (P500,000 - P200,000) x 10%] Six months ended December 31, 2016 (P200,000 x 40%) Total
P 30,000 80,000 P110,000
Elmar Company Requirement (1) July 2014: purchase of investment in trading security: Investment in trading security: Celebrity Corp. bonds (P1,000 x 8 x 1.02) .................................................. Interest receivable (P8,000 x 9% x 2/12; May 1 – July 1) ........................................................ Cash ..................................................................
8,160 120 8,280
Requirement (2) November 2014 - Interest collected: Cash (P8,000 x 9% x 6/12) ........................................... Interest revenue........................................................ Interest receivable ....................................................
360 240 120
Substantive Tests of Investments
12-13
Requirement (3) Dec. 31, 2014: accrue interest on the Celebrity Corp. bonds held as a trading securities investment: Interest receivable (P8,000 x 9% x 2/12, Nov. – Dec.). 120 Interest revenue........................................................
120
Dec. 31, 2014: record fair value: Unrealized loss on investment in trading securities (close to Income summary) ....................................... Valuation allowance: Celebrity Corp. bonds* ........
340
340
* Investment in Bonds: Original cost ............................................................. Fair value .................................................................. Unrealized loss ......................................................... Previously recorded unrealized loss ......................... DR to valuation allowance ..............................
P8,000 7,760 P 240 0 P 240
Requirement (4) Income Statement for 2014: Interest revenue (P200 + P100) .................................... Unrealized loss on investment in trading securities ...... Balance sheet at Dec. 31, 2014: Current assets: Interest receivable ............................... Investments in trading securities................................... Less: Allowance to reduce to fair value ....................... Investments in trading securities, at fair value .............. 12-15.
P 300 <240>
P 120 P8,000 240 P7,760
Jeng Company Requirement (1) Equity method January 1, 2013 – Acquisition of long-term investment: Investment in equity-basis company: Zash Corp. ........ Cash [(30,000 x 0.30 = 9,000 shares) x P17] ........... During 2013 – Dividends declared and paid by Zash Corp.: Cash (P8,000 x 0.30) .................................................. Long-term investment in equity-basis company: Zash Corp. ............................................................
153,000 153,000
2,400 2,400
12-14
Applied Auditing 2014 Edition Solutions Manual December 31, 2013 – To recognize proportionate part of Zash Corp. income: Long-term investment in equity-basis company: Zash Corp. ................................................................. 6,600 Investment income: equity in earnings of associated company (P24,000 x 0.30) ..................
6,600
December 31, 2013 – To recognize additional depreciation expense: Investment income: equity in earnings of associated company ................................................... 600 Long-term investment in equity-basis company: Zash Corp. ............................................................
600
Computation: (P220,000 – P200,000) = P20,000; (P20,000 x 0.30) 10 yrs. = P600 December 31, 2013 – To recognize additional cost of goods sold: Investment income: equity in earnings of associated company ................................................... 3,000 Long-term investment in equity-basis company: Zash Corp. ............................................................
3,000
Computation: [(P260,000 – P250,000) = P10,000] x 0.30 = P3,000 During 2014 – Dividends declared and paid by Zash Corp.: Cash (P5,000 x 0.30) .................................................. Long-term investment in equity-basis company: Zash Corp. ............................................................
1,500
December 31, 2014 – To recognize Zash loss: Investment income: equity in earnings of associated company (P10,000 x 0.30) ....................... Long-term investment in equity-basis company: Zash Corp. ............................................................
3,000
December 31, 2014 – To recognize additional depreciation: Investment income: equity in loss of associated company ................................................... Long-term investment in equity-basis company: Zash Corp. ............................................................
1,500
3,000
600 600
Substantive Tests of Investments
12-15
Requirement (2) January 1, 2015 – To record sale of 500 shares of Zash shares: Cash [(500 shares x P18), Zash Corp. .......................... 9,000 Long-term investment in equity-basis company: Zash Corp. ............................................................ Gain on disposal of long-term securities .................
8,250 750
Computation: Balance in investment account (P153,000 + P6,600 – P2,400 – P600 – P3,000 – P1,500 – P3,000 – P600) ... = P140,500. P148,500 x 500/9,000 shares = P8,250 Requirement (3) 2013 Income statement: Investment income (loss) (P6,600– P600 – P3,000) ...................... P3,000 Gain (loss) on disposal ............................. 0 Balance sheet: Investment in equity-basis company (P153,000 + P6,600 – P2,400 - P600 – P3,000) .................................... P153,600
(-P3,000– P600) .......................
2014
2015
(3,600) 0
* P750
(P153,600 – P1,500 – P3,000 – P600) ............................... P148,500
* Investment income for 2015 is not known, as no data are given for this year.
12-16.
Del Corporation Requirement (1) Assuming “other income” is zero, then the entire P74 million for 2015 and the P127 million for 2014 are equity in the income of affiliated companies:
Equity in income of affiliated companies ...................................... Less: Undistributed equity in income of affiliated companies ..... Maximum amount of dividends that could be received .................
2015 P 74 27 P 47
2014 P127 84 P 43
If dividends were zero, then all of the equity in income of affiliated companies would be retained. Since the amount actually retained was P27 million, the amount of other income is P74 million less P27 million, or P47 million.
12-16
Applied Auditing 2014 Edition Solutions Manual Requirement (2) Investment at December 31, 2015 .......................................... Investment at December 31, 2014 .......................................... Increase in investment in equity ............................................. Amount of increase resulting from undistributed equity in income of affiliated companies ................................... Amount of increase (decrease) in investment from other sources ............................................................................
P1,456 1,332 P 124 27 P
97
It appears Del either increased its equity holdings in its affiliated companies, or made “advances” which had been recorded in the Investments account. Requirement (3) Rate of return on average investment in equity-basis companies = P74 / ([P1,332 + P1,456] / 2) = 0.053% Requirement (4) If the investment at equity represents a 50% owned joint venture with no goodwill or adjustment for book value to fair value of net assets, the total shareholders’ equity (TSE) can be approximated as: Investment in Affiliate, at equity TSE of Affiliate
= =
50% x TSE of Affiliate Joint Venture P1,456 / 0.50 = P2,912 million.
Knowing the percentage owned allows estimates of the net assets of the equitybasis companies to be made, assuming there are no adjustments or goodwill involved. 12-17.
BYDG Company (a) Securities Fair Value Adjustment—Trading ........ Unrealized Holding Gain or Loss— Income....................................................... (b) Securities Fair Value Adjustment— Available-for-Sale ............................................ Unrealized Holding Gain or Loss— Equity ........................................................
5,000 5,000
5,000 5,000
(c) The Unrealized Holding Gain or Loss—Income account is reported in the income statement under Other Revenues and Gains. The Unrealized Holding Gain or Loss—Equity account is reported as a part of other comprehensive income and as a component of shareholders’ equity until realized. The Securities Fair Value Adjustment account is added to the cost of the Available-for-Sale or Trading Securities account to arrive at fair value.
Substantive Tests of Investments 12-18.
12-17
Troy Company (a) December 31, 2015 Unrealized Holding Gain or Loss—Income ......... Securities Fair Value Adjustment (Trading) .
1,400 1,400
(b) During 2016 Cash...................................................................... Loss on Sale of Securities .................................... Trading Securities .........................................
9,400 600 10,000
(c) December 31, 2016 Securities Eric Corp. shares Brad Co. shares Total of portfolio Previous securities fair value adjustment balance—Cr. Securities fair value adjustment—Dr.
Cost P20,000 20,000 P40,000
Securities Fair Value Adjustment (Trading) ........ Unrealized Holding Gain or Loss— Income....................................................... 12-19.
Fair Value P19,100 20,500 P39,600
Unrealized Gain (Loss) (P (900) ( 500) ( (400) ( (1,400) (P1,000)
1,000 1,000
Francis Corporation The unrealized gains and losses resulting from changes in the fair value of available-for-sale securities are recorded in an unrealized holding gain or loss account that is reported as other comprehensive income and as a separate component of shareholders’ equity until realized. Therefore, the following adjusting entry should be made at the year-end: Unrealized Holding Gain or Loss—Equity ................. Securities Fair Value Adjustment (Available-for-Sale) .........................................
8,000 8,000
Unrealized Holding Gain or Loss—Equity is reported as other comprehensive income and as a separate component in shareholders’ equity and not included in net income. The Securities Fair Value Adjustment (Available-for-Sale) account is a valuation account to the related investment account.
12-18 12-20
Applied Auditing 2014 Edition Solutions Manual Peter Corp.
