319688217-Problems-Audit-of-Investments.docx

Cordillera Career Development College COLLEGE OF BUSINESS BUS INESS EDUCATION AND ADMINISTRATION Buyagan, Poblacion, La Trinidad, Benguet

PROBLEM 1: MAGNOLIA CORP. invested its excess cash in equity securities during 2011. The business model for these investments is to profit form trading on price changes.

a. As of December 31, 2011, the equity investments portfolio consisted of the following: Investment Quantity Cost Fair Value LJ, Inc. 1,000 shares P45,000 P63,000 Polland Co. 2,000 shares 120,000 126,000 Alabang Corp. 2,000 shares 216,000 180,000 P381,000 P369,000 Totals 1. In the December 31, 2011, statement of financial position, what should be reported as carrying amount of the investment? A. P369,000 C. P381,000 B. P345,000 D. P405,000 2. In the 2011 income statement, what amount should be reported as unrealized gain or loss? A. Unrealized Unrealize d gain of P12,000 C. Unrealized loss of P36,000 B. Unrealized Unrealize d loss of P12,000 D. Unrealized gain of P24,000 b. During the year 2012, Magnolia Corp. sold 2,000 shares of Polland Co. for P114,600 and purchased 2,000 more shares of LJ, Inc. and 1,000 shares of Dwarfy Company. On December 31, 2012, Magnolia’s Magnolia’s equity securities portfolio consisted of the following Investment Quantity Cost Fair Value LJ, Inc. 1,000 shares P45,000 P63,000 LJ, Inc. 2,000 shares 99,000 120,000 Dwarfy Company 1,000 shares 48,000 36,000 Alabang Corp. 2,000 shares 216,000 66,000 P408,000 P282,000 Totals 3. What is the gain or loss on the sale of Polland Co. investment? investment? A. P5,4000 gain C. P11,400 gain B. P5,400 loss D. P11,400 loss 4. What is the carrying amount of the investments on December 31, 2012? A. P408,000 C. P282,000 B. P444,000 D. P246,000 5. What amount of unrealized gain or loss should be reported in the income statement for the year ended December 31, 2012? A. P126,000 unrealized gain B. P126,000 unrealized loss C. P108,000 unrealized gain D. P108,000 unrealized loss c.

During the year 2013, Magnolia sold 3,000 shares of LJ, Inc. for P119,700 and 500 shares of Dwarfy Company at a loss of P8,100. On December 31, 2013, Magnolia’s equity investment portfolio consisted consisted of the following. Investment Quantity Cost Fair Value Dwarfy Company 500 shares P24,000 P18,000 Alabang Corp. 2,000 shares 216,000 246,000 P240,000 P264,000 Totals 6. What should be reported as loss on sale of trading securities in 2013? A. P60,300 C. P24,300 B. P32,400 D. P68,400 7. What amount or unrealized gain or loss should be reported in the income statement for the year ended December 31, 2013? A. P180,000 unrealized gain C. P24,000 unrealized unrealize d gain B. P180,000 unrealized loss D. P24,000 unrealized unrealize d loss 8. In the December 31, 2013, statement of financial position, what should e reported as carrying amount of trading securities? A. P240,000 C. P246,000 B. P234,000 D. P270,000

Cordillera Career Development College COLLEGE OF BUSINESS EDUCATION AND ADMINISTRATION Buyagan, Poblacion, La Trinidad, Benguet

PROBLEM 2: During the course of your audit of the financial statements of FISHING CORPORATION for the year ended December 31, 2012, you found a new account “Investment in Equity Securities.” Your audit revealed that during 2012, Fishing began a program of investments, and all investment related transactions were entered in this account. Your analysis of this account for 2012 follows: Fishing Corporation Analysis of Investment in Equity Securities For the Year Ended December 31, 2012 debit credit (a) Salmon Company Ordinary Shares February 14 Purchased 12,000 shares @ P55 per share P660,000 July 26 Received 1,200 ordinary shares if Salmon Company as a share dividend (Memorandum entry in General ledger.) September 28 Sold the 1,200 of ordinary shares of Salmon Company received July 26 @ P70 per share P84,000

April 30 October 28

(b) Tamban, Inc. Ordinary Shares Purchased 60,000 shares @ P40 per share Received dividend of P1.20 per share

P2,400,000 P72,000

Additional information: a. The fair value for each security as of the 2012 sate of each transaction follow: Security Feb. 14 April 30 July 26 Sept. 28 Salmon company P55 P62 P70 Tamban. Inc. P40 Fishing Crop. 25 28 30 33

Dec. 31 P74 32 35

b. All of the investment of Fishing Corporation to be non-trading. Fishing Corporation designates its investment in these non-trading securities as available-for-sale. 1. What amount should be reported as gain on sale of non-trading equity securities in 2012? A. P18,000 C. P24,000 B. P6,000 D. P0 2. The receipt of 1,200 share dividend would cause the investment balance to increase by A. P74,400 C. P66,000 B. P84,000 D. P0 3. What entry is necessary to correct the recording of the cash dividend received from Tamban, Inc.? A. Cash 72,000 Dividend income 72,000 B. Cash 72,000 Investment in equity securities 72,000 C. Investment in equity securities 72,000 Dividend income 72,000 D. Dividend income 72,000 Investment in equity securities 72,000 4. What amount of unrealized gain or loss should be reported in the 2012 statement of comprehensive income as component of other comprehensive income? A. P192,000 gain C. P480,000 gain B. P192,000 loss D. P480,000 loss 5. What amount should be reported as Investment in Equity Securities in the statement of financial position on December 31, 2012? A. P2,808,000 C. P2,520,000 B. P3,000,000 D. P3,288,000 PROBLEM 3: Shown below is an amortization schedule to ANGER COMPANY’s 5-year, P500,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2009, for P543,300.

date

Interest

Interest

Premium

Carrying


12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14

received

income

amortization

P35,000 35,000 35,000 35,000 35,000

P27,165 26,773 26,362 25,930 25,470

P7,835 8,227 8,638 9,070 9,530

amount P543,300 535,465 527,238 518,600 509,530 500,000

The following shows a comparison of the amortized cost and fair value of the bonds at year-end: Amortized cost Fair value December 31, 2010 P535,465 P532,500 December 31, 2011 527,328 537,500 December 31, 2012 518,600 528,250 December 31, 2013 509,530 515,000 December 31, 2014 500,000 500,000 Required: a. Prepare the journal entry to record the purchase of these bonds on December 31, 2009, assuming the bonds are held as financial assets measured at amortized cost. b. Prepare the journal entry(ies) related to these bonds for 2010 c. Prepare the journal entry(ies) related to these bonds for 2012 d. What should be reported as the carrying amount of these bonds in the statement of financial position on December 31, 2013? PROBLEM 4: Supporting records of MAYON CORPORATION’s trading securities portfolio show the following debt and equity securities: Security Cost Fair Value 200 ordinary shares Concave Co. P127,250 P121,500 P400,000 Tipo Co. 7% bonds 398,250 387,000 P600,000 Turkey Co. 7 1/2% bonds 603,750 609,450 P1,129,250 P1,117,950 Totals

Interest dates on the bonds are January 1 and July 1. Mayon Corporation uses the income approach to record the purchase of bonds with accrued interest. During 2012 and 2013, Mayon completed the following transactions related to trading securities: 2012 January 1

Received semiannual interest on bonds. Assume that the appropriate adjusting entry made on December 31, 2011

April 1

Sold P300,000 of 7 ½% Turkey bonds at 102 plus accrued interest. Brokerage fees were P1,000

May 1

Received dividend of P1.25 per share on the Concave ordinary share capital. The dividend had not been recorded on the declaration date.

July 1

received semiannual interest on bonds and then sold the 7% Tipo bonds at 97 ½. Brokerage fees were P1,250

August 15

purchased 100 shares of Newman, Inc. ordinary share capital at P580 per share plus brokerage fees of P250

November 1

Purchased P250,000 of 8% Toll Co. Bonds at 101 plus accrued interest. Brokerage fees were P625. Interest dates are January 1 and July 1

December 31 Market prices of securities were: Concave ordinary shares 7 ½% Turkey bonds 8% Toll bonds Newman ordinary shares

P550 101 ¾ 101 P583.75


2013 January 2

recorded the receipt of semiannual interest on bonds

February 1

sold the remaining 7 ½% Turkey bonds at 101 plus accrued interest. Brokerage fees were P1,500

1. What is the total interest and dividend income for 2012? A. P62,583 C.P45,708 B. P82,208 D. P49,402 2. What amount should be reported as gain on sale of trading securities in 2012? A. P2,025 C. P4,275 B. P6,376 D. P3,125 3. What amount of unrealized gain or loss should be reported in the income statement for the year ended December 31, 2012? A. P10,600 unrealized gain C. P3,075 unrealized gain B. P10,600 unrealized loss D. P3,075 unrealized loss 4. What is the carrying amount of the remaining trading securities on December 31, 2012? A. P740,500 C. P P736,725 B. P725,225 D. P P726,125 5. What is the loss on the sale of the Turkey bonds on February 1, 2013? A. P3,750 C. P6,750 B. P5,250 D. P375 6. Prepare journal entries for the preceding transaction and to accrue interest on December 31, 2012. Ignore amortization of premium or discount on bonds. PROBLEM 5: KALUGONG CO. designates purchased debt securities as available for sale. The following amortization schedule relates to its 5-year, P1,000,000, 7% bonds purchased on December 31, 2010 for P1.086.565. the bonds were purchased to yield 5% interest.

date 12.31.10 12.31.11 12.31.12 12.31.13 12.31.14 12,31,15

Interest received

Interest income

Premium amortization

P70,000 70,000 70,000 70,000 70,000

P54,328 53,545 52,722 51,858 50,982*

P15,672 16,455 17,278 29,142 19,018

Amortized cost P1,086,565 1,070,893 1,054,438 1,037,160 1,019,018 1,000,000

*adjustment due to rounding The following schedule presents the amortized cost and fair value of the bonds at year-end. Fair value Amortized cost December 31, 2011 P1,065,000 P1,070,893 December 31, 2012 1,075,000 1,054,438 December 31, 2013 1,056,500 1,037,160 December 31, 2014 1,030,000 1,019,018 December 31, 2015 1,000,000 1,000,000 1. What amount should be reported as investment in available for sale securities in the statement of financial position of Kalugong Co. on December 31, 2012? A. P1,086,565 C. P1,075,000 B. P1,054,438 D. P1,065,000 2. What amount of unrealized gain should be shown as component of other comprehensive income in the 2012 statement of comprehensive income? A. P26,455 C. P10,000 B. P20,562 D. P16,455 3. What amount of unrealized loss should be shown as component of other comprehensive income in the 2013 statement of comprehensive income? A. P14,393 C. P19,340 B. P18,500 D. P1,222


4. What amount of unrealized loss should be shown as component of other comprehensive income in the 2014 statement of comprehensive income? A. P8,350 C. P9,792 B. P26,500 D. P10,982 5. What amount of unrealized gain should be shown in the 2014 statement of changes in equity? A. P26,455 C. P25,233 B. P16,883 D P10,990 PROBLEM 6: BUKIDNON CORP. has a policy of investing idle cash in equity securities. It has made periodic investments in its principal supplier, Nocon Company. Bukidnon currently owns 12% of Nocon’s outstanding ordinary shares.

Cherry Kosme, Bukidnon’s assistant controller, has gathered the following information about the company’s investments in equity securities. a. Bukidnon has trading equity investment in Delta Corp. and Polygon company. During 2012, Bukidnon purchased 100,000 shares of Delta Cop. For P4,200,000; these shares have a fair value of P4,800,000 at December 31, 2012. The investment in Polygon consists of 50,000 shares acquired in March 2012 at P60 per share and currently has a value of P2,160,000. b. Bukidnon’s 12% ownership on Nocon Company has a fair value of P66,675,000 on December 31, 2012. The securities were purchased prior to 2012 for P67,500,000 and was valued at P64,500,000 on December 31, 2011. Bukidnon has not changed its holdings in the current year. 1. What amount of unrealized loss should be reported as component of other comprehensive income on Bukidnon’s December 31, 2011 statement of comprehensive income? A. P1,065,000 C. P825,000 B. P0 D. P3,000,000 2. What is the cumulative unrealized gain/loss that should be shown on the statement of changes in equity for the year ended December 31, 2012? A. P2,175,000 unrealized gain C. P825,000 unrealized loss B. P1,065,000 unrealized loss` D. P1,935,000 unrealized gain 3. What amount of unrealized gain/loss should be reported on Bukidnon’s income statement for the year ended December 31, 2012? A. P600,000 unrealized gain C. P825,000 unrealized loss B. P240,000 unrealized loss D. P1,065,000 unrealized loss PROBLEM 7: On the acquisition date, POMELO COMPANY designates purchased debt and equity securities as available –forsale. Pomelo’s intent in buying investment securities is to make them available for when circumstances warrant, not to earn profit from short-term fluctuations in price, and not necessarily to old debt securities to maturity.

Pomelo’s Company’s fiscal year ends on December 31. No investments were held by the company at the beginning of the year. Described below are the company’s investment related transactions: 2012 March

1

Purchased 30,000 PG, Inc. ordinary shares for P750,000, including brokerage fees and commissions.

April

15

purchased P1,000,000 of 10% bonds at face value from OW Corporation

July

23

received cash dividends of P60,000 on the investment in Corporation bonds

October

15

Received semiannual interest on the investment in OW Corporation Bonds

October

16

Sold the OW Corporation bonds for P1,100,000

November

2

Purchased 250,000 ESP Co. preference shares for P12,500,000, including brokerage fees and commissions

December

31

recorded the necessary adjusting entries relating to the investments. The market values


of the investments are P30 per share for PG, Inc. and P44 per share for ESP Co. Preference shares 2013 January

27

Sold half the PG, Inc. shares for P65 per share.

March

2

Sold the ESP Co. preference shares for P78 per share

1. What is the gain (loss) on the sale of the OW Corporation bonds on October 16, 2012? A. P0 C. P(100,000) B. P200,000 D. P100,000 2. What is the total amount that would be reported on Pomelo Company’s December 31, 2012, income statement relative to these investments? A. P210,000 C. P110,000 B. P260,000 D. P160,000 3. How much unrealized gain (loss) should be reported in profit of loss in 2012? A. P150,000 C. P100,000 B. P(1,500,000) D. P0 4. What amount of gain on sale of PG, Inc. shares on January 27, 2013, should Pomelo recognize? A. P75,000 C. P450,000 B. P600,000 D. P300,000 5. What is the gain on the sale of the ESP Co. preference shares on March 2, 2013? A. P5,500 ,000 C. P7,000,000 B. P9,000,000 D. P1,500,00 PROBLEM 8: Your audit of KALABASA CORPORATION’s investments in debt and equity securities reveals the following information: a. On January 1, 2012, X Company issued P1,000,000 in debt securities. The stated interest is 9%, with interest payable semiannually, on June 30 and December 31. On February 1, Kalabasa purchased these debt securities from an investor who acquired them when they were originally issued. Kalabasa paid the investor an amount equal to the face value of the securities plus accrued interest. The securities were designated as held-for-trading. b. On June 1, kalabasa purchased 10,000 shares of equity securities for P50 per share. These securities were acquired as and available-for-sale investment. Kalabasa paid P13,900 broker’s commission on the purchase.

1. On initial recognition, a financial asset or financial liability is measured at A. Acquisition cost, i.e., the consideration paid or received plus any directly attributable transaction cots to the acquisition or issuance of the financial asset or financial liability B. The consideration paid or received for the financial asset or financial liability C. Fair Value. For items that are not measured at fair value through profit or loss, transaction costs are also included in the initial measurement. D. Zero 2. The entry to record the acquisition of debt on February 1 is A. Investment in trading securities 1,007,500 Cash 1,007,500 B. Investment in trading securities 992,500 Interest income 15,000 Cash 1,007,500 C. Investment in trading securities 1,000,000 Unrealized loss on trading securities 7,500 Cash 1,007,500 D. Investment in trading securities 1,000,000 Interest income 7,500 Cash 1,007,500 3. The entry to record the purchase of equity securities on June 1 is A. Investment in available-for-sale securities 500,000 Broker’s commission expense 13,000 Cash 513,000 B. Investment in available-for-sale securities 513,000


Cash C. Investment in trading securities Cash D. Investment in trading securities Broker’s commission expense Cash

513,000 513,000 513,000 500,000 13,000 513,000

PROBLEM 9: On January 1, 2012, RAMBUTAN CORP. purchased debt securities for cash of P765,540. The securities have a face value of P600,000, and they mature in 15 years. The securities carry fixed interest of 10%, that is receivable semiannually, on June 30 and December 31. The prevailing market interest rate on these debt securities is 7% compounded semiannually. Rambutan Corp. intends and has the financial resources to hold these securities to maturity.

1. The carrying value of the debt securities on December 31, 2012, at amortized cost using the effective interest rate method is A. P771,840 C. P765,540 B. P759,016 D. P600,000 2. The interest income to be reported for 2012 using the effective interest rate method is A. P66,524 C. P60,000 B. P6,524 D. P53,476

PROBLEM 10: CHICO COMPANY purchased the following available-for-sale securities 2011: Fair Value Security Cost Dec. 31, 2009 X P450,000 P500,000 Y 500,000 800,000 On July 28, 2012, Chico sold all the shares of Security Y for a total of P835,000. As of December 31, 2012, the shares Security X had a fair value of P200,000. No other activity occurred during 2012 in relation to the available-for-sale securities portfolio.

1. What amount should Chico Company report as realized gain in the 2012 income statement? A. P35,000 C. P300,000 B. P335,000 D. P265,000 2. What is the cumulative unrealized gain (loss) to be classified as component of other comprehensive income at December 31, 2012? A. P300,000 C. P(300,000) B. P150,000 D. P(250,000) PROBLEM 11: PAPAYA, INC. purchased the following securities during 2012: Security A1 Corp. stock B2 Co. stock C3, Inc. stock D4 Corp. bonds E5 Co. bonds

Category Trading Available-for-sale Available-for-sale Held-to-maturity Trading

No. of shares 25,000 5,000 125,000 -------

Total Cost P450,000 1,100,000 2,125,000 1,200,000 550,000

The following transactions related to Papaya, Inc.’s investments oc curred during 2012: a. Received interest from D4 Corp. and E5 company bonds totaling P181,500 b. Dividends received on the equity securities held amounted to P88,000 c. Sold 10,000 shares of the A1 Corp. stock at P17 per share and 12,500 shares of the C3, Inc. stock at P19 per share.

1. What is the gain (loss) on the sale of A1 Corp. stock? A. P10,000 C. P78,000 B. P(10,000) D. P0


2. What is the gain (loss) on the sale of C3, Inc. stock? A. P(25,000) C. P113,000 B. P25,000 D. P0 PROBLEM 12: The following investment-related transactions were completed by DALANDAN CORP. during 2012: a. Purchased P3,000,000 of X Company 7% bonds, paying 102.5 plus accrued interest of P52,500. In addition, the company paid brokerage fee of P15,000. Dalandan classified these bonds as a trading security. b. Purchase 30,000 shares of Y Company ordinary shares at P125 per share plus brokerage fees of P28,500. Dalandan classified this stock as an available-for-sale security. c. Received semiannual interest on the X company bonds. d. Sold 4,500 shares of Y company at P132 per share e. Sold P4480,000 of X company 7% bonds at 102, plus accrued interest of P2,790

1. The X Company bonds should be initially measured and recognized at A. P3,090,000 C. P3,000,000 B. P3,075,000 D. P3,142,500 2. The realized gain or loss on the sale of X Company bonds is A. P390 gain C. P4,800 loss B. P2,010 loss D. P2,400 loss 3. The 30,000 Y Company shares acquired should be initially measured and recognized at A. P3,778,500 C. P3,721,500 B. P3,750,000 D. P3,988,500 4. The realized gain or loss on the sale of Y Company stock is A. P27,225 gain C. P27,225 loss B. P31,500 gain D. O31,500 loss PROBLEM 13: SINELAS COMPANY purchased as a long-term investment P160 million of 8% bonds, dated January 1, on January 1, 2012. The company’s management does not intend to hold these bonds until maturity but to have them available for sale when circumstances warrant. On the acquisition date, the market yield of bonds with similar risk and maturity was 10%. The company paid P132 million for the price of the bonds. Interest is received semiannually on June 30 and December 31. Due to changes in market conditions, the fair value of the bonds at December 31, 2012, was P140 million. 1. At what amount will Sinelas Company report its investment in the December 31, 2012, statement of financial position? A. P132.2 million C. P132.41 million B. P140 million D. P160 million 2. The unrealized holding gain or loss to be classified as component other comprehensive income at December 31, 2012, is A. P8.39 million holding gain C. P7.59 million holding gain B. P8.39 million holding loss D. P7.59 million holding loss 3. The amount of interest income to be reported in Sinelas Company’s income statement for the year ended December 31, 2012, is A. P6.4 million C. P6.61 million B. P12.8 million D. P13.21 million PROBLEM 14: STRAWBERRY COMPANY has the following securities in its available-for-sale portfolio of securities on December 31, 2011: Security Shares Cost Fair Value Danica Co. ordinary shares 4,500 P220,500 P207,000 Rose Corp. ordinary shares 15,000 540,000 525,000 Assunta, Inc. preference shares 1,200 180,000 184,000 P940,500 P916,800 Totals

All of the following securities were bought in 2011. In 2012, strawberry had the following transactions relating to its investments: April

1

sold the 4,500 ordinary shares of Danica Co. for P65 per share.


May

1

bought 2,100 ordinary shares of Rita Corp. at P75 plus broker’s fee of P5,200

Strawberry’s portfolio of available-for-sale securities appeared as follows on December 31, 2012: Security Shares Cost Fair Value Rose Corp. ordinary shares 15,000 540,000 525,000 Rita Corp. ordinary shares 2,100 157,500* 151,200 Assunta, Inc. preference shares 1,200 180,000 174,000 P877,500 P850,200 Totals *the P5,200 broker’s fee was recorded as expense. 1. What is the realized gain or loss on the sale of Danica Co. ordinary shares on April 1, 2012? A. P72,000 gain C. P85,500 loss B. P85,500 gain D. P0 2. The 2,100 shares of Rita Corp. purchased on May 1, 2012, should be initially measured at A. P151,200 C. P162,700 B. P156,400 D. P157,500 3. Strawberry’s December 31, 2012, statement of financial position should report investment in availablefor-sale securities at A. P850,200 C. P881,400 B. P877,500 D. P916,800 PROBLEM 15: SANTOL CORP. invested its excess cash in available-for-sale securities (AFS) during 2010. As of December 31, 2010, the company’s AFS securities portfolio consisted of the following: Investee Shares Cost Fair Value Company Kelly, Inc. 30,000 P450,000 425,000 Eloy corp. 60,000 1,500,000 1,610,000 Yogi Enterprises 60,000 2,160,000 2,300,000 P4,110,000 P4,335,000

During the year 2011, Santol sold 60,000 shares of Eloy Corp. for P1,600,000 and purchased 60,000 additional shares of Kelly, Inc. and 30,000 shares of Kongga Company. On December 31, 2011, Santol’s portfolio of AFS securities comprised the following: Investee Shares Cost Fair Value Company Kelly, Inc. 30,000 P450,000 425,000 Kelly, Inc. 60,000 1,300,000 1,450,000 Kongga Company 30,000 520,000 480,000 Yogi Enterprises 60,000 2,160,000 700,000 P4,430,000 P3,130,000 During the year 2012, santol sold all the Kelly, Inc. shares for P2,300,000 and 15,000 shares of Kongga Company at a loss of P90,000. On December 31, 2012, Santol’s portfolio of AFS consisted of the following: Investee Shares Cost Fair Value Company Yogi Enterprises 60,000 P2,160,000 P4,200,000 Kongga Company 15,000 260,000 180,000 P2,420,000 P4,380,000

1. What should be reported on Santol’s Statement of Financial position as of December 31, 2010? Unrealized Holding Gain on AFS Securities AFS Securities A. P4,335,000 P0 B. 4,110,000 0 C. 4,085,000 0 D. 4,335,000 225,000


2. What should be reported on Santol’s statement of financial position as of December 31, 2011? Unrealized Holding Loss on AFS Securities AFS Securities A. P3,130,000 P0 B. 3,130,000 1,300,000 C. 4,430,000 0 D. 2,450,000 1,980,000 3. What should be reported on Santol’s statement of financial position as of December 31, 2012? Unrealized Holding gain on AFS Securities AFS Securities A. P4,380,000 P1,960,000 B. 2,420,000 0 C. 4,380,000 0 D. 2,340,000 2,090,000 4. What is the realized gain or loss on the sale of Eloy Corp. shares in 2011? A. P10,000 loss C. P100,000 gain B. P120,000 loss D. P90,000 gain 5. What is the net realized gain on the sale of securities in 2012? A. P550,000 C. P350,000 B. P460,000 D. P260,000

PROBLEM 16: PEAR COMPANY’ investment portfolio contains the following securities on December 31, 2011: Security Shares Cost Market Value Classified as Omar Co. Ordinary 150,000 P3,000,000 P2,850,000 Trading Godling Inc. preference 60,000 1,200,000 1,290,000 Trading Sonata Co. ordinary 600,000 34,200,000 33,900,000 Investment in (30% ownership) associate Jordan Co. ordinary 750,000 2,025,000 1,500,000 Available-for-sale

Pear Company’s investment had the following market values at December 31, 2012: Omar Co. ordinary P3,060,000 Godling, Inc. preference 1,290,000 Sonata Co. ordinary 33,450,000 Jordan Co. ordinary 1,700,000 1. What valuation entries are required at December 31, 2011, assuming that al of the above securities were acquired in 2011 and none of the indicated declines in market value are considered other than temporary? 2. Assume that Jordan Co.’s ordinary shares market decline is considered other than temporary. What valuation entries are required at December 31, 2011, under this change in assumption? 3. Assume that the investment categories remain the same and that al declines in 2011 and 2012 are temporary except for the 2011 decline in Jordan Co.’s ordinary shares. What valuation entries are required at December 31, 2012? PROBLEM 17: On January 2, 2010, PLUM COMPANY purchased as a long-term investment a debt instrument with a 5-year term for its fair value of P1,386,275. The instrument has a principal amount of P1,500,000 and carries a fixed interest of 8% annually. The effective interest is determined to hold the debt instrument until maturity.

During 2012, the issuer of the instrument is in financial difficulties and it becomes probable that the issuer will be put into administration by a receiver. The fair value of the instrument is estimated to be P750,000 at the end of 2012, calculated by discounting the expected future cash flows at 10%. No cash flows are received during 2013. At the end of 2013, the issuer is released from administration and Plum receives a letter from the receiver stating that the issuer will be able to meet its remaining obligations, including interest and repayment of principal.


1. What is the book value of the held-to-maturity investment at the end of 2011? A. P1,347,157 C. P1,500,000 B. P1,460,882 D. P1,425,393 2. What amount of impairment loss should be recognized in 2012? A. P697,932 C. P636,275 B. P750,000 D. P675,393 3. How much interest income should be recognized in 2013? A. P24,793 C. P75,000 B. P0 D. P120,000 4. What amount of impairment loss reversal should be recognized in 2013? A. P697,932 C. P750,000 B. P647,725 D. P0 5. How much discount amortization should be recognized in 2014? A. P27,275 C. P120,000 B. P0 D. P75,000 PROBLEM 18: The investment in AFS securities account in the general ledger of PEACH CO. is reproduced below:

2012 January 1 June 1

Investment in Available-for-sale (AFS) Securities 2012 balance P1,410,000 September 11 3,150,000 November 29

P390,000 2,700,000

Your examination of the company’s records reveals the following information: a. the January 1 balance consists of the following: shares Cost Abe Co. 15,000 P630,000 Bea Co. 12,000 780,000 P 1,410,000 Total b. On March 15, Peach Co. received 3,000 ordinary shares of Bea as stock dividend. The market value of Bea shares shortly after declaration of the dividend was P73 per share. c. On June 1, Peach Co. purchased 3,000 Eba Co. P1,000 bonds for P3,150,000, including accrued interest. The bonds earn interest at 20% per annum (payable every March 1 and September 1) and will mature on June 1, 2022. d. On September 11, 6,000 ordinary shares of Bea were sold at P75 per share e. On September 29, the Eba bonds were sold for P2,550,000, plus accrued interest.

1. The Eba Co. bonds should be initially measured and recognized at A. P3,000,000 C. P2,850,000 B. P3,150,000 D. P2,550,000 2. What amount of gain or loss should be recognized on the sale of the Bea Co. stock? A. P60,000 gain C. P138,000 gain B. P330,000 loss D. P0 3. What amount of gain or loss should be recognized on the sale of the Eba Co. bonds? A. P450,000 loss C. P450,000 gain B. P300,000 loss D. P300,000 gain PROBLEM 19: CHERRY, INC. received dividends from its investments in ordinary shares during the year ended December 31, 2012, as follows: a. A cash dividend of P720,000 is received from JJ Corporation. (Cherry, Inc. owns a 2% interest in JJ) b. A cash dividend of P3,600,000 is received for W Corporation. (Cherry, Inc. owns a 30% interest in W) c. A stock dividend of 18,000 shares from YY Company was received on December 15, 2012, on which date the quoted market value of YY’s shares was P20 per share. Cherry, Inc. owns less than 1% of YY’s ordinary shares.

What amount of dividend income should be reported be Cherry, Inc. in its 2012 income statement? A. P1,080,000 C. P4,320,000 B. P4,680,000 D. P720,000


PROBLEM 20: BERRIES COMPANY owns a 5% interest in ST Corporation, which declared a cash dividend of P3,720,000 on November 27, 2012, to shareholders of record on December 20, 2012, payable on January 15, 2013. In addition, on October 15, 2012, Berries Company received a liquidation dividend of P100,000 from VG Corporation. Berries Company owns 6% of VG Corporation.

What amount of dividend income should be included in Berries Company’s income statement for the year ended December 31, 2012? A. P186,000 C. P191,000 B. P3,720,000 D. P181,000 PROBLEM 21: (Equity method) DURIAN CORP. purchased 40% of Associate Company’s outstanding ordinary shares on January 2, 2012, for P270 million. The book value of Associate Company’s net assets (shareholders’ Equity) at the purchase date totaled P450 million. Book Values and Fair values were the same for all financial statement items except for inventory and buildings, for which fair values exceed book values by P12.5 million and P112.5 million, respectively. All inventory on hand at the purchase date was sold during Associate Company reported net income of P110 million for the year ended December 31, 2012, and paid cash dividends of P40 million. The fair value of Durian’s investment in associate was P300 million at December 31, 2012.

1. Of the amount paid for the acquisition of Associate Company’s ordinary shares, how much is attributable to goodwill? A. P50 million C. P40 million B. P45 million D. P90 million 2. What is the investment balance at December 31, 2012? A. P270 million C. P290 million B. P300 million D. P298 million 3. At what amount will Durian Corp. report its investment income in its 2012 income statement? A. P44 million C. P20 million B. P36 million D. P16 million PROBLEM 22: (Equity method) On January 4, 2012, EGGPLANT COMPANY paid P38 million for 2 million shares of Turko Co. ordinary shares. The stock investment represents a 25% interest on the net assets of Turko and gave Eggplant the ability to exercise significant influence over Turko’s operations. The book value of Turko’s net assets was P106 million. The fair market value of Turko’s depreciable assets exceed their book value by P20 million. These assets had an average remaining useful life of 5 years. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.

On December 28, 2012, Eggplant received dividends of P1.50 per share. Turko reported net income of P30 million for the year ended December 31, 2012. The market value of Turko’s ordinary shares at December 31, 2012, was P27.50 per share. 1. What portion of the investment cost is attributable to goodwill? A. P11.5 MILLION c. P5 million B. P1.5 million D. P6.5 million 2. What is the carrying value of the investment in Turko stock on December 31, 2012? A. P45.5 million C. P55 million B. P41.5 million D. P42.5 million PROBLEM 23: On January 4, 2012, TOMATO CORP. paid P1,296,000 for 40,000 ordinary shares of Baron Company. The investment represents a 30% interest in the net assets of Baron and gave Tomato the ability to exercise significant influence over Baron’s operating and financial policy decisions. Tomato received dividends of P1 per share on December 4, 2012, and Baron reported net income of P640,000 for the year ended December 31, 2012. The market value of Baron’s ordinary shares at December 31, 2012, was P32 per share. The book value of Baron’s net assets was P3,200,000 and:


The fair market value of Baron’s depreciable assets, with an average remaining useful life of 8 years, exceeded their book value by P320,000. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill. 1. What amount of the investment cost is attributable to goodwill? A. P240,000 C. P336,000 B. P96,000 D. P144,000 2. What amount of investment revenue should be reported in Tomato’s income statement for the year ended December 31, 2012? A. P120,000 C. P180,000 B. P108,000 D. P192,000 3. What is the carrying value of the investment in Baron ordinary shares on December 31, 2012? A. P1,280,000 C. P1,296,000 B. P1,436,000 D. P1,368,000 



Assume that the 40,000 shares represent a 10% interest in the net assets of Baron rather than a 30% interest.

4. What amount of investment revenue should be reported in Tomato’s income statement for the year ended December 31, 2012? A. P40,000 C. P60,000 B. P64,000 D. P180,000 5. What is the carrying value of the investment in baron ordinary shares at December 31, 2012? A. P1,296,000 C. P1,280,000 B. P1,436,000 D. P1,236,000

PROBLEM 24: Equity method CUCUMBER CORP. bought 40% of the outstanding ordinary shares of Super Company on January 2, 2012. At the date of purchase, the book value of Super’s net assets was P77.5 million. The book values and fair values for all statement of financial position items were the same except for inventory and plant facilities. The fair value exceeded book value by P500,000 for the inventory and by P2 million for the plant facilities. The estimated life of the plant facilities is 8 years. All inventory acquired was sold during 2012. Super reported net income of P14 million for the year ended December 31, 2012, and paid a cash dividend of P3 million. Cucumber’s statement of financial position as of December 31, 2012, shows an amount of P44.1 million as its investment in Super Company.

1. What amount should Cucumber report as its income from investment in Super Company for the year ended December 31, 2012? A. P1.2 million C. P5.6 million B. P7.1 million D. P5.3 million 2. What is the acquisition cost of Cucumber’s investment in Super Company? A. P40 million C. P45.6 million B. P39.4 million D. P77.2 million 3. Of the amount paid by Cucumber for the 40% interest in Super Company, how much is attributable to goodwill? A. P8 million C. P8.8 million B. P8.2 million D. P9 million 4. What should Cucumber report in its statement of cash flows regarding its investment in Super Company? A. P40 million cash outflow from investing activities and P1.2 million cash inflow among operating activities. B. P45.6 million cash outflow from investing activities and P5.3 million cash inflow among operating activities C. P40 million cash outflow from financing activities and P1.2 million cash inflow among operating activities D. P39.4 million cash outflow from investing activities and P3 million cash inflow among operating activities PROBLEM 25:


On June 30, 2012, CABBAGE COMPANY purchased 25% of the outstanding ordinary shares of IB Co. at a total cost of P2,100,000. The book value of IB Co.’s net assets on acquisition date was P7,200,000. For the following reasons, Cabbage was willing to pay more than book value for the IB Co. shares: IB Co. has depreciable assets with a current fair value of P180,000 more than their book value. These assets have a remaining useful life of 10 years. IB Co. owns a tract of land with a current fair value of P900,000 more then its carrying amount. All other identifiable tangible and intangible assets of IB Co. have current fair values that are equal to their carrying amounts. 

 

IB Co. reported net income of P1,620,000, earned evenly during current year ended December 31, 2012. Also in the current year, it declared and paid cash dividends of P315,000 to its ordinary shareholders. Market value of IB Co.’s ordinary shares at December 31, 2012, is P9 million. Cabbage Company’s financial year-end is December 31. 1. What is the total amount of goodwill of IB Co. based on the price paid by Cabbage Company? A. P300,000 C. P120,000 B. P1,080,000 D. P30,000 2. What amount of investment income should Cabbage report in its income statement for the year ended December 31, 2012, under the fair value method? A. P78,750 C. P228,750 B. P202,500 D. P71,250 3. What amount of investment income should cabbage report in its income statement for the year ended December 31, 2012, under the equity method? A. P202,500 C. P78,750 B. P200,250 D. P123,750 4. Under the equity method, the carrying value of the Cabbage Company’s investment in ordinary shares of IB Co. on December 31, 2012, should be A. P2,221,500 C. P2,070,000 B. P2,100,000 D. P2,250,000 5. What amount should Cabbage Company report in its December 31, 2012, statement of financial position as its investment in IB Co. under the fair value method? A. P2,250,000 C. P2,221,500 B. P2,070,000 D. P2,100,000 PROBLEM 26: (Equity method ) LETTUCE CO. purchased 40% of MU Corp. on April 1, 2012, for P500,000 when MU’s book value was P1,260,000. On the date of acquisition, the market value of MU’s net assets equaled their book values except for the following: MU’s equipment has a fair value of P50,000 less than its book value. The equipment has a remaining useful life of 10 years. MU’s building has a fair value of P40,000 than its book value. The building has a remaining useful life of 20 years. 



MU’s results of operations in 2012 and 2013 are as follows: 2012 net income P150,000 2013 net loss P30,000 MU paid cash dividends of P20,000 and P10,000 in 2012 and 2013, respectively. 1. What amount of investment income should be reported on Lettuce Company’s income statement for the year ended December 31, 2012? A. P44,100 C. P61,200 B. P58,800 D. P45,900 2. The investment loss to be reported on Lettuce Company’s 2013 income statements A. P10,800 C. P13,200 B. P8,100 D. P12,000 3. What is the carrying value of the stock investment on December 31, 2012? A. P536,100 C. P553,200 B. P537,900 D. P500,000 4. What is the carrying value of the stock investment on December 31, 2013? A. P521,300 C. P523,100


B. P536,000

D. P500,000

PROBLEM 27: Equity method On January 2, 2012, OKRA CORP. paid P1,600,000 for the purchase of 40% of the ordinary shares of Thunder Company. The statement of financial position of Thunder at the date of acquisition shows the following information: Assets subject to depreciation (remaining useful life is 8 years) P2,400,000 Assets not subject to depreciation 800,000 Liabilities 400,000

The book value and fair value are the same for assets not subject to depreciation and liabilities. The fair market value of Thunder’s assets subject to depreciation is P2,720,000. Thunder depreciates its assets using the straight-line method. Thunder’s intangibles are amortized over a 20-year period. Net income for the year ended December 31, 2012, is P640,000. It declares and pays dividends of P500,000 in 2012. 5. What amount of the investment cost is attributable to goodwill? A. P352,000 C. P128,000 B. P480,000 D. P608,000 6. What is the carrying value of the stock investment at December 31, 2012? A. P1,622,400 C. P1,784,000 B. P1,600,000 D. P1,640,000 PROBLEM 28: (discontinuance of Equity method) KANGKONG COMPANY purchased 250,000 shares of Secret Co. ordinary shares on July 1, 2012, at P66 per share, which reflected book value as of that date. At the time of purchase, Secret Co. had 1,000 ordinary shares outstanding. Kangkong had no ownership interest in Secret prior to this purchase. Secret reported net income of P3,360,000 for the six months ended June 30, 2012. Kangkong received a dividend of P420,000 from Secret on August 1, 2012. Secret reported net income of P7,200,000 for the year ended December 31, 2012, and again paid Kangkong dividends of P420,000.

On January 1, 2013, Kangkong sold 100,000 ordinary shares of Secret for P68 per share and reclassified the remaining stock as available-for-sale securities. The quoted market price of such investment on January 1, 2013 was P69 per share. Secret reported net income of P7,440,000 for the year ended December 31, 2013, and paid Kangkong dividends of P240,000. The fair value of Secret ordinary shares at December 31, 2013 was P70 per share. 1. What is the carrying value of the stock investment at December 31, 2012? 2. The total amount of gain to be reported in the 2013 income statement is 3. What amount of unrealized gain should be reported in the 2013 statement of comprehensive income as component of other comprehensive income? 4. The carrying value of the retained investment to be shown in the statement of financial position of December 31, 2013 is

319688217-Problems-Audit-of-Investments.docx

Recommend Documents