AUDIT OF INVESTMENTS

PROBLEM NO.1

The following Investment in Trading Securities account appears in the books of CAP, INC.
Date Explanation Debit Credit
2018
Jan 1 Balance P5,349,000
31 Sold Robusta ordinary P640,920
Mar 31 Bought Wilma ordinary 365,000
June 30 Dividend on Bulik ordinary 300,000
July 31 Sold Bulik ordinary 262,500
Aug 1 Sold Gudo bonds 675,000
The audit work papers of the preceding year show that the account balance as of January 1, 2018,
consisted of the following:

Robusta Company ordinary:

30,000 shares, purchased in June 2015, P20 per share......................................................... P600,000
60,000 shares, purchased in August 2016, P16 per share……………….………………………..960,000
45,000 shares, purchased in May 2017, P22 per share............................................................ 990,000
Wilma Company ordinary:
60,000 shares, purchased in January 2017, P33 per share.....................................................1,980,000

Bulik Company ordinary:

3,000 shares, purchased in August 2016, P73, per share (par P100)........................................219,000

Gudo Company 15% bonds:

600 bonds, P1,000 each, purchased in July 2017, at par
(Interest dates: February 1 and August 1)..................................................................................600,000
P5,349,000

Your examination discloses the following:

1. On January 31, 2018,30,000 ordinary shares of the Robusta Company purchased in May
2017were sold for P640,920.
2. On March 31, 2018, 15,000 ordinary shares of Wilma Company were purchased at P24.25 per
share plus brokerage fee, for P365,000.
3. In June 2018, the Bulik Company paid a 100% ordinary share dividend on ordinary shares.
4. In July 2018, CAP, INC. sold to its president, for P125 per share, 3,000 ordinary shares ofBulik
Company, for which the president gave his check for P262,500 and a letter in which he agreed
to pay the balance upon demand of the treasurer of the company.
5. On August 1, 2018, CAP, INC., sold its Gudo Company 5% bonds atplus accrued interest.
6. The total market value of the securities at year-end amounted to P4,500,000.

Questions:

1. What is the gain on sale of Bulik Company shares on July 31, 2018?
2. What is the gain on sale of Gudo Company bonds on August 1, 2018?
3. The adjusting entry for the sale of Robusta Company ordinary shares on January 31, 2018,
should include a
A. Debit to Loss on sale of trading securities for P19,080.
B. Credit to Gain on sale of trading securities for P19,080.
C. Debit to Cash for P640,920.
D. Credit to Investment in trading securities for P660,000.

4. The December 31, 2018, carrying amount (before market adjustment) of CAP, INC.'S
investment in trading securities is
5. What amount of unrealized gain should be reported in the income statement for the year
ended December 31, 2018?
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PROBLEM NO. 2

MAGNOLIA CORP. invested its excess cash in equity securities during 2017. The business model for
these investments is to profit from trading on price changes.

(a) As of December 31, 2017, the equity investment portfolio consisted of the following:

Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares P 90,000 P 126,000
Polland Co. 2,000 shares 240,000 252,000
Alabang Corp. 2,000 shares 432,000 360,000
Totals P762,000 P738,000

1. In the December 31, 2017, statement of financial position, what should be reported as
carrying amount of the investments?
2. In the 2017 income statement, what amount should be reported as unrealized gain orloss?

(b) During the year 2018, Magnolia Corp. sold 2,000 shares of Polland Co. for P229,200 and
purchased 2,000 more shares of LJ, Inc. and 1,000 shares of Dwarfy Company. On December
31, 2018, Magnolia's equity securities portfolio consisted of the following.

Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares P 90,000 P 120,000
LJ, Inc. 2,000 shares 198,000 240,000
Dwarfy Company 1,000 shares 96,000 72,000
Alabang Corp. 2,000 shares 432,000 132,000
Totals P816,000 P564,000

3. What is the gain or loss on the sale of Polland Co. investment?

4. What is the carrying amount of the investments on December 31, 2018?
5. What amount of unrealized gain or loss should be reported in the income statement for the
year ended December 31, 2018?

(c) During the year 2019, Magnolia sold 3,000 shares of LJ, Inc. for P239,400 and 500 shares of
Dwarfy Company at a loss of P16,200. On December 31, 2019, Magnolia's equity investment
portfolio consisted of the following.

Investment Quantity Cost Fair Value

Dwarfy Company 500 share P 48,000 P480,000
Alabang Corp 2,000 shares 432,000 492,000
Totals P480,000 P528,000

6. What should be reported as loss on sale of trading securities in 2019?

7. What amount of unrealized gain or loss should be reported in the income statement forthe
year ended December 31, 2019?
8. In the December 31, 2019, statement of financial position, what should be reported
ascarrying amount of trading securities?

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PROBLEM NO.3

Supporting records of MAYON CORPORATION's trading securities portfolio show the following debt
and equity securities:

Security Cost Fair Value

400 ordinary shares Concave Co. P 254,500 P243,000
P800,000 Tipo Co.7% bonds 796,500 774,000
P1,200,000 Turkey Co. 7 12% bonds 1,207,500 1,218,900
Totals P2,258,500 P2,235,900

Interest dates on the bonds are January 1 and July 1. Mavon Corporation uses the income approach
to record the purchase of bonds with accrued interest. During 2018 and 2019, Mayon completed the
following transactions related to trading securities:

2018

Jan
1
Received semiannual interest on bonds. Assume that the appropriate adjusting entrywas made on
December 31, 2017.
Apr
1
Sold P600,000 of 7 72% Turkey bonds at 102 plus accrued interest.
May
21
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 1/2.
Aug
15
Purchased 200 shares of Newman, Inc. ordinary share capital at P580 per share plus brokerage fees
of P500.
Nov
1
Purchased P500,000 of 8% Toll Co. bonds at 101 plus accrued interest. Brokerage fees were P1,250.
Interest dates are January 1 and July 1.
Dec

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Market prices of securities were:

Concave ordinary shares

P550

7 1/2% Turkey bonds

101 ¾

8% Toll bonds
101

Newman ordinary shares

P583.75

2019

Jan
2
Recorded the receipt of semiannual interest on bonds.
Feb

1
Sold the remaining 7 12% Turkey bonds at 101 plus accrued interest.

QUESTIONS:

1. What is the total interest and dividend income for 2018?

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2. What amount should be reported as gain on sale of trading securities in 2018?
3. What amount of unrealized gain or loss should be reported in the income statement forthe
year ended December 31, 2018?
4. What is the carrying amount of the remaining trading securities on December 31, 2018?
5. What is the loss on the sale of the remaining Turkey bonds on February 1, 2019?

PROBLEM NO.4

SANTOL CORP. invested its excess cash in non-trading equity securities during 2018. On initial
recognition, the entity made an irrevocable election to present its securities at fair value through other
comprehensive income (FVOCI). As of December 31, 2018, the company's securities portfolio
consisted of the following:
Investee Company Shares Cost Market Value
Kelly, Inc. 30,000 P 450,000 P 425,000
Eloy Corp. 60,000 1,500,000 1,610,000
Yogi Enterprises 60,000 2,160,000 2,300,000
Totals P4,110,000 P4,335,000
During the year 2019, Santol sold 60,000 shares of Eloy Corp. for P1,700,000 and purchased 60,000
additional shares of Kelly, Inc. and 30,000 shares of Kongga Company.

On December 31, 2019, Santol's portfolio of non-trading equity securities comprised the following:

Investee Company Shares Cost Market Value

Kelly, Inc. 30,000 P 450,000 P 500,000
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
Totals P4,430,000 P3,130,000

During the year 2020, Santol sold all the Kelly, Inc. shares for P2,300,000 and 15,000 shareof
Kongga Company at a loss of P90,000. On December 31, 2020, Santol's portfolio of non-tradino
equity securities consisted of the following:
Investee Company Shares Cost Market Value
Yogi Enterprises 60,000 P 2,160,000 P 4,200,000
Kongga Company 15,000 260,000 180,000
Totals P2,420,000 P4,380,000

QUESTIONS:

1. What total amount should be credited to retained earnings as a result of the sale of
EloyCorp. securities in 2019?
2. What unrealized loss on the remaining financial assets should be reported in the
2019statement of comprehensive income as component of other comprehensive income?
3. What cumulative amount of unrealized loss should be reported as component of
othercomprehensive income in the statement of changes in equity on December 31, 2019?
4. What unrealized gain on the remaining financial assets should be reported in the
2020statement of comprehensive income as component of other comprehensive income?
5. What cumulative amount of unrealized gain should be reported as component of
othercomprehensive income in the statement of changes in equity on December 31, 2020?

PROBLEM NO. 5

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HARLINGTOM COMPANY buys and sells securities expecting to earn profits on short-term
differences in price. During 2018, Harlington Company purchased the following trading securities:

Fair Value
Security Cost Dec. 31, 2018
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000

Before any adjustments related to these trading securities, Harlington Company had net income of
P2,700,000.

1. What is Harlington's net income alter making any necessary trading security adjustments?
A. P2,430,000 B. P2,286,060 C P2,934,000 D. P2,700,000

2. What would Harlington's net income be if the fair value of security B were P855,00?
A. P2,601,000 B. P2,799,000 C. P2,700,000 D. P2,655,000

PROBLEM NO. 6

LADADA CO.'s portfolio of trading securities includes the following on December 31, 2017:

Cost Fair Value

15,000 ordinary shares of Camias Co. P1,431,000 P1, 251,000
30,000 ordinary shares of Ganda Co. 1,638,000 1,710,000
P3,069.000 P2,961.000

All of the above securities have been purchased in 2017. In 2018, Labada Co. completed the
following securities transactions:

Mar. 1 Sold 15,000 shares of Camias Co. ordinary shares for P1,381,500.

April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, andother
transaction costs of P4,950.

The Labada Co. portfolio of trading securities appeared as follows on December 31, 2018:

Cost Fair Value

30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,0001
1,800 ordinary shares of Waston, Inc. 247 950 225.0002
P1,885.950 P1,965.000

1. What amount of unrealized gain on these securities should be reported in the 2018
Incomestatement?
A. P31,050 B. P79,050 C. P84,000 D. P36,000

2. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2018?
A. P144,000 B. P27,000 C. P130,500 D. P13,500

PROBLEM NO. 7

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CORDOVA CO, holds det sources within a business whose objective is achievedboth by collecting
contractual cash flow and selling the debt securities. The contractual cash flows are solely payments
of principal and interest on specified dates.

On December 31, 2017, the company purchased 5-year, P1,000,000, 7% bonds for P 1,086,565. The
bonds were purchased to yield 5% interest. The following schedule presents the fair value of the
bonds year end.

Fair Value
December 31, 2018 P1,055,000
December 31, 2019 P1,075,000
December 31, 2020 P1,056,500
December 31, 2021 P1,030,000
December 31, 2022 P1,000,000

1. What amount should be reported as investment in bonds in the statement of financial

position of Cordova Co. on December 31, 2019?
A. P1,054,438 B. P1,065,000 C. P1,075,000 D. P1,036,565

2. What amount of unrealized gain should be shown as component of other comprehensive

income in the 2019 statement of comprehensive income?
A. P10,000 B. P16,455 C. P20,562 D. P26,455

3. What amount of unrealized loss should be shown as component of other

comprehensiveincome in the 2020 statement of comprehensive income?
A. P1,222 B. P14,393 C. P18,500 D. P19,340

4. What amount of unrealized loss should be shown as component of other

comprehensiveincome in the 2021 statement of comprehensive income?
A. P8,358 B. P9,792 C.P10,982 D. P26,500

PROBLEM NO. 8

JOKE BANK loaned P16,500,000 to Baratin Company on January 1, 2016. The initial loan repayment
terms include a 10% interest rate plus annual principal payments of P3,300,000 on January 1 each
year. Baratin made the required interest payment in 2016 but did not make the P3,300,000 principal
payment nor the P1,650,000 interest payment for 2017, Joke is preparing its annual financial
statements on December 31, 2017. Baratin is having financial difficulty, and Joke has concluded that
the loan is Impaired.

Analysis of Baratin's financial condition on December 31, 2017 indicates the principal payments will
be collected, but the collection of interest is unlikely. Joke did not accrue the Interest on December
31, 2017

The projected cash flows are:

December 31, 2018 P5,250,000
December 31, 2019 6,000,000
December 31, 2020 5,250,000
16,500,000

1. What is the loan impairment loss on December 31, 2017?

A. PO B. P1,650,000 C. P2,824,500 D. P16,500,000

2. What is the interest income to be reported by Joke Bank in 2018?

A.P979,305 B. P1,367,550 C. P1,504,305 D. P1,650,000

3. What is the carrying value of the loan receivable on December 31, 2019?
A.P4,772,355 B. P5,250,000 C. P9,793,050 D. P13,675,500
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4. What is the interest income in 2019?
A. 477,237 B. P979,305 C. P1,367,550 D. P1,650,000

5. What is the interest income in 2020?

A. 477,645 B. P979,305 C. P1,367,550 D. P1,650,000

PROBLEM NO. 9

Chisolm Corporation's accounting records included the followinginvestments:

Investment in Ordinary Shares

1/1/16 P1,000,000 7/1/18 P800,000
12/31/16 200,000
12/31/17 300,000

Investment in Bonds
1/1/18 P1,000,000

Investment in Ordinary Shares

 The entity intends to hold the investment indefinitely.
 Acquired on January 1, 2016 at P950,000 plus transaction costs of P50,000.
 On July 1, 2018, the entity sold half of the investment for its fair value of P800,000.
 Fair value of the investment: December 31, 2016, P1,200,000 December 31, 2017,
P1,500,000: December 31, 2010, P900,000.
Investment in Bonds
 The entity intends to hold the investment indefinitely
 P1,000,000, 10% bonds, purchased for P1,051,510 including transaction costs of P20,000.
Interest is payable annually every December 31. The bonds mature on December 31, 2020.
 The prevailing market rate for the bonds is 9% at December 31, 2018.

Questions:
Based on the above and the result of your audit, answer the following:

1. The carrying amount of Investment in Ordinary Shares as of December 31, 2018 is

misstated by
2. The carrying amount of Investment in Bonds as of December31, 2018 is overstated by
3. The net amount to be recognized in 2018 profit or loss related to these investments is
4. The net amount to be recognized in 2018 other comprehensive related to these
investments is

PROBLEM NO. 10

Responsibility Company has the following equity securities classified as available for sale at
December 31, 2017:

Fair value
Cost 12/31/17 12/31/16
50,000 ordinary shares of OK Corp. P1,600,000 P1,500,000 P1,400,000
100,000 ordinary shares of PA 1,700,000 1,900,000 1,600,000

All of the securities had been purchased in 2016. In 2018, Responsibility completed the following
securities transactions:

 January 1 - purchased P1,000,000 8% bonds of X Corporation for P924,164 (including broker's

commission of P50,000). Interest is payable annually, every January 1. The bonds mature on
January 1, 2023.
 March 1 - Sold 50,000 shares of OK Corp. @ P35 less fees of P15,000.

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  December 1 - Bought 6,000 shares of BA Stores @ P50 plus fees of P5,500. These shares are
held for trading.

The fair values of the securities appeared as follows on December 31, 2018:

Fair Value
100,000 shares of PA P2,000,000
6,000 shares of BA Stores 315,000
X Corporation bonds 980,000

QUESTIONS:
Based on the above and the result of your audit, answer the following:

1. In relation to investment in shares classified as available for sale, the net amount to be
recognized in 2018 profit or loss is
A. Nil B. P235,000 C. P150,000 D. P135,000

2. In relation to investment in shares classified as held for trading, the net amount to be
recognized in 2018 profit or loss is
A. P20,500 B. P15,000 C. P9,500 D. Nil

3. Assuming the investment in bonds was acquired for the purpose of selling it in the near
term, the net amount to be recognized in 2018 profit or loss is
A. P135,836 B. P105,836 C. P92,416 D. Ni

4. Assuming the investment in bonds is available for sale, the net amount to be recognized in
2018 profit or loss is
A.P135,836 B. P105,836 C. P92,416 D. Nil

5. Assuming the investment in bonds was acquired for the purpose of holding it until
maturity, the net amount to be recognized in 2018 profit or loss is
A. P135,836 B. P105,836 C. P92,416 D. Nil

PROBLEM NO. 11

On June 30, 2018, Fiesta Company purchased 25% of the outstanding ordinary shares of XY Com.,
at a total cost of P2,100,000. The book value of XY Co.’s net assets on acquisition date was
P7,200,00. For the following reasons, Fiesta was willing to pay moe book value for the XY Co stock:
 XY 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.
 XY Co., owns a tract of land with a current fair value of P105,000 more than its carrying
amount.
 All other identifiable tangibe and intangible assets of XY Co., have current fair values that are
equal to their carrying amounts.
XY Co., reported net income of P1,620,000, earned evenly during the current year ended
December 31,2018. Also during the current year, it declared and paid cash dividends of P315,000
to its ordianry shares at December 31,2018 is P9.5 million. Fiesta Company’s financial year-end is
December 31.

QUESTIONS:
1. What is the total amoun of goodwill of XY Co. Based on the price paid by Fiesta
Company?
2. What amount of investment revenue evenue shoulf Fiesta report on its income
statement for the year ended December 31,2018 under the cost/fair value method?

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 3. What amount of investment revenue should Fiesta report on its income statement for
the year ended December 31,2018, under thhe equity method?
4. Under the equity method, the carrying value of the Fiesta Company’s investment in
ordinary shares of XY Co. On December 31,2018, should be
5. What amount should Fiesta Company report on its December 31,2018, balance sheet as
its investment in XY Co. Under the cost/faie value method?

PROBLEM NO. 12

COLOONG CO. holds debt securities within a business model whose objective is achieved both by
collecting contractual cash flows and selling the debt securities. The contractual cash flows are solely
payments of principal and interest on specified dates.
The following. amortization schedule relates to its 5-year, P1,000,000, 7% bonds purchased on
December 31, 2015, for P1,086,565. The bonds were purchased to yield 5% interest.

Interest Interest Premium Amortized

Date Received Income Amortization Cost
12.31.15 P1,086,565
12.31.16 P 70,000 P 54,328 P 15,672 1,070,893
12.31.17 70,000 53,545 16,455 1,054,438
12.31.18 70,000 52,722 17,278 1,037,160
12.31.19 70,000 51,858 18,142 1,019,018
12.31.20 70,000 50,982* 19,018 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, 2016 P1,065,000 P1,070,893
December 31, 2017 1,075,000 1,054,438
December 31, 2018 1,056,500 1,037,160
December 31, 2019 1,030,000 1,019,018
December 31, 2020 1,000,000 1,000,000

Questions:
1. What amount should be reported as investment in bonds in the statement of financial
position of Coloong Co. on December 31, 2017?
2. What amount of unrealized gain should be shown as component of other
comprehensive income in the 2018 statement of comprehensive income?
3. What amount of unrealized loss should be shown as component of other
comprehensive income in the 2019 statement of comprehensive income?
4. What amount of unrealized loss should be shown as component ofother comprehensive
income in the 20120 statement of comprehensive income?
5. What amount of unrealized gain should be shown in the 2019 statement of changes in
equity?

PROBLEM NO. 13

On January 1, 2016, ELAGRO COMPANY purchased P2,000,000 face value bonds at a price of
P1,824,800 which will yield an interest rate of 10%. The nominal interest rate on the bonds is 8%
payable annually every December 31. The company's business model is to collect contractual cash
flows that are solely payments of principal and interest.

On December 31, 2017, Elagro Company changed the business model in managing the bonds from
collecting contract cash flows that are solely payments of principal and interest to realizing short term
gains. The market value of the bonds on January 1, 2018, is 105.

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Questions:

1. What amount should be reported as interest income for 2017?

2. What is the carrying amount of the bonds on December 31, 2017?
3. On reclassification date, what amount of gain on reclassification of financial asset
should be recognized by Elagro Company?

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