Audit of Investment

AUDIT OF INVESTMENTS Problem 1: EDZEL CORP. invested its excess cash in equity securities during 2014. The business model for these investments is to profit from trading on price changes. (a.) As of December 31, 2014, the equity investment portfolio consisted of the following: Investment LJ, Inc Polland Co. Alabang Corp Totals

Quantity 1.000 shares 2,000 shares 2,000 shares

Cost P45,000 120,000 216,000 P381,000

Fair Value P63,000 126,000 180,000 P369,000

1.) In the December 31, 2014, statement of financial position, what should be reported as carrying amount of the investments? A. P369,000 B. P345,000 C. P381,000 D. P405,000 2.) In the 2014 income statement, what amount should be reported as unrealized gain or loss? A. Unrealized gain of P12,000 B. Unrealized loss of P12,000 C. Unrealized loss of P36,000 D. Unrealized gain of P24,000 (b.) During the year 2015, Edzel Corp. sold 2,000 shares of Polland Co. for P114,600 and purchased 2,000 more shares of LJ Inc., and P1,000 shares of Dwarfy Company. On December 31, 2015, Edzel’s equity securities portfolio consisted of the following: Investment LJ, Inc LJ, Inc. Dwarfy Company Alabang Corp Totals

Quantity 1.000 shares 2,000 shares 1,000 shares 2,000 shares

Cost P45,000 99,000 48,000 216,000 P408,000

Fair Value P60,000 120,000 36,000 66,000 P282,000

3.) What is the gain or loss on the sale of Polland Co. Investment? A. P5,400 gain B. P5,400 loss C. P11,400 gain D. P11,400 loss 4.) What is the carrying amount of the investments on December 31, 2015? A. P408,000 B. P444,000 C. P282,000 D. P246,000 5.) What amount of unrealized gain or loss should be reported in the income statement for the year ended December 31, 2015? A. P126,000 unrealized gain B. P126,000 unrealized loss C. P108,000 unrealized gain D. P108,000 unrealized loss (c.) During the year 2016, Edzel 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, 2016, Edzel’s equity investment portfolio consisted of the following: Investment Dwarfy Company Alabang Corp Totals

Quantity 500 shares 2,000 shares

Cost

6.) What should be reported as loss on sale of trading securities? A. P60,300

Fair Value 24,000 216,000 P240,000

18,000 246,000 P264,000

B. P32,400 C. P24,300 D. P68,400 7.) What amount of unrealized gain or loss should be reported in the income statement for the year ended December 31, 2016? A. P180,000 unrealized gain B. P180,000 unrealized loss C. P24,000 unrealized gain D. P24,000 unrealized loss 8.) In the December 31, 2016, statement of financial position, what should be reported as carrying amount of trading securities? A. P240,000 B. P234,000 C. P264,000 D. P270,000 Problem 2: During the course of your audit of the financial statements of KENNETH CORPORATION for the year ended December 31, 2014, you found a new account, “Investment in Equity Securities.” Your audit revealed that during 2014, Kenneth began a program of Investments, and all investment-related transactions were entered in this account. Your analysis of this account for 2014 follows: KENNETH CORPORATION Analysis of Investment in Equity Securities For the year ended December 31, 2014 Debit

Feb. 14 July 26

Sept. 28

SALMON COMPANY ORDINARY SHARES Purchased 36,000 shares @ P55 per share Received 3,600 ordinary shares of Salmon Company as a share dividend (*Memorandum entry was made in general ledger) Sold the P3,600 ordinary shares of Salmon Company received July 26 @ P70 per share

P1,980,000

P252,000

Debit

April 30 Oct. 28

TAMBAN INC, ORDINARY SHARES Purchased 180,000 shares @ P40 per share Received dividend of P1.20 per share

Credit

Credit

P7.200.000 P216,000

Additional Information: a. The fair value for each security as of the 2014 date of each transaction follow: Security Feb.14 April 30 July 26 September 28 Salmon P55 P62 P70 Company Tamban, Inc. P40 Kenneth Corp. 25 28 30 33

December 31 P74 32 35

b. All of the investments of Kenneth Corporation are nominal in respect to percentage of ownership (5% or less)

c. Each investment is considered by Kenneth Corporation to be non-trading. Kenneth has made an irrevocable election to present in Other Comprehensive Income. Subsequent changes in fair value of its non-trading equity securities. 1.) What amount should be reported as gain on sale of non-trading equity securities in 2014? A. P72,000 B. P18,000 C. P54,000 D. P0 2.) The receipt of 3,600 share dividend would cause the investment balance to increase by A. P223,200 B. P252,000 C. P198,000 D. P0 3.) What is the entry necessary to correct the recording of the cash dividend received from Tamban Inc.? A. (Dr) Cash, P216,000; (Cr) Dividend Income, P216,000 B. (Dr) Cash, P216,000; (Cr) Investment in equity securities, P216,000 C. (Dr) Investment in equity securities, P216,000; (Cr) Dividend Income, P216,000 D. (Dr) Dividend Income; (Cr) Investment in equity securities, P216,000 4.) What amount of unrealized gain or loss should be reported in the 2014 statement of comprehensive income as component of other comprehensive income? A. P1,440,000 gain B. P1,440,000 loss C. P576,000 gain D. P576,000 loss 5.) What amount should be reported as Investment in equity securities in the statement of financial position on December 31, 2014? A. P9,000,000 B. P8,424,000 C. P7,560,000 D. P9,864,000 Problem 3: Shown below is an amortization schedule related to ERIKA COMPANY’s 5- year, P500,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2014, for P543,300. Date 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19

Interest Received

Interest Income

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

Amortization

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

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

Carrying 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 December 31, 2015 December 31, 2016 December 31, 2017 December 31, 2018 December 31, 2019

Fair Value P535,465 527,238 518,600 509,530 500,000

P532,500 537,500 528,250 515,000 500,000

Required: a. Prepare the journal entry to record the purchase of these bonds on December 31, 2014, assuming the bonds are held as financial assets at amortized cost. b. Prepare the journal entry(ies) related to these bonds for 2015 c. Prepare the journal entry(ies) related to these bonds for 2017 d. What should be reported as the carrying amount of these bonds in the statement of financial position on December 31, 2015? Problem 4: On January 1, 2014, CAMILLE B. CORP. purchased debt securities for cash of P765,540 to be held as financial assets at amortized cost. 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.

1.) The carrying value of the debt securities on December 31, 2014,at amortized cost using the effective interest rate method is A. P771,840 B. P759,016 C. P765,540 D. P600,000 2.) The interest income to be reported for 2014 using the effective interest rate method is A. P66,524 B. P6,524 C. P60,000 D. P53,476 Problem 5: MARA INC, received dividends from its investments in ordinary shares during the year ended December 31, 2014, as follows: (a) A cash dividend of P720,000 is received from JJ Corporation. (Mara owns a 2% interest in JJ.) (b) A cash dividend of P3,600,000 is received from VV Corporation. (Mara owns a 30% interest in VV) (c) A stock dividend of 18,000 shares from YY Company was received on December 31, 2014, on which date the quoted market value of YY’s shares was P20 per share. (Mara owns less than 1% of YY’s ordinary shares) 1.) What amount of dividend income should be reported by Mara in its 2014 income statement? A. P1,080,000 B. P4,680,000 C. P4,320,000 D. P720,000 Problem 6: KENNETH D. INC. purchased 40% of MU Corp. on April 1, 2014, 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 equalled their book values except for the following:  

MU’s equipment has a fair value of P50,000 less than the book value. The equipment has a remaining useful life of 10 years. MU’s building has a fair value of P40,000 more than the book value. The building has a remaining life of 20 years.

MU’s results of operations in 2014 and 2015 are as follows: 2014 net income amounted to P150,000 while 2015 saw a net loss of P30,000 MU paid cash dividends of P20,000 and P10,000 in 2014 and 2015 respectively 1.) What amount of investment income should be reported on Kenneth D’s income statement for the year ended December 31, 2014? A. P44,100 B. P58,800 C. P61,200 D. P45,900 2.) The investment loss to be reported on Kenneth D’s 2015 income statement is A. P10,800 B. P8,100 C. P13,200 D. P12,000 3.) What is the carrying value of the stock investment on December 31, 2014? A. P536,100 B. P537,900 C. P553,200 D. P500,000 4.) What is the carrying value of the stock investment on December 31, 2015? A. P521,300 B. P536,000 C. P523,100

D. P500,000 Problem 7: On January 2, 2014, WAYNE INC. acquired a 15% interest in CPS Corp by paying P8,000,000 for 150,000 ordinary shares. On this date, the net assets of CPS Corp. totalled P40,000,000. The fair values of CPS Corp’s identifiable assets and liabilities were equal to their book values. Wayne did not have the ability to exercise significant influence over the operating and financial policies of CPS. Wayne received dividends of P1.40 per share from CPS on October 1, 2014. CPS reported net income of P5,000,000 for the year ended December 31, 2014. Wayne classified the investment as at fair value through other comprehensive income. Market price for the 100,000 shares was P9,000,000 on December 31, 2014. Wayne paid P30,000,000 on January 1, 2015, for 250,000 additional ordinary shares, which represents a 25% interest in CPS. The fair value of CPS Corp’s identifiable assets, net of liabilities were equal to their book values of P92,000,000. As a result of this additional acquisition, Wayne has the ability to exercise significant influence over the operating and financial policies of CPS. Wayne received a dividend of P2.70 per share on October 5, 2015. CPS reported net income of P6,000,000 for the year ended December 31, 2015. The investment’s fair value on December 31, 2015, is P45,000,000. 1.) In the December 31, 2014 statement of financial position, what is the carrying amount of the investment in equity securities? A. P8,610,000 B. P9,000,000 C. P8,000,000 D. P8,750,000 2.) What is the total amount of investment-related revenue that should be reported in the 2014 income statement? A. P140,000 B. P1,140,000 C. P750,000 D. P1,610,000 3.) What amount of gain on remeasurement to equity should be reported in the 2015 income statement? A. P1,320,000 B. P1,080,000 C. P0 D. P1,000,000 4.) What is the goodwill arising from the acquisition of additional 300,000 shares on January 1, 2015? A. P0 B. P2,200,000 C. P7,000,000 D. P9,000,000 5.) What is the carrying amount of the investment in associate on December 31, 2015? A. P45,000,000 B. P40,320,000 C. P38,120,000 D. P39,000,000

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