Audit of Investments

AUDIT OF INVESTMENTS (cpar oct 2013 AP-7405) PROBLEM NO 1 Magnolia corp. invested its excess cash in equity securities during 2012. The business model for these investments is to profit from trading on price changes (A.) As of dec 31 2012, the equity investment portfolio consisted of the following: Investment quantity cost fair value Lj inc 1,000 shares 90,000 126,000 Polland co. 2,000 shares 240,000 252,000 Alabang corp 2,000 shares 432,000 360,000 Totals 762,000 738,000 1. In the dec 31 2012 statement of financial position, what should be reported as carrying amount of the investment a. 738,000 b. 690,000 c. 762,000 d. 810,000 2. In the 2012income statement, what amount should be reported as unrealized gain or loss a. Unrealized gain of 24,000 b. Unrealized loss of 24,000 c. Unrealized loss of 72,000 d. Unrealized gain of 48,000 (B.) During the year 2013, magnolia corp. sold 2,000 shares of polland co. for 229,200 and purchased 2,000 more of lj inc and 1,000 shares of dwarfy company. On the dec 31 2013, magnolias equity securities portfolio consisted of the following Investment quantity cost fair value Lj inc 1,000 shares 90,000 120,000 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 Total 816,000 564,000 3. What is the gain or loss on the sale of polland co. investment a. 10,800 gain b. 10,800 loss c. 22,800 gain d. 22,800 loss 4. What is the carrying amount of the investment on dec 31 2013 a. 816,000 b. 888,000 c. 564,000 d. 492,000 5. What is the amount of unrealized gain or loss should be reported in the income statement ofr the year ended dec 31 2013 a. 252,000 unrealized gain b. 252,000 unrealized loss c. 216,000 unrealized gain d. 216,000 unrealized loss (C.) During the year 2014, magnolia sold 3,000 shares of lj shares ,inc for 239,400 and 500 shares of dwarfy company at a loss of 15,200. On dec 31 2014, magnolias equity investment portfolio consisted of the following. Investment quantity cost fair value Dwarfy company 500 shares 48,000 36,000 Alabang corp 2,000 shares 432,000 492,000 Totals 480,000 528,000 6. What should be reported as a loss on sale of trading securities in 2014? a. 120,600 b. 64,800 c. 48,600 d. 136,800 7. What amount of unrealized gain or loss should be reported in the income statement of the year ended dec 31 2014 a. 360,000 unrealized gain

b. 360,000 unrealized loss c. 48,000 unrealized gain d. 48,000 unrealized loss 8. In the dec 31 2014 statement of financial position, what should be reported as carrying amount of trading securities? a. 480,000 b. 468,000 c. 528,000 d. 540,000 PROBLEM NO.2 Supporting records of mayon corp. trading securities portfolio show the following debt and equity securities: Security cost fair value 400 ordinary shares concave co. 254,500 243,000 800,000 Tipo co. 7 1/2 bonds 796,500 774,000 1,200,000 turkey co, 7 1/2% bonds 1,207,500 1,218,900 Totals 2,258,500 2,235,900 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 2013 and 2014, mayon completed the following transactions related to trading securities. 2013 Jan April May July Aug Nov Dec

2014 Jan Feb

1 received semiannual interest on bonds. Assume that the appropriate adjusting entry was made on dec 31 2012 1 sold 600,000 of 7 1/2 bonds at 102 plus accrued interest. Brokerage fees were 2,000 21 received dividend of 1.25 per share on the concave ordinary share capital. The dividend had not been recorded on the date of declaration 1 received semiannual interest on bonds and then sold the 7% tipo bonds at 97 1/2. The brokerage fee were 2,500 15 purchased 200 shares of newman inc ordinary share capital at 580 per share plus brokerage fee of 500 1 purchased 500,000 of 8% toll co. bonds at 101 plus accrued interest. Brokerage fees were 1,250. The interest dates are jan 1 and july 1 31 market prices of securities were: Concave ordinary share P550 7 1/2% turkey bonds 101 3/4 8% toll bonds 101 Newman ordinary share P583.75 2 recorded the receipt of semiannual interest on bonds 1 sold the remaining 7 1/2 turkey bonds at 101 plus accrued interest. Brokerage fees were 3,000

1. What is the total interest and dividend income for 2013 a. 125,166 c. 91,417 b. 164,416 d. 98,804 2. what amount should be reported as gain on sale of trading securities in 2013 a. 4,050 c. 8,550 b. 12,752 d. 9,375 3. what amount of unrealized gain or loss should be recorded in the income statement for the

year ended dec 31 2013 a. 21,200 unrealized gain b. 21,200 unrealized loss c. 3,150 unrealized gain d. 6,150 unrealized loss 4. what is the carrying amount of the remaining trading securities on dec 31 2013 a. 1,481,000 b. 1,450,450 c. 1,473,450 d. 1,452,250 5. What is the loss on sale of the remaining turkey bonds on feb 1 2014? a. 7,500 b. 10,500 c. 13,500 d. 750 PROBLEM NO.3 During the course or your audit of the financial statements of fishing corporation for the year ended dec 31 2013, you found a new account, “investment in equity securities”. Your audit revealed that during 2013, fishing began a program of investments, and all investment-related transactions were entered in this account. T=your analysis of this account for 2013 follows: Fishing corporation Analysis of investment in equity securities For the year ended dec 31 2013 Debit (a) Salmon company ordinary shares Feb.14 purchased 24,000 ordinary shares at p55 per share july.26 received 2,400 ordinary shares of Salmon co. as a share dividend (memo. Entry in general ledger sept.28 sold the 2,400 ordinary shares of salmon company received july 26 @ 70 per share (b) Tamban inc ordinary shares April. 30 purchased 120,000 shares @ 40 per share Oct. 28 received dividend of 1.20 share

credit

1,320,000

168,000

4,800,000 144,000

Additional information: a. The fair value for each security as of the 2013 date of each transaction follow Security feb.14 april30 july 26 setp 28 dec 31 Salmon co 55 62 70 74 Tamban inc 40 32 Fishing corp 25 28 30 33 35 b. All of the investment of fishing corporation are nominal in respect to percentage of ownership (5% or less) c. Each investment is considered by fishing corporation to be non-trading. Fishing corp has made irrevocable election to present in other comprehensive income. Subsequent changes in the fair value of its non-trading equity securities.

1. What amount should be reported as gain on sale of non-trading equity securities in 2013 a. 36,000 c. 48,000 b. 12,000 d. -02. The receipt of 2,400 share dividend would cause the investment balance to increase by a. 148,800 c. 132,000 b. 168,000 d. -03. What entry is necessary to correct the recording of the cash dividend received from tamban inc? a. Cash 144,000 Dividend 144,000 b. Cash 144,000 Investment in equity securities 144,000 c. Investment in equity securities 144,000 Dividend income 144,000 d. Dividend income 144,000 Investment in equity securities 144,000 4. What amount of unrealized gain or loss should be recorded in the 2013 statement of comprehensive income as component of other comprehensive income a. 384,000 gain c. 960,000 gain b. 384,000 loss d. 960,000 loss 5. What amount should be reported as investment in equity securities in the statement of financial position on dec 31 2013 a. 5,616,000 c. 5,040,000 b. 6,000,000 d. 6,576,000 PROBLEM NO.4 On june 30 2013, cabbage company purchased 25% of the outstanding ordinary shares of IB co. at a total cost of 4,200,000. The book value of IB’s net asset on acquisition date was 14,400,000. For the following reasons, cabbage was willing to pay more that the book value for the IB co. shares  IB co has depreciable assets with a current fair value of 360,000 more that their value. These assets have remaining useful life of 10 years  IB co owns a tract of land with a current fair values that are equal to their carrying amount  All other identifiable tangible assets of IB co. have current fair values that are equal to their carrying amounts IB co. reported net income of 3,240,000 earned evenly during the current year ended dec 31 2013. Also in the current year, it declared and paid cash dividends of 630,000 to its ordinary shareholders. Market value of IB co. ordinary share at dec 31 2013, is 18m. Cabbage Company’s financial year-end dec 31. 1. What is the total amount of goodwill of IB Co. base on the price paid by cabbage co. a. 600,000 c. 240,000 b. 2,160,000 d. 60,000 2. What amount of investment income should cabbage report in its income statement for the year ended dec 31 2013, under the equity method a. 405,000 c. 157,500 b. 400,500 d. 247,500 3. Under the equity method, the carrying value of the cabbage company’s investment in ordinary shares of IB Co. on dec 31 2013 should be a. 4,443,000 c. 4,140,000 b. 4,200,000 d. 4,500,000

PROBLEM NO.5 Durian Corp. purchased 40% of associate company’s outstanding ordinary shares on jan 2 2013 for 540milion. The book value of associate company’s net assets (shareholders’ equity) at the purchase date totaled 900million. Book value and fair values were the same for all financial statement items except for inventory and buildings, for which fair values exceeded book values by 25million and 225million respectively. All inventory on hand at the purchase date was sold during 2013. The buildings have average useful lives of 15 years. Associate company reported net income of 220million for the year ended dec 31 2013, and paid cash dividends of 80million. The fair value of durians investment in associate was 600million at dec 31 2013 1. Of the amount paid for acquisition of associate company’s ordinary shares,how much is attributable to goodwill a. 100million b.90million c.80million d. 180million 2. What is the investment balance at dec 31 2013 a. 540 million b. 600 million c. 580 million d. 596 million 3. At what amount will durian corp report its investment revenue in its 2013 income statement a. 88 millio b. 72 million c. 40 million d. 32 million THEORY 1. A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will a. Request the bank to confirm to the auditor the content of the safe-deposit box at the balance sheet date b. Examine supporting evidence for transaction occurring during the year c. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date d. Request the client to have bank seal the safe-deposit box until the auditor can count the securities at a subsequent date. 2. When an auditor is unable to inspect and count a clients investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be asked to a. Verify any differences between the contents of the box and the balances in the clients subsidiary ledger b. Provide a list of securities added and removed from the box between the balance sheet date and the security count date c. Count the securities in the box so that the auditor will have an independent direct verification d. Confirm that there has been no access to the box between the balance sheet date and the security count date. 3. Which of the following is not one of the auditors primary objectives in an audit of trading securities a. To determine whether the securities are authentic b. To determine whether the securities are the property of the client c. To determine whether the securities actually exist d. To determine whether the securities are properly classified on the balance sheet date 4. Apol boba, CPA, observe the count of securities on dec 31. She records the serial numbers and reconciles then and the number of shares with company records. Which fraud should be detected by this procedure a. An investee company declared and paid a stock dividend on dec 15. The stock cert for the

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additional shares was received directly by the treasurer who made no record of the receipt and embezzled the shares b. The treasurer embezzled ad sold securities on april 4. She speculated successfully with the proceeds and replaced the securities on dec 29 c. The treasurer borrowed securities on july 15 to use as collateral for a personal loan. He repaid the loan and returned the securities on dec 2 d. The treasurer embezzled interest receipts from bonds by having the payments mailed directly to him Which of the following is the least effective audit procedure regarding the existence assertion for the securities held by the auditee a. Examination of paid check issued in payment of securities purchased b. Vouching all changes during the year to supporting documents c. Simultaneous count of liquid asset d. Confirmation from custodian An auditee is holding equity securities as collateral for a debt. The auditor should a. Determine from date published in the financial press that the auditee has recorded dividend income from collateral b. Ascertain the value of securities c. Ascertain that the amount of recorded for the collateral in the investment account equal to its fair value at the balance sheet date d. Verify that the client has taken title to the securities Which of the following is the most effective audit procedure for verification of dividends earned on investments in equity securities a. Tracing deposited dividend checks to the cash receipts book b. Reconciling the amounts received with published dividends record c. Comparing the amounts received with preceding year dividends d. Recomputing selected extensions and footings of dividend schedules and comparing totals to the general ledger In conforming with an outside agent, such a financial institution, that the agent holding investment securities in the clients name, an auditor most likely gathers evidence in support of managements financial statement assertion of existence and a. Valuation c.completeness b. Rights and obligation d. presentation and disclosure in establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should inspect the securities and a. obtain written representations from management confirming that the securities are properly classified as trading securities b. inspect the audited financial statements of the auditee company c. confirm the number of shares held by an independent custodian d. determine that the investment is carried at fair value an auditor is most likely to verify the interest earned on bond investment by a. verifying the receipt and deposit of interest checks b. confirming the bond interest rate with the issuer of the bonds c. recomputing the interest earned on the basis of the face amount, interest rate, and period held d. testing controls relevant to cash receipts