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JOSE RIZAL UNIVERSITY ACCOUNTANCY

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INVESTING CYCLE Learning Objectives:  At the end of the learning activities, activities, the student should be able to: 1. Describe the functions and related activities involved in investing c ycle. 2. Discuss the procedures in an auditor’s consideration of an entity’s internal control system related to the investing. 3. Describe the nature of the substantive audit procedures involved in the audit of investments.

OVERVIEW OF THE INVESTING CYCLE he inventory cycle transactions involving cash outflows to acquire financial instruments (debt or equity) like trading and available for sale securities or held-to-maturity securities and cash inflows derived from disposal of securities and realization of periodic earnings (interest or dividends).

CONSIDERING CONSIDERING THE INTERNAL CONTROL

 AUTHORIZATION ll investment acquisitions and sales should require specific authorization by the board of directors or its investment's committee because it requires substantial substantial amounts. Investment made without regard to management's policies could expose the company's high-risk venture that may result to significant losses.

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CUSTODY he company should have a designated custodian who has physical control over its investment securities. To reduce the risk of losses, theft, theft, or damage, the securities should be kept in a reproof sale or vault and access to them should be restricted restricted to the custodian. custodian. The absence of physical control over investment securities securities is an invitation to fraud fraud because any can take and sell sell them. If the loss cannot be recovered, both investment and income are overstated. If investment securities are to be kept externally, an independent party (banks, brokerage firm or trust company) may be designated as company's custodian. custodian. Since custodian does not have direct direct access/contact with company personnel who maintain investment records, possibility of concealing fraud is minimized.  Any withdrawals of securities in the hands of an outside custodian should be made by at least two designated high-ranking company officials.

RECORDKEEPING nvestment subsidiary records may not be maintained if there is only a small number of investment transactions. In these instances, investments can be be properly accounted for and controlled controlled through GL account. The need to maintain maintain detailed records records of investments arises arises when the company company has a large number of investments. Each investment will have a subsidiary record that shows its its specific description (common or preferred), certificate serial number, the name in which it is registered and its cost. To ensure accuracy, the investment subsidiary records should be reconciled to related GL control account on a periodic basis. Differences should be promptly promptly and adequately investigated investigated and adjustments if any, should be made. An individual other than than the subsidiary record clerk, person person who maintains control account, the custodian of securities or one who is involved in cash activities, should perform the reconciliation.

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JOSE RIZAL UNIVERSITY ACCOUNTANCY

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Periodic securities count and reconciliation with investments records to verify existence and check the accuracy of investment records. An individual that does not perform tasks, which are enumerated above, odes this on a surprise basis. Differences should be promptly and adequately investigated and adjustments, if any, should be made.

PERIODIC SECURITIES COUNT AND RECONCILIATION WITH INVESTMENT RECORDS n a surprise basis by individual other than the securities custodian, the person that maintains the control accounts, the subsidiary records clerk, and those involved in the activities should perform a physical count of securities on hand periodically.

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During the count, a count sheet (list of securities on hand) should be prepared. It includes details like specific description, name of the entity represented by the certificate, name of which is registered, interest or dividend rate, due date (bonds), certificate serial number, face or par value, and number of shares. The details above should be compared to the investment subsidiary records and to the related general ledger control account. Differences should be promptly and adequately investigated. Securities that are entrusted to third parties for custodianship or as collateral, evidence of its existence can be obtained through confirmation procedures. SAT OF INVESTMENTS AND RELATED ACCOUNTS

he audit of investment securities typically involves analytical review procedures and one or more tests of details. The following table presents the specific audit objectives and the appropriate audit procedures for management assertions:

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 ASSERTIONS Existence or occurrence Rights Completeness  Valuation

SPECIFIC AUDIT OBJECTIVES  All securities that exist and are owned by the company and are properly recorded. Revenues, gains and losses are properly recorded.  Valuation is in conformity with PAS/PFRS. Decline in market value is properly accounted. Pledged securities are properly identified and disclosed. Financial statement presentation is appropriate and disclosures are adequate.

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Presentation and Disclosures

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SUBSTANTIVE TESTS Securities count Confirmation  Analytical review procedures  Analyses of accounts Recalculations  Vouching Inquiries

Evaluation of market value adjustments  Analytical review procedures Inquiries as to securities pledged. Review of loan agreements for pledging Confirmation of pledged marketable securities Review financial statements presentation and disclosures for compliance with PAS/PFRS

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 ANALYSIS OF CHANGES IN INVESTMENT SECURITIES

The analysis should include columns for purchases, sales, and other dispositions of securities during the year, as well as the balances of investments at the end of the current year. In addition, 1) unrealized holding loss of available for sale securities beginning balance and changes of which should be included in the information; 2) analysis of income; proceeds from sales and other dispositions including gains and losses; market values at the end of the period are part of the information. Beginning balances can be traced to prior year’s working paper while the ending balance, are verified through: 1) reconcile to the related GL accounts; 2) physical count; 3) confirmation to other parties; and 4) comparison of market values of securities with published sources. Purchases, sales, and other dispositions of securities during the audit period should be vouched to supporting documentation like brokers’ advices. Traced amounts received from sales to the cash receipts books or bank statements. Prices paid or received can be compared with quoted market prices at transaction dates. Interest earned, received and accrued can be verified thru independent calculations using information provided from the ledger or indicated in t he certificates or confirmations.

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ther Substantive Tests 1.  Analytical review procedures. It involves comparison of account balances from prior period to current period including actual with budget. Relate changes to unrealized holding losses of available-for-sale securities to its market values and dispositions. Compare average yield to expected yield for each type of investment. Securities count. The custodian of the client should be present at all times; the client’s representative should acknowledge in writing that the securities were returned intact; prepare a list of securities counted including signatures of individuals who counted the securities; and during the count, the exact names and descriptions of securities should be verified (check by noting the signatures, corporate seal in the investment certificates). Confirmation of securities held by third parties. A positive confirmation should be sent to the custodian to prepare a detailed list of securities owned by the client including information about any amounts due to or from the custodian. Test of carrying values and evaluation of accounting methods. Comparison of carrying value (cost) with market values of the investment securities. Review of financial statements presentation and adequacy of disclosures.

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ROBELM 1 During 2017, MAYE Company purchased marketable securities as a trading investment. For the year ended December 31,2017, the company recognized an unrealized loss of P230,000. There were no security transactions during 2018. Pertinent information at December 31,2018 is as follows:

Security  AYE-AYE  YAE-YAE

Cost P 2,450,000 1,800,000

Market Value P 2,300,000 1,820,000

P 4,250,000

P 4,120,000

REQUIRED: Compute the correct balance of investment account on December 31,2017.

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ROBLEM 2 During 2017, MAHAL Company purchased trading securities. December 31,2017 were as follows:

Securities  ANNA RACHEL  AMOR

# of Shares 1,000 10,000 20,000

Unit Cost P 280.00 170.00 157.50

The cost and market value at

2017 Market  Value P 340,000 1,530,000 2,950,000

2018 Market  Value P 350,000 3,000,000

The client company sold 10,000 shares of RACHEL stock on January 15,2018, for P150 per share, incurring P150,000 in brokerage commission and taxes. The client recorded this transaction by crediting the investment account at the amount of proceeds net of incidental costs. REQUIRED: Compute the Investment balance and prepare audit adjusting journal entries on December 31,2018.

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ROBLEM 3 The following account appears on the books of ELOHIM Company. Prepare any necessary correcting entries, assuming that the debt investment is held – to – maturity securities.

Date 8/01/08

Transactions Purchased 10 bonds at 90 plus interest of P400

10/01/08

Received P600 interest

11/01/08

Sold 5 bonds, sales price plus interest, less commission

Unit Cost

Debit

P 900

P 9,400

Credit

P 600

4,400

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ROBLEM 4 The following transactions for the investments of GOD’SGLORYUNFOLD Company (your client) took place in 2015, these are classified as Available for sale securities:

Date 02/10

Transactions The client company acquired 1,000 shares of Glory Co. common stock at P88 per share.

03/31

Glory issued a 10% stock dividend to common stockholders.

06/30

Glory issued rights to common stockholders for the acquisition of one additional share at P90 for every shares held. The common stock was trading ex – rights at P114 a share and rights had a market value of P6 per right.

07/13

The client exercised 1,000 rights to acquire new shares.

07/20

The remaining 100 rights were sold for P5.50 each.

10/12

The client sold 400 shares of Glory common stock for P30,000. The shares sold were specifically identified as being from those acquired on February 10.

Required: Based on the foregoing data, compute the following: 1) Gain or loss on sale of stock rights 2) Gain or loss on sale of stock 3) The correct balance of investments.

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ROBLEM 5  You are engaged to audit the marketable securities of BATCH215 Company. In your inquiries, the accountant presented to you the account of investments.

Date 2015 01/01

Particulars

Debit

Beginning balance

P 75,000

03/15

Purchased 2,000 shares of GRAZE common at P100 per share P2,000 for commission

04/10

Received 50% stock dividend from BART Co.

07/15

Received 50% stock dividend from RICH, Inc.

07/31

Sold 100 shares of Rich, Inc. at P30 each, P30 commission

10/01

11/15

12/01

12/30

200,000

Sold 50 shares of BARTOLMS Co. at P10 per share, less P15 for commission

06/30

Purchased 10 BERTOLDS Bonds at 110, plus interest accrued to date; commission amounted to P110

Credit

P 500 P 4,950 5,400

P 3,000

11,500

Proceeds from sale of 200 shares of GRAZE; no commission involved

26,000

Proceeds from sale of 4 bonds at 105, including interest to date; commission involved amounted to P42

4,240

Sold 50 shares of BARTOLMS at P20 per share, no commission involved

1,000

 Additional information that were found helpful to your analysis are as follows: 1) Beginning balance (agrees with your working papers last year) a. BARTOLMS CO., COMMON – 5,000 shares P 11,000 b. RICH, INC., COMMON – 900 shares 19,000 c.  YLEVOL Corp., COMMON – 15,000 shares 45,000 2) Commission were recorded as expense 3) Details of BERTOLDS Bonds: a. Face value P 1,000 per bond b. Interest rate 12% c. Interest dates May 1 and November 1 Required: Prepare the following: 1)  Adjusting entries – December 31,2015 2) Working papers

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Problem No. 6  ANYANG CORP., invested its excess cash in marketable equity securities during 2012. The securities do not qualify as financial asset held for trading. Anyang Corp. has made an irrevocable election to present in other comprehensive income subsequent changes in fair value of its Investment securities. As of December 31, 2012, the company’s securities portfolio consisted of the following. Investee Company Kandong Inc. Egoy Corp.  Yoga Enterprises Totals

Shares 30,000 60,000 60,000

Cost P1,350,000 4,5000,000 6,480,000 P12,330,000

Fair Value P1,275,000 4,830,000 6,900,000 P13,005,000

During the year 2013, Anyang Corp. sold 60,000 shares of Egoy Corp. for P4,800, 000 and purchased 60,000 additional shares of Kandong, Inc. and 30,000 shares of Kongga Company. On December 31, 2013, Anyang Copr.’s portfolio of securities comprised the following: Investee Company Kandong, Inc. Kandong, Inc. Kongga Company  Yoga Enterprise Totals

Shares 30,000 60,000 30,000 60,000

Cost P1,350,000 3,900,000 1,560,000 6,480,000 P13,290,000

Fair Value P1,500,000 4,350,000 1,440,000 2,100,000 P9,390,000

During the year 2014, Anyang Corp sold all the Kandong, Inc. shares. Also 15,000 shares of Kongga Company were sold at a loss of P270,000. The net realized gain on sale securities in 2014 amounted to P1,440,000. On December 31, 2014, Anyang Corp.’s portfolio of securities consisted of the following: Investee Company  Yoga Enterprises Kongga Company Totals

Shares

Cost

Fair Value

60,000 15,000

P6,480,000 780,000 P7,260,000

P12,600,000 540,000 P13,140,000

1. For the year ended December 31, 2013, Anyang’s Statement of Comprehensive Income should report unrealized loss of 2. What amount of unrealized loss should be reported in Anyang’s December 31, 2013 Statement of Changes in Equity? 3. How much was received by Anyang from the sale of its Investment in Kandong securities in 2014? 4.  Anyang’s Statement of Financial Position should report investment in equity securities of Dec.31, 2014 Dec.31, 2013 Dec.31, 2012 5. What amount should be reported as unrealized gain in Anyang’s Statement of Changes in Equity for 2014?

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Trading Securities (securities at fair value  – profit/loss) Specific Learning Objectives: At the end of the lesson, the students will be able to:    

Understand the nature and concepts of trading securities. Prepare journal entries for transactions affecting short-term marketable securities. Understand the nature of the trading securities issues and their effect on financial statement accounts. Identify financial statement presentation and required disclosures relating to inventories.

Investments Investments are assets held by enterprise for the accretion of wealth through distribution such as interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing enterprise such as those obtained through trading operations. These investments are classified as long-term or short-term depending on their maturity dates. Financial instruments are contract that gives rise to both financial asset and financial liability of another enterprise. Trading securities are generally purchased and sold in the exchange market to generate short-term gains or profits. These are: (1) inventories of stock securities for sale held by brokers (2) active and frequent for buying and selling securities held by banks in order to generate profits. Securities at fair value  – other comprehensive income Securirities - OCI are purchased and held indefinitely and available to be sold when the need for liquid funds arises during the operating cycle. Securities at amortized cost are debt securities with fixed or determinable payments and fixed maturities that enterprise has the positive intent and ability to hold to maturity. IFRS 9 Provides that financial assets are initially recorded at cost, however, subsequent to the acquisition, these assets are recorded as follows: Trading securities are reported at fair value; Securities at fair value – OCI are reported at fair value; Securities at amortized cost (net of discount, premium and impairment); Loans and receivable originated by the enterprise and not held for trading are reported at amortized cost less impairment; and Financial assets of which fair value cannot be reliably measured are also reported at amortized cost less any impairment in value.    

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Accounting for Stock Rights and Stock Split Nature and Concepts. The acquisition of equity securities for the purpose of accruing income through dividends and increase in market value or controlling another enterprise. Equity securities represent ownership shares such as common and preferred stock, it may also represent rights, and options to acquire additional shares.

Transactions

Recognition

Measurement

1. Receipt of Dividend 1.1 Cash 1.2 Property 1.3 Stock 2. Receipt of Rights 3. Stock Split

Part of Income Part of Income MEMO MEMO MEMO

D/S(# of S) CV or Cost Increases # of S MV Increases # of S

Valuation

Face value CV/Cost Cost is unchanged Allocated Cost Cost is unchanged

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Hilton, Inc. has trading securities purchased during 2013. At the end of 2013, the securities had total market value of P525,000. As of December 31, 2014, the records show cost and market values as follows: Investment Cost Market Value 1 P100,000 P 90,000 2 190,000 210,000 3 250,000 235,000 The gain or loss that would be reported in profit or loss as a result of the valuation of the securities at the end of 2014 is a. P 5,000 b. P10,000 c. P20,000 d. P25,000 2. On January 1, 2013, the Pacita Corporation purchased marketable equity securities to be held as trading for P2,000,000. The company also paid commission, taxes and other transaction costs amounting to P50,000. The securities had the following market values at December 31, 2013 and 2014, respectively: P1,750,000 and P2,100,000. No securities were sold during 2013. What amount of unrealized gain or loss should be reported in the 2013 profit or loss section of the statement of comprehensive income? a. P200,000 loss b. P250,000 loss c. P50,000 gain d. P100,000 gain 3. On January 1, 2013, the Pacita Corporation purchased marketable equity securities for P2,000,000. The company also paid commission, taxes and other transaction costs amounting to P50,000. Because the securities were acquired not for immediate trading, Pacita exercised its option to measure the change in fair value through other comprehensive income. The securities had the following market values at December 31, 2013 and 2014 respectively: P1,750,000 and P2,100,000. No securities were sold during 2013 or 2014. What amount of unrealized gain or loss should be reported in the December 31, 2014 statement of financial position as a component of shareholders’ equity? a. P200,000 unrealized loss b. P250,000 unrealized loss c. P50,000 unrealized gain d. P100,000 unrealized gain 4. Silahis Trading made investments in non- trading equity ecurities. The cumulative “Holding Gain or Loss” account has a debit balance of P12,900 at December 31, Year 1. An analysis of the investments on December 31, Year 1 showed the following No. of Shares or Face Value Cost Fair Value  Asia Textile ordinary 600 shares P307,500 P270,000 S- Mart, Inc. ordinary 225 shares 76,500 90,000 RJ Company ordinary 2,000 shares 269,500 280,600 P653,500 P640,600 On July 1, Year 2, the shares of S- Mart were sold for P70,000. The balance of the equity pertaining to these shares was transferred to the retained earnings account. On December 31, Year 2, Asia Textile shares were quoted at P440 per share; RJ shares were quoted at P138 per share. How much is the required debit to other comprehensive income account at the end of Year 2? a. P43,500 b. P37,000 c. P30,600 d. P10,600 5. Bayview Company bought 1,000 shares of PLDT shares as equity investments at fair value on January 10, Year 2 at P150 per share and paid P2,250 as brokerage fee. On December 5, Year 1, a P10 dividend per share of PLDT had been declared to be paid on April 30, Year 2 to shareholders of January 31, Year 2. There were no other transactions in Year 2 affecting the investment in PLDT.  At what am ount should the investment in equity securities be initially recognized on January 10, Year 2? a. P142,250 b. P150,000 c. P152,250 d. P162,250 6. On December 30, 2012, Aloha Company purchased 10,000 ordinary shares of Sun Valley Corporation at P150 per share. At the time of the purchase, Sun Valley has an outstanding 50,000 shares with a total shareholders’ equity of P7,500,000. For the year 2013, Sun Valley reported profit

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of P3,000,000. On December 30, Aloha received a cash dividend of P50 per share. Aloha uses the equity method. What is the investment carrying value at December 31, 2013? a. P2,600,000 b. 2,100,000 c. P1,600,000 d. P1,500,000 7. During Year 1, Peninsula Corporation acquired, financial asset at fair value through profit or loss, ordinary shares of RPP Company as follows: Lot Date No. of Shares Cost Per Share Total Cost  A January 25 800 P560 P448,000 B April 5 600 600 360,000 RPP Company effected a 20% bonus issue on February 14, Year Stock rights on ordinary shares were issued on October 30, Year 1, entitling holders to purchase one new ordinary share at P450 for each ten shares held. On this date, the stock ex-rights were being traded at P620 per share. On November 8, Year 1, Peninsula sold 500 rights that pertained to Lot A. Sales price was P20.00 per right. The corporation paid a brokerage fee of P 500 on the sale of the stock rights. Peninsula exercised the remaining rights on November 11.Year 1. Fair value of each share on December 31 was P650.How many new ordinary shares of RPP were acquired by Peninsula through the exercised of the rights? a. 168 shares b. 140 shares c. 118 shares d. 106 shares 8. Use the same information given in MC24. How much total income from investments shall Peninsula Corporation report during Year 1? a. P9,500 .b. P18,020 c. P27,520 d. P28,020 9. Holiday, Inc. had the following transactions in the ordinary shares of May Corporation : January 5 Bought 4,000 ordinary shares, P100 par, at 88. June 15 Received 10% bonus issue.  August 31 Received P4 cash dividend for each ordinary share. October 10 Received stock rights to buy one new share at P100 for every 5 shares held. Market value of stock ex-right, P156. November 15 Sold all stock rights at P4 per right. What is the revised cost per share after receipt of the bonus issue? a. P75 b. P80 c. P85 d. P90 10. On January 1, 2013, IBM Company paid P1,200,000 for 40,000 ordinary shares of Apple Corp., which represent a 25% investment in the net assets of Apple. IBM has the ability to exercise significant influence over Apple. IBM received a dividend of P3 per share from Apple in 2013. The reported profit of Apple for the year ended December 31, 2013 was P640,000. The balance of IBM’s Investment in  Apple at December 31, 2013 should be a. P1,200,000 b. P1,240,000 c. P1,360,000 d. P1,480,000 11. On December 31, 2013, Year 1 Penthouse Company held 1,000 ordinary shares of X Co. in its portfolio of long-term investments in equity securities. The shares were designated as at fair value through other comprehensive income. The shares had a cost of P150 per share and had a market value of P130 per share at Dec. 31, Year 1. During Year 2, Penthouse acquired the following investments, all of which were designated as at fair value through other comprehensive income: 900 ordinary shares of Y Co. for P180 per share and 800 ordinary shares of Z Co. for P220 per share. At the end of Year 2, market values per share were: X - P140; Y - P170; Z  – P140. The adjusting entry on December 31, Year 2 would a. increase unrealized loss by P35,000 b. increase unrealized loss by P15,000 c. decrease unrealized loss by P20,000 d. decrease unrealized loss by P15,000 12. Use the same information given in MC28. What is the net unrealized loss account balance reported in the shareholders’ equity section of Penthouse’s statement of financial position at December 31, Year 2?

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a. P35,000 b. P20,000 c. P15,000 d. P0 13. On January 1, 2013, Inkjet Co. acquired 40% of GIC Company by purchasing 8,000 shares for P1,440,000. On the date of acquisition, Inkjet calculated that its share of the excess of the fair value over the book value of GIC’s depreciable assets was P150,000 and that the purchased goodwill was P120,000. At the end of 2013, GIC reported profit of P450,000 and paid dividends of P7.00 per share. Inkjet depreciates depreciable assets over a 2-year remaining life. What is the amount of income Inkjet would report from its investment in GIC for the year ended December 31, 2013? a. P172,000 b. P167,000 c. P105,000 d. P 56,000 14. On April 1, 2011, Village Company purchased 25,000 ordinary shares of Sulo Co. at P180 per share, which reflected book value as of that date. At the time of the purchase, Sulo had 100,000 ordinary shares outstanding. Village had no ownership interest in Sulo before the purchase. The first quarter statement ending March 31, 2011 of Sulo recorded earnings of P480,000. For the year ended December 31, 2011, Sulo reported profit of P2,400,000. Sulo paid Village dividends of P60,000 on June 1and again P60,000 on December 31, 2011. During 2012, Sulo reported profit of P2,000,000 and paid dividends of P2,000,000 to its shareholders. On January 1, 2013, Village sold 10,000 ordinary shares of Sulo for P200 per share. For the year ended December 31, 2013, the reported profit of Sulo was P2,500,000 and dividends of P60,000 were paid to Village. The market value of Sulo shares remained unchanged during the year 2013. The carrying value of Village investments in Sulo on December 31, 2011 was a. P4,860,000 b. P4,980,000 c. P4,500,000 d. P3,900,000 15. Use the same information given in MC31. The carrying value of Village investments in Sulo on December 31, 2013 was a. P3,000,000 b. P2,988,000 c. P2,961,000 d. P2,916,000 16. Use the same information given in MC31. The gain of Village on the sale of 10,000 ordinary shares of Sulo was a. P200,000 b. P 56,000 c. P 8,000 d. P 0 17. On January 1, 2013, Admiral Company purchased 10,000 ordinary shares of LTS Corp., a large, publicly-traded company listed on a major stock exchange. In December, LTS distributed a 20% bonus issue when the par value was P100 per share and the market value was P500 per share. How much income should Admiral Co. report? a. P0 b. P200,000 c, P1,000,000 d. P4,000,000 18. Carlston, Inc. purchased 10%, of Toy Co.’s 100,000 outstanding ordinary shares on January 1, 2013, for P500,000. On December 31, 2013, Carlston purchased an additional 20,000 shares of Toy for P1,500,000. The market price of the shares previously held by Carlston was P750,000 on this date. Toy had not issued any additional share during 2013. Toy reported earnings of P3,000,000 for 2013. What amount should Carlston report in its December 31, 2013, statement of financial position as investment in Toy? a. P1,700,000 b. P2,000,000 c. P2,250,000 d. P2,300,000 19. Las Palmas, Inc. bought 40% of Adams’ outstanding ordinary Shares on January 2, 2013, for P4,000,000. The carrying amount of Adams net assets at the purchase date totaled P9,000,000. Fair values and carrying amounts were the same for all items except for plant and inventories, for which fair values exceeded their carrying amounts by P9,000,000 and P100,000, respectively. The plant has an 18-year life. All inventories were sold during 2013. During 2013, Adams reported profit of P1,200,000 and paid a P200,000 cash dividend. What amount should Las Palmas report in its statement of Comprehensive income from its investment in Adams for the year ended December 31, 2013? a. P480,000 b. P420,000 c. P360,000 d. P320,000 20. Use the same information given in MC36. What is the investment carrying value reported in Las Palmas’ statement of financial position at December 31, 2013? a. P4,400,000 b. P4,380,000 c. P4,340,000 d. P4,000,000

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21. Hope Company bought 20% of Prudence Company’s ordinary share on January 1, 2013 for P3,700,000. The carrying amount of Prudence’s net assets at purchase date totaled P16,000,000. Fair values and carrying amounts were the same for all items, except for land and inventory, for which fair values exceed their carrying amounts by P3,000,000 and P1,000,000 respectively. All inventories at January 1, 2013 were sold during 2013. During 2013, Prudence reported profit of P5,500,000 and paid P1,500,000 cash dividend. What amount should Hope report as income from investment in its 2013 profit or loss section of the statement of comprehensive income? a. P300,000 b. P900,000 c. P1,100,000 d. P1,200,000 22. Use the same information given in MC38. What amount should Hope report as investment in associate on December 31, 2013? a. P3,700,000 b P4,300,000 c. P4,500,000 d. P4,600,000 23. On September 1, Year 2, the Lucky Company acquired P1,000,000 faced value, 12% bonds of Key Company at 104. The bonds were dated May 1, Year 2, and mature on April 30, year 5, with interest payable each October 31 and April 30. The company did not elect to measure the securities at fair value. What entry should Lucky make to record the purchase of the bonds on September 1, Year2? Debit Credit a. Debt Investments 1,040,000 Interest Receivable 40,000 Cash 1,080,000 b. Debt Investments 1,080,000 Cash 1,080,000 c. Debt Investments 1,080,000 Interest receivable 40,000 Cash 1,040,000 d. Debt Investments 1,000,000 Premium on Debt Investments 80,000 Cash 1,080,000 24. On July 1, Year 2, Marvelous Company purchased P10 million of West Company’s 8% bonds due on July 1, Year 10. Based on the company’s business model for the portfolio of investments, Marvelous designates the bonds as investments measured at amortized cost. The bonds, which pay interest semiannually on January 1 and July 1 were purchased for P8,750,000 to yield10%. In this statement of comprehensive income for the year ended December 31, Year 2, Marvelous should report interest income of a. P350,000 b. P400,000 c. P437,500 d. P500,000 25. On July 1, Year 2, Superb Company purchased 4,000 of the P1,000 face amount, 8% bonds of Oat Corp. for P3,692,000 to yield 10% per annum. The bonds, which mature on July 1, Year 5, pay interest semiannually on January 1 and July 1. Superb classifies the securities as at amortized cost. What is the investment carrying value at December 31, Year 2? a. P3,975,400 b. P3,741,000 c. P3,716,600 d. P3,667,400 26. Use the same information given in MC42. How much is the interest revenue reported by Superb in its statement of comprehensive income for year ended December 31, Year 2? a. P200,000 b. P190,800 c. P184,600 d. P160,000 27. On January 1, Year 2, Grand Company purchased as held for collection investments P1,000,000 face value of Greek Company’s 8% bonds for P912,400. The bonds were purchased to yield 10% interest annually on January 1. What amount should Grand report on its December 31, Year 2 statement of financial position for held for collection investment? a. P1,000,000 b. P 923,000 c. P 912,000 d. P 901,000 28. On June 1, Year 1, Fantastic Company purchased as held for collection securities 8,000 of the P1,000 face value, 8% bonds of Universe Company for P7,383,000. The bonds were purchased to yield 10% interest. Interest is payable semiannually on December 1 and June 1. The bonds mature

JOSE RIZAL UNIVERSITY ACCOUNTANCY

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on June 1, Year 5. On June 1, Year 2, Fantastic sold the bonds for P7,850,000. This amount includes the appropriate accrued interest. What is the gain or loss on the sale of the bond investment? a. P368,700 b. P366,240 c. P 48,700 d. P 46,242 On July 1, 2012, Sprakenheit Company purchased P500,000 face value Swazzeg Company 8% bonds for P455,000 plus accrued interest to yield 10%. The bonds were designated as at fair value through profit or loss. The bonds mature on January 1, 2016 and pay interest annually on January 1. On December 31, 2012,the bonds had a market value of P472,500. On February 14,2013, Sprakenheit sold the bonds for P460,000 plus accrued Interest. On its December 31, 2012 statement of financial position, what amount should Sprakenhheit report as debt investments? a. P455,000 b. P457,750 c. P460,000 d. P472,500 Use the same information given in MC46. What is the interest income reported by Sprakenheit for the year 2012? a. P18,200 b. P20,000 c. P22,750 d. P25,000 Use the same information given in MC46. What is the gain (loss) on the sale of the securities in 2013? a. P12,500 b. P 5,000 c. P (5,000) d. P (12,500) ** Shangri-La bought the shares of Crossing, Inc. (classified as available for sale) as follows: June 10, 2012 2,000 shares at P100 P200,000 December 5, 2012 3,000 shares at P120 P360,000 P560,000 The following were the transaction for 2013: January 10 Received cash dividend at P10 per share June 20 Received 20% bonus issue December 10 Sold 3,000 shares at P120 per share How much is the gain on the sale of the shares assuming the average cost approach is used? a. P 0 b. P 60,000 c. P 80,000 d. P100,000 ** Use the same information given in MC49, assuming that the first-in, first-out method of identifying the shares sold was used, how much is the gain on the sale of the shares? a. P0 b. P 60,000 c. P 80,000 d. P100,000