AUDIT OF INVESTMENTS

Introduction
Investment is an asset held by an entity for purposes of accretion of wealth through distributions of dividends,
interest and rentals or for capital appreciation or other benefits to be obtained.
Investments are presented either as ‘current investments’ and ‘long-term investments.’ A current investment
is an investment that is by its nature readily realizable and is intended to be held for not more than one year from the
date on which such investment is made. A Long-term investment is an investment other than a current investment.
Quick review: Purpose of Investments

Investment
 Investment in Equity Instruments – Financial
Asset at fair value
 Investment in Equity Instruments –
Associate
 Investment in Equity Instruments –
Subsidiary
 Investment in Equity Instruments – Joint
Venture
 Investment in Debt Investments
 Investment in special purpose funds
Purpose
To earn from changes in fair value and dividends
To benefit from exercising significant influence over
another entity
To benefit from exercising control over another entity
To benefit from exercising joint control over another entity
To earn from changes in fair value and interest
To accumulate funds for basically any purpose such as
plant expansion and long-term debt retirement

 Investment in Derivatives To earn from changes in fair value

 Investment in life Insurance policies – Cash To compensate the entity from the untimely death of key
surrender value officers
Audit of Investments in a nutshell:
1. Understand the Client’s investing activities
The complexity of auditing entity’s investments always going to be different because for entities with simple
investment instruments, auditing does not require much tedious work. One of the primary audit procedures might
be to confirm its existence.
Under other conditions, complex investments or entities with large investment portfolio, however, require
additional work such as auditing values. As investment complexity increases, so will the need for more highly
competent audit team members (those that can thoroughly understand unusual investments).
Inherent Risk Assessment
The inherent risk for an assertion about an investment is its susceptibility to a material misstatement,
assuming there are no related controls. Factors that might affect the auditor's assessment of inherent
risk for assertions about an investment include the following:
 The complexity of the features of the investment.
 Whether external factors affect the assertion.
2. Internal Control Evaluation
The auditor should carefully evaluate and study the system of internal control for audit clients that have large
investment portfolio to determine the nature, timing and extent of audit procedures. Since it has several
investments related transactions, the auditor should decide whether it would be more efficient to conduct test of
control before substantive test. Before he opts to decide to rely on test of control, the auditor should ascertain the
following internal control regarding investments:
 Control over acquisition, accretion and disposal of investments
 Safeguarding of investments
 Controls relating to title to investments
 Information controls
Control Risk Assessment
After obtaining the understanding of internal control over investment transactions, the auditor should
assess control risk for the related assertions. If the auditor plans to assess control risk at less than
maximum for one or more assertions regarding investments, the auditor should identify specific controls
relevant to the assertions that are likely to prevent or detect material misstatements and gather audit
evidence about their operating effectiveness.
 PRIMARY SUBSTANTIVE TESTS

The auditor should use the assessed levels of inherent risk and control risk for assertions about investments
to determine the nature, timing, and extent of the substantive procedures to be performed to detect material
misstatements of the financial statement assertions. Some substantive procedures address more than one assertion
about various investment transactions.

 Management Assertion: Existence and Rights

Audit Objectives:
 All recorded investments in the statement of financial position exist.
 The entity owns, or has legal right to the investments included on the statement of financial position.
Audit Procedures:
The auditor’s procedure depends whether the securities or evidence of ownership are held by the client or
third party.
 If the securities or evidence of ownership is held by the client, the auditor counts the securities or
instruments on hand with simultaneous count of cash and other negotiable instrument to prevent
substitution.
 If held by third party, the auditor will confirm to the custodian or arrange for a visit to the custodian
and conduct a count.
 For investment properties, arrange for an ocular inspection of investment properties and trace back
acquisition of investment properties to acquisition documents.
Documents/Files needed:
 Stock certificates
 Confirmation letter1
 Deed of sale and other title transfer papers

 Management Assertion: Completeness

Audit Objectives:
 To determine that investments to which the company has title to are all included in the statement of
financial position.
Audit Procedures:
 Trace selected purchases and sales of securities and other investments during the year.
 Inspect securities on hand.
 Obtain confirmation of securities held by others.
Document/Files needed:
 Stock certificates
 Deed of sale and other title transfer papers
 BOD’s minutes of meeting

 Management Assertion: Occurrence and Valuation and Allocation

Audit Objectives:
 All recorded income from investments has accrued to the entity at the reporting date.
 To determine that investments are valued properly in accordance with applicable PFRS.
Audit Procedures:
 The Accounting method and impairment test on investments of the client depends on the applicable
PFRS. Therefore, the procedure applied by the auditor depends on the type of investment.
Accounting Classification of
Level of Influence % of ownership Applicable PFRS
Method Investment

PFRS 9
Financial asset at
Little or none <20% Fair Value PFRS 7
fair value
PAS 32

Investment in
Significant 20-50% Equity PAS 28
Associate
Investment in
Control >50% Consolidation PFRS 10
Subsidiary
No quantitative Investment in Joint
Joint Control Equity PAS 28
presumption Venture

For Investment under Fair value method:

The auditor should examine whether at initial measurement, in computing the cost directly
attributable to investments, has been expensed outright (for FA-FVTPL) or was capitalized in the cost
of investments (FA-FVOCI) – In accordance with Application Guidance of PFRS 9.
The auditor should ascertain the fair value of the quoted securities from official quotations of the
Philippine Stock Exchange. And in case of unquoted securities, the auditor should ascertain if it was
measured in accordance with Application Guidance B5.4.14 of PFRS 9 (For FA@FV). In which, equity
instruments must be measured at fair value and at cost in case fair value cannot reliably measured.
For Investment under Equity Method:
The auditor should verify the share in net income or loss by examining the audited financial statement
of the investee and making independent calculation. For dividends received, the auditor can examine
published dividend record of the investee.
For Investment under Consolidation:
The auditor should verify the beginning balance of the investment for the current year, the auditor
will normally refer to its prior working paper. The auditor will also examine any addition or disposal by
examining supporting documentation.
Test Impairments of Investment
Test of Impairment will also depend on the applicable PFRS which is to be considered by the auditor
in evaluating the impairment made by the management. The auditor should also inquire with the
management in their methods in identifying impairment.
Document/Files needed:
 Audited financial statement of investee
 PSE quotations
 OTHER SUBSTANTIVE TESTS

 Management Assertion: Accuracy

Audit Objective:
 Amounts and other data relating to recorded transactions and events have been recorded
appropriately.
Audit Procedures:
 Evaluating the accounting methods used and test the valuation.
 Investigating current and potential impairments of investments.
o Inquire with management their approach in identifying indicators of impairment, and the actions
taken as a result of any potential impairment noted.
o Evaluate the appropriateness of the valuation model and assumptions used.
o Assess the reasonableness of management’s estimates.
o Evaluate the accuracy, completeness, and relevance of the important data on which the
estimates or measurements are based.
Documents/Files needed:
 Audited Financial Statement of Investee
 Management Assertion: Classification
Audit Objective:
 Income statement related items are appropriately recorded in the proper accounts in the statement
of comprehensive income.
Audit Procedures:
 Reviewing appropriateness of presentation and adequacy of disclosure of investments including
related account.
 Discuss with the entity the process used by management in classifying its investments.
Documents/Files needed:
 Audited Financial Statement of Investee

 Management Assertion: Presentation & Disclosure

Audit Objectives:
 Investments and related investment income accounts are properly classified, described, and
disclosed in the financial statements, including notes, in accordance with the applicable PFRS.
 All investment pledged or other security interests are adequately and properly disclosed.
Audit Procedures:
 Reviewing board of directors’ (BOD) minutes of meetings, shareholders meeting, committee
meetings and agreements and confirmation replies.
o Gather evidence regarding authorization, liens, and pledges.
o Disclose unrecorded purchases and sales of securities or other financial instruments.
 Reviewing appropriateness of presentation and adequacy of disclosure of investments including
related account.
o Determine the applicable PFRS in the proper classification and presentation of investments in
the statement of financial position and necessary disclosures.
o Determine that the related income statement accounts are correctly recorded in profit or loss or
as a component of other comprehensive income.
Documents/Files needed:
 Minutes of BOD meeting
 Audited Financial Statement of Investee
 Other evidence to determine current value of investments
 Management Representations
The auditor should obtain from the management of the entity a written statement regarding classification and
valuation of investments for Balance Sheet purposes. While such a representation letter serves as a formal
acknowledgment of the management's responsibilities with regard to investments, it does not relieve the auditor of his
responsibility for performing audit procedures to obtain sufficient appropriate audit evidence to form the basis for the
expression of his opinion on the financial information. It may be mentioned that the representations made in the letter
can alternatively be included in the composite representation letter usually issued by the management to the auditor.
 Documentation
The auditor should maintain adequate working papers regarding audit of investments. Among others, he
should maintain on his audit file, the management representation letter concerning investments.
 SITUATIONAL PROBLEMS

SITUATIONAL PROBLEM NO. 1 – ABC Ltd. .

Outline of the case:
ABC Ltd. has a material investment in XYZ Co., a foreign subsidiary whose net worth has been
fully/substantially eroded. The management has not provided any evidence of how they valued the investment to
conclude on the carrying amount. The auditor was also unable to obtain sufficient appropriate audit evidence about
the carrying amount of ABC Ltd.’s investment in XYZ Co. as at 31st March 20XX, because they were denied access
to the financial information, management & the auditors of XYZ Co., due to the collision between the two entities.
Discussions on the case:
There is an issue on the valuation assertion of the investments of the ABC Ltd., since there is uncertainty as
to how the management had come up with the carrying amount of its investments in the XYZ Co. Assertions about
the valuation of investments address whether the amounts reported in the financial statements through
measurement or disclosure were determined in conformity with generally accepted accounting principles (GAAP),
to which in this case, it cannot be determined since there are limitations on the data that the auditor can access.
Tests of valuation assertions should be designed according to the valuation method used for the measurement
or disclosure. The GAAP may require that an instrument be valued based on cost, the investee's financial results,
or fair value. Also, the GAAP for securities may vary depending on the type of security, the nature of the transaction,
management's objectives related to the security, and the type of entity.
What the auditor may do is to seek the financial statements readily available in the website of the Securities
and Exchange Commission (SEC), so that he may study the financial status of the XYZ Co. to see if the
investments of the ABC Ltd. are properly valued. He may also see the quotations in the active market for the like
investments as reference.

SITUATIONAL PROBLEM NO. 2 – PMO Co. .

Outline of the case:
Justin, the investment custodian of PMO Co., stole more than $2 Million from the company to finance his
gambling addiction, as well as to pay for his rent and his car. To cover up for his theft, he manipulated the statement
of financial position of the company by intentionally overstating its assets by increasing the investments presented.
Discussions on the case:
There is an issue on the existence and rights and obligations assertions over the investments as there are
investments that may not exist, or could have existed but the company may not have the rights over, as at year-
end due to the intentional overstatement made by the investment custodian to cover up for his theft. The existence
assertion addresses whether the investments reported in the financial statements through recognition or disclosure
exist at the date of the statement of financial position.
Since he made these overstatements, he may present files to support his claims, so the auditor may perform
measures to confirm his claims.
He may choose among the following procedures to ascertain the existence assertion such as doing a physical
inspection of the investment contracts and vouching these, doing a bank confirmation for investments held as
mortgage or safe custody, doing a confirmation with the issuer of the securities and ask if there are indeed
investments made by the company and if how much is the investment, or by doing a confirmation of the settled,
as well as the unsettled, transactions with the broker-dealer or its counterparty.
Also, it is always a good idea to check the minutes of the corporate meetings to confirm the authorization to
purchase and sell each investment, as these matters are always written in the minutes.

SITUATIONAL PROBLEM NO. 3 – YG Inc. .

Outline of the case:

Sandy is auditing the financial statements of YG Inc. for the year ended 20x8. As a result of her audit, she
found out that there are some investments and investment-related income accounts that were omitted from the
general ledger by the investment custodian.
She has confirmed that not all investment-related interest and dividend income has hit the income statement
as revenue and that some investment income hitting the income statement can’t be matched to an investment,
which means that not all investments are reflecting on the balance sheet.
Discussions on the case:
The issue lies in the completeness and accuracy assertions the company had over its recorded investments.
Completeness assertion addresses whether all of the entity's derivatives and securities are reported in the financial
statements through recognition or disclosure. They also address whether all investment-related transactions are
reported in the financial statements as a part of earnings, other comprehensive income, or cash flows or through
disclosure.
To test a client’s investments, auditors mostly look at how a security is categorized and whether it’s presented
on the client’s income statement or balance sheet. The accuracy assertion states that all information disclosed are
in the correct amounts, and reflect their proper values. Since there are some values that cannot be matched to any
investment account, there is an issue on the company’s assertion on the accuracy of its recorded investments.
The auditor may opt to calculate expected income with reference to supporting documents and compare them
with the recorded income. She may also obtain or prepare a lead schedule of investments, and trace last year’s
balances with last year’s working papers, check arithmetical accuracy of the schedule and trace totals of the
schedule to general ledger control account and balance sheet. Comparing previous and current account detail may
also help to identify the assets that have been removed from the accounts and testing those items further to
determine that the criteria for sales treatment have been met. She may also do a confirmation with the issuers of
the investment items, to know if there really an investment that exists and if there is, how much is it.
She also may opt to do an inspection of the entries in investments and related income accounts. She may
check additions and sales, inspect board of directors minutes for authorization of sales and purchases of
investments, or re-compute gain or loss on sale of investments, if any.

SITUATIONAL PROBLEM NO. 4 – WorldCom .

Outline of the case:
WorldCom recorded operating expenses as investments. Apparently, the company felt that office pens,
pencils, and paper were an investment in the future of the company and, therefore, capitalized the cost of these
items over a number of years. In total, $3.8 billion worth of normal operating expenses, which should all be recorded
as expenses for the fiscal year in which they were incurred, were treated as investments and were recorded over
a number of years. This little accounting trick grossly exaggerated profits for the year the expenses were incurred.
Discussions on the case:
Assertions about presentation and disclosure address whether the classification, description, and disclosure
of the investments in the entity's financial statements are in conformity with generally accepted accounting
principles. The issue here is that the company has recorded the supposedly operating expenses as investments,
which will result into the overstatement of its reported investment.
In evaluating the adequacy of presentation and disclosure, the auditor should consider the form, arrangement,
and content of the financial statements and their notes, including, for example, the terminology used, the amount
of detail given, the classification of items in the statements, and the bases of amounts reported.
What the auditor may opt to do is to check the disclosures written in the notes to the financial statements of
the company and see how the company has presented the investments, as the breakdown for the investments are
usually disclosed in there.

SITUATIONAL PROBLEM NO. 5 – SMV Company .

Outline of the case:
The financial statements of SMV Co. for the year 20xA has been audited by Russel. During the course of his
audit, he found out that some of the investments of the company are improperly valued due to their complexity and
management’s lack of accounting knowledge in recording and classifying them. The auditor is thinking of hiring an
investment specialist to value these investments.

Discussions on the case:

What the auditor may opt to do instead of hiring an investment specialist to classify and value these
investments is to rather check all of the documents and information available, and re-compute for the amount of
the investment, as hiring one can just add to the cost of the company. If the amount computed reconciles with the
amount recorded, it means that the investments are complete.
For the valuation assertion to be addressed, the auditor may refer to the quotations in the market to see how
these investments are currently valued.
 PRACTICAL PROBLEMS

PRACTICAL PROBLEM NO. 1 – Bato Company .

You were engaged by Bato Company to audit its financial statements for the year 2019. During the course of your
audit, you noted that the following trading securities were properly reported as current assets at December 31, 2018:

Cost Market
France Corporation, 5,000 shares,
convertible preferred shares P 450,000.00 P 487,500.00
Ces, Inc., 30,000 shares of common stock 675,000.00 742,500.00
Coo Co., 10,000 shares of common stock 618,750.00 450,000.00
P1,743,750.00 P1,680,000.00

The following sale and conversion transactions transpired during 2019:

Mar. 1 Sold 12,500 shares of Ces for P33.75 per share.

April 1 Sold 2,500 shares of Coo for P45.00 per share.

Sept. 21 Converted 2,500 shares of France’s preferred stock into 7,500

shares of France’s common stock, when the market price was
P78.75 per share for the preferred stock and P47.25 per share for
the common stock.

The following 2019 dividend information pertains to stocks owned by Bato:

Jan. 2 Coo issued a 10% stock dividend when the market price of Coo’s
common stock was P49.50 per share.

March 31 and France paid dividends of P2.50 per share on its preferred stock, to
Sept. 30 stockholders of record on March 15 and September 15, respectively.
France did not pay dividends on its common stock during 2006.

July 1 Ces paid a P2.25 per share dividend on its common stock.

Market prices per share of the securities were as follows:

12/31/2019 12/31/2018
France Corp., preferred 92.25 97.50
France Corp., common 42.75 38.25
Ces, Inc., common 22.50 24.75
Coo Co., common 40.50 45.00
All of the foregoing stocks are listed in the Philippine Stock Exchange. Declines in market value from cost would not be
considered permanent.

Questions:
1. How much is the gain or loss on conversion of 2,500 France preferred stock into 15,000 common stock?
2. How much should be reported as unrealized gain on trading securities in the company’s income statement for the
year 2019?

Suggested Solutions:

Fair value of preferred stock (2,500 shares x P78.75) P196,875.00

Less: CV of shares converted (P487,500 x 2.5/5) (243,750.00)
1.) Loss on conversion of 2,500 France preferred shares P 46,875.00
 Trading securities, 1/1/19 P1,680,000.00
Less: CV of Ces shares sold (309,375.00)
CV of Coo shares sold (102,273.00)
CV of France preferred shares converted (243,750.00)
Add: Cost of 7,500 France common shares received 196,875.00
Trading securities, 12/31/19 before mark-to-market P1,221,477.00
Less: Fair value of trading securities, 12/31/19* (1,289,250.00)
2.) Unrealized gain on trading securities P 67,773.00

France Corp., preferred [(5,000 - 2,500) x P92.25] P 230,625.00

France Corp. – Common (7,500 x P42.75) 320,625.00
Ces, Inc., common [(30,000 - 12,500) x P22.50] 393,750.00
Coo Co., common {[(10,000 x 1.1) - 2,500] x P40.50} 344,250.00
*Fair value of trading securities, 12/31/19 P1,289,250.00

PRACTICAL PROBLEM NO. 2 – Leo Corporation .

On June 1, 2019, Leo Corporation purchased as a long term investment 4,000 of the P1,000 face value, 8% bonds of
Angela Corporation. The bonds were purchased to yield 10% interest. Interest is payable semi-annually on December
1 and June 1. The bonds mature on June 1, 2025.Leo uses the effective interest method of amortization. On November
1, 2020, Leo sold the bonds for a total consideration of P3,925,000. Leo intended to hold these bonds until they matured,
so year-to-year market fluctuations were ignored in accounting for bonds.
Questions:
1. The carrying value of the investment in bonds as of December 31, 2019
2. The interest income for the year 2020
3. The gain on sale of investment in bonds on November 1, 2020
4. The carrying value of the investment in bonds as of November 1, 2020

Suggested Solutions:

Carrying value, 6/1/19 P3,645,328.00

Add: Discount amortization, 6/1/19 to 11/30/19:
Effective interest (P3,645,468 x 10% x 6/12) P182,266.00
Nominal interest (P4,000,000 x 8% x 6/12) (160,000.00) 22,266.00
Carrying value, 12/1/19 P3,667,594.00

PV of principal (P4,000,000 x 0.5568) P2,227,200.00

PV of interest [(P4,000,000 x 4%) x 8.8633] 1,418,128.00
Purchase price P3,645,328.00
Carrying value, 12/1/19 P3,667,594.00
Add: Discount amortization, 12/1/19 to
12/31/19:
Effective interest (P3,667,594 x 10% x P30,563.00
1/12)
Nominal interest (P4,000,000 x 8% x 1/12) (26,667.00) 3,896.00
1.) Carrying value, 12/31/19 P3,671,490.00

Jan. 1 to May 31 (P3,667,594 x 10% x 5/12) P152,816.00

June 1 to Nov. 1 (P3,690,974 x 10% x 5/12)
b
153,791.00
2.) Total interest income for 2020 P306,620.00

Carrying value, 12/1/2019 P3,667,594.00

Add: Discount amortization, 12/1/19 to 5/31/20
Effective interest (P3,667,594 x 10% x 6/12) P183,380.00
Nominal interest (P4,000,000 x 8% x 6/12) (160,000.00) 23,380.00
Carrying value, 6/1/20 P3,690,974.00
 Total proceeds P3,925,000.00
Less: Accrued interest (P4,000,000 x 8% x 5/12) (133,333.00)
Sales proceeds 3,791,667.00
Less: Carrying value, 11/1/06 (see below) ( 3,711,432.00)
3.) Gain on sale on investment in bonds P 80,235.00
Carrying value, 6/1/20 P3,690,974.00
Add: Discount amortization, 6/1/20 to 11/1/20
Effective interest (P3,690,974 x 10% x 5/12) P153,791.00
Nominal interest (P4,000,000 x 8% x 5/12) (133,333.00) 20,468.00
4.) Carrying value, 11/1/20 P3,711,432.00

PRACTICAL PROBLEM NO. 3 – MILLAN Inc. .

Your audit of the MILLAN Inc., revealed the following transactions on its “Financial Asset at Fair Market Value through
profit or loss” account:

Date Particulars Debit Credit

01/15/19 Purchased 40,000 shares of ABS at P21.50 per share and P1, 120, 000.00
20,000 shares of CBN at P13.00 per share. Amount
includes transaction costs amounting to P1.50 per share.

06/30/19 Purchased 1,000 of GMA Inc.’s 12%, 4-year, P1,000 face 1, 044, 258.00
value bonds dated January 1, 2017 and pays annual
interest every December 31. Prevailing interest on the
same date at 14%. Amount includes accrued interest and
transaction costs amounting to P10 per bond.

07/01/19 Received 3,000 shares of CBN as stock dividends, 36, 000.00

prevailing market price at P12 per share

08/05/19 Sold 15, 000 of ABS shares at P15 per share and 5,000 of P290, 000.00
CBN at 13 per share

12/01/19 Sold half of the GMA bonds at 98 plus accrued interest. 515,000.00

12/30/19 Received P80,000 in lieu of 5, 000 stock dividends from its 80,000.00
ABS shares
12/31/19 BALANCE P1, 315, 258.00
Additional information:
On December 31, 2019, the market values of the ABS and CBN shares were at P18 and P15 per share, respectively.
Moreover, the GMA bonds had a prevailing interest on the same date at 11%.

Questions:
1. How much is the total realized gain/loss on disposal of bonds on December 1?
2. How much should be the unrealized holding gain to be recorded in the income statement for the year 2019?
3. How much investment in trading securities should be reported in the statement of financial position?

Suggested Solutions:

Proceeds from sale plus accrued interest P545,000.00

(500,000*98%) + (500,000*12%*11/12)
Less: Carrying value
Total cash consideration paid P1,044,258.00
Less: Accrued interest (1M*12*6/12) (60,000.00)
Transaction cost (10,000.00) 974,258.00
Pro-rata: Portion sold 50% (487,129.00)
Accrued interest(P500,000*12%*11/12) (55,000.00)
1.) Realized gain on sale P2,871.00
 FMV 12/31/19 CV
ABS (25,000sh*P18) P450,000.00 P416,667.00 (a)
CBN (18,000sh*P15) 270,000.00 180,000.00 (c)
GMA at 11% yield rate
Principal (P500,000*0.9009009)
P450,450.00
Add: Interest (P60,000*0.9009009)
54,054.00 504,505,00 487,129.00
Total P1,224,505.00 1,083,796.00
2.) Unrealized holding gain- P&L P140,709.00
***

Initial cost ABS (40,000*20) P800,000.00

CV of 15,000 shares sold (300,000.00)
Effect of cash div. in lieu of stock div. (83,333.00) (b)
(5,000shares x P16.67**)
CV of ABS, 12/31/19 P416,667.00 (a)
*
CV of ABS before cash div. in lieu of stock div. P500,000.00
Divide by: #no. of shares (25,000+5,000) 30,000shares
CV of ABS after cash div. in lieu of stock div. P16.67**
Multiply by: Remaining shares 25,000shares
CV, 12/31/19 P416, 667.00
*
(c) Initial cost CBN (20,000*11.50) P230,000.00
CV of shares sold on 8/5 (50,000.00)
CV CBN 12/31/19 P180,000.00 (c)

FMV 12/31/19
ABS (25,000sh*P18) P450,000.00
CBN (18,000sh*P15) 270,000.00
GMA at 11% yield rate
Principal (P500,000*0.9009009)
450,450.00
Interest (P60,000*0.9009009)
54,054.00 504,505.00
3.) Total P1,224,505.00

PRACTICAL PROBLEM NO. 4 – Corgi Corporation .

Corgi Corp. Has the following non-trading securities on December 31, 2019:

Security # of shares Cost Fair Value (12/31/2018)

ABC 9,000 P 441,000.00 P 46.00 per share
DEF 30,000 1,080,000.00 35.00 per share
GHI 2,400 360,000.00 154.00 per share

Audit notes:

a. The above securities were all bought in 2018. on the initial recognition, Corgi made an irrevocable election
to present gain/loss on the said securities to other comprehensive income.
b. On April 1, 2019, the company sold all of the ABC ordinary shares for P65 per share.
 c. On May 1, 2019, the company purchased 4,200 ordinary shares of JKL Corp. At P75 per share. The
company incurred brokers’ fees amounting to P10,400.
d. The following additional information in 2019 were deemed relevant:

Dividends Declared Reported Net Income Fair value of shares

ABC ordinary shares P2/share P 900,000.00 P 62.00
DEF ordinary shares P1.5/share 1,300,000.00 38.00
GHI preference shares P1/share 750,000.00 145.00
JKL ordinary shares P0.75/share 450,000.00 77.00

Questions:
1. What is the realized gain on sale of ABC ordinary shares in 2019?
2. What is the unrealized holding gain/loss to be reported in the stockholder’s equity portion of the 2019 statement
of financial position?
Suggested Solutions:

Proceeds from sale (9,000*65 P585,000.00

Less: Original cost 441,000.00
1.) Realized gain on sale 144,000.00

FMV (12/19) Cost

DEf Corp. shares P1,140,000.00 P1,080,000.00
GHI Corp. shares 348,000.00 360,000.00
JKL shares 323,400.00 325,400.00
Total P1,811,400.00 P1,734,600.00
2.) Unrealized holding gain SHE P76,800.00

PRACTICAL PROBLEM NO. 5 – BARBIE Corporation .

BARBIE Corporation acquired a building on January 1, 2017.The acquisition cost is P5,000,000 payable at the rate of
P1M at the beginning of each year starting on January 1, 2017. The company paid option money totaling P400,000,
P85,221 of which is attributed to real properties not acquired. The company also paid property taxes in arrears.

The company also paid property taxes in arrears as of January 1, 2017 at P147,872. The prevailing market rate of
interest for transaction is 12%. The building is estimated to have useful life of 25 years.
The property was appraised at the end of each year as follows:

Year 2017 2018 2019

Appraised values P4,600,000.00 P4,100,000.00 P4,300,000.00

Questions:

1. What is the carrying value of the property as of December 31, 2019, assuming that the building is an investment
property under the cost method?
2. How much recovery gain should be recognized from the asset in the 2019 profit or loss?

Suggested Solutions:

Recoverable Amount 12/31/18 P4,100,000.00

Less: Depreciation 2019: 4.1M/23 years (178,261.00)
Carrying Value, before impairment recovery 3,921,739.00
1.) Carrying Value had there been no impairment (4.5M*22/25) P3,960,000.00
2.) Impairment recovery- P&L P38,261.00