Chapter 9 – Audit of Investments

APPLIED AUDITING

EXERCISE 1 – EQUITY SECURITIES: HELD-FOR-TRADING (FVTPL) (r17c4P1)

Presented below are unrelated situations.

1. LITSON Company buys and sells securities expecting to earn profits on short-term differences in
price. During 2016, Litson Company purchased the following trading securities:

SECURITY COST FAIR VALUE AT 12/31/16

A P 195,000 P 225,000
B 300,000 162,000
C 660,000 678,000

Before any adjustments related to these trading securities, Litson Company trading security had
net income of P900,000.

What is Litson’s net income after making any necessary trading security adjustments?
a. P900,000
b. P810,000
c. P762,000
d. P948,000

What would Litson’s net income be if the fair value of security B were P285,000?

a. P867,000
b. P900,000
c. P885,000
d. P933,000

2. KEYNEDE Co.’s portfolio of trading securities includes the following on December 31, 2015:
Cost Fair Value
15,000 ordinary shares of Thowmas Co. P 477,000 P 417,000
30,000 ordinary shares of Ghundarah Co. 546,000 570,000
P 1,023,000 P 987,000
All of the above securities have been purchased in 2015. In 2016, KEYNEDE Co. completed the
following securities transactions:

Mar. 1 – Sold 15,000 shares of Thowmas Co. ordinary shares at P31, less brokerage commission
of P4,500.

April 1 – Bought 1,800 ordinary shares of Housteen, Inc. at P45 plus commission, taxes, and
other transaction costs of P1,650.

The KEYNEDE Co. portfolio of trading securities appeared as follows on December 31, 2016:
Cost Fair Value
30,000 ordinary shares of Ghundarah Co. P 546,000 P 580,000 1
1,800 ordinary shares of Housteen, Inc. 82,650 75,000 2

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 Chapter 9 – Audit of Investments
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Fine print 1 – Net of P6,500 estimated transaction costs that would be incurred on the sale of
the securities.
Fine print 2 – Net of P1,500 estimated transaction costs that would be increased on the sale of
the securities.

What amount of unrealized gain on these securities should be reported in the 2016 income
statement?
a. P12,000
b. P10,350
c. P26,350
d. P28,000

What is the gain or loss on the sale of Thowmas Co. ordinary shares on March 01, 2016?

a. P48,000
b. P9,000
c. P43,500
d. P4,500

What amount should be reported as trading securities in KEYNEDE’s statement of financial

position as at December 31, 2016?

a. P655,000
b. P663,000
c. P628,650
d. P636,650

EXERCISE 2 – EQUITY SECURITIES: FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (FVOCI)
(r17c4P3)

During the course of your audit of the financial statements of FISHING CORPORATION for the year ended
December 31, 2016, you found a new account, “Investment in Equity Securities”. Your audit revealed
that during 2016, Fishing began a program of investments, and all investment-related transactions were
entered in this account. Your analysis of this account for 2016 follows:

Fishing Corporation
Analysis of Investment in Equity Securities
For the year ended December 31, 2016

Debit Credit
(a) Salmon Company Ordinary Shares
Feb 14 – Purchased 36,000 shares @ P55 per share P 1,980,000
Jul 26 – Received 3,600 ordinary shares of Salmon
Company as a stock dividend. (Memorandum
Entry in general ledger)
Sep 28 – Sold 3,600 ordinary shares of Salmon Company
received July 26 @ P70 per share P 252,000

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 Chapter 9 – Audit of Investments
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(b) Tamban, Inc. Ordinary Shares

Apr 30 – purchased 180,000 shares @ P40 per share P 7,200,000
Oct 28 – Received dividend of P1.20 per share P 216,000

Additional Information:
a. The fair value for each security as of the 2016 date of each transaction follow:

Security Feb. 14 Apr. 30 Jul. 26 Sep. 28 Dec. 31

Salmon Company P55 P62 P70 P74
Tamban Inc. P40 32
Fishing Corp. 25 28 30 33 35
b. All of the investments of Fishing Company are nominal in respect to percentage of ownership
(5% or less)
c. Each investment is considered by Fishing Corporation to be non-trading. Fishing Corporation 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 the income
statement of Fishing Corporation for the year ended December 31, 2016?
a. P72,000
b. P18,000
c. P54,000
d. P-0-
2. The receipt of 3,600 stock dividend would cause the investment balance to increase by
a. P223,200
b. P252,000
c. P198,000
d. P-0-
3. What entry is necessary to correct the recording of the cash dividend received from Tamban,
Inc.?
a. Cash 216,000
Dividend Income 216,000
b. Cash 216,000
Investment In Equity Securities 216,000
c. Investment In Equity Securities 216,000
Dividend Income 216,000
d. Dividend Income 216,000
Investment In Equity Securities 216,000
4. What amount of unrealized gain or loss should be reported in the 2016 statement of
comprehensive income as component of other comprehensive income?
a. P1,440,000 gain
b. P1,440,000 loss
c. P576,000 gain

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 Chapter 9 – Audit of Investments
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d. P576,000 loss
5. What amount should be reported as investment in equity securities in the statement of financial
position on December 31, 2016?
a. P9,000,000
b. P8,424,000
c. P7,560,000
d. P9,864,000

EXERCISE 3 – DEBT SECURITIES: FAIR VALUE THORUGH PROFIT OR LOSS (FVTPL) (v10c21P1)
Raiza Company acquired a financial asset at its market value of P3,200,000. Broker fees of P200,000
were incurred in relation to the purchase. At what amount should the financial asset initially be
recognized respectively if it is classified as at “fair value through profit or loss”, or as at “fair value
through other comprehensive income”?
a. P3,400,000 and P3,200,000
b. P3,200,000 and P3,200,000
c. P3,200,000 and P3,400,000
d. P3,400,000 and P3,400,000

EXERCISE 4 – DEBT SECURITIES: FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (r17c4P5)
PETMALU Company holds debt securities within a business model whose objective is achieved both by
collecting contractual cash flows and selling the debt securities. The contractual cash flows are solely
payments of principal and interest on specified dates.

The following amortization schedule relates to its 5-year, P1,000,000, 7% bonds purchased on December
31, 2014, for P1,086,565. The bonds were purchased to yield 5% interest.

Date Interest Interest Premium Amortized

Received Income Amortization Cost
12.31.14 P 1,086,565
12.31.15 P 70,000 P 54,328 P 15,672 1,070,893
12.31.16 70,000 53,545 16,455 1,054,438
12.31.17 70,000 52,722 17,278 1,037,160
12.31.18 70,000 51,858 18,142 1,019,018
12.31.19 70,000 50,982* 19,018 1,000,000
*adjusted due to rounding-off

The following schedule presents the amortized cost and fair value of the bonds at year-end.
Fair Value Amortized Cost
December 31, 2015 P 1,065,000 P 1,070,893
December 31, 2016 1,075,000 1,054,438
December 31, 2017 1,056,500 1,037,160
December 31, 2018 1,030,000 1,019,018
December 31, 2019 1,000,000 1,000,000

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 Chapter 9 – Audit of Investments
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1. What amount should be reported as investment in bonds in the statement of financial position
of PETMALU Company on December 31, 2016?
a. P1,086,565
b. P1,054,438
c. P1,075,000
d. P1,065,000
2. What amount of unrealized gain should be shown as component of other comprehensive
income in the 2016 statement of comprehensive income?
a. P26,455
b. P20,562
c. P10,000
d. P16,455
3. What amount of unrealized loss should be shown as component of other comprehensive
income in the 2017 statement of comprehensive income?
a. P14,393
b. P18,500
c. P19,340
d. P1,222
4. What amount of unrealized loss should be shown as component of other comprehensive
income in the 2018 statement of comprehensive income?
a. P8,350
b. P26,500
c. P9,792
d. P10,982
5. What amount of unrealized gain should be shown in the 2018 statement of changes in equity?
a. P26,455
b. P16,883
c. P25,233
d. P10,990

EXERCISE 5 – DEBT SECURITIES: FINANCIAL ASSETS AT AMORTIZED COST (r17c4P9)

On January 01, 2016, RAMBUTAN 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 semi-annually, on June 30 and
December 31. The prevailing market interest rate on these debt securities is 7% compounded semi-
annually.
1. The carrying value of debt securities on December 31, 2016, at amortized cost using the
effective interest rate method is…
a. P771,840 c. P765,540
b. P759,016 d. P600,000
2. The interest income to be reported for 2016 using the effective interest rate method is…
a. P66,524 c. P60,000
b. P6,524 d. P53,476

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 Chapter 9 – Audit of Investments
APPLIED AUDITING

EXERCISE 6 – INVESTMENT IN ASSOCIATES (sn10E1)

On January 01, 2016, MATSALA Company acquired 10 per cent of the equity of entities B, C, and D for
P10,000, P15,000, and P28,000 respectively. MATSALA Company has significant influence over entity B.
Transaction costs of 1 per cent of the purchase price of the shares were incurred by MATSALA Company.

MATSALA Company appropriately classified its investment in C and D as FVTPL and FVOCI securities
respectively.

On January 02, 2016 entity B declared and paid dividends of P1,000 for the year ended 2015. On December
31, 2016, entity C declared a dividend of P8,000 for the year ended 2016. The dividend declared by entity
C was paid in 2017.

For the year ended December 31, 2016, entities B and C recognized a profit of respectively, P5,000 and
P18,000. However, entity D recognized a loss of P20,000 for that year.

Published price quotations do not exist for the shares of entities B, C and D. Using the appropriate
valuation techniques, MATSALA Company determined the fair value of its investments in entities B, C and
D at 31 December 2016 as P13,000, P29,000, and P15,000 respectively. Costs to sell are estimated at 5
per cent of the fair value of the investments.

MATSALA Company has no subsidiaries and therefore does not produce consolidated financial
statements.

1. What is the carrying value of investment in associate at December 31, 2016?

a. P10,000
b. P10,400
c. P10,500
d. P10,600
2. How much dividend income should be recognized in 2016?
a. P800
b. P900
c. P100
d. P-0-
3. What is the effect on the 2016 profit of the year-end market value adjustments of the
investment?
a. P13,850 increase
b. P1,000 increase
c. P14,000 increase
d. P1,800 increase

EXERCISE 7 – INVESTMENT PROPERTY (sn10E10)

In 2016, SARAHAH Company incurred (and paid) the following expenditures in acquiring property
consisting of ten identical freehold detached building each with separate legal title including the land on
which it is built:

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 Chapter 9 – Audit of Investments
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Date Amount Additional Information

1 January P200,000,000 20 per cent of the price is attributable to the land
1 January 20,000,000 Non-refundable transfer taxes (not included in the P200 million
purchase price
1 January 1,000,000 Legal costs directly attributable to the acquisition
1 January 10,000 Reimbursing the previous owner for prepaying the non-refundable
local government property taxes for the six-month period ending 30
June 2016
1 January 500,000 Advertising campaign to attract tenants
2 January 200,000 Operating function to celebrate new rental business that attracted
extensive coverage by the local press
30 June 20,000 Non-refundable annual local government property taxes for the year
ending 30 June 2017
Throughout 120,000 Day-to-day repairs and maintenance, including the salary and other
2016 costs of the administration and maintenance staff. These costs are
attributable equally to each of the ten units.
SARAHAH Company uses one of the ten units to accommodate its administration and maintenance staff.
The other nine units are rented to independent third parties under non-cancellable operating leases.
Before occupying the premises, tenants pay SARAHAH Company a refundable deposit equal to two
months’ rentals. Deposits held by SARAHAH Company at 31 December 2016 totaled P270,000. Rentals
received in the year ended 31 December 2016 totaled P1,550,000, of which P50,000 relates to January
2017.

At December 31, 2016, SARAHAH Company made the following assessments about the units:
• Useful life of the buildings: 50 years from the date of acquisition
• The entity will consume the buildings’ future economic benefits evenly over 50 years from the
date of acquisition
1. Assume that the cost method is used and that the residual value is immaterial. What is the
carrying value of the investment property at December 31, 2016?
a. P198,900,000
b. P216,580,000
c. P195,717,600
d. P194,922,000
2. What is the carrying value of the Property, Plant and Equipment at December 31, 2016?
a. P22,100,000
b. P24,064,000
c. P21,658,000
d. P21,746,400
3. Assume that the fair value method is used and that the fair value of investment property at the
end of 2016 is P25,000,000 each. How much should be recognized in Profit and Loss as market
adjustment?
a. P26,100,000
b. P29,000,000
c. P30,078,000
d. P-0-

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