Audit of Investments Reviewer

IV.
INVESTMENTS Lyre Company p. 431

Liton Company p. 294 Ukelele Corporation p. 435
Magnolia Corp. p. 297 Snare Drum Company p. 440
Fishing Corporation p. 301 Bugle Company p. 442
Angler Company p. 304 Alphorn Company p. 446
Coloong Co. p. 306 Bagpipe Manufacturing p. 450
Bunzoo Company p. 309 Company
Mayon Corporation p. 311 Cornet Company p. 457
Bukidnon Corp. p. 316 Hornpipe Company p. 461
Guava Corporation p. 318 Vibraharp Company p. 465
Rambutan Corporation p. 321 Timpani Trucking p. 468
Chico Company p. 322 Company
Sineguelas Company p. 324 Viele Company p. 471
Strawberry Company p. 325 Kettledrum Company p. 472
Elagro Company p. 327 Bells Company p. 474
Cherry Inc. p. 329 Khaen Co. p. 475
Berries Company p. 330 Clappers Inc. p. 478
Durian Corp. p. 331 Angklung Company p. 481
Tomato Corp. p. 332 Kazoo Company p. 482
Cucumber Corp. p. 335 Koto Inc. p. 484
Cabbage Company p. 337 Sahnai Mining Company p. 486
Lettuce Co. p. 340 Mina Mining Co. p. 490
Kangkong Company p. 342
Lovely Inc. p. 344

V. PPE
Bradpit Inc. / Impo p. 353
Company / Hagai
Company
French Horn Company / p. 358
Trumpet Inc. / Tuba Co.
/ Flute Corp.
Saxophone Company p. 361
Bassoon Co. p. 364
Cello Corp. p. 367
Guitar Company p. 369
Piano Company p. 371
Drums Corp. p. 374
Accordion Company p. 378
Harpsichord Inc. p. 380
Cymbals Inc. p. 382
Banjo Company p. 386
Violin Co. p. 388
Organ Corp. p. 391
Carillon Company p. 393
Bagnet Inc. p. 397
Gong Company p. 398
Maracas Company p. 400
Viola Corporation p. 403
Xylophone Company p. 406
Cabara Company p. 407
Sheng Company p. 410
Mandolin Corp. p. 412
Sitar Company p. 414
Fiddle Company p. 417
Harp Company p. 420
Kithara Corp. p. 422
Cornette Manufacturing p. 425
Company
Auditing Assurance Concepts II
Audit of Investments
Drill 1: Fishing DIY 1: Cabbage

Drill 2: Coloong DIY 2: Bunzoo
Drill 3: Rambutan DIY 3: Mayon
Drill 4: Lovely DIY 4: Cucumber
Drill:
Problem No. 1 – Non-trading Equity Securities: Fair Value Changes in Other Comprehensive
Income (OCI)
During the course of your audit of the financial statements of FISHING CORPORATION for the year
ended December 31, 2018, you found a new account, “Investment in Equity Securities.” Your audit
revealed that during 2018, Fishing began a program of investments, and all investment-related
transactions were entered in this account. Your analysis of this account for 2018 follows:
Fishing Corporation
Analysis of Investment in Equity Securities
For the Year Ended December 31, 2018
Debit Credit
(a)
Salmon Company Ordinary Shares
Feb. 14 Purchased 36,000 shares @ P55 per P1,980,000
share
July 26 Received 3,600 ordinary shares of
Salmon Company as a stock dividend.
(Memorandum entry in general ledger)
Sept. 28 Sold the 3,600 ordinary shares of Salmon P252,000
Company received July 26 @P70 per
share.
(b)
Debit Credit
Tamban, Inc. Ordinary Shares
April 30 Purchased 180,000 shares @ P40 per P7,200,000
share
Oct. 28 Received dividend of P 1.20 per share P216,000
Additional information:
a. The fair value for each security as of the 2018 date of each transaction follow:
Security Feb. 14 April 30 July 26 Sept. 28 Dec. 31
Salmon Comp. P55 P62 P70 P74
Tamban, Inc. P40 32
Fishing Corp. 25 28 30 33 35
b. All of the investments 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 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, 2018?
a. P72,000
b. P18,000
c. P54,000
d. P0
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. P0
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 2018 statement of
comprehensive income as component of other comprehensive income?
a. P1,440,000 gain
b. P1,440,000 loss
c. P576,000 gain
d. P576,000 loss
5. What amount should be reported as investment in equity securities in the statement of financial
position on December 31, 2018?
a. P9,000,000
b. P8,424,000
c. P7,560,000
d. P9,864,000
Solutions:
1. Gain on sale of Salmon ordinary shares shall be recognized in retained earnings.
2. This will not affect the cost of investment.
3. Investment in equity securities 216,000

Dividend income (1.20 x 180,000 shares) 216,000
4. Unrealized loss (9M – 8,424,000) = 576,000

INVESTMENT QUANTITY COST FV
Salmon Company 36,000 shares 1,800,000 2,664,000 (74 x

36k shares)
Tamban, Inc. 180,000 7,200,000 5,760,000 (32 x
180k shares)
Total 9,000,000 8,424,000
5. Investment in equity securities at FV = 8,424,000

Problem No. 2 – Investments in bonds at FVOCI (Fair Value through Other Comprehensive
Income)
COLOONG CO. 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, 2016 for P1,086,565. The bonds were purchased to yield 5% interest.
Date Interest Interest income Premium Amortized cost

received amortization
12.31.16 P1,086,565
12.31.17 P70,000 P54,328 P15,672 1,070,893
12.31.18 70,000 53,545 16,455 1,054,438
12.31.19 70,000 52,722 17,278 1,037,160
12.31.20 70,000 51,858 18,142 1,019,018
12.31.21 70,000 50,982* 19,018 1,000,000
*adjustment due to rounding
The following schedule presents the amortized cost and fair value of the bonds at year-end.
Fair Value Amortized Cost
December 31, 2017 P1,065,000 P1,070,893
December 31, 2018 1,075,000 1,054,438
December 31, 2019 1,056,500 1,037,160
December 31, 2020 1,030,000 1,019,018
December 31, 2021 1,000,000 1,000,000
1. What amount should be reported as investment in bonds in the statement of financial position
of Caloong Co. on December 31, 2018?
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 2018 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
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
a. P8,350
b. P26,500
c. P9,792
d. P10,982
5. What amount of unrealized gain should be shown in the 2020 statement of change in equity?
a. P26,455
b. P16,883
c. P25,233
d. P10,990
Solution:
1. Investments in bonds – FVOCI 1,075,000
2. FV, Dec. 31, 2018 1,075,000
Carrying Value, Dec. 31, 2018:

FV, Dec. 31, 2017 1,065,000
Premium Amortization in 2018 (16,445) 1,048,545
Unrealized gain 26,455
3. FV, Dec. 31, 2020 1,056,500

Carrying value, Dec. 31, 2019:
FV, Dec. 31, 2018 1,075,000
Premium amortization in 2020 (17,278) 1,057,722
Unrealized loss 1,222
4. FV, Dec. 31, 2020 1,030,000

Carrying value, Dec. 31, 2020:
FV, Dec. 31, 2019 1,075,000
Premium amortization in 2020 (18,142) 1,038,358
Unrealized loss 8,350
Problem No. 3 – Investment in Debt Securities: Computation of Interest Income and Amortized
Cost
On January 1, 2018, RAMBUTAN CORP. purchase debt securities for cash of P765,540 to be held
as financial assets at amortized cost. The securities have a face value of P600,000, and they mature
in 15 years. The securities carry fixed interest of 10% that is receivable semiannually, on June 30 and
December 31. The prevailing market interest rate on these debt securities is 7% compounded
semiannually.
1. The carrying value of the debt securities on December 31, 2018, at amortized cost using the
effective interest rate method is
a. P771,840
b. P759,016
c. P765,540
d. P600,000
2. The interest income to be reported for 2018 using the effective interest rate method is
a. P66,524
b. P6,524
c. P60,000
d. P53,476
Solutions:
1. Carrying value, Jan. 1, 2018 765,540
Amortization of premium, Jan. 1 – Jun. 30:
Nominal int. (600k x 10%x ½) 30,000
Effective int. (765,540 x 7% x ½) (26,794) (3,206)
Carrying value, Jun. 30, 2018 762,334
Amortization of premium, Jul. 1 – Dec, 31:

Nominal int. 30,000
Effective int. (762,334 x 7% x ½) (26,682) (3,318)
Carrying value at amortized cost, Dec. 31, 2018 759,016
2. Interest income 2018 26,794 + 26,682 = 53,476

Problem No. 4 – Investment in Associate Achieved in Stages: Fair Value to Equity Method
On January 2, 2017, LOVELY INC. acquired a 15% interest in CPS Corp. by paying P8,000,000 for
100,000 ordinary shares. On this date, the net assets of CPS Corp. totaled P40,000,000. The fair
values of CPS Corp.’s Identifiable assets and liabilities were equal to their book values. Lovely did not
have the ability to exercise significant influence over the operating and financial policies of CPS.
Lovely receives dividends of P1.40 per share from CPS on October 1, 2017. CPS reported net
income of P5,000,000 for the year ended December 31, 2017. Lovely classified the investment as at
fair value through other comprehensive income. Market price for the 100,000 shares was P9,000,000
on December 31, 2017.
Lovely paid P30,000,000 on January 1, 2018 for 300,000 additional CPS ordinary shares, which
represents a 25% interest in CPS. The fair value of CPS Corp.’s Identifiable assets, net of liabilities,
was equal to their book values of P92,000,000. As a result of this additional acquisition, Lovely has
the ability to exercise significant influence over the operating and financial policies of CPS. Lovely
received a dividend of P2.70 per share on October 5, 2018. CPS reported net income of P6,000,000
for the year ended December 31, 2018, I P45,000,000.
1. In the December 31, 2017 statement of financial position, what is the carrying amount of the
investment in equity securities?
a. P8,610,000
b. P9,000,000
c. P8,000,000
d. P8,750,000
2. What is the total amount of investment-related income that should be reported in the 2017
income statement?
a. P140,000
b. P1,140,000
c. P750,000
d. P1,610,000
3. What amount of gain on remeasurement to equity should be reported in the 2018 income
statement?
a. P1,320,000
b. P1,080,000
c. P0
d. P1,000,000
4. What is the goodwill arising from the acquisition of additional 300,000 shares on January 1,
2018?
a. P0
b. P2,200,000
c. P7,000,000
d. P9,000,000
5. What is the carrying amount of the investment in associate on December 31, 2018?
a. P45,000,000
b. P40,320,000
c. P38,120,000
d. P39,000,000
Solutions:
1. Investment in equity securities FV 9,000,000
2. Dividend income 1.40 x 100,000 = 140,000
3. FV, Dec. 31, 2017 9,000,000

CA 8,000,000
Unrealized gain 1,000,000 – will be reclassified to retained earnings
4. FV of 15% int. 9,000,000

Cost of 25% additional int. 30,000,000
Total cost of investment in associate 39,000,000
CA of net assets acquired (92M x 40%) 36,800,000
Goodwill not amortized 2,200,000
5. Total cost of inv. in associate, Jan. 1, 2018 39,000,000

Cash dividend received (2.70 x 400k) (1,080,000)
Share in NI (6M x 40%) 2,400,000
CA, Dec. 31, 2018 40,320,000
Do-it -yourself activities:

Problem No. 1 – Investment in Equity Securities
On June 30, 2018, CABBAGE COMPANY purchased 25% of the outstanding ordinary shares of IB
Co. at a total cost of P2,100,000. The book value of IB Co.’s net assets on acquisition date was
P7,200,000. For the following reasons, Cabbage was willing to pay more than book value for the IB
Co.’s shares:
• IB Co. has depreciable assets with a current fair value of P180,000 more than their book value.
These assets have a remaining useful life of 10 years.
• IB Co. owns a tract of land with a current fair value of P900,000 more than its carrying amount.
• All other identifiable tangible and intangible assets of IB Co. have current fair values that are
equal to their carrying amounts.
IB Co. reported net income of P1,620,000, earned evenly during the current year ended December
31, 2018. Also, in the current year, it declared and paid cash dividends of P315,000 to its ordinary
shareholders. Market value of IB Co.’s ordinary shares at December 31, 2018, is P9 million. Cabbage
Company’s financial year-ended is December 31.
1. What is the total amount of goodwill of IB Co. based on the price paid by Cabbage Company?
a. P300,000
b. P1,080,000
c. P120,000
d. P30,000
2. What amount of investment income should cabbage report in its income statement for the year
ended December 31, 2018, under the fair value method?
a. P78,750
b. P202,500
c. P228,750
d. P71,250
3. What amount of investment income should Cabbage report in its income statement for the year
ended December 31, 2018, under the equity method?
a. P202,500
b. P200,250
c. P78,750
d. P123,750
4. Under the equity method, the carrying value of Cabbage Company’s investment in ordinary
shares of IB Co. on December 31, 2018 should be
a. P2,221,500
b. P2,100,000
c. P2,070,000
d. P2,250,000
5. What amount should Cabbage Company report in its December 31, 2018, statement of
financial position as its investment in IB Co. under the fair value method?
a. P2,250,000
b. P2,070,000
c. P2,221,500
d. P2,100,000
Solutions:
1. Underlying value of IB Co.’s owner’s equity 8,400,000
FV of IB Co.’s net assets (7.2M + 180k + 900k) 8,280,000
Goodwill 120,000
2. Investment income FV method

Dividend received (315k x 25%) 78,750
3. Investment income Equity method

Share of NI (1,620,000 x 25% x 6/12) 202,500
Depreciation adjustment (180k x 25% = 45k / 10 x 6/12) (2,250)
Investment income 200,250
4. Acquisition cost 2,100,000

Share of NI 200,250
Cash dividends received (315k x 25%) (78,750)
Carrying value, Dec. 31, 2018 2,221,500
5. 9M x 25% = 2,250,000
Problem No. 2 – Impairment Loss on Debt Securities at FVOCI (Fair Value Through Other
Comprehensive Income)
On November 1, 2018, Bunzoo Company purchased a debt security at face value of P1,000,000. This
financial asset is to be measured at Fair Value Through Other Comprehensive Income (FVOCI). The
contractual term is 10 years with an annual coupon of 6%. At December 31, 2018, the debt security’s
fair value has decreased to P950,000 due to increases in market interest rates. There has not been a
significant increase in the credit risk of this debt investment. Hence, Bunzoo decided to recognize a
12-month Expected Credit Loss (ECL) of P30,000.
On December 31, 2019, the debt security’s fair value has decreased further to P925,000 as a result
of increases in market interest rates. There has not been a significant increase in the credit risk of the
debt security since initial recognition; hence, Bunzoo decided to recognize a 12-month ECL
amounting to P40,000.
On January 1, 2020, Bunzoo sold the debt security for its fair value of P925,000.
1. The cumulative gain (loss) in OCI at December 31, 2018 is

a. P20,000
b. (P20,000)
c. P50,000
d. (P30,000)
2. The cumulative loss in OCI at December 31, 2019 is

a. P20,000
b. P45,000
c. P35,000
d. P10,000
3. What amount should be reported as loss on sale of the debt security on January 1, 2020?
a. P35,000
b. P45,000
c. P10,000
d. P20,000
Solutions:
1. Decrease in FV of debt securities (1M – 950k) (50,000)
Impairment loss 12 month 30,000
Cumulative loss (20,000)
2. Cumulative loss, Dec. 31, 2018 (20,000)

Decrease in FV (950k – 925k) (25,000)
Increase in loss of allowance (40k – 30k) 10,000
Cumulative loss OCI, Dec. 31, 2019 (35,000)
3. Loss on sale = 35,000

Problem No. 3 – Trading Securities
Supporting records of MAYON CORPORATION’s trading securities portfolio show the following debt
and equity securities:
Security Cost Fair Value

200 ordinary shares P127,250 P121,500
Concave Co.
P400,000 Tipo Co. 7% 398,250 387,000
bonds
P600,000 Turkey Co. 7 ½
% bonds 603,750 609,450
Totals P1,129,250 P1,117,950
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 2018 and 2019, Mayon completed the
following transactions related to trading securities:
2018
Jan. 1 – received semiannual interest on bonds. Assume that the appropriate adjusting entry was
made on December 31, 2017.
Apr. 1 – Sold P300,000 of 7 ½ % Turkey bonds for P305,000.
May 21 – Received dividend of P1.25 per share on the Concave ordinary share capital. The dividend
had not been recorded on the declaration date.
July 1 – Received semiannual interest on bonds and then sold the 7% Tipo bonds P388,750.
Aug. 15 – Purchased 100 shares of Newman, Inc. ordinary share capital at P580 per share plus
brokerage fees of P250.
Nov. 1 – Purchased P250,000 of 8% Toll Co. bonds at 101 plus accrued interest. Brokerage fees
were P625. Interest dates are January 1 and July 1.
Dec. 31 – Market prices of securities were:
Concave ordinary shares P550
7 ½ % Turkey bonds 101 ¼
8% Toll bonds 101
Newman ordinary shares P583.75
2019
Jan. 2 – Recorded the receipt of semiannual interest on bonds
Feb. 1 – Sold the remaining 7 ½ % Turkey bonds for P301,500 plus accrued interest.
1. What is the total interest and dividend income for 2018?

a. P62,583
b. P82,208
c. P45,708
d. P49,402
2. What amount should be reported as gain on sale of trading securities in 2018?

a. P2,025
b. P6,376
c. P4,275
d. P3,125
3. What amount of unrealized gain or loss should be reported in the income statement for the
year ended December 31, 2018?
a. P10,600 unrealized gain
b. P10,600 unrealized loss
c. P3,075 unrealized gain
d. P3,075 unrealized loss
4. What is the carrying amount of the remaining trading securities on December 31, 2018?
a. P740,500
b. P725,225
c. P736,725
d. P726,125
5. What is the loss on the sale of the remaining Turkey bonds on February 1, 2019?
a. P3,750
b. P5,250
c. P6,750
d. P375
Solutions:
1. Interest income:
Tipo Co. bonds, Jan. 1 – Jul. 1 (400k x 7% x 6/12) 14,000
Turkey Co. bonds:
Jan. 1 – Apr. 1 (600k x 7 ½ x 3/12) 11,250
Apr. 1 – Dec. 31 (300k x 7 ½ x 9/12) 16,875
Toll Co. bonds (250k x 8% x 2/12) 3,333
Dividend income 250
Total 45,708
2. Gain on sale of Turkey bonds:

Sales price 305,000
Carrying amount (609,450 x ½) 304,725 275
Gain on sale of Tipo bonds:
Sales price 388,750
Carrying amount 387,000 1,750
Total 2,025
3-4. Unrealized loss on trading securities 10,600

SECURTY CARRYING AMT FAIR VALUE INCREASE
(DECREASE)
Concave Co. ordinary 121,500 110,000 (11,500)
Turkey bonds 204,725 305,250 525
Newman, Inc. ordinary 58,000 58,375 375
Toll Co. bonds 252,500 252,500 -
Total 736,725 726,125 (10,600)
5. Sales price 301,500

Carrying amount 305,250
Loss in sale of Turkey Bonds 3,750
Problem No. 4 – Equity Method
CUCUMBER CORP. bought 40% of the understanding ordinary shares of Super Company on
January 2, 2018. At the date of purchase, the book value of Super’s net assets was P77.5 million.
The book values and fair values for all statement of financial position items were the same except for
inventory and plant facilities. The fair value exceeded book value P500,000 for the inventory and by
P2 million for the plant facilities. All inventory acquired was sold during 2018. Super reported net
income of P14 million for the year ended December 31, 2018 and paid a cash dividend of P3 million.
Cucumber’s statement of financial position as of December 31, 2018, shows an amount of P44.1
million as its investment in Super Company.
1. What amount should Cucumber report as its income from investment in Super Company for
the year ended December 31, 2018?
a. P1.2 million
b. P7.1 million
c. P5.6 million
d. P5.3 million
2. What is the acquisition cost of Cucumber’s investment in Super Company?

a. P40 million
b. P39.4 million
c. P45.6 million
d. P77.2 million
3. Of the amount paid by Cucumber for the 40% interest in Super Company, how much is
attributable to goodwill?
a. P8 million
b. P8.2 million
c. P8.8 million
d. P9 million
4. What should Cucumber report in its statement of cash flows regarding its investment in Super
Company?
a. P40 million cash outflow from investing activities and P1.2 million cash inflow among
operating activities.
b. P45.6 million cash outflow from investing activities and P5.3 million cash inflow among
c. P40 million cash outflow from financing activities and P1.2 million cash inflow among
d. P39.4 million cash outflow from investing activities and P3 million cash inflow among
Solutions:
1. Share of NI (14M x 40%) 5,600,000
Adjustment for inv. sold (500k x 40%) (200,000)
Adjustment for depreciation (2M x 40% = 800k / 8yrs) (100,000)
Investment Income 5,300,000
2. Acquisition cost -
Investment income 5,300,000
Dividends received (3M x 40%) (1,200,000)
CV, Dec. 31, 2018 44,100,000
Squeeze acquisition cost 40,000,000
3. Acquisition cost 40,000,000

FV of net assets purchased (77.5M + 500k + 2M = 80M x 40%) 32,000,000
Goodwill 8,000,000
1: Jaran
2: M Company
3: Lumobo
4: Kazoo
5: Green

Gonzales, Aira Jaimee S.
BSA 3
AUDIT OF PPE

BSA 3
AUDIT OF PPE

BSA 3
AUDIT OF PPE

BSA 3
AUDIT OF PPE

BSA 3
AUDIT OF PPE

BSA 3
AUDIT OF PPE

BSA 3
AUDIT OF PPE

IV – AUDIT OF INVESTMENTS
PROBLEM NO. 1
The following transactions of the Angat Company were completed during
the year 2006:
Jan. 2 Purchased 20,000 shares of Bulacan Auto Co. for P40 per
share plus brokerage costs of P4,500. These shares were
classified as trading securities.
Feb. 1 Purchased 20,000 shares of Malolos Company common stock

at P125 per share plus brokerage fees of P19,000. Angat
classifies this stock as and available-for-sale security.
Apr. 1 Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5

plus accrued interest of P35,000. In addition, the company
paid brokerage fees of P18,000. Angat classified these bonds
as a trading security.
Jul. 1 Received semiannual interest on the RP Treasury Bonds.
Aug. 1 Sold P500,000 of RP Treasury 7% bonds at 103 plus accrued

interest.
Oct. 1 Sold 3,000 shares of Malolos at P132 per share.
The market values of the stocks and bonds on December 31, 2006, are as
follows:
Bulacan Auto Co. P45 per share
Malolos Company P130 per share
RP Treasury 7% bonds 102
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of P500,000 RP Treasury Bonds on August 1, 2006
a. P15,000 gain c. P2,000 loss
b. P 2,500 gain d. P7,500 loss
2. Gain or loss on sale of 3,000 Malolos shares on October 1, 2006
a. P18,150 loss c. P 2,000 gain
b. P18,150 gain d. P21,000 gain
103
3. What amount of unrealized gain should be shown as component of
income in 2006?
a. P92,500 c. P74,500
b. P97,000 d. P80,000
4. What amount of unrealized gain should be shown as component of
equity as of December 31, 2006?
a. P68,850 c. P66,000
b. P85,000 d. P 0
Suggested Solution:
Question No. 1
Sales proceeds (P500,000 x 1.03) P515,000
Less cost of RP Treasury bonds sold (P500,000 x 1.025)* 512,500
Gain on sale of P500,000 RP Treasury Bonds P 2,500
* PAS 39 par. 43 states that when a financial asset or financial liability is

recognized initially, an entity shall measure it at its fair value plus, in the
case of a financial asset or financial liability not at fair value through profit
or loss, transaction costs that are directly attributable to the acquisition or
issue of financial asset or financial liability. Therefore, the transaction costs
(e.g. brokerage fees) should be expensed for trading securities.
Question No. 2
Sales proceeds (3,000 shares x P132) P396,000
Less cost of shares sold
{[(20,000 x P125) + P19,000] x 3/20} 377,850
Gain on sale of 3,000 Malolos shares P 18,150
Question No. 3
Cost of Bulacan Auto Co. shares (20,000 x P40) P 800,000
Cost of RP Treasury 7% bonds (P2,000,000 x 1.025) 2,050,000
Cost of P500,000 RP Treasury bonds sold (see no. 1) ( 512,500)
Trading securities, 12/31/06 before mark-to-market 2,337,500
Fair value of trading securities, 12/31/06 (see below) 2,430,000
Unrealized gain on TS to be reported on the IS P 92,500
Bulacan Auto Co. (20,000 x P45) P 900,000

RP Treasury 7% bonds (P1,500,000 x 1.02) 1,530,200
Fair value of trading securities, 12/31/06 P2,430,000
104
Question No. 4
Cost of Malolos Company shares
[(20,000 x P125) + P19,000] P2,519,000
Cost of 3,000 shares sold (see no. 2) (377,850)
AFS, 12/31/06 before mark-to-market 2,141,150
Fair value of AFS, 12/31/06 [(20,000 - 3,000) x P130] 2,210,000
Unrealized gain-AFS, 12/31/06 to be reported under SHE P 68,850
Answers: 1) B; 2) B; 3) A; 4) A
PROBLEM NO. 2
You were engaged by Balagtas Company to audit its financial statements

for the year 2006. During the course of your audit, you noted that the
following trading securities were properly reported as current assets at
December 31, 2005:
Cost Market
France Corporation, 5,000 shares,
convertible preferred shares P 450,000 P 487,500
Ces, Inc., 30,000 shares of common stock 675,000 742,500
Coo Co., 10,000 shares of common stock 618,750 450,000
P1,743,750 P1,680,000
The following sale and conversion transactions transpired during 2006:

Mar. 1 Sold 12,500 shares of Ces for P33.75 per share.
April 1 Sold 2,500 shares of Coo for P45 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 2006 dividend information pertains to stocks owned by

Balagtas:
Jan. 2 Coo issued a 10% stock dividend when the market price
of Coo’s common stock was P49.50 per share.
March 31 France paid dividends of P2.50 per share on its preferred

and Sept. 30 stock, to stockholders of record on March 15 and
September 15, respectively. France did not pay
dividends on its common stock during 2006.
105
July 1 Ces paid a P2.25 per share dividend on its common
stock.
Market prices per share of the securities were as follows:

12/31/2006 12/31/2005
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:
Based on the above and the result of your audit, you are to provide the
answers to the following:
1. How much is the gain on sale of 12,500 Ces shares?
a. P112,500 c. P140,625
b. P281,250 d. P 0
2. How much is the gain or loss on sale of 2,500 Coo shares?
a. P28,125 gain c. P28,125 loss
b. P10,227 gain d. P 0
3. How much is the gain or loss on conversion of 2,500 France preferred
stock into 15,000 common stock?
a. P 28,125 loss c. P46,875 loss
b. P129,375 gain d. P 0
4. How much is the total dividend income for the year 2006?
a. P 64,375 c. P 51,875
b. P101,375 d. P364,375
5. How much should be reported as unrealized gain on trading securities
in the company’s income statement for the year 2006?
a. P 4,500 c. P59,250
b. P67,773 d. P 0
Suggested Solution:
Question No. 1
Sales proceeds (12,500 shares x P33.75) P421,875
Less CV of Ces shares sold (12.5/30 x P742,500) 309,375
Gain on sale of 12,500 Ces shares P112,500
106
Question No. 2
Less CV of Coo shares sold (P450,000 x 2,500/11,000*) 102,273
Gain on sale of 2,500 Coo shares P 10,227
* total number of shares after 10% stock dividends (10,000 x 1.1)
Question No. 3
Fair value of preferred stock (2,500 shares x P78.75) P196,875
Less CV of shares converted (P487,500 x 2.5/5) 243,750
Loss on conversion of 2,500 France preferred shares P 46,875
Question No. 4
From France (5,000 shares x P2.50 x 2) P25,000
From Ces [(30,000 - 12,500) x P2.25) 39,375
Total dividend income in 2006 P64,375
Question No. 5
Trading securities, 1/1/06 P1,680,000
CV of Ces shares sold (see no. 1) (309,375)
CV of Coo shares sold (see no. 2) (102,273)
CV of France preferred shares converted (see no. 3) (243,750)
Cost of 7,500 France common shares received (see no. 3) 196,875
Trading securities, 12/31/06 before mark-to-market 1,221,477
Fair value of trading securities, 12/31/06 (see below) 1,289,250
Unrealized gain on trading securities P 67,773
France Corp., preferred [(5,000 - 2,500) x P92.25] P 230,625

France Corp. – Common (7,500 x P42.75) 320,625
Ces, Inc., common [(30,000 - 12,500) x P22.50] 393,750
Coo Co., common {[(10,000 x 1.1) - 2,500] x P40.50} 344,250
Fair value of trading securities, 12/31/06 P1,289,250
Answers: 1) A; 2) B; 3) C; 4) A; 5) B
PROBLEM NO. 3
You were able to obtain the following ledger details of Trading Securities in
connection with your audit of the Bocaue Corporation for the year ended
December 31, 2006:
107
Particulars Date Ref. DR CR
Purchase of GOOD Co. – 1-14 CV P 960,000
4,000 shares
Purchase of LUCK Co. –
4,800 shares 2-20 CV 1,200,000
Sale of LUCK Co. – 1,600 shares 3-01 CR 360,000
Receipt of GOOD Stock Dividend
– Offsetting Credit to retained
earnings 5-31 JV 88,000
Sale of GOOD Stocks –
3,200 shares 8-15 CR 784,000
Sale of GOOD Stocks –
800 shares 10-1 CR 184,000
From the Philippine Stock Exchange, the GOOD dividends were analyzed
as follows:
Kind Declared Record Payment Rate
Cash 01-02 01-15 01-31 P20/share
Stock 05-02 05-15 05-31 10%
Cash 08-01 08-30 09-15 P30/share
At December 31, 2006, GOOD and LUCK shares were selling at P210 and
P240 per share, respectively.
QUESTIONS:
1. Gain or loss on sale of 1,600 LUCK shares on March 1, 2006
a. P360,000 gain c. P40,000 loss
b. P200,000 loss d. P40,000 gain
2. Gain on sale of 3,200 GOOD shares on August 15, 2006
a. P 48,000 c. P16,000
b. P144,000 d. P 0
3. Gain or loss on sale of 800 GOOD shares on October 1, 2006
a. P 8,000 gain c. P 8,000 loss
b. P24,000 loss d. P24,000 gain
4. Dividend income for the year 2006
a. P132,000 c. P212,000
b. P300,000 d. P 0
108
5. Carrying value of Trading Securities as of December 31, 2006
a. P768,000 c. P880,000
b. P852,000 d. P768,000
Suggested Solution:
Question No. 1
Sales proceeds P360,000
Less CV of shares sold (P1,200,000 x 1,600/4,800) 400,000
Loss on sale of 1,600 Luck shares on 3/1/06 P 40,000
Question No. 2
Total proceeds P784,000
Less dividends sold (3,200 shares x P30) 96,000
Sales proceeds 688,000
Less CV of investment sold
(P880,000* x 3,200/4,400**) 640,000
Gain on sale of 3,200 Good shares on 9/15/06 P 48,000
Computation of adjusted cost of Good Co. shares

Total cash paid P960,000
Less purchased dividend (4,000 x P20) 80,000
Adjusted cost P880,000 *
**After 10% stock dividend
Question No. 3
Less CV of investment sold (P880,000 x 800/4,400) 160,000
Gain on sale of 800 Good shares on 10/1/06 P 24,000
Question No. 4
Dividend income - Declared Aug. 1 (4,400 shares x P30) P132,000
Question No. 5
Good Co. [(4,000 x 1.1) - 3,200 - 800] = 400 x P210 P 84,000
Luck Co. (4,800 - 1,600) = 3,200 x P240 768,000
Carrying value of trading securities, 12/31/06 P852,000
Answers: 1) C; 2) A; 3) D; 4) A, 5) B
109
PROBLEM NO. 4
In connection with your audit of the financial statements of the Guiguinto
Company for the year 2006, the following Available for Sale Securities and
Dividend Income accounts were presented to you:
Available for Sale Securities
Date Description Ref. Debit Credit
01/08 Purchased 20,000 shares
common, par value P50,
BUSTOS Co. VR-69 780,000
03/30 10,000 shares BUSTOS Co.
received as stock dividend CJ-30 500,000
04/03 Sold 10,000 shares @ P25 CR-44 250,000
12/02 Sold 4,000 shares @ P60 CR-65 240,000
Dividend Income
03/30 Stock dividend SJ-8 500,000
08/30 BUSTOS Company common CR-52 100,000
The following information was obtained during your examination:

1. From independent sources, you determine the following dividend
information:
Type of Date Date of Date of
Dividend Declared Record Payment Rate
Stock 02/14/2006 02/28/2006 03/30/2006 50%
Cash 08/01/2006 08/15/2006 08/30/2006 P5/share
Cash 12/01/2006 12/15/2006 01/02/2007 20%
2. Closing market quotation as at December 31, 2006:

Bid Asked
BUSTOS Company common 13-3/4 16-1/2
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the gain or loss on the April 3, 2006 sale?
a. P10,000 loss c. P140,000 loss
b. P10,000 gain d. P 0
2. How much is the gain on the December 2, 2006 sale?
a. P136,000 c. P84,000
b. P 96,000 d. P 0
110
a. P600,000 c. P100,000
b. P800,000 d. P300,000
4. How much is the adjusted balance of Available for Sale Securities as of
December 31, 2006?
a. P290,000 c. P220,000
b. P264,000 d. P416,000
5. How much is the Unrealized Loss on AFS as of December 31, 2006?
a. P196,000 c. P152,000
b. P 70,000 d. P 0
Suggested Solution:
Question No. 1
Less CV of investment sold (P780,000 x 10/30*) 260,000
Loss on sale of AFS on 4/3/06 P 10,000
*After 50% stock dividend
Question No. 2
Total proceeds (4,000 shares x P60) P240,000
Less dividends sold (4,000 shares x P50 x 20%) 40,000
Net sales proceeds 200,000
Less CV of investment sold (P780,000 x 4/30) 104,000
Gain on sale of AFS on 12/2/06 P 96,000
Question No. 3
Cash dividends declared, 8/1/2006 P100,000
(20,000 shares x P5)
Cash dividends declared, 12/1/2006
(20,000 shares x P50 x 20%) 200,000
Total dividend income P300,000
Question No. 4
Shares purchased, 1/08 20,000
Shares received as stock dividend 10,000
Sold, 4/3 (10,000)
Sold, 12/2 (4,000)
Balance, 12/31/06 16,000
Multiply by market value/share, 12/31/06 13.75
Carrying value of AFS, 12/31/06 P220,000
111
Note: Application guidance par. 72 of PAS 39 states that the appropriate
market price for an asset held or liability to be issued is usually the
current bid price and, for an asset to be acquired or liability held, the
asking price.
Question No. 5
Acquisition cost P780,000
CV of 10,000 shares sold, 4/3 (see no. 1) (260,000)
CV of 4,000 shares sold, 12/2 (see no. 2) (104,000)
AFS, 12/31/06 before mark-to-market 416,000
Fair value of AFS, 12/31/06 220,000
Unrealized loss on AFS, 12/31/06 P196,000
Answers: 1) A; 2) B; 3) D; 4) C, 5) A
PROBLEM NO. 5
Your audit of the Baliuag Corporation disclosed that the company owned
the following securities on December 31, 2005:
Trading securities:
Security Shares Cost Market
Sputnik, Inc. 4,800 P 72,000 P 92,000
Explorer, Inc. 8,000 216,000 144,000
10% , P100,000 face value ,
Vanguard bonds (interest payable
semiannually on Jan. 1 and Jul. 1) 79,200 81,720
Total P367,200 P317,720
Available-for-sale securities:
Security Shares Cost Market
Score Products 16,000 P 688,000 P 720,000
Tiros, Inc. 120,000 3,120,000 2,920,000
Midas, Inc. 40,000 480,000 640,000
Total P4,288,000 P4,280,000
Held to maturity:
Cost Book value
12%, 1,000,000 face value, Discoverer bonds
(interest payable annually every Dec. 31) P950,000 P963,000
112
During 2006, the following transactions occurred:
Jan. 1 Receive interest on the Vanguard bonds.
Mar. 1 Sold 4,000 shares of Explorer Inc. stock for P76,000.
May 15 Sold 1,600 shares of Midas, Inc. for P15 per share.
July 1 Received interest on the Vanguard bonds.
Dec. 31 Received interest on the Discoverer bonds.
31 Transferred the Discoverer bonds to the available-for-sale
portfolio. The bonds were selling at 101 on this date. The
bonds were purchased on January 2, 2005. The discount was
amortized using the effective interest method.
The market values of the stocks and bonds on December 31, 2006, are as
follows:
Sputnik, Inc. P22 per share
Explorer, Inc. P15 per share
10% Vanguard bonds P75,600
Score Products P42 per share
Tiros, Inc. P28 per share
Midas, Inc. P18 per share
QUESTIONS:
1. Gain or loss on sale of 4,000 Explorer, Inc. shares on March 1, 2006
a. P4,000 loss c. P32,000 loss
b. P4,000 gain d. P32,000 gain
2. Realized gain or loss on sale of 1,600 Midas, Inc. shares on May 15,
2006
b. P4,800 gain d. P1,600 gain
3. Total interest income for the year 2006?
a. P130,000 c. P144,820
b. P125,560 d. P143,000
4. The amount that should be reported as unrealized gain in the
statement of changes in equity regarding transfer of Discoverer bonds
to AFS?
a. P47,000 c. P61,820
b. P32,180 d. P 0
113
5. Carrying value of Trading Securities and Available-for-sale securities as
of December 31, 2006 should be
Trading securities Available-for-sale securities
a. P241,200 P5,733,200
b. P301,200 P4,723,200
c. P241,200 P5,762,000
d. P301,200 P5,720,800
Suggested Solution:
Question No. 1
Less CV of shares sold (P144,000 x 4/8) 72,000
Loss on sale of 4,000 Explorer, Inc. shares P 4,000
Question No. 2
Unrealized gain on the shares sold(P160,000 x 1.6/40) 6,400
Total 30,400
Less CV of shares sold (P640,000 x 1.6/40) 25,600
Realized gain on sale of 1,600 Midas, Inc. shares P 4,800
Alternative computation:
Cost of shares sold (P480,000 x 1.6/40) 19,200
Realized gain on sale of 1,600 Midas, Inc. shares P 4,800
Question No. 3
Vanguard bonds (P100,000 x 10%) P 10,000
Discoverer bonds (P963,000 x 14%*) 134,820
Total interest income for 2006 P144,820
*Computation of effective interest rate:

Carrying value, 12/31/05 P963,000
Less carrying value, 1/2/05 (Cost) 950,000
Discount amortization for 2005 13,000
Add nominal interest (P1,000,000 x 12%) 120,000
Effective interest 133,000
Divide by carrying value, 1/2/05 950,000
Effective interest rate 14%
114
Question No. 4
Carrying value, 12/31/05 P 963,000
Add discount amortization in 2006:
Effective interest (P963,000 x 14%) P134,820
Nominal interest (P1,000,000 x 12%) (120,000) 14, 820
Carrying value, 12/31/06 977,820
Fair value of Discoverer bonds on
12/31/06 (P1,000,000 x 1.01) 1,010,000
Unrealized gain on transfer of securities
to be reported under SHE P 32,180
Question No. 5
Trading securities
Sputnik, Inc. (4,800 x P22) P105,600
Explorer, Inc. [(8,000 - 4,000) x P15] 60,000
10% , P100,000 face value , Vanguard bonds 75,600
Total market value P241,200
Available-for-sale securities
Score Products (16,000 x P42) P 672,000
Tiros, Inc. (120,000 x P28) 3,360,000
Midas, Inc. [(40,000 - 1,600) x P18] 691,200
Discoverer bonds (P1,000,000 x 1.01) 1,010,000
Total market value P5,733,200
Answers: 1) B; 2) B; 3) C; 4) B, 5) A
PROBLEM NO. 6
In connection with your audit of Hogonoy Company’s financial statements,
you were able to gather the following subsidiary account which reflect the
marketable securities of the company for the year 2006:
Hugo Corp..
Date Transactions Shares Debit Credit
9/01 Purchase 40,000 P2,000,000
9/30 Cash dividends to
stockholders of record
9/15, declared 8/15 P 100,000
10/01 Purchase 100,000 5,000,000
10/15 Sale at P65 40,000 2,000,000
115
Hugo Corp..
Date Transactions Shares Debit Credit
11/30 Cash collected for sale
made on 11/10, after a
11/1 declaration of P5
cash dividend per share
to stockholders on record
as of 12/1 40,000 6,600,000
12/15 Cash dividend received . 300,000
Totals P7,000,000 P9,000,000
Hogonoy, Inc. acquired 30% of Pugo Corporation’s voting stock on January

1, 2005 for P5,000,000. During 2005, Pugo earned P2,000,000 and paid
dividends of P1,250,000. Hogonoy’s 30% interest in Pugo gives Hogonoy
the ability to exercise significant influence over Pugo’s operating and
financial policies. During 2006, Pugo earned P2,500,000 and paid
dividends of P750,000 on April 1 and P750,000 on October 1. On July 1,
2006, Hogonoy sold half of its investment in Pugo for P3,300,000 cash.
QUESTIONS:
1. The gain on sale of 40,000 shares of Hugo Corp. on October 15 is
a. P628,600 c. P 600,000
b. P700,000 d. P2,057,000
2. The gain on sale of 40,000 shares of Hugo Corp. on November 10 is
a. P4,400,000 c. P2,000,000
b. P4,800,000 d. P4,600,000
3. The carrying value of the Company’s investment in Hugo Corp. on
December 31, 2006 is
a. P2,700,000 c. P2,400,000
b. P2,000,000 d. P3,000,000
4. The gain on sale of investment in Pugo Corp. is
a. P1,312,500 c. P687,500
b. P 537,500 d. P612,500
5. The carrying value of the Company’s investment in Pugo Corp. on
a. P2,612,500 c. P2,687,500
b. P2,762,500 d. P1,987,500
116
Suggested Solution:
Question No. 1
Sales proceeds (40,000 shares x P65) P2,600,000
Less cost of investment sold:
Cash paid P2,000,000
Less purchased dividend 100,000 1,900,000
Gain on sale P 700,000
Question No. 2
Total proceeds P6,600,000
Less dividends sold (40,000 shares x P5) 200,000
Sales proceeds 6,400,000
Less cost of investment sold (P5,000,000 x 40/100) 2,000,000
Gain on sale of 40,000 shares of Hugo Corp., 11/10 P4,400,000
Question No. 3
Acquisition cost, 10/1 purchase P5,000,000
Less cost of investment sold on 11/10 (see no. 2) 2,000,000
Gain on sale of 3,200 Good shares on 9/15/06 P3,000,000
Question No. 4
Proceeds on sale of investment P3,300,000
Less carrying amount of investment sold:
Acquisition cost, 1/1/05 P5,000,000
Share in net income for 2005
(P2,000,000 x 30%) 600,000
Dividends received in 2005
(P1,250,000 x 30%) (375,000)
Carrying value, 12/31/05 5,225,000
Share in net income up to 7/1/06
(P2,500,000 x 6/12 x 30%) 375,000
Dividends received up to 7/1/06
(P750,000 x 30%) (225,000)
Carrying value, 7/1/06 5,375,000
Multiply by 1/2 2,687,500
Gain on sale P 612,500
Question No. 5
Carrying value, 7/1/06 P5,375,000
Less carrying amount of investment sold (see no. 4) 2,687,500
Gain on sale of 3,200 Good shares on 9/15/06 P2,687,500
117
Note: Since the client's equity was reduced to 15%, it was assumed that the
client lost its ability to exercise significant influence. Thus, the investment
will be accounted for using cost method from 7/1/06. Change from equity to
cost method is accounted for currently and prospectively.
Answers: 1) B; 2) A; 3) D; 4) D, 5) C
PROBLEM NO. 7
The Marilao Company has the following transactions in the stocks of the
Sta. Maria Corp.
a) On January 2, 1999, Marilao purchased 4,000 shares of P100 par

value common stock at P110 per share.
b) The Sta. Maria Corp. was expanding and on March 2, 2000, it issued
stock rights to its stockholders. The holder needs four rights to
purchase one share of common stock at par. The market value of the
stock on that date was P140 per share. There was no quoted price for
the rights. No journal entry was made to record the receipt of the
rights.
c) On April 2, 2000, Marilao exercised all its stock rights. The Investment
in Stock account was charged for the amount paid.
d) Robinson, Marilao’s accountant, felt that the cash paid for the new
shares was merely an assessment since Marilao’s proportionate share
in Sta. Maria was not changed. Hence, he credited all dividends (5% in
December of each year) to the Investment in Stock account until the
debit was fully offset.
e) Marilao received a 50% stock dividend from Sta. Maria in December
2004. Because the shares received were expected to be sold, the
company’s president instructed Robinson not to make any entry for
this dividend. The company did sell the dividend shares in January
2005 for P150 per share. The proceeds from the sale were credited to
income.
f) In December 2005, Sta. Maria’ stocks were split on a two-for-one basis
and the new shares were issued as no par shares. Marilao found that
each new share was worth P10 more than the P110 per share original
acquisition cost. For this reason, Marilao decided to debit the
Investment in Stock account with the additional shares received at
P110 per share and credited revenue for it.
118
g) In August 2006, Marilao sold one half (½) of its holdings in Sta. Maria
at P120 per share. The proceeds were credited to the Investment in
Stock account.
Marilao uses the average method in recording the sale of its investment in
stock.
QUESTIONS:
1. The cost of investment to be allocated to stock rights received on March
2, 2000 is
a. P 0 c. P31,429
b. P29,333 d. P25,143
2. The unadjusted balance of Investment in Sta. Maria stock on December
31, 2006 is
a. P940,000 c. P390,000
b. P490,000 d. P430,000
3. The adjusted balance of Investment in Sta. Maria stock on December
31, 2006 is
a. P135,000 c. P180,000
b. P360,000 d. P270,000
4. The gain on the sale of stock dividend received in December 2004 is
a. P100,000 c. P 80,000
b. P105,000 d. P195,000
5. The gain on sale of the shares sold in August 2006 is
a. P240,000 c. P120,000
b. P420,000 d. P870,000
Suggested Solution:
Question No. 1
Cost allocated to stock rights (P10*/P150 x P440,000) P29,333
Since the MV of rights is not available we must compute for the

theoretical value of the stock rights. Since the market value of the stock
given is on the date of issuance of the stock rights, the market value is
considered “ex-rights”.
Theoretical value of stock rights = MV of stock ex-rights – subs. price

Number of rights to purchase 1 share
= (P 140 - P100)/4
= P10*
119
Question No. 2
Debits to Investment account:
Purchase, 1/2/99 (4,000 shares x P110) P440,000
Exercise of rights, 4/2/00 (4,000/4 x P100) 100,000
Stock split, 12/2005 (5,000 x P110) 550,000 P1,090,000
Less credits to Investment account:
Dividends received, 2000-2003
(5,000 x P100 x 5% x 4) 100,000
Sale, 8/2006 (5,000 shares x P120) 600,000 700,000
Balance, 12/31/06 per books P 390,000
Question No. 3
Cost/
Shares share Total cost
Purchase, 1/2/1999 4,000 P110 P440,000
Receipt of stock rights, 3/2/2000 (29,333)
Balance 4,000 103 410,667
Exercise of rights, 4/2/2000 (see below) 1,000 129 129,333
Balance 5,000 108 540,000
50% stock dividend, 12/2004 2,500
Balance 7,500 72 540,000
Sale of stock dividend, 1/2005 (2,500) 72 (180,000)
Balance 5,000 72 360,000
Stock split, 12/2005 5,000
Balance 10,000 36 360,000
Sale, 8/2006 (5,000) 36 (180,000)
Adjusted balance, 12/31/06 5,000 36 P180,000
Cash paid (4,000/5 x P100) P 80,000

Cost of stock rights 29,333
Total cost P129,333
Question No. 4
Less cost of investment sold (see no. 3) 180,000
Gain on sale of stock dividend received P195,000
Question No. 5
Less cost of investment sold (see no. 3) 180,000
Gain on sale of investment in 8/2006 P420,000
120
Answers: 1) B; 2) C; 3) C; 4) D, 5) B
PROBLEM NO. 8
Meycauayan Inc. acquired 50,000 shares of AAA stock for P5 per share and
125,000 shares of BBB stock for P10 per share on January 2, 2005. Both
AAA Inc. and BBB Corp. have 500,000 shares of no-par common stock
outstanding. Both securities are being held as long term investments.
Changes in retained earnings for AAA and BBB for 2005 and 2006 are as
follows:
AAA, Inc. BBB Corp.

Retained earnings (deficit), 1/1/05 P1,000,000 (P175,000)
Cash dividends, 2005 (125,000) -
Net income, 2005 200,000 325,000
Retained earnings, December 31, 2005 1,075,000 150,000
Cash dividends, 2006 (150,000) (50,000)
Net income, 2006 300,000 125,000
Retained earnings, December 31, 2006 P1,225,000 P 225,000
Market value of stock: 12/31/05 P7.00 P12.00
12/31/06 6.50 15.00
QUESTIONS:
1. The income from investment in AAA, Inc. in 2006 is
a. P15,000 c. P12,500
b. P 1,000 d. P 0
2. The income from investment in BBB, Inc. in 2005 is
a. P31,250 c. P2,500
b. P81,250 d. P 0
3. The carrying value of Investment in AAA, Inc. as December 31, 2006 is
a. P250,000 c. P325,000
b. P350,000 d. P252,500
4. The carrying value of Investment in BBB, Inc. as December 31, 2006 is
a. P1,250,000 c. P1,875,000
b. P1,268,750 d. P1,350,000
5. How much is the unrealized gain or loss that will be included as
component of equity as of December 31, 2006?
a. P75,000 gain c. P25,000 gain
b. P25,000 loss d. P 0
121
Suggested Solution:
Question No. 1
Meycauayan, Inc. owns 10% (50,000/500,000) of AAA, Inc. stock; therefore,
the cost method is used and the dividend is computed as follows:
Dividends paid by AAA, Inc. in 2006 P150,000
Multiply by % ownership 10%
Income from investment in AAA, Inc. in 2006 P 15,000
Question No. 2
Meycauayan, Inc. owns 25% (125,000/500,000) of BBB Corp. stock;
therefore, the equity method is used to record the income earned.
AAA, Inc. net income in 2005 P325,000
Multiply by % ownership 25%
Income from investment in BBB Corp. in 2005 P 81,250
Question No. 3
Investment in AAA, Inc. stock will be classified as available-for-sale securities
since the shares are held as long term investment and there is reliable fair
value. Therefore, the carrying value as of 12/31/06 is P325,000 (50,000
shares x P6.50).
Question No. 4
Acquisition cost (125,000 shares x P10) P1,250,000
Share in net income for 2005 (P325,000 x 25%) 81,250
Carrying value, 12/31/05 1,331,250
Dividends received in 2006 (P50,000 x 25%) (12,500)
Share in net income for 2006 (P125,000 x 25%) 31,250
Question No. 5
Fair value, 12/31/06 (50,000 shares x P6.50) P 325,000
Acquisition cost (50,000 shares x P5) 250,000
Unrealized gain, 12/31/06 P 75,000
Answers: 1) A; 2) B; 3) C; 4) D, 5) A
122
PROBLEM NO. 9
On January 2, 2004, Norzagaray Company acquired 20% of the 400,000
shares of outstanding common stock of Imaw Corporation for P30 per
share. The purchase price was equal to Imaw’s underlying book value.
Norzagaray plans to hold this stock to influence the activities of Imaw.
The following data are applicable for 2004 and 2005:

2004 2005
Imaw dividends (paid Oct. 31) P 40,000 P 48,000
Imaw earnings 140,000 160,000
Imaw stock market price at year-end 32 31
On January 2, 2006, Norzagaray Company sold 20,000 shares of Imaw

stock for P31 per share. During 2006, Imaw reported net income of
P120,000, and on October 31, 2006, Imaw paid dividends of P20,000. At
December 31, 2006, after a significant stock decline, which is expected to
be temporary, Imaw’s stock was selling for P22 per share. After selling the
20,000 shares, Norzagaray does not expect to exercise significant influence
over Imaw, and the shares are classified as available for sale.
QUESTIONS:
1. Carrying value of Investment in Imaw as of December 31, 2004
a. P12,020,000 c. P2,420,000
b. P 2,500,000 d. P2,388,000
2. Carrying value of Investment in Imaw as of December 31, 2005
a. P2,442,400 c. P12,042,400
b. P2,612,000 d. P 2,372,000
3. Gain or loss on sale of Investment in Imaw on January 2, 2006
a. P2,390,600 loss c. P33,000 loss
b. P 9,400 gain d. P27,000 gain
4. The income from investment in BBB, Inc. in 2005 is
a. P 3,000 c. P4,000
b. P24,000 d. P 0
5. Net unrealized loss on available for sale securities as of December 31,
2006
a. P671,800 c. P639,000
b. P511,800 d. P459,000
123
Suggested Solution:
Question No. 1
Acquisition cost (400,000 x 20% x P30) P2,400,000
Dividends received(P40,000 x 20%) (8,000)
Investment income (P140,000 x 20%) 28,000
Question No. 2
Carrying value, 12/31/04 (see no. 1) P2,420,000
Dividends received (P48,000 x 20%) (9,600)
Investment income (P160,000 x 20%) 32,000
Question No. 3
Sales proceeds (20,000 x P31) P620,000
Less carrying value of investment sold
(P2,442,400 x 20/80) 610,600
Gain on sale of investment P 9,400
Question No. 4
Dividend income (P20,000 x 15%*) P3,000
* [20% - (20,000/400,000 x 100%)]
Question No. 5
Less carrying value of investment sold 610,600
Carrying value, 12/31/06 - before reclassification 1,831,800
Fair value of AFS, 12/31/06 [(80,000 - 20,000) x P22] 1,320,000
Unrealized loss on AFS P 511,800
Answers: 1) C; 2) A; 3) B; 4) A, 5) B
PROBLEM NO. 10
You were able to gather the following in connection with your audit of
Obando, Inc. On December 31, 2005, Obando reported the following
available for sale securities:
124
Unrealized
Cost Market loss
ERAP Corp., 10,000 shares
of common stock
(a 1% interest) P 250,000 P 220,000 P 30,000
GMA Corp., 20,000 shares
of common stock
(a 2% interest) 320,000 300,000 20,000
FVR Corp., 50,000 shares of
common stock
(a 10% interest) 1,400,000 1,350,000 50,000
Total P1,970,000 P1,870,000 P100,000
On April 1, 2006, ERAP issued 10% stock dividend when the market
price of its stock was P24 per share.
On September 15, 2006, ERAP paid cash dividend of P0.75 per share.
On August 30, 2006, GMA issued to all shareholders, stock rights on

the basis of one right per share. Market prices at date of issue were
P13.50 per share of stock and P1.50 per right. Obando sold all rights
on December 1, 2006 for net proceeds of P37,600.
On July 1, 2006, Obando paid P3,040,000 for 100,000 additional

shares of FVR Corp.’s common stock which represented a 20%
investment in FVR. The fair value of all of FVR’s identifiable assets net
of liabilities was equal to their carrying amount of P12,700,000. As a
result of this transaction, Obando owns 30% of FVR and can exercise
significant influence over FVR’s operating and financial policies.
Obando’s initial 10% interest of 50,000 shares of FVR’s common stock

was acquired on January 2, 2005 for P1,400,000. At that date, the net
assets of FVR totaled P11,600,000 and the fair values of FVR‘s
identifiable assets net liabilities were equal to their carrying amount.
Market prices per share of the securities which are all listed in the
Philippine Stock Exchange, are as follows:
12/31/2006 12/31/2005
ERAP Corp. – common P23 P22
GMA Corp. – common 14 15
FVR Corp. – common 31 27
125
FVR reported net income and paid dividends of:
Dividend
Net income per share
Year ended December 31, 2005 P700,000 None
Six months ended June 30, 2006 400,000 None
Six months ended December 31, 2006
(dividend was paid on 10/1/2006) 740,000 P1.30
There were no other intercompany transactions between Obando and

FVR.
QUESTIONS:
1. Net unrealized gain or loss on available for sale securities as of
December 31, 2006
a. P95,000 gain c. P 5,000 loss
b. P37,000 loss d. P55,000 loss
2. Net adjustment to Retained Earnings as of January 1, 2006 as a result
of the purchase of additional shares of stock of FVR Corp.
a. P 70,000 c. P58,000
b. P210,000 d. P 0
3. Net investment income from FVR Corp. for year ended December 31,
2006
a. P237,500 c. P262,000
b. P225,000 d. P305,000
4. Carrying amount of Investment in FVR Corp. as of December 31, 2006
a. P4,674,500 c. P4,577,000
b. P4,677,000 d. P4,540,500
5. Gain on sale of stock rights on December 1, 2006
a. P 0 c. P7,600
b. P2,050 d. P5,600
Suggested Solution:
Question No. 1
Available-for-sale securities, 1/1/06 P 1,870,000
Receipt of stock rights from GMA, 8/30
(P300,000 x 1.5/15) (30,000)
Reclassification of Investment in FVR (1,350,000)
AFS, 12/31/06 before mark-to-market 490,000
126
Fair value of AFS, 12/31/06:
GMA [(10,000 x 1.1) x 23] P253,000
ERAP (20,000 x 14) 280,000 533,000
Decrease in unrealized loss on AFS 43,000
Unrealized loss on AFS, 12/31/05
(P100,000 - P2,000 - P50,000)
(see note below) 48,000
Unrealized loss, 12/31/06 - as adjusted P 5,000
Note: Alternatively, the unrealized loss on AFS can be computed by

comparing the total fair value and total cost of AFS as of December 31,
2006. Incidentally, the journal entries to record the receipt of stock rights
and reclassification of the investment in FVR follow:
Stock rights P 32,000
Available for sale securities (P300,000 x 1.5/15) P30,000
Unrealized loss on AFS (P20,000 x 1.5/15) 2,000
Investment in associate P1,400,000

Available for sale securities P1,350,000
Unrealized loss on AFS 50,000
Questions No. 2 to 4
Reclassification of investment in FVR (see no. 1) P1,400,000
Retroactive adjustment
(cost to equity method):
Share in NI for 2005 (P700,000 x 10%) 70,000 (2)
Adjusted balance, 1/1/06 1,470,000
Cost of additional 100,000 shares 3,040,000
Net investment income for 2006:
Share in NI for six months ended 6/30
(P400,000 x 10%) P40,000
Share in NI for six months ended
12/31 [P740,000 x (10%+20%)] 222,000 262,000 (3)
Dividends received
[(50,000 shares + 100,000 shares) x 1.3] (195,000)
Carrying value of investment in FVR, 12/31/06 P 4,577,000 (4)
Note: The excess of cost over the book value of net assets acquired will
be attributed to Goodwill. Therefore, the excess will not affect the
investment income and the carrying value of the investment since
Goodwill is not amortized.
127
Question No. 5
Less cost of stock rights (see no. 1) 32,000
Gain on sale of stock rights P 5,600
Answers: 1) C; 2) A; 3) C; 4) C, 5) D
PROBLEM NO. 11
Paombong Corporation purchased P200,000 8% bonds for P184,557 on
January 1, 2004. Paombong classified the bonds as available for sale. The
bonds were purchased to yield 10% interest. Interest is payable
semiannually on July 1 and January 1. The bonds mature on January 1,
2009. Paombong uses the effective interest method to amortize premium or
discount. On January 2, 2006, Paombong sold the bonds for P185,000
after receiving interest to meet its liquidity needs.
The market values of the bonds are as follows:

December 31, 2004 P190,449
December 31, 2005 186,363
QUESTIONS:
1. Interest income for the year 2004
a. P14,869 c. P18,517
b. P16,000 d. P18,456
2. Unrealized gain on AFS as of December 31, 2004
a. P3,436 c. P5,892
b. P3,375 d. P 0
3. Interest income for the year 2005
a. P18,775 c. P16,000
b. P15,272 d. P18,701
4. Unrealized gain or loss on AFS as of December 31, 2005
a. P8,053 gain c. P3,351 gain
b. P3,486 loss d. P1,806 loss
5. Realized gain or loss on sale of AFS on January 2, 2006
b. P4,714 loss d. P9,416 gain
128
Suggested Solution:
Question No. 1
The following amortization schedule will be useful in computing for the
requirements:
Effective Nominal Discount Carrying
Date interest interest amortization value
01/01/04 P184,557
07/01/04 P9,228 P8,000 P1,228 185,785
12/31/04 9,289 8,000 1,289 187,074
07/01/05 9,354 8,000 1,354 188,428
12/31/05 9,421 8,000 1,421 189,849
07/01/06 9,492 8,000 1,492 191,341
12/31/06 9,567 8,000 1,567 192,908
07/01/07 9,645 8,000 1,645 194,553
12/31/07 9,728 8,000 1,728 196,281
07/01/08 9,814 8,000 1,814 198,095
12/31/08 9,905 8,000 1,905 200,000
1/1/04 to 6/30/04 (see amortization schedule) P 9,228

7/1/04 to 12/31/04 (see amortization schedule) 9,289
Note: PAS 39 par. 55(b) states that a gain or loss on an available-for-sale

financial asset shall be recognized directly in equity, through the
statement of changes in equity, except for impairment losses and foreign
exchange gains and losses, until the financial asset is derecognized, at
which time the cumulative gain or loss previously recognized in equity
shall be recognized in profit or loss. However, interest calculated
using effective interest method shall be recognized in profit or
loss.
Question No. 2
Fair value the bonds, 12/31/04 P190,449
Carrying value, 12/31/04 (see amortization schedule) 187,074
Unrealized gain on AFS, 12/31/04 P 3,375
Question No. 3
1/1/05 to 6/30/05 (see amortization schedule) P 9,354
7/1/05 to 12/31/0 (see amortization schedule) 9,421
129
Question No. 4
Fair value the bonds, 12/31/05 P186,363
Carrying value, 12/31/05 (see amortization schedule) 189,849
Unrealized loss on AFS, 12/31/05 (P 3,486)
Incidentally, the adjusting entry on 12/31/05 follows:
Unrealized gain on AFS P 3,375
Available for sale securities P6,861
Question No. 5
Unrealized loss on AFS ( 3,486)
Net 181,514
Carrying value, 12/31/05 (fair value) 186,363
Realized loss on sale of AFS (P 4,849)
Note: PAS 39 par. 26 states that on derecognition of a financial asset in

its entirety, the difference between (a) the carrying amount and (b) the
sum of the consideration received and any cumulative gain or loss
recognized directly in equity, shall be recognized in profit or loss.
Incidentally, the journal entry to record the sale is:
Cash P185,000
Realized loss on sale of AFS 4,849
Available for sale securities P186,363
Answers: 1) C; 2) B; 3) A; 4) B, 5) C
PROBLEM NO. 12
On June 1, 2005, Pandi Corporation purchased as a long term investment
4,000 of the P1,000 face value, 8% bonds of Violet 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, 2011. Pandi uses
the effective interest method of amortization. On November 1, 2006, Pandi
sold the bonds for a total consideration of P3,925,000. Pandi intended to
hold these bonds until they matured, so year-to-year market fluctuations
were ignored in accounting for bonds.
130
QUESTIONS:
(Round off present value factors to four decimal places)
1. The purchase price of the bonds on June 1, 2005 is
a. P3,645,328 c. P3,696,736
b. P3,691,132 d. P3,624,596
2. The interest income for the year 2005 is
a. P215,850 c. P212,829
b. P215,521 d. P211,612
3. The carrying value of the investment in bonds as of December 31, 2005
is
a. P3,725,919 c. P3,719,986
b. P3,649,541 d. P3,671,490
a. P306,607 c. P311,218
b. P310,715 d. P304,748
5. The gain on sale of investment in bonds on November 1, 2006 is
a. P21,196 c. P 27,632
b. P80,235 d. P104,045
Suggested Solution:
Question No. 1
PV of principal (P4,000,000 x 0.5568) P2,227,200
PV of interest [(P4,000,000 x 4%) x 8.8633] 1,418,128
Purchase price P3,645,328
Question No. 2
June 1 to Nov. 30 (P3,645,328 x 10% x 6/12) P182,266
Dec. 1 to Dec. 31 (P3,667,594a x 10% x 1/12) 30,563
a Computation of carrying value,12/1/05:
Add discount amortization,
6/1/05 to 11/30/05:
Effective interest (P3,645,468 x 10% x 6/12) P182,266
Nominal interest (P4,000,000 x 8% x 6/12) 160,000 22,266
131
Question No. 3
12/1/05 to 12/31/05:
Question No. 4
Jan. 1 to May 31 (P3,667,594 x 10% x 5/12) P152,816
June 1 to Nov. 1 (P3,690,974b x 10% x 5/12) 153,791
b Computation of carrying value,6/1/06:
12/1/05 to 5/31/06
Question No. 5
Total proceeds P3,925,000
Less accrued interest (P4,000,000 x 8% x 5/12) 133,333
Sales proceeds 3,791,667
Less carrying value, 11/1/06 (see below) 3,711,432
Gain on sale on investment in bonds P 80,235
Computation of carrying value,11/1/06:

6/1/06 to 11/1/06
Answers: 1) A; 2) C; 3) D; 4) A, 5) B
132
PROBLEM NO. 13
On May 1, 2003, Plaridel Corporation acquired P1,600,000 of J & B
Corporation 9% bonds at 97 plus accrued interest. Interest on bonds is
payable semiannually on March 1 and September 1, and bonds mature on
September 1, 2006. Plaridel intends to hold these bonds until they
matured.
Due to an isolated event that is beyond Plaridel’s control, is non-recurring

and could not have been reasonably anticipated by Plaridel, the company
sold bonds of P480,000 for 103 plus accrued interest on May 1, 2004.
On July 1, 2005, bonds of P640,000 were exchanged for 90,000 shares of J

& B Corporation, common, no par value, quoted on the market on this date
at P8 per share. Interest was received on bonds to date of exchange.
On September 1, 2006, remaining bonds were redeemed and accrued

interest was received.
QUESTIONS:
(Use the straight line amortization method)
1. Total interest income for 2003 is
a. P96,000 c. P105,600
b. P86,400 d. P106,800
2. The carrying value of the investment in bonds as of December 31, 2003
is
a. P1,561,600 c. P1,562,800
b. P1,540,000 d. P1,564,000
3. The gain on sale of the bonds on May 1, 2004 is
a. P 0 c. P 2,880
b. P4,320 d. P24,480
4. The gain on exchange the bonds on July 1, 2005 is
a. P 0 c. P57,920
b. P86,720 d. P73,280
5. Total cash received by the company on September 1, 2006 is
a. P501,600 c. P480,000
b. P523,200 d. P508,800
133
Suggested Solution:
Question No. 1
Nominal interest (P1,600,000 x 9% x 8/12) P 96,000
Discount amortization for 2003 (P48,000 x 8/40) 9,600
Question No. 2
Carrying value, 5/1/03 (P1,600,000 x 97%) P1,552,000
Add discount amortization for 2003 (see no. 1) 9,600
Question No. 3
Selling price (P480,000 x 1.03) P494,400
Less carrying value of bonds sold:
Face value P480,000
Less unamortized bond discount, 5/1/04
to 9/1/06 (P48,000 x 480/1,600 x 28/40) 10,080 469,920
Gain on sale of investment in bonds P 24,480
PAS 39 par. 52 states that whenever sales or reclassifications of more than an
insignificant amount of held-to-maturity investments do not meet any of the
conditions in par. 9, any remaining held-to-maturity investments shall be
reclassified as available for sale. Since the sale of the bonds on May 1, 2004 is
due to an isolated event that is beyond Plaridel’s control, is non-recurring and
could not have been reasonably anticipated by Plaridel, the investment is not
required to be reclassified as available for sale.
Question No. 4
Fair value of stocks received (P90,000 x P8) P720,000
Less carrying value of bonds exchanged:
Face value P640,000
Less unamortized bond discount, 7/1/05
to 9/1/06 (P48,000 x 640/1,600 x 14/40) 6,720 633,280
Gain on exchange of bonds P 86,720
Question No. 5
Face value of remaining bonds
(P1,600,000 - P480,000 - P640,000) P480,000
Interest, 3/1/06 to 9/1/06 (P480,000 x 9% x 6/12) 21,600
Total cash received, 9/1/06 P501,600
Answers: 1) C; 2) A; 3) D; 4) B, 5) A
134
PROBLEM NO. 14
Pulilan Company’s accounting records showed the following investments at
January 1, 2006:
Common stock:
Jang Company (1,000 shares) P 500,000
Geum Company (5,000 shares) 5,000,000
Parking lot (leased to Jewel Company) 2,500,000
Trademark 2,000,000
Total investments P10,000,000
Pulilan owns 1% of Jang and 30% of Geum. During the year ended
December 31, 2006, Pulilan received cash dividends of P350,000 from
Jang and P750,000 from Geum, whose 2006 net earnings were
P4,000,000 and P10,000,000 respectively.
The Jewel lease which commenced on January 1, 2005 is for 5 years at

an annual rental of P1,250,000. In addition, on January 1, 2005,
Jewel paid a nonrefundable deposit of P400,000 as well as a security
deposit of P250,000, to be refunded upon expiration of lease. Pulilan
received P1,250,000 rent from Jewel in 2006.
The trademark was licensed to Palace Company for royalties of 10% of

sales of the trademark items. Royalties are payable semiannually on
March 1, for sales in July through December of the prior year, and on
September 1, for sales in January through June of same year. On
March 1, 2005 and 2006, Pulilan received royalties of P500,000 and
P750,000, respectively. On September 1, 2005 and 2006, Pulilan
received royalties of P1,000,000 and P1,500,000 respectively. Palace
Company’s sales of the trademarked items totaled P4,000,000 for the
last half of 2006.
QUESTIONS:
1. Total income from investments in equity securities

a. P3,350,000 c. P4,100,000
b. P1,100,000 d. P3,000,000
2. Rent income for 2006
a. P1,250,000 c. P1,650,000
b. P1,330,000 d. P1,380,000
135
3. Royalty income for 2006
a. P1,500,000 c. P2,500,000
b. P2,000,000 d. P1,900,000
Suggested Solution:
Question No. 1
Dividend income from Jang P 350,000
Investment income from Geum (P10,000,000 x 30%) 3,000,000
Total income from investments in equity securities P3,350,000
Question No. 2
Annual rental P1,250,000
Amortization of lease bonus (P400,000/5) 80,000
Rent income for 2006 P1,330,000
Question No. 3
January to June 2006 P1,500,000
July to December 2006 (P4,000,000 x 10%) 400,000
Royalty income for 2006 P1,900,000
Answers: 1) A; 2) B; 3) D
PROBLEM NO. 15
Select the best answer for each of the following:
1. Which of the following is not a control that is designed to protect
investment securities?
a. Access to securities should be vested in more than one individual.
b. Securities should be properly controlled physically in order to
prevent unauthorized usage.
c. Securities should be registered in the name of the owner.
d. Custody over securities should be limited to individuals who have
recordkeeping responsibility over the securities.
2. Which of the following controls would a company most likely use to

safeguard investment securities when an independent trust agent is not
employed?
a. The chairman of the board verifies the investment securities, which
are kept in a bank safe deposit box, each year on the balance sheet
date.
136
b. The investment committee of the board of directors periodically
reviews the investment decisions delegated to the treasurer.
c. Two company officials have joint control of investment securities,
which are kept in a bank safe deposit box.
d. The internal auditor and the controller independently trace all
purchases and sales of investment securities from the subsidiary
ledgers to the general ledger.
3. Which of the following controls would an entity most likely use to assist
in satisfying the completeness assertion related to long-term
investments?
a. The controller compares the current market prices of recorded
investments with the brokers’ advices on file.
b. Senior management verifies that securities in the bank safe deposit
box are registered in the entity’s name.
c. The internal auditor compares the securities in the bank safe
deposit box with recorded investments.
d. The treasurer vouches the acquisition of securities by comparing
brokers’ advices with canceled checks.
4. Which of the following controls would an entity most likely use in

safeguarding against the loss of investment securities?
a. A designated member of the board of directors controls the
securities in a bank safe deposit box.
b. An independent trust company that has no direct contact with the
employees who have record-keeping responsibilities has possession
of securities.
c. The internal auditor verifies the investment securities in the entity’s
safe each year on the balance sheet date.
d. The independent auditor traces all purchases and sales of
investment securities through the subsidiary ledgers to the general
ledger.
5. When negotiable securities are of considerable volume, planning by the

auditor is necessary to guard against
a. Substitution of securities already counted for other securities which
should be on hand but are not.
b. Substitution of authentic securities with counterfeit securities.
c. Unauthorized negotiation of the securities before they are counted.
d. Unrecorded sales of securities after they are counted.
6. In auditing investments for proper valuation, the auditor should do all

but the following:
137
a. Vouch purchases and sales of securities by tracing to brokers'
advices and canceled checks.
b. Compare cost and market by reference to year end market values
for selected securities.
c. Confirm securities held in safekeeping off the client's premises.
d. Recalculate gain or loss on disposals.
7. An audit procedure that provides evidence about proper valuation of

trading securities arising from a short-term investment of excess cash
is
a. Recalculation of investment carrying value by applying the equity
method.
b. Comparison of carrying value with current market quotations.
c. Confirmation of securities held by broker.
d. Calculation of premium or discount amortization.
8. The auditee has acquired another company by purchase. Which of the

following would be the best audit procedure to test the appropriateness
of the allocation of cost to tangible assets?
a. Evaluate procedures used to estimate and record fair market values
for purchased assets.
b. Determine whether assets have been recorded at their book value at
the date of purchase.
c. Evaluate the reasonableness of recorded values by discussion with
operating personnel.
d. Evaluate the reasonableness of recorded values by use of
replacement cost data.
9. The auditee has just acquired another company by purchasing all its
assets. As a result of the purchase, "goodwill" has been recorded on
the auditee's books. Which of the following comparisons would be the
most appropriate audit test for the amount of recorded goodwill?
a. The purchase price and the fair market value of assets purchased.
b. The purchase price and the book value of assets purchased.
c. The figure for goodwill specified in the contract for purchase.
d. Earnings in excess of 15% of net assets for the past five years.
10. Of the following, which is the most efficient audit procedure for testing
accrued interest earned on bond investments?
a. Vouching the receipt and deposit of interest checks.
b. Tracing interest declarations to an independent record book.
c. Recomputing interest earned.
d. Confirming interest rate with the issuer of the bonds.
Answers: 1) D; 2) C; 3) C; 4) B, 5) A; 6) C; 7) B; 8) A; 9) A; 10) C
138
Page 1 of 4
CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
AUDITING PROBLEMS
AUDIT OF INVESTMENTS - QUIZZERS
PROBLEM NO. 1
The following transactions appear on the “Trading Securities” account of CHICKER
Corporation:
Date Particulars Debit Credit
03/1/05 Purchased 40,000 shares of PLDT at
P30.75/share and 20,000 shares of Benpres at P1,690,000
P23/share
07/3/05 Purchased PAG-IBIG 15% bonds, face value
P4,000,000. Interest dates July 1 and Jan 1.
Maturity date July 1, 2009 4,000,000
11/5/05 Sold 14,400 shares of PLDT at P30/share and
4,000 shares of Benpres at P25/share P532,000
12/31/05 Sold PAG-IBIG bonds at 98 plus accrued interest 4,220,000
Your audit revealed the following additional information:
1. CHICKER received on Oct. 1, 2005, 8,000 shares of PLDT as stock dividend.
2. Benpres declared a 15% stock dividend to all stockholders of record as of November
15, 2005 payable December 1, 2005.
Note: Disregard broker’s commission and stock transfer tax in your solution.
QUESTIONS:
1. How much is the adjusted balance of CHICKER’s “trading securities” as of December
31, 2005?
a. P935,200 b. P1,155,200 c. P1,158,000 d. P1,229,000
2. How much is the average cost per share of PLDT’s stocks as of December 31, 2005?
a. P23.43 b. P25.63 c. P29.50 d. P30.75
3. How much is the average cost per share of Benpres stocks as of December 31,
2005?
a. P20.00 b. P22.50 c. P23.00 d. P25.00
4. How much is the total gain (loss) on sale of trading securities for the year 2005?
a. P291,000 b. P3,000 c. (P82,800) d. (P9,000)
SUGGESTED ANSWERS: D, B, A, D
PROBLEM NO. 2
In connection with your audit of the financial statements of the Pin Shop Company for the
year 2005, the following Available for Sale Securities and Dividend Income accounts were
presented to you:
Available for Sale Securities
01/15/2005 10,000 shares common,
par value P50, SPIKES Co. VR-18 390,000
04/30/2005 5,000 shares SPIKES Co.
received as stock dividend CJ-7 250,000
05/20/2005 Sold 5,000 shares @ P25 CR-21 125,000
12/10/2005 Sold 2,000 shares @ P60 CR-S2 120,000
AP-5904Q
Page 2 of 4
Dividend Income
04/30/2005 Stock dividend SJ-7 `250,000
11/30/2005 SPIKES Company common CR-22 50,000
The following information was obtained during your examination:
1. From independent sources, you determine the following dividend information:
Date Date of Date of
Type of Dividend Declared Record Payment Rate
Stock 03/15/2005 04/01/2005 04/30/2005 50%
Cash 11/01/2005 11/15/2005 11/28/2005 P5/share
Cash 12/01/2005 12/15/2005 01/02/2006 20%
2. Closing market quotation as at December 31, 2005:
Bid Asked
SPIKES Company common 13-3/4 16-1/2
QUESTIONS:
1. How much is the gain (loss) on the May 20, 2005 sale?
a. (P5,000) b. (P70,000) c. P5,000 d. P0
2. How much is the gain on the December 10, 2005 sale?
a. P68,000 b. P42,000 c. P48,000 d. P0
a. P300,000 b. P50,000 c. P400,000 d. P150,000
4. How much is the adjusted balance of Available for Sale Securities as of December
31, 2005?
a. P145,000 b. P110,000 c. P132,000 d. P208,000
5. How much is the Unrealized Loss on AFS as of December 31, 2005?
a. P98,000 b. P76,000 c. P35,000 d. P0
SUGGESTED ANSWERS: A, C, D, B, A
PROBLEM NO. 3
Your client, UK Company, showed the following details of its Investment in Stock account
for the year 2005:
Investment in Stock
Jan. 01 Audited balance, 40,000 shares P800,000
Feb. 14 Cash dividend P20,000
Mar. 31 Shares purchased 90,000
Apr. 01 Sale of rights 60,000
Jun. 30 Sale of shares 110,000
Dec. 31 Balance 700,000
P890,000 P890,000
The following transactions occurred:
1. A cash dividend of P0.50 per share was received on Feb. 14. The adjusting entry is:
Debit Credit
a. Investment in Stock 20,000 Dividend income 20,000
b. Retained earnings 20,000 Dividend income 20,000
c. Dividend income 20,000 Investment in Stock 20,000
d. None
AP-5904Q
Page 3 of 4
2. On March 15, stock rights were received entitling shareholders to purchase one share
for every five held at P15 per share. Market values on this date were: shares, P20;
rights, P5. The adjusting entry to recognize the cost allocated to the right is:
Debit Credit
a. Stock rights 160,000 Investment in Stock 160,000
b. Stock rights 200,000 Investment in Stock 200,000
c. Stock rights 38,000 Investment in Stock 38,000
d. None
3. On March 31, 6,000 shares were purchased with the partial exercise of the rights.
The adjusting entry, after the adjustment in No. 2 above has been effected, is:
Debit Credit
a. Investment in Stock 120,000 Stock rights 120,000
b. Investment in Stock 150,000 Stock rights 150,000
c. Investment in Stock 28,500 Stock rights 28,500
d. None
4. On April 1, the remaining rights were sold for P60,000. The adjusting entry,
considering the adjustment in No. 2 above has been effected, is:
Debit Credit
a. Investment in Stock 60,000 Gain on sale of rights 60,000
b. Investment in Stock 20,000 Gain on sale of rights 20,000
c. Investment in Stock 60,000 Stock rights 40,000
Gain on sale of rights 20,000
d. None
5. On June 30, 4,600 shares were sold for P110,000. The adjusting entry is:
Debit Credit
a. Cash 110,000 Investment in Stock 85,000
Gain on sale of stock 25,000
b. Investment in Stock 36,400 Gain on sale of stock 36,400
c. Investment in stock 25,000 Gain on sale of stock 25,000
d. None
6. How much is the adjusted balance of the Investment in Stock account as of
December 31, 2005?
a. P765,000 b. P700,000 c. P776,400 d. P801,000
SUGGESTED ANSWERS: A, A, A, C, B, C
PROBLEM NO. 4
The following two subsidiary accounts reflect the trading securities of Jordano Company
for the year 2005:
LOYAL COMPANY
Date Transactions Shares Ref. Debit Credit
Jan. 16 Purchase 20,000 CD P1,900,000
31 Raised to market value,
offset credit to retained GJ 100,000
earnings
Mar. 30 Sale at P150 10,000 CR P1,500,000
June 10 Stock dividend at par 10,000 GJ 1,000,000
July 29 Sale at P110 10,000 CR . 1,100,000
Totals P3,000,000 P 2,600,000
AP-5904Q
Page 4 of 4
FAITHFUL CORP.
Date Transactions Shares Ref. Debit Credit
Sep. 05 Purchase 20,000 CD P1,000,000
28 Cash dividends to
stockholders of record P 50,000
Sept. 15, declared Aug. 15 CR
Oct. 01 Purchase 50,000 CD 2,500,000
05 Sale at P65 20,000 CR 1,000,000
Nov.30 Cash collected for sale
made on Nov. 10, after a
Nov. 1 declaration of P5
cash dividend per share to
stockholders on record as
of December 1 20,000 CR 3,300,000
Dec.15 Cash dividend received CR . 150,000
Totals P3,500,000 P4,500,000
On January 2, 2005, Jordano Company purchased 39,000 shares of Trustworthy Co.’s
200,000 shares of outstanding common stock for P1,170,000. On that date, the carrying
amount of the acquired shares on Trustworthy Co.’s books was P810,000. Jordano
attributed the excess of cost over carrying amount to goodwill.
During 2005, Jordano’s president gained a seat on Trustworthy’s board of directors.
Trustworthy reported earnings of P800,000 for the year ended December 31, 2005, and
declared and paid cash dividends of P200,000 during 2005. On December 31, 2005,
Trustworthy’s common stock was trading at P30 per share.
QUESTIONS:
1. The gain on sale of 10,000 shares of Loyal Company on March 30 is
a. P500,000 b. P1,500,000 c. P550,000 d. None
2. The gain on sale of 10,000 shares of Loyal Company on July 29 is
a. P625,000 b. P337,500 c. P525,000 d. P150,000
3. The correct acquisition cost of 20,000 shares of Faithful Corp. acquired on
September 5 is
a. P3,500,000 b. P950,000 c. P1,000,000 d. P3,450,000
4. The gain on sale of 20,000 shares of Faithful Corp. October 5 is
a. P350,000 b. P300,000 c. P1,028,500 d. P314,300
5. The gain on sale of 20,000 shares of Faithful Corp. on November 10 is
a. P1,000,000 b. P2,400,000 c. P2,300,000 d. P2,200,000
6. The balance of the Company’s investment in Loyal Company before mark-to-market
on December 31, 2005 is
a. P475,000 b. P500,000 c. P1,475,000 d. P525,000
7. The adjusted balance of the Company’s investment in Faithful Corp. before mark-to-
market on December 31, 2005 is
a. P1,500,000 b. P1,350,000 c. P1,200,000 d. P1,000,000
8. The income from investment in common stock of Trustworthy Company to be
reported on the income statement for the year ended December 31, 2005 is
a. P156,000 b. P159,000 c. P120,000 d. P39,000
9. The adjusted balance of investment in Trustworthy Company at December 31, 2003
is
a. P1,326,000 b. P1,170,000 c. P1,287,000 d. P1,251,000
SUGGESTED ANSWERS: C, A, B, A, D, A, A, A, C
– End of AP-5904Q –
AP-5904Q
Page 1 of 9
CEBU CPAR CENTER

Mandaue CIty
AUDITING PROBLEMS
AUDIT OF INVESTMENTS
PROBLEM NO. 1
You were engaged by MISMO COMPANY to audit its financial statements for the year
2005. During the course of your audit, you noted that the following trading securities were
properly reported as current assets at December 31, 2004:
Cost Market
Aquata Corporation, 10,000 shares,
convertible preferred shares P 900,000 P 975,000
Andrina, Inc., 60,000 shares of common stock 1,350,000 1,485,000
Attina Co., 20,000 shares of common stock 1,237,500 900,000
P3,487,500 P3,360,000
The following sale and conversion transactions transpired during 2005:

Mar. 27 Sold 25,000 shares of Andrina for P33.75 per share.
April 15 Sold 5,000 shares of Attina for P45 per share.
Sept. 21 Converted 5,000 shares of Aquata’s preferred stock into 15,000 shares
of Aquata’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 2005 dividend information pertains to stocks owned by MISMO:

Jan. 12 Attina issued a 10% stock dividend when the market price of Attina’s
common stock was P49.50 per share.
March 31 and Aquata paid dividends of P2.50 per share on its preferred stock, to
Sept. 30 stockholders of record on March 15 and September 15, respectively.
Aquata did not pay dividends on its common stock during 2005.
July 1 Andrina paid a P2.25 per share dividend on its common stock.
June 30 Adella paid semi-annual dividends of P1.50 on each of these dates.
and Dec. 31 Adella’s net income for the year ended December 31, 2005 was
P2,400,000.
On January 2, 2005, MISMO purchased 100,000 shares of Adella Corporation common

stock for P3,600,000, representing 20% of Adella’s outstanding common stock and an
underlying equity of P3,150,000 in Adella’s net assets on January 2, 2005.
MISMO intends to hold Adella’s stock as a long-term investment, with the remaining
investments being considered as held for trading. Market prices per share of the securities
were as follows:
12/31/2005 12/31/2004
Aquata Corp., preferred 92.25 97.50
Aquata Corp., common 42.75 38.25
Andrina, Inc., common 22.50 24.75
Attina Co., common 40.50 45.00
Adella Corp., common 40.00 36.75
All of the foregoing stocks are listed in the Philippine Stock Exchange. Declines in market
value from cost would not be considered permanent.
AP-5904
Page 2 of 9
REQUIRED
Based on the above and the result of your audit, you are to provide the answers to the
following:
1. How much is the gain on sale of Andrina shares?
a. P225,000 b. P281,250 c. P562,500 d. P0
2. How much is the gain or loss on sale of Attina shares?
a. P20,455 gain b. P56,250 gain c. P56,250 loss d. P0
3. How much is the gain or loss on conversion of 5,000 Aquata preferred stock into
15,000 common stock?
a. P93,750 loss b. P258,750 gain c. P56,250 loss d. P0
a. P128,750 b. P103,750 c. P202,750 d. P728,750
5. How much is the net investment income on investment in Adella Corp. in 2005?
a. P480,000 b. P457,500 c. P577,500 d. P502,500
6. How much is the carrying amount of MISMO’s investment in Adella Corp. as of
December 31, 2005?
a. P3,780,000 b. P3,600,000 c. P3,757,500 d. P4,000,000
7. Assuming MISMO has no significant influence on Adella Corp., how much is the
carrying amount of MISMO’s investment in Adella Corp. as of December 31, 2005?
a. P4,000,000 b. P3,600,000 c. P3,757,500 d. P3,780,000
8. Assuming MISMO has no significant influence on Adella Corp. and the stock of Adella
has no reliable fair value, how much is the carrying amount of MISMO’s investment in
Adella Corp. as of December 31, 2005?
a. P3,600,000 b. P3,780,000 c. P3,757,500 d. P4,000,000
9. Using the same assumptions in no. 8 and that Adella Corp. declared semi-annual
cash dividends of P3 per share, how much is the carrying amount of MISMO’s
investment in Adella Corp. as of December 31, 2005?
a. P3,480,000 b. P3,757,500 c. P3,235,000 d. P3,600,000
10. The trading securities should be reported on MISMO’s December 31, 2005 balance
sheet at
a. P2,578,500 b. P2,587,500 c. P5,813,500 d. P2,421,000
11. How much should be reported as unrealized gain on trading securities?

a. P135,545 b. P9,000 c. P118,500 d. P0
PROBLEM NO. 2
On December 31, 2004, La Cost Company’s balance sheet showed the following
balances related to its securities accounts:
Trading securities P1,477,500
Available-for-sale securities (AFS) 1,180,000
Interest receivable-Mayniladlad water bonds 12,500
Unrealized gain - AFS 100,000
La Cost’s securities portfolio on December 31, 2004, was made up of the following
securities:
Security Classification Cost Market

10,000 shares Yeye Bonel Corp. stock Trading P750,000 P762,500
8,000 shares Totoy Bibo Inc. stock Trading 550,000 528,250
10% Mayniladlad water bonds (interest
payable semiannually on Jan. 1 and Jul. 1) Trading 250,000 186,750
AP-5904
Page 3 of 9
Security Classification Cost Market

10,000 shares Bulaklak Inc. stock Available for 590,000 630,000
sale
20,000 shares Jumbo Hotdog Unlimited Inc. Available for 490,000 550,000
stock sale
During 2005, the following transactions took place:
Jan. 3 Receive interest on the Mayniladlad water bonds.

Mar. 1 Purchased 3,000 additional shares of Yeye Bonel Corp. stock for P229,500,
classified as a trading security.
Apr. 15 Sold 4,000 shares of the Totoy Bibo Inc. stock for P69 per share.
May 4 Sold 4,000 shares of the Bulaklak Inc. stock for P62 per share.
July 1 Received interest on the Mayniladlad water bonds.
Oct. 30 Purchased 15,000 shares of Pasaway Co. stock for P832,500, classified as a
trading security.
The market values of the stocks and bonds on December 31, 2005, are as follows:
Yeye Bonel Corp. stock P76.60 per share
Totoy Bibo Inc. stock P68.50 per share
Pasaway Co. stock P55.25 per share
Mayniladlad water bonds P205,550
Bulaklak Inc. stock P61.00 per share
Jumbo Hotdog Unlimited Inc. stock P27.00 per share
QUESTIONS:
1. Gain or loss on sale of 4,000 Totoy Bibo Inc. shares on April 15, 2005
a. P1,000 gain b. P1,000 loss c. P11,875 gain d. P11,875 loss
2. Net realized gain or loss on sale of 4,000 Bulaklak Inc. shares on May 4, 2005
a. P12,000 gain b. P12,000 loss c. P4,000 gain d. P4,000 loss
3. Carrying value of Trading Securities as of December 31, 2005
a. P2,337,000 b. P2,287,800 c. P2,304,100 d. P2,297,400
4. Carrying value of Available for Sale Securities as of December 31, 2005
a. P844,000 b. P806,000 c. P906,000 d. P944,000
5. In 2005, what amount of unrealized gain or loss should be shown as component of
income and stockholders’ equity?
Income Stockholders’ equity
a. P28,725 gain P62,000 gain
b. P28,725 gain P22,000 loss
c. P32,900 loss P122,000 loss
d. P39,600 gain P78,000 gain
PROBLEM NO. 3
GUEST COMPANY has a stock investment in Marciano Corporation. Described below are
the transactions pertaining to this investment:
a) On January 2, 1998, GUEST purchased 10,000 shares of P100 par value common
stock at P110 per share. The company debited Investment in Stock account.
AP-5904
Page 4 of 9
b) The Marciano Corporation was expanding and on March 2, 1999 it issued stock rights
to its stockholders. Each right entitles GUEST to purchase one fourth (¼) share of
common stock at par. The market value of the stock on that date was P140 per
share. There was no quoted price for the rights. No journal entry was made to
record the foregoing.
c) On April 2, 1999, GUEST exercised all its stock rights. The Investment in Stock
account was charged for the amount paid.
d) GUEST’s accountant felt that the cash paid for the new shares was merely an
assessment since GUEST’s proportionate share in Marciano was not changed.
Hence, he credited all dividends (5% in December of each year) to the Investment in
Stock account until the debit was fully offset.
e) GUEST received a 50% stock dividend from Marciano in December 2003. Because
the shares received were expected to be sold, the company’s president instructed the
accountant not to make any entry for this dividend. The company did sell the
dividend shares in January 2004 for P160 per share. The proceeds from the sale
were credited to income.
f) In December 2004, Marciano’s stocks were split on a two-for-one basis and the new
shares were issued as no par shares. GUEST found that each new share was worth
P10 more than the P110 per share original acquisition cost. For this reason, GUEST
decided to debit the Investment in Stock account with the additional shares received
at P120 per share and credited revenue for it.
g) In August 2005, GUEST sold one half (½) of its holdings in Marciano at P100 per
share. The proceeds were credited to the Investment in Stock account.
GUEST uses the average method in recording disposals of its investment in stock.
REQUIRED
1. Prepare the journal entry to record the receipt of stock rights on March 2, 1999.
2. What is the total cost of the shares acquired on April 2, 1999?
3. What was the average cost per share of GUEST’s Investment in Stock after the
exercise of the stock rights on April 2, 1999?
4. Compute the amount of cash dividends received by GUEST for the period 1999 to
2002.
5. Prepare the journal entry to record the stock dividend received.
6. Determine the gain or loss on the sale of dividend shares received.
7. How many shares were received by GUEST as a result of the two-for-one stock split?
8. What journal entry should be made to record the stock split?
9. How much gain or loss should have been recognized by GUEST from the sale of
stocks in August 2005?
10. How much is the unadjusted balance of the Investment in Stock account on
December 31, 2005?
11. How much is the adjusted balance of the Investment in Stock account on December
31, 2005?
AP-5904
Page 5 of 9
PROBLEM NO. 4
The LEE BUYS COMPANY had acquired interest in a promising local company, the Silver
Tab Company. During your audit of the company’s accounts for the year 2005, which was
a first audit, you obtained the following:
Investment in Silver Tab Company
2003–Jan. 2 30,000 sh @35 P1,050,000 2005–Jul. 15 50,000 sh @40 P2,000,000
2004–Jul. 2 90,000 sh @60 5,400,000
2005–Mar. 2 30,000 sh @70 2,100,000
Investment in Red Tab Company

2005 - Aug. 10 P10,000
Dividend Income
2005 January. 2 P120,000
April 1 150,000
August 10 10,000
December 20 100,000
The transactions pertaining to the foregoing for 2005 were as follows:

Jan. 2 Received cash dividend (declared on December 1) of P1 per share.
Mar. 2 Bought 30,000 shares at P70 per share.
Apr. 1 Received cash dividend (declared on March 1 to stockholders of record as of
March 10) of P1 per share.
July 15 Sold 50,000 shares at P40 per share.
Aug. 10 Received an “extra” dividend in stock of one share of Red Tab Company for
every ten shares of Silver Tab Company. The stock dividend had a market
value of P3 per share and its book value on the ledger of Silver Tab Company
was P1 per share.
Dec. 20 Received cash dividend of P1 per share, declared December 1, out of Silver
Tab Company’s “Reserve for Depletion”.
29 Sold 10,000 Silver Tab Company shares at P90. Cash was received on
January 5, 2006.
QUESTIONS:
1. Loss on sale of 50,000 Silver Tab Company shares on July 15, 2005
a. P250,000 b. P1,300,000 c. P850,000 d. P0
2. Gain on sale of 10,000 Silver Tab Company shares on December 29, 2005
a. P330,000 b. P310,000 c. P300,000 d. P0
3. Adjusted balance of Investment in Silver Tab Company as of December 31, 2005
a. P5,570,000 b. P5,130,000 c. P5,580,000 d. P5,640,000
4. Adjusted balance of Investment in Red Tab Company as of December 31, 2005
a. P10,000 b. P20,000 c. P30,000 d. P0
5. Dividend income for the year ended December 31, 2005
a. P180,000 b. P160,000 c. P150,000 d. P280,000
AP-5904
Page 6 of 9
PROBLEM NO. 5
On July 1, 2005, Pir Carding Company acquired 25% of the outstanding shares of
common stock of Cinderela Corporation at a total cost of P7,000,000. The underlying
equity of the stock acquired by Pir Carding was only P6,000,000. Pir Carding is willing to
pay more than the book value for the following reasons:
a) Cinderela owned depreciable plant assets (10-year remaining economic life) with a
current fair value of P600,000 more than their carrying amount.
b) Cinderela owned land with current fair value of P3,000,000 more than its carrying
amount.
c) There are no other identifiable tangible or intangible assets with fair value in excess of
book value. Accordingly, the remaining excess, if any, is to be allocated to goodwill.
Cinderela earned net income of P5,400,000 evenly over the year ended December 31,
2005. On December 31, Cinderela declared and paid a cash dividend of P1,050,000 to
common stockholders. Market value of Pir Carding’s share of the stock at December 31,
2005 is P7,500,000. Both companies close their accounting records on December 31.
QUESTIONS:
1. Total amount of goodwill of Cinderela Corporation based on the price paid by Pir
Carding
a. P4,000,000 b. P400,000 c. P1,000,000 d. P100,000
2. Net investment income from Investment in Cinderela Corporation
a. P675,000 b. P667,500 c. P1,335,000 d. P662,500
3. Carrying value of Investment in Cinderela Corporation as of December 31, 2005
a. P7,412,500 b. P7,667,500 c. P7,405,000 d. P7,662,500
PROBLEM NO. 6
On June 1, 2004, You Corporation purchased as a long term investment 4,000 of the
P1,000 face value, 8% bonds of Too Corporation. You Corporation has the positive
intention and ability to hold these bonds to maturity. 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, 2010. On November 1, 2005, You Corporation sold the bonds for a
total consideration of P3,925,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Round off
present value factors to four decimal places)
1. The purchase price of the bonds on June 1, 2004 is
a. P3,645,328 b. P3,696,736 c. P3,691,132 d. P3,624,596
a. P215,850 b. P212,830 c. P215,521 d. P211,612
3. The carrying value of the investment in bonds as of December 31, 2004 is
a. P3,725,919 b. P3,719,986 c. P3,649,541 d. P3,671,491
a. P306,607 b. P311,218 c. P310,715 d. P304,748
5. The gain on sale of investment in bonds on November 1, 2005 is
a. P21,196 b. P27,632 c. P80,235 d. P104,045
AP-5904
Page 7 of 9
PROBLEM NO. 7
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 contents of the safe deposit box at
the balance sheet date.
b. Examine supporting evidence for transactions occurring during the year.
c. Count the securities at a subsequent date and confirm with bank whether securities
were added or removed since the balance sheet date.
d. Request the client to have a 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 client’s 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
client’s 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 auditor’s primary objectives in an audit of
trading securities?
a. To determine whether securities are authentic.
b. To determine whether securities are the property of the client.
c. To determine whether securities actually exist.
d. To determine whether securities are properly classified on the balance sheet date.
4. Apol Boba, CPA, observes the count of securities on December 31. She records the
serial numbers of the securities and reconciles them 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 December 15. The
stock certificate for the additional shares was received directly by the treasurer who
made no record of the receipt and embezzled the shares.
b. The treasurer embezzled and sold securities on April 4. She speculated
successfully with the proceeds and replaced the securities on December 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 December 2.
d. The treasurer embezzled interest receipts from bonds by having the payments
mailed directly to him.
5. 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 checks issued in payment of securities purchased.
b. Vouching all changes during the year to supporting documents.
c. Simultaneous count of liquid assets.
d. Confirmation from the custodian.
6. An auditee is holding equity securities as collateral for a debt. The auditor should
a. Determine from data published in the financial press that the auditee has recorded
dividend income from the collateral.
b. Ascertain the value of the securities.
AP-5904
Page 8 of 9
c. Ascertain that the amount recorded for the collateral in the investment account is
equal to its fair value at the balance sheet date.
d. Verify that the client has taken title to the securities.
7. 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 amount received with published dividend records.
c. Comparing the amounts received with preceding year dividends received.
d. Recomputing selected extensions and footings of dividend schedules and
comparing totals to the general ledger.
8. In confirming with an outside agent, such as a financial institution, that the agent is
holding investment securities in the client’s name an auditor most likely gathers
evidence in support of management’s financial statement assertions of existence and
a. Valuation c. Completeness
b. Rights and obligations d. Presentation and disclosure
9. In establishing the existence and ownership of an investment held by a corporation in

the form of publicity traded stock and auditor should inspect the securities or
a. Obtain written representations from management confirming that the securities are
properly classified as trading securities.
b. Inspect the audited financial statements of the investee company.
c. Confirm the number of shares held by an independent custodian.
d. Determine that the investment is carried at the lower of cost or market.
10. An auditor 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 face amount, interest rate, and
period held.
d. Testing controls relevant to cash receipts.
11. Which of the following provides the best form of evidence pertaining to the annual
valuation of an investment in which the independent auditor’s client owns a 30% voting
interest?
a. Market quotations of the investee company’s stock.
b. Current fair value of the investee company’s assets.
c. Historical cost of the investee company’s assets.
d. Audited financial statements of the investee company.
12. In verifying the amount of goodwill recorded by a client, the most convincing evidence
an auditor can obtain is by comparing the recorded value of assets acquired with the
a. Assessed value as evidenced by tax bills.
b. Seller’s book value as evidenced by financial statements.
c. Insured value as evidenced by insurance policies.
d. Appraised value as evidenced by independent appraisals.
13. The auditor can best verify a client’s bond sinking-fund transactions and year-end
balance by
a. Confirmation with individual holders of retired bonds.
b. Confirmation with the bond trustee.
c. Recomputation of interest expense, interest payable, and amortization of bond
discount or premium.
d. Examination and count of the bonds retired during the year.
AP-5904
Page 9 of 9
14. An auditor who physically examines securities should insist that a client representative
be present in order to
a. Detect fraudulent securities.
b. Lend authority to the auditor’s directives.
c. Coordinate the return of securities to the proper locations.
d. Acknowledge the receipt of securities returned.
15. In testing long-term investments, an auditor ordinarily would use analytical procedures
to ascertain the reasonableness of the
a. Classification between current and noncurrent portfolios.
b. Valuation of marketable equity securities.
c. Existence of unrealized gains or losses in the portfolio.
d. Completeness of recorded investment income.
16. In performing tests of the carrying value of trading securities, the auditor would usually:
a. Ask management to estimate the market value of the securities.
b. Refer to the quoted market prices of the securities.
c. Value the securities at cost regardless of their market prices.
d. Count the securities.
17. Which of the following statements is the least accepted reason/purpose for acquiring
long-term investments:
a. To create specific funds.
b. To yield a relatively permanent other income.
c. To generate cash for operating purposes.
d. To establish business relationships.
18. In testing long-term investments, an auditor would use analytical procedures to

ascertain the reasonableness of the classification between current and noncurrent
portfolios.
In testing long-term investments, an auditor would use analytical procedures to
ascertain the reasonableness of the valuation of marketable equity securities.
In testing long-term investments, an auditor would use analytical procedures to
ascertain the reasonableness of the existence of unrealized gains or losses in the
portfolio.
a. b. c. d.
First statement False True False False
Second statement True True False False
Third statement True True True False
– End of AP-5904 –
AP-5904
V – AUDIT OF PROPERTY, PLANT AND EQUIPMENT
PROBLEM NO. 1
Aliaga Corporation was incorporated on January 2, 2006. The following
items relate to the Aliaga’s property and equipment transactions:
Cost of land, which included an old apartment building

appraised at P300,000 P3,000,000
Apartment building mortgage assumed, including related
interest due at the time of purchase 80,000
Deliquent property taxes assumed by the Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
Proceeds from sale of salvaged materials 10,000
Architects fee for new building 60,000
Building permit for new construction 40,000
Fee for title search 25,000
Survey before construction of new building 20,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Assessment by city for drainage project 15,000
Cost of grading and leveling 50,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new building
more energy efficient 90,000
Interest cost on specific borrowing incurred during
construction 360,000
Payment of medical bills of employees accidentally injured
while inspecting building construction 18,000
Cost of paving driveway and parking lot 60,000
Cost of installing lights in parking lot 12,000
Premium for insurance on building during construction 30,000
Cost of open house party to celebrate opening of new
building 50,000
Cost of windows broken by vandals distracted by the
celebration 12,000
QUESTIONS:
1. Cost of Land
a. P2,980,000 c. P3,185,000
b. P3,270,000 d. P3,205,000
139
2. Cost of Building
a. P10,810,000 c. P10,875,000
b. P10,895,000 d. P11,110,000
3. Cost of Land Improvements
a. P12,000 c. P122,000
b. P72,000 d. P 0
4. Amount that should be expensed when incurred
a. P 80,000 c. P62,000
b. P110,000 d. P50,000
5. Total depreciable property and equipment
a. P11,182,000 c. P10,947,500
b. P10,967,000 d. P10,882,000
Suggested Solution:
PAS 16 par. 6 defines “Property, plant and equipment” as tangible items

that:
i. are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
ii. are expected to be used during more than one period.
Par. 15 and 16 further state that an item of property, plant and equipment
that qualifies for recognition of an asset shall be measured at its cost. The
cost of an item of PPE comprises:
a) its purchase price, including import duties and non-refundable
purchase taxes, after deducting trade discounts and rebates.
b) any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the
manner intended by management.
c) the initial estimate of the costs of dismantling and removing the item
and restoring the site on which it is located, the obligation for which
an entity incurs either when the item is acquired or as a consequence
of having used the item during a particular period for purposes other
than to produce inventories during that period.
Question No. 1
Cost of land P3,000,000
Apartment building mortgage assumed, including
related interest due at the time of purchase 80,000
Deliquent property taxes assumed by the Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
140
Proceeds from sale of salvaged materials (10,000)
Fee for title search 25,000
Survey before construction of new building 20,000
Assessment by city for drainage project 15,000
Cost of grading and leveling 50,000
Total cost of Land P3,270,000
Question No. 2
Architects fee for new building P60,000
Building permit for new construction 40,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new
building more energy efficient 90,000
Interest cost on specific borrowing incurred during
construction 360,000
Premium for insurance on building during construction 30,000
Total cost of Building P10,810,000
Question No. 3
Cost of paving driveway and parking lot P60,000
Cost of installing lights in parking lot 12,000
Total cost of Land Improvements P72,000
Question No. 4
Payment of medical bills of employees P18,000
Cost of open house party 50,000
Cost of windows broken by vandals 12,000
Total cost amount that should be expensed P80,000
Question No. 5
Building (see no. 2) P10,810,000
Land improvements (see no. 3) 72,000
Total depreciable PPE P10,882,000
Answers: 1) B; 2) A; 3) B; 4) A, 5) D
141
PROBLEM NO. 2
The following items relate to the acquisition of a new machine by Bongabon
Corporation in 2006:
Invoice price of machinery P2,000,000

Cash discount not taken 40,000
Freight on new machine 10,000
Cost of removing the old machine 12,000
Loss on disposal of the old machine 150,000
Gratuity paid to operator of the old machine who was
laid off 70,000
Installation cost of new machine 60,000
Repair cost of new machine damaged in the process
of installation 8,000
Testing costs before machine was put into regular 15,000
operation
Salary of engineer for the duration of the trial run 40,000
Operating cost during first month of regular use 250,000
Cash allowance granted because the new machine
proved to be of inferior quality 100,000
Question:
How much should be recognized as cost of the new machine?
a. P1,985,000 c. P1,930,000
b. P1,993,000 d. P2,025,000
Suggested Solution:
Invoice price of machinery P2,000,000
Cash discount not taken (40,000)
Freight on new machine 10,000
Installation cost of new machine 60,000
Testing costs 15,000
Salary of engineer for the duration of the trial run 40,000
Cash allowance (100,000)
Cost of the new machine P1,985,000
Answer: A
142
PROBLEM NO. 3
On January 1, 2005, Cabiao Corporation purchased a tract of land (site
number 101) with a building for P1,800,000. Additionally, Cabiao paid a
real state broker’s commission of P108,000, legal fees of P18,000 and title
guarantee insurance of P54,000. The closing statement indicated that the
land value was P1,500,000 and the building value was P300,000. Shortly
after acquisition, the building was razed at a cost of P225,000.
Cabiao entered into a P9,000,000 fixed-price contract with Cabanatuan

Builders, Inc. on March 1, 2005 for the construction of an office building
on the land site 101. The building was completed and occupied on
September 30, 2006. Additional construction costs were incurred as
follows:
Plans, specifications and blueprints P 36,000
Architect’s fees for design and supervision 285,000
The building is estimated to have a forty-year life from date of completion

and will be depreciated using the 150%-declining-balance method.
To finance the construction cost, Cabiao borrowed P9,000,000 on March 1,

2005. The loan is payable in ten annual installments of P900,000 plus
interest at the rate of 14%. Cabiao used part of the loan proceeds for
working capital requirements. Cabiao’s average amounts of accumulated
building construction expenditures were as follows:
For the period March 1 to December 31, 2005 P2,700,000
For the period January 1 to September 31, 2006 6,900,000
Cabiao is using the allowed alternative treatment for borrowing cost.
QUESTIONS:
1. Cost of land site number 101
a. P1,905,000 c. P2,205,000
b. P1,800,000 d. P2,151,000
2. Cost of office building
a. P10,581,000 c. P10,329,000
b. P10,360,500 d. P10,960,500
3. Depreciation of office building for 2006
a. P96,800 c. P102,800
b. P97,130 d. P 99,197
143
Suggested Solution:
Question No. 1
Acquisition cost P1,800,000
Real estate broker's commission 108,000
Legal fees 18,000
Title guarantee insurance 54,000
Cost of razing the existing building 225,000
Total cost of land site 101 P2,205,000
Question No. 2
Fixed-price contract cost P 9,000,000
Plans, specifications and blueprints 36,000
Architect's fees and design supervision 285,000
Capitalizable borrowing cost:
Mar. 1 to Dec. 31, 2005
(P2,700,000 x 14% x 10/12) P315,000
Jan. 1 to Sept. 30, 2006
(P6,900,000 x 14% x 9/12) 724,500 1,039,500
Total cost of office building P10,360,500
Question No. 3
Depreciation expense [P10,360,500 x (1/40x1.5) x 3/12] P97,130
Answers: 1) C; 2) B; 3) B
PROBLEM NO. 4
You noted during your audit of the Carranglan Company that the company
carried out a number of transactions involving the acquisition of several
assets. All expenditures were recorded in the following single asset
account, identified as Property and equipment:
Property and equipment

Acquisition price of land and building P 960,000
Options taken out on several pieces of property 16,000
List price of machinery purchased 318,400
Freight on machinery purchased 5,000
Repair to machinery resulting from damage
during shipment 1,480
Cost of removing old machinery 4,800
Driveways and sidewalks 102,000
Building remodeling 400,000
144
Property and equipment
Utilities paid since acquisition of building 20,800
P1,828,480
Based on property tax assessments, which are believed to fairly represent

the relative values involved, the building is worth twice as much as the
land. The machinery was subject to a 2% cash discount, which was taken
and credited to Purchases Discounts. Of the two options, P6,000 is related
to the building and land purchased and P10,000 related to those not
purchased. The old machinery was sold at book value.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted
balance of the following:
1. Land
a. P644,000 c. P326,000
b. P322,000 d. P424,000
2. Building
a. P 644,000 c. P1,044,000
b. P1,040,000 d. P 722,000
3. Machinery
a. P317,032 c. P323,400
b. P318,512 d. P321,832
Suggested Solution:
Questions No. 1 and 2

Land Building
Allocation of acquisition price:
Land (P960,000 x 1/3) P320,000
Building (960,000 x 2/3) P 640,000
Option paid on property acquired:
Land (6,000 x 1/3) 2,000
Building (6,000 x 2/3) 4,000
Cost of building remodelling 400,000
Adjusted balances P322,000 P1,044,000
Question No. 3
Net purchase price of machinery (P318,400 x .98) P312,032
Freight on machinery purchased 5,000
Adjusted balance P317,032
145
Answers: 1) B; 2) C; 3) A
PROBLEM NO. 5
In connection with your audit of Cuyapo Company’s financial statements
for the year 2006, you noted the following transactions affecting the
property and equipment items of the company:
Jan. 1 Purchased real property for P5,026,000, which included a

charge of P146,000 representing property tax for 2006 that
had been prepaid by the vendor; 20% of the purchase price is
deemed applicable to land and the balance to buildings. A
mortgage of P3,000,000 was assumed by Cuyapo on the
purchase. Cash was paid for the balance.
Jan. 15 Previous owners had failed to take care of normal

maintenance and repair requirements on the buildings,
necessitating current reconditioning at a cost of P236,800.
Feb. 15 Demolished garages in the rear of the building, P36,000 being

recovered on the lumber salvage. The company proceeded to
construct a warehouse. The cost of such warehouse was
P540,800, which was P90,000 less than the average bids
made on the construction by independent contractors. Upon
completion of construction, city inspectors ordered extensive
modifications to the building as a result of failure on the part
of the company to comply with building safety code. Such
modifications, which could have been avoided, cost P76,800.
Mar. 1 The company exchanged its own stock with a fair value of
P320,000 (par P24,000) for a patent and a new equipment.
The equipment has a fair value of P200,000.
Apr. 1 The new machinery for the new building arrived. In addition,
a new franchise was acquired from the manufacturer of the
machinery. Payment was made by issuing bonds with a face
value of P400,000 and by paying cash of P144,000. The value
of the franchise is set at P160,000, while the machine’s fair
value is P360,000.
May 1 The company contracted for parking lots and waiting sheds at
a cost P360,000 and P76,800, respectively. The work was
completed and paid for on June 1.
146
Dec. 31 The business was closed to permit taking the year-end
inventory. During this time, required redecorating and repairs
were completed at a cost of P60,000.
QUESTIONS:
Based on the above and the result of your audit, determine the cost of the
following:
1. Land
a. P 940,000 c. P 976,000
b. P1,005,200 d. P1,052,800
2. Buildings
a. P4,645,600 c. P4,762,400
b. P5,005,600 d. P4,681,600
3. Machinery and equipment
a. P360,000 c. P576,615
b. P560,000 d. P659,692
4. Land improvements
a. P360,000 c. P436,800
b. P 76,800 d. P 0
5. Total property, plant and equipment
a. P6,764,400 c. P6,718,092
b. P6,731,200 d. P6,618,400
Suggested Solution:
Question No. 1
Total contract price P5,026,000
Less property taxes for 2006 146,000
Adjusted cost of land and building 4,880,000
Percentage applicable to land 20%
Cost of Land P 976,000
Question No. 2
Cost allocated to building (P4,880,000 x 80%) P3,904,000
Reconditioning costs prior to use 236,800
Salvage proceeds from demolition of garages (36,000)
Construction cost of warehouse 540,800
Cost of Buildings P4,645,600
147
Notes:
1) The savings on construction of P90,000 should be ignored.
2) The modification costs of P76,800 and the redecorating and repair
costs of P60,000 should be expensed.
Question No. 3
Fair value of equipment acquired on Mar. 1 P200,000
Fair value of machine acquired on Apr. 1 360,000
Cost of Machinery and equipment P560,000
Question No. 4
Parking lots P360,000
Waiting sheds 76,800
Cost of Land improvements P436,800
Question No. 5
Land P 976,000
Buildings 4,645,600
Machinery and equipment 560,000
Land improvements 436,800
Total cost of property, plant and equipment P6,618,400
Answers: 1) C; 2) A; 3) B; 4) C, 5) D
PROBLEM NO. 6
Gabaldon Company’s property, plant and equipment and accumulated
depreciation balances at December 31, 2005 are:
Accumulated
Cost Depreciation
Machinery and equipment P1,380,000 P 367,500
Automobiles and trucks 210,000 114,326
Leasehold improvements 432,000 108,000
Additional information follows:

Depreciation methods and useful lives:
Machinery and equipment – straight line; 10 years.
Automobiles and trucks – 150% declining balance; 5 years, all acquired
after 2001.
Leasehold improvements – straight line
148
Depreciation is computed to the nearest month.
Salvage values are immaterial except for automobiles and trucks which
have estimated salvage values equal to 15% of cost.
Other additional information:

a. Gabaldon entered into a 12-year operating lease starting January 1,
2003. The leasehold improvements were completed on December 31,
2002 and the facility was occupied on January 1, 2003.
b. On July 1, 2006, machinery and equipment were purchased at a total
invoice cost of P325,000. Installation cost of P44,000 was incurred.
c. On August 30, 2006, Gabaldon purchased new automobile for P25,000.
d. On September 30, 2006, a truck with a cost of P48,000 and a carrying
amount of P30,000 on December 31, 2005 was sold for P23,500.
e. On December 20, 2006, a machine with a cost of P17,000, a carrying
amount of P2,975 on date of disposition, was sold for P4,000.
QUESTIONS:
1. The gain on sale of truck on September 30 is
a. P2,680 c. P250
b. P6,500 d. P 0
2. The gain on sale of machinery on December 20, 2006 is
a. P1,025 c. P13,000
b. P2,725 d. P 0
3. The adjusted balance of the property, plant and equipment as of
a. P1,919,000 c. P2,307,000
b. P2,388,500 d. P2,351,000
4. The total depreciation expense for the year ended December 31, 2006 is
a. P185,402 c. P138,000
b. 245,065 d. P221,402
5. The carrying amount of the property, plant and equipment as of
a. P1,567,497 c. P1,578,547
b. P1,290,547 d. P1,617,322
149
Suggested Solution:
Question No. 1
Less carrying value of truck
Cost P48,000
Less accumulated dep.:
Balance, 1/1/06
(P48,000 - P30,000) P18,000
Depreciation for 2006
(P30,000 x 30% x 9/12) 6,750 24,750 23,250
Gain on sale of truck P 250
Question No. 2
Less carrying value of machine sold 2,975
Gain on sale of machine P1,025
Question No. 3
Machinery and equipment:
Balance, 1/1 P1,380,000
Acquired, 7/1 (P325,000 + P44,000) 369,000
Machine sold, 12/20 (17,000) P1,732,000
Automobiles and trucks:
Balance, 1/1 210,000
Acquired, 8/30 25,000
Truck sold, 9/30 (48,000) 187,000
Leasehold improvements 432,000
Property, plant & equipment, 12/31/06 P2,351,000
Question No. 4
Remaining beginning balance
[(P1,380,000 - P17,000) x 10%] P136,300
Machine sold, 12/20 (P17,000 x 10%) 1,700
Acquired, 7/1/06
[(P325,000 + P44,000) x 10% x 6/12] 18,450 P156,450
Automobiles and trucks
Remaining beginning balance
[(P210,000-114,326-P30,000) x 30%] 19,702
Truck sold, 9/30 (P30,000x30%x9/12) 6,750
Acquired, 8/30 (P25,000 x 30% x 4/12) 2,500 28,952
150
Leasehold improvements (P432,000/12) 36,000
Total depreciation expense for 2006 P221,402
Question No. 5
Total cost of PPE, 12/31/06 (see no. 3) P2,351,000
Less accumulated depreciation, 12/31/06:
Balance, 1/1 P367,500
Depreciation expense for 2006 156,450
Machine sold, 12/20
(P17,000 - P2,975) (14,025) P509,925
Automobiles and trucks:
Balance, 1/1 114,326
Depreciation expense for 2006 28,952
Truck sold, 9/30 (see no. 1) (24,750) 118,528
Leasehold improvements
Balance, 1/1 108,000
Depreciation expense for 2006 36,000 144,000
772,453
Answers: 1) C; 2) A; 3) D; 4) D, 5) C
PROBLEM NO. 7
Your new audit client, Guimba Company, prepared the trial balance below
as of December 31, 2006. The company started its operations on January
1, 2005. Your examination resulted in the necessity of applying the
adjusting entries indicated in the additional data below.
Guimba Company
TRIAL BALANCE
December 31, 2006
Debits Credits
Cash P510,000
Accounts receivable – net 600,000
Inventories, December 31, 2005 669,000
Land 660,000
Buildings 990,000
Accumulated depreciation, building P19,800
Machinery 444,000
Accumulated depreciation, machinery 45,000
Sinking fund assets 75,000
151
Guimba Company
TRIAL BALANCE
December 31, 2006
Debits Credits
Bond discount 75,000
Treasury stock, common 105,000
Accounts payable 567,000
Accrued bond interest 11,250
First mortgage, 6% sinking fund bonds 679,500
Common stock 1,500,000
Premium on common stock 150,000
Stock donation 180,000
Retained earnings, December 31, 2005 222,450
Net sales 2,625,000
Purchases 850,500
Salaries and wages 507,000
Factory operating expenses 364,500
Administrative expenses 105,000
Bond interest 45,000
P6,000,000 P6,000,000
Additional data are as follows:
(1) The 1,500,000 common stock was issued at a 10 percent premium to

the owners of the land and buildings on December 31, 2004, the date
of organization. Stock with a par value of 180,000 was donated back
by the vendors. The following entry was made:
Treasury stock P180,000
Stock donation P180,000
The stock was donated because the proceeds from its subsequent sale
were to be considered as an allowance on the purchase price of land
and buildings in proportion to their values as first recorded. The
treasury stock was sold in 2006 for P75,000, which was credited to
Treasury Stock.
(2) On December 31, 2006, a machine costing P15,000 when the business
started was removed. The machine had been depreciated at 10 percent
during the first year. The only entry made was one crediting the
Machinery account with its sales price of P6,000.
(3) Depreciation is to be provided on the straight-line basis, as follows:

buildings, 2 percent of cost; machinery, 10 percent of cost. Ignore
salvage values.
152
QUESTIONS:
Based on the above and the result of your audit, you are to provide the
answers to the following:
1. The correct balance of Land account as of December 31, 2006 is
a. P660,000 c. P630,000
b. P588,000 d. P 0
2. The adjusted carrying value of Building as of December 31. 2006 is
a. P907,200 c. P905,400
b. P950,400 d. P945,000
3. The adjusted carrying value of Machinery as of December 31, 2006 is
a. P399,000 c. P354,000
b. P345,000 d. P348,000
4. The adjusted depreciation expense for 2006 is
a. P648,000 c. P63,900
b. P62,400 d. P63,000
5. How much is the gain or loss on sale of machinery on December 31,
2006?
a. P6,000 loss c. P6,000 gain
b. P7,500 loss d. P7,500 gain
Suggested Solution:
Question No. 1
Land Building Total
Unadjusted balances P660,000 P990,000 P1,650,000
Proceeds from sale of donated
stock
Applied as deduction to:
Land (P75,000 x 660/1,650) (30,000) (30,000)
Bldg. (P75,000 x 990/1,650) (45,000) (45,000)
Adjusted balances P630,000 P945,000 P1,575,000
Note: The proceeds received from sale of donated shares will not be credited
to Donated Capital account since this involves "Treasury stock subterfuge".
This occurs when excessive shares are issued for a property with the
understanding that the stockholders shall subsequently donate a portion of
their shares.
153
Question No. 2
Adjusted cost of building (see no. 1) P945,000
Less accumulated depreciation, 12/31/06
(P945,000 x 2% x 2) 37,800
Carrying value of building, 12/31/06 P907,200
Question No. 3
Machinery, 1/1/06 (P444,000 + P6,000) P450,000
Less machinery sold on 12/31/06 15,000
Machinery, 12/31/06 435,000
(P435,000 x 10% x 2) 87,000
Carrying value of Machinery, 12/31/06 P348,000
Question No. 4
Depreciation on Building (P945,000 x 2%) P18,900
Depreciation on Machinery (P450,000 x 10%) 45,000
Question No. 5
Sales proceeds P 6,000
Less carrying value, 12/31/06:
Cost P15,000
Less accumulated depreciation
(P15,000 x 10% x 2) 3,000 12,000
Loss on sale of machinery P 6,000
Answers: 1) C; 2) A; 3) D; 4) C, 5) A
PROBLEM NO. 5
Jaen Corporation, a manufacturer of steel products, began operation on
October 1, 2004. The accounting department of Jaen has started the fixed-
asset and depreciation presented below.
JAEN CORPORATION
Fixed Asset and Depreciation Schedule
For Fiscal Years Ended September 30, 2005, and September 30, 2006
154
Depreciation Expense
Year Ended Sept. 30
Acq. Dep.
Assets Date Cost Salvage Method Life 2005 2006
Land A 10/1/04 ? N/A N/A N/A N/A N/A
Bldg. A 10/1/04 ? P320,000 Straight-line ? P139,600 ?
Land B 10/1/04 ? N/A N/A N/A N/A N/A
Bldg. B Under ? Straight-line 30 - ?
Const. -
Donated 10/2/04 ? 24,000 150% 10 ? ?
equip. declining
balance
Mach. A 10/2/04 ? 48,000 Sum-of-the- 8 ? ?
years’-digits
Mach. B 10/1/05 ? - Straight-line 20 - ?
N/A – Not applicable
You have been asked to assist in completing this schedule. In addition in

ascertaining that the data already on the schedule are correct, you have
obtained the following information from the Company’s records and
personnel:
a. Land A and Building A were acquired from a predecessor corporation.
Jaen paid P6,560,000 for the land and building together. At the time of
acquisition, the land had an appraised value of P720,000, and the
building had an appraised value of P6,480,000.
b. Land B was acquired on October 2, 2004, in exchange for 20,000 newly

issued shares of Jaen’s common stock. At the date of acquisition, the
stock had a par value of P5 per share and a fair value of P30 per share.
During October 2004, Jaen paid P128,000 to demolish an existing
building on this land so it could construct new building.
c. Construction of building B on the newly acquired land began on

October 1, 2005. By September 30, 2006, Jaen has paid P2,560,000 of
the estimated total construction costs of P3,600,000. It is estimated
that the building will be completed and occupied by July 2007.
d. Certain equipment was donated to the corporation by a local university.

An independent appraisal of the equipment when donated placed the
fair market value at P240,000 and the salvage value at P24,000.
e. Machinery A’s total cost of P1,319,200 includes installation expense of

P4,800 and normal repairs and maintenance of P119,200. Salvage
value is estimated at P48,000. Machinery A was sold on February 1,
2006.
155
f. On October 1, 2005, Machinery B was acquired with a down payment
of P45,920 and the remaining payments to be made in 11 annual
installments of P48,000 each beginning October 1, 2005. The
prevailing interest rate was 8%.
QUESTIONS:
1. The cost of Building A is
a. P5,904,000 c. P656,000
b. P6,560,000 d. P 0
2. The cost of Land B is
a. P600,000 c. P228,000
b. P728,000 d. P 0
3. The cost of Machine B is
a. P370,080 c. P388,592
b. P416,000 d. P389,776
4. The total depreciation expense for the year ended September 30, 2006
is
a. P264,296 c. P265,667
b. P415,000 d. P262,608
Suggested Solution:
Question No. 1
Cost of building A (P6,560,000 x 6,480/7,200) P5,904,000
Question No. 2
Fair value of common stock (20,000 x P30) P600,000
Demolition costs 128,000
Cost of Land B P728,000
Question No. 3
Down payment P 45,920
Add present value of installment payments
(P48,000 x 7.710) 370,080
Cost of Machine B P416,000
156
Question No. 4
Building A (same in 2005 since it is
straight-line depreciation) P139,600
Building B (under construction) -
Donated equipment (P240,000 x 85% x 15%) 30,600
Machine A
[(P1,319,200-P119,200-P48,000) x 7/36 x 4/12] 74,667
Machine B (P416,000/20) 20,800
Total depreciation expense P265,667
Answers: 1) A; 2) B; 3) B; 4) C
PROBLEM NO. 9
The following data relate on the Plant Assets account of Licab, Inc. at
December 31, 2005:
Plant Assets
L A R E
Original cost P87,500 P127,500 P200,000 P200,000
Year Purchased 2000 2001 2002 2004
Useful life 10 years 37,500 hours 15 years 10 years
Salvage value P7,750 P7,500 P12,500 P12,500
Depreciation SYD Activity Straight-line Double-
method declining
balance
Note: In the year an asset is purchased, Licab, Inc. does not record any
depreciation expense on the asset.
In the year an asset is retired or traded in, Licab, Inc. takes a full year
depreciation on the asset.
The following transaction occurred during 2006:

(a) On May 5, Asset L was sold for P32,500 cash.
(b) On December 31, it was determined that asset A had been used 5,250
hours during 2006.
(c) On December 31, before computing depreciation expense on Asset R,

the management of Licab, Inc. decided the useful life remaining from
1/1/06 was 10 years.
157
(d) On December 31, it was discovered that a plant asset purchased in
2005 had been expensed completely in that year. This asset costs
P55,000 and has useful life of 10 years and no salvage value.
Management has decided to use the double-declining balance for this
asset, which can be referred to as “Asset S.”
QUESTIONS:
(Disregard tax implications)
1. How much is the gain or loss on sale of Asset L?
a. P10,250 loss c. P16,050 gain
b. P10,250 gain d. P16,050 loss
2. How much is the depreciation of Asset R for 2006?
a. P15,000 c. P16,250
b. P21,429 d. P23,214
3. The adjusting entry to correct the error of failure to capitalize Asset S
would include a debit/credit to Retained Earnings of
a. P55,000 debit c. P44,000 credit
b. P55,000 credit d. P 0
4. How much is the adjusted balance of Plant Assets as of December 31,
2006?
a. P670,000 c. P615,000
b. P527,500 d. P582,500
5. How much is the total depreciation expense for 2006?
a. P83,300 c. P82,050
b. P88,479 d. P80,600
Suggested Solution:
Question No. 1
Less carrying value:
Cost P87,500
Less accumulated depreciation
[(P87,500-P7,750) x 45/55] 65,250 22,250
Gain on sale of Asset L P10,250
158
Question No. 2
Cost P200,000
[(P200,000 - P12,500) x 3/15] 37,500
Carrying value, 1/1/06 162,500
Less residual value 12,500
Remaining depreciable amount 150,000
Divide by remaining life 10
Depreciation of Asset R for 2006 P 15,000
Question No. 3
Adjusting entry:
Asset S P55,000
Retained earnings P55,000
Question No. 4
Asset L (Sold) P -
Asset A 127,500
Asset R 200,000
Asset E 200,000
Asset S 55,000
Plant Assets, 12/31/06 P582,500
Question No. 5
Asset L [(P87,500 - P7,750) x 5/55] P 7,250
Asset A [(P127,500 - P7,500)/37,500 x 5,250] 16,800
Asset R (see no. 2) 15,000
Asset E [(P200,000 x 80%) x 20%] 32,000
Asset S (P55,000 x 20%) 11,000
Answers: 1) B; 2) A; 3) B; 4) D, 5) C
PROBLEM NO. 10
Your audit of Llanera Corporation for the year 2006 disclosed the following
property dispositions:
Cost Acc. Dep. Proceeds Fair value
Land P4,800,000 - 3,720,000 3,720,000
Building 1,800,000 - 288,000 -
159
Cost Acc. Dep. Proceeds Fair value
Warehouse 8,400,000 1,320,000 8,880,000 8,880,000
Machine 960,000 384,000 108,000 864,000
Delivery truck 1,200,000 570,000 564,000 564,000
Land
On January 15, a condemnation award was received as consideration for
the forced sale of the company’s land and building, which stood in the path
of a new highway.
Building
On March 12, land and building were purchased at a total cost of
P6,000,000, of which 30% was allocated to the building on the corporate
books. The real estate was acquired with the intention of demolishing the
building, and this was accomplished during the month of August. Cash
proceeds received in September represent the net proceeds from demolition
of building.
Warehouse
On July 4, the warehouse was destroyed by fire. The warehouse was
purchased on January 2, 2000. On December 12, the insurance proceeds
and other funds were used to purchase a replacement warehouse at a cost
of P7,200,000.
Machine
On December 15, the machine was exchanged for a machine having a fair
value of P756,000 and cash of P108,000 was received.
Delivery Truck
On November 13, the delivery truck was sold to a used car dealer.
QUESTIONS:
Based on the above and the result of your audit, compute the gain or loss
to be recognized for each of the following dispositions:
1. Land
a. P3,720,000 gain c. P4,800,000 loss
b. P1,080,000 loss d. P 0
2. Building
a. P 432,000 gain c. P1,368,000 loss
b. P2,232,000 loss d. P 0
160
3. Warehouse
a. P1,800,000 gain c. P5,400,000 loss
b. P 480,000 gain d. P 0
4. Machine
a. P36,000 gain c. P288,000 gain
b. P27,000 gain d. P 0
5. Delivery truck
a. P636,000 loss c. P66,000 loss
b. P636,000 gain d. P66,000 gain
Suggested Solution:
Question No. 1
Cash received P3,720,000
Cost of land 4,800,000
Loss on condemnation of land P1,080,000
Question No. 2
None. The proceeds from demolition of building will be deducted from
the cost of the land.
Question No. 3
Insurance proceeds P8,880,000
Carrying value (P8,400,000 - P1,320,000) 7,080,000
Gain on insurance policy settlement P1,800,000
Question No. 4
Fair value of old machine P864,000
Carrying value (P960,000 - P384,000) 576,000
Gain on exchange P288,000
Question No. 5
Carrying value (P1,200,000 - P570,000) 630,000
Loss on sale P 66,000
Answers: 1) B; 2) D; 3) A; 4) C, 5) C
161
PROBLEM NO. 11
In connection with your audit of the Talavera Mining Corporation for the
year ended December 31, 2006, you noted that the company purchased for
P10,400,000 mining property estimated to contain 8,000,000 tons of ore.
The residual value of the property is P800,000.
Building used in mine operations costs P800,000 and have estimated life of
fifteen years with no residual value. Mine machinery costs P1,600,000
with an estimated residual value P320,000 after its physical life of 4 years.
Following is the summary of the company’s operations for first year of

operations.
Tons mined 800,000 tons
Tons sold 640,000 tons
Unit selling price per ton P4.40
Direct labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses (excluding depreciation) 576,000
Inventories are valued on a first-in, first-out basis. Depreciation on the

building is to be allocated as follows: 20% to operating expenses, 80% to
production. Depreciation on machinery is chargeable to production.
QUESTIONS:
(Disregard tax implications)
1. How much is the depletion for 2006?
a. P768,000 c. P 960,000
b. P192,000 d. P1,040,000
2. Total inventoriable depreciation for 2006?
a. P400,000 c. P362,667
b. P384,000 d. P 0
3. How much is the Inventory as of December 31, 2006?
a. P438,400 c. P422,400
b. P425,600 d. P418,133
4. How much is the cost of sales for the year ended December 31, 2005?
a. P1,689,600 c. P1,753,600
b. P1,702,400 d. P1,672,533
162
5. How much is the maximum amount that may be declared as dividends
at the end of the company’s first year of operations?
a. P1,494,400 c. P1,289,600
b. P1,302,400 d. P1,319,467
Suggested Solution:
Question No. 1
Acquisition cost P10,400,000
Less residual value 800,000
Depletable cost 9,600,000
Divide by total estimated reserves 8,000,000
Depletion rate 1.20
Multiply by tons mined in 2006 800,000
Depletion for 2006 P 960,000
Question No. 2
Depreciation - Building P 64,000
[(P800,000/8,000,000 tons) x 800,000 tons x 80%]
Depreciation - Machinery [(P1,600,000-P320,000/4] 320,000
Total depreciation chargeable to production P384,000
Question No. 3
Depletion (see no. 1) P 960,000
Depreciation (see no. 2) 384,000
Total production cost 2,112,000
Divide by tons mined 800,000
Cost per ton 2.64
Unsold tons (800,000 - 640,000) 160,000
Inventory, 12/31/06 P 422,400
Question No. 4
Cost of sales (640,000 tons x P2.64) P1,689,600
163
Question No. 5
Sales (640,000 x P4.4) P2,816,000
Less cost of sales (see no. 4) 1,689,600
Gross profit 1,126,400
Operating expenses (576,000)
Depreciation - Building (16,000)

[(P800,000/8,000,000 tons) x 800,000 tons x 20%]
Net income 534,400
Realized depletion (640,000 tons x P1.2) 768,000
Maximum amount that may be declared as dividends P1,302,400
Answers: 1) C; 2) B; 3) C; 4) A, 5) B
PROBLEM NO. 12
1. Which of the following questions would an auditor least likely include

on an internal control questionnaire concerning the initiation and
execution of equipment transactions?
a. Are procedures in place to monitor and properly restrict access to
equipment?
b. Are requests for major repairs approved at a higher level than the
department initiating the request?
c. Are prenumbered purchase orders used for equipment and
periodically accounted for?
d. Are requests for purchases of equipment reviewed for consideration
of soliciting competitive bids?
2. Property acquisitions that are misclassified as maintenance expense

would most likely be detected by internal control procedures that
provide for
a. Review and approval of the monthly depreciation entry by the plant
supervisor.
b. Investigation of variances within a formal budgeting system.
c. Examination by the internal auditor of vendor invoices and
canceled checks for property acquisitions.
d. Segregation of duties of employees in the accounts payable
department.
164
3. A weakness in internal accounting control over recording retirements of
equipment may cause the auditor to
a. Trace additions to the "other assets" account to search for
equipment that is still on hand but no longer being used.
b. Inspect certain items of equipment in the plant and trace those
items to the accounting records.
c. Select certain items of equipment from the accounting records and
locate them in the plant.
d. Review the subsidiary ledger to ascertain whether depreciation was
taken on each item of equipment during the year.
4. The most significant audit step in substantiating additions to the office

furniture account balance is
a. Comparison to prior year's acquisitions.
b. Examination of vendors' invoices and receiving reports for current
year's acquisitions.
c. Review of transactions near the balance sheet date for proper
period cutoff.
d. Calculation of ratio of depreciation expense to gross office
equipment cost.
5. An auditor is verifying the existence of newly acquired fixed assets

recorded in the accounting records. Which of the following is the best
evidence to help achieve this objective?
a. Oral evidence obtained by discussions with operating management.
b. Documentary support obtained by vouching entries to subsidiary
records and invoices.
c. Documentary support obtained by reviewing titles and tax returns.
d. Physical examination of a sample of newly recorded fixed assets.
6. In auditing plant assets and accumulated depreciation for proper

valuation, the auditor should do all except the following:
a. Physically inspect major plant assets additions.
b. Recalculate depreciation expense on a test basis.
c. Vouch repairs and maintenance expense on a test basis.
d. Vouch major additions by reference to underlying documentation.
7. To verify the proper value of costs charged to real property records for
improvements to the property, the best source of evidence would be:
a. A letter signed by the real property manager asserting the propriety
of costs incurred.
b. Original invoices supporting entries into the accounting records.
c. A comparison of billed amounts to contract estimates.
d. Inspection by the auditor of real property improvements.
165
8. To test the accuracy of the current year's depreciation charges, an
auditor should rely most heavily on
a. Comparison of depreciation schedule detail with schedules
supporting the income tax return.
b. Re-computation of depreciation for a sample of plant assets.
c. Tracing of totals from the depreciation schedule to properly
approved journal entries and ledger postings.
d. Vouching of the current year's fixed asset acquisitions.
9. The audit procedure of analyzing the repairs and maintenance

accounts is primarily designed to provide evidence in support of the
audit proposition that all
a. Capital expenditures have been properly authorized.
b. Expenditures for fixed assets have been recorded in the proper
period.
c. Expenditures for fixed assets have been capitalized.
d. Non-capitalizable expenditures have been properly expensed.
10. Assets may suffer an impairment in value for a variety of reasons, but
not likely as a result of:
a. A corporate restructuring.
b. Slumping demand for uncompetitive products.
c. Significant increases in market share.
d. Obsolescence.
Answers: 1) A; 2) B; 3) C; 4) B, 5) D; 6) A; 7) B; 8) B; 9) C; 10) C
166
Page 1 of 10
CEBU CPAR CENTER

Mandaue CIty
AUDITING PROBLEMS
AUDIT OF PROPERTY, PLANT & EQUIPMENT AND INTANGIBLE ASSETS
PROBLEM NO. 1
The property, plant and equipment section of White Corporation’s balance sheet at
December 31, 2004 included the following items:
Land P 2,500,000
Land improvements 560,000
Building 3,600,000
Machinery and equipment 6,600,000
During 2005 the following data were available to you upon your analysis of the accounts:
Cash paid on purchase of land P10,000,000
Mortgage assumed on the land bought, including interest at 16% 16,000,000
Realtor’s commission 1,200,000
Legal fees, realty taxes and documentation expenses 200,000
Amount paid to relocate persons squatting on the property 400,000
Cost of tearing down an old building on the land 300,000
Amount recovered from the salvage of the building demolished 600,000
Cost of fencing the property 440,000
Amount paid to a contractor for the building erected 8,000,000
Building permit fees 50,000
Excavation expenses 250,000
Architect’s fee 100,000
Interest that would have been earned had the money used during
the period of construction been invested in the money market 600,000
Invoice cost of machinery acquired 8,000,000
Freight, unloading, and delivery charges 240,000
Customs duties and other charges 560,000
Allowances, hotel accommodations, etc., paid to foreign
technicians during instillation and test run of machines 1,600,000
Royalty payment on machines purchased (based on units
produced and sold) 480,000
REQUIRED:
Based on the above and the result of your audit, compute for the following as of December
31, 2005:
1. Land
2. Land improvements
3. Building
4. Machinery and equipment
5. Total depreciable property, plant and equipment
PROBLEM NO. 2
The following were discovered during your audit of Black Company’s financial statements
for the year ended December 31, 2005:
a. On December 24, 2005, Black purchased an office equipment for P400,000, terms
2/5, n/15. No entry was made on the date of purchase. The same was paid on
December 31, 2005 and the accountant debited Office Equipment and credited cash
for P400,000.
AP-5903
Page 2 of 10
b. Machine C, with a cash price of P128,000, was purchased on January 2, 2005. The
company paid P20,000 down and P10,000 for 12 months. The last payment was
made on December 30, 2005. Straight line depreciation, based on a five-year useful
life and no salvage value, was recorded at P28,000 for the year. Freight of P4,000 on
machine C was debited to the Freight in account.
c. Machine P with a cash selling price of P360,000 was acquired on April 1, 2005, in
exchange for P400,000 face amount of bonds payable selling at 94, and maturing on
April 1, 2015. The accountant recorded the acquisition by a debit to Machinery and a
credit to Bonds Payable for P400,000. Straight line depreciation was recorded based
on a five-year economic life and amounted to P54,000 for nine months. In the
computation of depreciation, residual value of P40,000 was used.
d. Machine A was acquired on January 22, 2005, in exchange for past due accounts
receivable of P140,000, on which an allowance of 20% was established at the end of
2004. The current fair value of the machine on January 22 was estimated at
P110,000. The machine was recorded by a debit to Machinery and a credit to
Accounts Receivable for P140,000. No depreciation was recorded on Machine A,
because it was not installed and never used in operations. On February 2, 2005,
Machine A was exchanged for 1,000 shares of the company’s outstanding capital
stock with market price of P105 per share. The Treasury Stock account was debited
for P140,000 with the corresponding credit to Machinery.
e. On December 29, 2005, the company exchanged 10,000 shares of Emong, Inc.
common stock, which Black was holding as an investment, for an equipment from De
Leon Corporation. The common stock of Emong, Inc., which had been purchased by
Black for P45 per share, had a quoted market value of P50 per share on the date of
exchange. The equipment had a market value of P470,000. The transaction was
recorded by a debit to Equipment and a credit to Investment in Emong, Inc.-Common
for P450,000.
f. On December 30, 2005, Machine M with a carrying amount of P120,000 (cost

P400,000) was exchanged for a similar asset with a fair value of P150,000. In
addition, Black paid P20,000 to acquire the new machine. The exchange, which
lacks commercial substance, was recorded by a debit to Machinery and a credit to
cash for P20,000.
g. Machine E was recorded at P102,000, which included the carrying amount of

P22,000 for an old machine accepted as a trade in, and cash of P80,000. The cash
price of Machine S was P90,000, and the trade in allowance was P10,000. This
transaction took place on December 31, 2005.
h. Ms. Beauty, the company’s president, donated land and building appraised at
P200,000 and P400,000, respectively, to the company to be used as plant site. The
company began operating the plant on September 30, 2005. The building is
estimated to have a useful life of 25 years. Since no money was involved, no journal
entry was made for the above transaction.
i. On July 1, 2004, the national government granted a parcel of land located in Baliuag,
Bulacan to Black. On the date of grant, the land had a fair value of P2,000,000. The
grant required Black to construct a cold storage building on the site. Black finished
the construction of the building, which has an estimated useful life of 25 years, on
January 2, 2005. Black appropriately recorded the cost of the building of P4,000,000
(which include direct materials, direct labor, and indirect cost and incremental
overhead) but failed to provide depreciation in 2005. Unaware of the accounting
procedures for government grants, the company did not reflect the grant on its books.
AP-5903
Page 3 of 10
REQUIRED:
As Black’s external auditor, you are required to prepare any necessary adjusting journal
entries as of December 31, 2005.
PROBLEM NO. 3
The Blue Corporation was incorporated on January 2, 2005, but was unable to begin
manufacturing activities until July 1, 2005 because the new factory facilities were not
completed until that date.
The “Land and Building” account at December 31, 2005 follows:

Date Particulars Amount
Jan. 31 Land and building P 1,098,000
Feb. 28 Cost of removal of old building 60,000
May 02 Partial payment on new construction 700,000
02 Legal fees paid 15,000
June 01 Second payment on new construction 600,000
July 01 Fire insurance premium – 1 year 26,000
01 Final payment on new construction 200,000
Dec. 31 Asset write-up 500,000
P 3,199,000
Dec. 31 Depreciation – 2005, at 1% of account balance 31,990
P 3,167,010
You were able to gather the following during your audit:
a. To acquire land and building, the company paid P98,000 cash and 10,000 shares of its
9% cumulative preferred shares, P100 par value per share. The shares were then
selling at P120.
b. Legal fees covered the following:

Cost of incorporation P 9,500
Examination of title covering purchase of the land 4,000
Legal work in connection with construction contract 1,500
P 15,000
c. Because of a general increase in construction costs after entering into the building
contract, the board of directors increased the value of the building by P500,000,
believing such increase is justified to reflect current market value at the time the
building was completed. Retained earnings was credited for this amount.
d. Estimated useful life of the building is 25 years.
REQUIRED:
1. Prepare the necessary adjusting journal entries as of December 31, 2005.
2. Determine the adjusted balances of the following as of December 31, 2005:

a. Land and building
b. Land
c. Carrying value of building
d. Organization cost, net (presented under Noncurrent Assets)
AP-5903
Page 4 of 10
PROBLEM NO. 4
In the audit of the books of Green Company for the year 2005, the following items and
information appeared in the Production Machines account of the auditee:
2005
Jan. 01 Balance–Machines 1, 2, 3, and 4 at P90,000 each P 360,000
Aug 31 Machine 5 198,000
Machine 1 P 3,000
Sept 30 Machine 6 96,000
Dec 01 Machines 7 and 8 at P216,000 each 432,000
Dec 01 Machine 2 21,000
31 Balance . 1,062,000
P1,086,000 P1,086,000
The Accumulated Depreciation account contained no entries for the year 2005. The
balance on January 1, 2005 per your audit, was as follows:
Machine 1 P 84,375
Machine 2 39,375
Machine 3 33,750
Machine 4 22,500
Total P 180,000
Based on your further inquiry and verification, you noted the following:
1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this
date for P3,000.
2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on
December 1, 2005. Insurance of P21,000 was recovered. Machine 7 was to replace
Machine 2.
3. Machine 3 was traded in for Machine 6 at an allowance of P12,000; the difference

was paid in cash and charged to Production Machine account.
4. Depreciation rate is recognized at 25% per annum.
REQUIRED:
Determine the adjusted balance of the Production Machine as of December 31, 2005 and
Depreciation Expense for the year 2005.
PROBLEM NO. 5
You obtain the following information pertaining to Red Co.’s property, plant, and
equipment for 2005 in connection with your audit of the company’s financial statements.
Audited balances at December 31, 2004:

Debit Credit
Land P 3,750,000
Buildings 30,000,000
Accumulated depreciation – buildings P 6,577,500
Machinery and equipment 22,500,000
Accumulated depreciation –
Machinery and Equipment 6,250,000
Delivery Equipment 2,875,000
Accumulated Depreciation –
Delivery Equipment 2,115,000
AP-5903
Page 5 of 10
Depreciation Data:
Depreciation Method Useful Life
Buildings 150% declining – balance 25 years
Machinery and Equipment Straight-line 10 years
Delivery Equipment Sum-of-the-years’-digits 4 years
Leasehold Improvements Straight-line -
Transaction during 2005 and other information are as follows:

a. On January 2, 2005, Red purchased a new truck for P500,000 cash and traded-in a
2-year-old truck with a cost of P450,000 and a book value of P135,000. The new
truck has a cash price of P600,000; the market value of the old truck is not known.
b. On April 1, 2005, a machine purchased for P575,000 on April 1, 2000 was destroyed
by fire. Red recovered P387,500 from its insurance company.
c. On May 1, 2005, cost of P4,200,000 were incurred to improve leased office premises.
The leasehold improvements have a useful life of 8 years. The related lease
terminates on December 31, 2011.
d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P7,000,000; additional cost of P125,000 for freight and P625,000 for installation were
incurred.
e. Red determined that the delivery equipment comprising the P2,875,000 balance at
January 1, 2005, would have been depreciated at a total amount of P450,000 for the
year ended December 31, 2005.
The salvage values of the depreciable assets are immaterial. The policy of the Red Co. is
to compute depreciation to the nearest month.
QUESTIONS:
1. How much is the Accumulated depreciation – Buildings as of December 31, 2005?
a. P7,777,500 b. P7,982,850 c. P8,377,500 d. P7,103,700
2. How much is the Accumulated depreciation – Machinery and Equipment as of
December 31, 2005?
a. P8,844,375 b. P8,614,375 c. P8,830,000 d. P8,556,875
3. How much is the Accumulated depreciation – Delivery Equipment as of December
31, 2005?
a. P2,715,000 b. P2,400,000 c. P2,490,000 d. P2,805,000
4. How much is the Accumulated depreciation – Leasehold Improvements as of
December 31, 2005?
a. P420,000 b. P525,000 c. P350,000 d. P630,000
5. How much is the net gain (loss) from disposal of assets for the year ended December
31, 2005?
a. P100,000 b. (P35,000) c. P65,000 d. (P65,000)
PROBLEM NO. 6
In connection with your audit of the Josef Mining Corporation for the year ended December
31, 2005, you noted that the company purchased for P10,400,000 mining property
estimated to contain 8,000,000 tons of ore. The residual value of the property is
P800,000.
AP-5903
Page 6 of 10
Building used in mine operations costs P800,000 and have estimated life of fifteen years
with no residual value. Mine machinery costs P1,600,000 with an estimated residual value
P320,000 after its physical life of 4 years.
Following is the summary of the company’s operations for first year of operations.
Tons mined 800,000 tons
Tons sold 640,000 tons
Unit selling price per ton P4.40
Operating expenses (excluding depreciation) 576,000
Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be

allocated as follows: 20% to operating expenses, 80% to production. Depreciation on
machinery is chargeable to production.
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Disregard tax
implications)
1. How much is the depletion for 2005?
a. P768,000 b. P960,000 c. P192,000 d. P1,040,000
2. Total inventoriable depreciation for 2005?
a. P400,000 b. P362,667 c. P384,000 d. P0
3. How much is the Inventory as of December 31, 2005?
a. P438,400 b. P422,400 c. P425,600 d. P418,133
4. How much is the cost of sales for the year ended December 31, 2005?
a. P1,689,600 b. P1,753,600 c. P1,702,400 d. P1,672,533
5. How much is the maximum amount that may be declared as dividends at the end of
the company’s first year of operations?
a. P1,494,400 b. P1,289,600 c. P1,302,400 d. P1,319,467
PROBLEM NO. 7
Transactions during 2005 of the newly organized Pink Corporation included the following:
Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to
complete organization of the corporation.
15 Hired a clown to stand in front of the corporate office for 2 weeks and
hound out pamphlets and candy to create goodwill for the new
enterprise. Clown cost, P10,000; pamphlets and candy, P5,000.
Apr. 1 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P 429,000
Patent application and licensing fees 63,500
Total P 492,500
It is estimated that in 6 years other companies will have developed
improved processes, making the Pink Corporation process obsolete.
May 1 Acquired both a license to use a special type of container and a
distinctive trademark to be printed on the container in exchange for
6,000 shares of Pink’s no-par common stock selling for P50 per share.
The license is worth twice as much as the trademark, both of which may
be used for 6 years.
AP-5903
Page 7 of 10
July 1 Constructed a shed for P1,310,000 to house prototypes of experimental

models to be developed in future research projects.
Dec. 31 Incurred salaries for an engineer and chemist involved in product
development totaling P1,750,000 in 2005.
QUESTIONS:
1. Cost of patent
a. P492,500 b. P429,000 c. P63,500 d. P0
2. Cost of licenses
a. P150,000 b. P200,000 c. P100,000 d. P0
3. Cost of trademark
a. P150,000 b. P200,000 c. P100,000 d. P0
4. Carrying amount of Intangible Assets
a. P712,604 b. P2,477,604 c. P697,604 d. P0
5. Total amount resulting from the foregoing transactions that should be expensed when
incurred
a. P4,100,500 b. P1,983,000 c. P1,998,000 d. P0
PROBLEM NO. 8
On December 31, 2004, Silver Corporation acquired the following three intangible assets:
A trademark for P300,000. The trademark has 7 years remaining legal life. It is
anticipated that the trademark will be renewed in the future, indefinitely, without
problem.
Goodwill for P1,500,000. The goodwill is associated with Silver’s Hayo Manufacturing
reporting unit.
A customer list for P220,000. By contract, Silver has exclusive use of the list for 5
years. Because of market conditions, it is expected that the list will have economic
value for just 3 years.
On December 31, 2005, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:
a) Because of a decline in the economy, the trademark is now expected to generate cash
flows of just P10,000 per year. The useful life of trademark still extends beyond the
foreseeable horizon.
b) The cash flows expected to be generated by the Hayo Manufacturing reporting unit is
P250,000 per year for the next 22 years. Book values and fair values of the assets and
liabilities of the Hayo Manufacturing reporting unit are as follows:
Book values Fair values
Identifiable assets P2,700,000 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000
c) The cash flows expected to be generated by the customer list are P120,000 in 2006
and P80,000 in 2007.
AP-5903
Page 8 of 10
REQUIRED:
Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):
1. Total amortization for the year 2005
a. P73,333 b. P141,515 c. P116,190 d. P86,857
2. Impairment loss for the year 2005

a. P90,476 b. P133,333 c. P179,584 d. P0
3. Carrying value of Trademark as of December 31, 2005

a. P300,000 b. P257,143 c. P166,667 d. P120,416
4. Carrying value of Goodwill as of December 31, 2005

a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500
5. Carrying value of Customer list as of December 31, 2005

a. P220,000 b. P146,667 c. P176,000 d. P0
PROBLEM NO. 9
1. Property, plant and equipment is typically judged to be one of the accounts least
susceptible to fraud because
a. The amounts recorded on the balance sheet for most companies are immaterial.
b. The inherent risk is usually low.
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this account.
2. Which is the best audit procedure to obtain evidence to support the legal ownership
of real property?
a. Examination of corporate minutes and board resolutions with regard to approvals
to acquire real property.
b. Examination of closing documents, deeds and ownership documents registered
and on file at the register of deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a specific
piece of property.
d. Confirmation with the title company that handled the escrow account and
disbursement of proceeds for the closing of the property.
3. When few property and equipment transactions occur during the year the continuing
auditor usually obtains and understanding of internal control and performs
a. Tests of controls
b. Analytical procedures to verify current year additions to property and equipment
c. A thorough examination of the balances at the beginning of the year.
d. Extensive tests of current year property and equipment transactions.
4. Which of the following combinations of procedures is an auditor most likely to perform

to obtain evidence about fixed asset addition?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirming ownership and corroborating transactions through inquiries of client
personnel.
AP-5903
Page 9 of 10
5. If an auditor tours a production facility, which of the misstatements or questionable

practices is most likely to be detected by the audit procedures specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
6. In testing for unrecorded retirements of equipment, an auditor is most likely to

a. Select items of equipment from the accounting records and then locate them
during the plant tour.
b. Compare depreciation journal entries with similar prior-year entries in search of
fully depreciated equipment.
c. Inspect items of equipment observed during the plant tour and then trace them to
the equipment subsidiary ledger.
d. Scan the general journal for unusual equipment additions and excessive debits to
repairs and maintenance expense.
7. Determining that proper amounts of depreciation are expensed provides assurance

about management’s assertions of valuation and
a. Presentation and disclosure. c. Rights and obligations.
b. Completeness. d. Existence or occurrence.
8. The auditor may conclude that depreciation charges are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.
9. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in

support of the audit assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been recorded in
the proper period.
b. Expenditures for property and equipment have been recorded in the proper
period.
c. Noncapitalizable expenditures for repairs and maintenance have been properly
charged to expense.
d. Expenditures for property and equipment have not been charged expense.
10. In violation of company policy, Coatsen Company erroneously capitalized the cost of
painting its warehouse. An auditor would most likely detect this when
a. Discussing capitalization policies with Coatsen's controller.
b. Examining maintenance expense accounts.
c. Observing that the warehouse had been painted.
d. Examining construction work orders that support items capitalized during the year.
11. Additions to equipment are sometimes understated. Which of the following accounts
would be reviewed by the auditor to gain reasonable assurance that additions are not
understated?
a. Accounts payable c. Depreciation expense
b. Gain on disposal of equipment d. Repair and maintenance expense
12. When an auditor interviews the plant manager, he will most likely seek from the plant
manager information regarding
a. Appropriateness of physical inventory observation procedures.
b. Existence of obsolete machinery.
c. Deferral of procurement of certain necessary insurance coverage.
d. Adequacy of the provision for uncollectible accounts.
AP-5903
Page 10 of 10
13. The auditor is least likely to learn of retirements of equipment through which of the
following?
a. Review of the purchase return and allowance account.
b. Review of depreciation.
c. Analysis of the debits to the accumulated depreciation account.
d. Review of insurance policy riders.
14. Which of the following is not likely a motive for management to manipulate the timing
and amount of impaired asset writedowns?
a. Steady increases in earnings per share over the past 5 years.
b. Income smoothing.
c. A "big bath."
d. An abnormally unprofitable year.
15. There is goodwill involved in the acquisition of a business if the purchase price paid is
in excess of the proprietorship of the business acquired.
Goodwill might be viewed as the enjoyment of a profit by a company in excess of the

normal or usual return for the industry as a whole but such goodwill is not recorded if
it has not been purchased or paid for.
a. False; True. c. True; False.
b. False; False. d. True; True.
16. In auditing intangible assets, an auditor most likely would review or recompute
amortization and determine whether the amortization period is reasonable in support
of management’s financial statement assertion of
a. Valuation. c. Completeness.
b. Existence or occurrence. d. Rights and obligations.
– End of AP-5903 –
AP-5903

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IV.

INVESTMENTS Lyre Company p. 431

Drill 1: Fishing DIY 1: Cabbage

1. Gain on sale of Salmon ordinary shares shall be recognized in retained earnings.

2. This will not affect the cost of investment.

3. Investment in equity securities 216,000

4. Unrealized loss (9M – 8,424,000) = 576,000

Salmon Company 36,000 shares 1,800,000 2,664,000 (74 x

5. Investment in equity securities at FV = 8,424,000

Date Interest Interest income Premium Amortized cost

1. Investments in bonds – FVOCI 1,075,000

2. FV, Dec. 31, 2018 1,075,000

Carrying Value, Dec. 31, 2018:

3. FV, Dec. 31, 2020 1,056,500

4. FV, Dec. 31, 2020 1,030,000

Amortization of premium, Jul. 1 – Dec, 31:

2. Interest income 2018 26,794 + 26,682 = 53,476

3. FV, Dec. 31, 2017 9,000,000

4. FV of 15% int. 9,000,000

5. Total cost of inv. in associate, Jan. 1, 2018 39,000,000

Do-it -yourself activities:

2. Investment income FV method

3. Investment income Equity method

4. Acquisition cost 2,100,000

1. The cumulative gain (loss) in OCI at December 31, 2018 is

2. The cumulative loss in OCI at December 31, 2019 is

2. Cumulative loss, Dec. 31, 2018 (20,000)

3. Loss on sale = 35,000

Problem No. 3 – Trading Securities

Security Cost Fair Value

1. What is the total interest and dividend income for 2018?

2. What amount should be reported as gain on sale of trading securities in 2018?

2. Gain on sale of Turkey bonds:

3-4. Unrealized loss on trading securities 10,600

5. Sales price 301,500

Problem No. 4 – Equity Method

2. What is the acquisition cost of Cucumber’s investment in Super Company?

Squeeze acquisition cost 40,000,000

3. Acquisition cost 40,000,000

Feb. 1 Purchased 20,000 shares of Malolos Company common stock

Apr. 1 Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5

Jul. 1 Received semiannual interest on the RP Treasury Bonds.

Aug. 1 Sold P500,000 of RP Treasury 7% bonds at 103 plus accrued

Oct. 1 Sold 3,000 shares of Malolos at P132 per share.

* PAS 39 par. 43 states that when a financial asset or financial liability is

Bulacan Auto Co. (20,000 x P45) P 900,000

You were engaged by Balagtas Company to audit its financial statements

The following sale and conversion transactions transpired during 2006:

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

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

The following 2006 dividend information pertains to stocks owned by

March 31 France paid dividends of P2.50 per share on its preferred

Market prices per share of the securities were as follows:

France Corp., preferred [(5,000 - 2,500) x P92.25] P 230,625

Computation of adjusted cost of Good Co. shares

The following information was obtained during your examination:

2. Closing market quotation as at December 31, 2006:

*Computation of effective interest rate:

Hogonoy, Inc. acquired 30% of Pugo Corporation’s voting stock on January

a) On January 2, 1999, Marilao purchased 4,000 shares of P100 par

Since the MV of rights is not available we must compute for the

Theoretical value of stock rights = MV of stock ex-rights – subs. price

Cash paid (4,000/5 x P100) P 80,000

AAA, Inc. BBB Corp.