Accounting 43 Auditng and Assurance – Concepts and Applications

Audit of Investments in Financial Instruments

PROBLEM 1
During your adult of the financial statements of the Grebialde Corporation for the year 2014, you found the following
postings to the FVPL (Financial Assets and Fair Value through Profit of Loss) account:

Date Particulars Debit Credit

Jan. 3 Purchased 1,000 shares, A Corporation 54,000
8 Purchased 1,000 shares, B Corporation 60,000
April 2 Cash dividends, A Corporation 1,000
5 Sold 500 shares, A Corporation 28,000
8 Purchased 1,000 shares, C Corporation 30,000
8 Purchased 1,000 shares, D Corporation 36,000
July 15 Purchased 200 shares, Grebialde Corporation 33,000
15 Sold 100 shares, Grebialde Corporation 20,000
Aug. 15 Sold 100 shares, Grebialde Corporation 20,000
Dec. 8 Received 10% Bonus issue from E Corporation 2,000
10 Cash dividends, C Corporation 1,200

The following information was discovered from your audit procedures:

a. The Grebialde Corporation purchased 200 of its own ordinary shares held by a deceased shareholder at P165
per share. One hundred of these shares were sold at its market price of P200 per share on August 15.
b. On December 8, fifty shares of E Corporation were received. Grebialde credited dividend income equal to the
market price of the shares received.
c. On December 15, D Corporation declared a P5 cash dividend per share, payable on January 10, 2015 to
shareholders of record as of December 29, 2014. No accrual has yet been taken up by Grebialde.
d. The market price of the shares are as follows at December 31, 2014:
A Corporation P55
B Corporation 54
C Corporation 32
D Corporation 39
E Corporation 38

1. Prepare all audit adjusting entries as a result of the foregoing.

2. Compute the following:

a. Carrying amount of FVPL at December 31, 2014
b. Gain or loss on the sale of FVPL
c. Dividend Income
d. Unrealized gain or loss taken to profit or loss

PROBLEM 2
The Investments and Dividends Income accounts of the Mina Company are shown below:

TRADING SECURITIES
Date Description Ref. Debit Credit
June 22, 2013 500 ordinary shares, par value P50. Darlyn Co. CD-18 32,500
December 31, 2014 Adjustment to market 2,500
May 31, 2014 250 shares Darlyn Co. received stock dividend GJ-8 12,500
June 10, 2014 Sold 250 shares @ P67 CR-21 16,750
December 4, 2014 Sold 100 shares @ P60 CR-46 6,000

DIVIDEND INCOME
Date Description Ref. Debit Credit
May 31, 2014 Stock Dividend GJ-7 12,500
August 1, 2014 Cash on Darlyn Co. ordinary CR-22 2,500

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 Accounting 43 Auditng and Assurance – Concepts and Applications
Audit of Investments in Financial Instruments

The following information was obtained during your examination:

1. The balance in the investments account at December 31, 2013 per your last year’s working papers was P32,500.
2. Market value of the securities on January 1, 2014 was P70.
3. From independent sources, you determined the following dividend information:

Type of
Dividend Date declared Date of record Date of payment Rate
Stock April 15, 2014 May 10, 2014 May 29, 2014 50%
Cash June 15, 2014 July 15, 2014 July 31, 2014 P5/share
Cash December 10, 2014 December 28, 2014 January 15, 2015 20%

4. Closing market quotation is P68 as at December 31, 2014.

3. Compute
a. Gain or loss on the July 10 sale
b. Gain or loss on the December 4 sale
c. Dividend income for the year 2014
d. Unrealized gain or loss
e. Adjusted balance of the investment account at December 31, 2014

4. Audit adjustments at December 31, 2014.

PROBLEM 3
The Oli Company had acquired interest in a promising local company, the Christine Company. During your audit of the
company’s account for the past calendar year, 2014, which was a first audit, you found the following accounts in the
general ledger.

INVESTMENT IN CHRISTINE CORPORATION

Debit Credit
Jan. 2, 2012 3,000 shares at P35 P105,000 July 1, 2014 5,000 share at P110 P550,000
Oct. 11, 2013 9,000 shares at 60 540,000
March 5, 2014 3,000 shares at 70 210,000

INVESTMENT IN OIL CORPORATION

Debit Credit
Aug. 10, 2014 P1,000

DIVIDEND INCOME
Debit Credit
Jan. 2, 2014 P12,000
April 1, 2014 15,000
Aug. 10, 2014 1,000
Dec. 20, 2014 10,000

The transactions of the audit year 2014 are described as follows:

Jan. 1 The Company classifies the investments as at Fair Value through Other Comprehensive Income. Market value
on this date is 65.

Jan. 2 Received a cash dividend (declared on December 1) of P1 per share.

Mar. 5 Bought 3,000 shares at P70.

Apr. 1 Received a cash dividend (declared on march 1 to shareholders of record as of March 10 of P1.00 per share.

July 1 Sold 5,000 shares at P72.

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 Accounting 43 Auditng and Assurance – Concepts and Applications
Audit of Investments in Financial Instruments

Aug. 10 Received an “extra” dividend in one share Oil Company for each 10 shares of Christine Company. The Oil
Company had a market value of P3.00 per share and its book value on the ledger of Christine Company was
P1.00 per share.

Dec. 20 Received a cash dividend of P1.00 per share, declared December 1.

Dec. 29 Sold 1,000 shares at P90. Cash was received on January 3, 2015.

Dec. 31 Market values per share: Christine, P95; Oil P3.50.

5. Audit adjusting entries.

PROBLEM 4
At December 31, 2014, Paliza Corp. properly reported as current assets the following equity securities classified as at Fair
Value through Profit or Loss:

S Corp. 1,000 shares, P2.40 convertible preferences share P 45,000

L Inc., 6,000 ordinary shares 65,000
T Cp., 2,000 ordinary shares 55,000
Trading Securities, at market P165,000

On January 2, 2014, Paliza purchased 100,000 ordinary shares of P Corp. for P1,600,000 representing 30% of P’s
outstanding ordinary shares and an underlying equity of P1,400,000 in P’s net assets at January 2. Paliza had no other
financial transactions with P during 2014. As a result of Paliza’s 30% ownership of P, Paliza has the ability to exercise
significant influence over P’s financial and operating policies.

During 2014, Paliza disposed of the following securities:

Jan. 17 Sold 2,500 shares of L for P13 per share.

June 1 Sold 500 shares of T, after a 10% bonus issue, for P21 per share.
Oct. 1 Converted 500 shares S’s preference into 1,500 shares of S’s ordinary, when the market price was P60 per
share for the preference.

The following 2014 dividend information pertains to the shares held by the Paliza:

a. February 14, T issued a 10 % bonus issue, when the market price of T’s ordinary was P22 per share.
b. April 6 and October 6, S paid dividends of p1.20 per share on its P2.40 preference share, to shareholders of
record on March 9 and September 9, respectively. Rd did not pay any dividends on its ordinary shares during
2014.
c. June 30, L paid a P1.00 per share dividend on its ordinary shares.
d. March 1, June 1, Sept. 1, and Dec. 1, P paid quarterly dividends of p0.50 per share on each of these dates. P’s
profit for the year ended December 31, 2014, was P1,200,000.

At December 31, 2014, Paliza’s management intended to hold the P shares as a long-term investment. Market prices per
share of the securities as of December 31, 2014 were as follows
S Corp. – preference P56
S Corp. – ordinary 20
L Corp. – ordinary 11
T Co. – ordinary 22
P Corp. – ordinary 16

6. Prepare a schedule showing the Paliza’s Investment in financial assets at fair value through profit or loss.

7. Prepare a schedule to show the carrying amount of Paliza’s investment in P at December 31, 2014.

8. Prepare a schedule showing all income, gains and losses relating to Paliza’s investment for the year ended December 31,
2014.

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 Accounting 43 Auditng and Assurance – Concepts and Applications
Audit of Investments in Financial Instruments

PROBLEM 5
On May 1, 2013, the Pingol Company acquire as at fair value through profit or loss P400,000 of Aubrey Corporation 9%
bonds at a price that yields 12%. Interest on bonds is payable semiannually on March 1 and September 1, and bonds
mature on September 1, 2015.

On May 1, 2014, the Pingol Company sold bonds for P100,000 for 103 plus accrued interest.

On July 1, 2014, bonds of P150,000 were exchanged for 2,200 shares of Aubrey Corporation, no par ordinary, quoted on
the market on this date at P80. Interest was received on bonds on the date of exchange.

On September 1, 2015, the remaining bods were redeemed by Aubrey.

Market values at each yearend are as follow:

December 31, 2013 107

December 31, 2014 105
December 31, 2015 102

9. Give the journal entries for 2013 through 2015 record the foregoing transaction in the books of Pingol Company, including
any adjustments that are required at the end of each fiscal year ending on December 31.

PROBLEM 6
On June 1, 2013, Ricasio, Inc. purchased 400 of the 1,000 face value, 8% bonds of Stateline Corporation for P369,150.
The bonds were purchased to yield 10% interest. Interest is payable semiannually on December 1 and June 1. The bonds
mature on June 1, 2017. Ricasio uses the effective interest method of amortization.

The company intends to collect the contractual cash flows from the bond investments until maturity and did not exercise
its option to measure the debt investments at fair value.

10. Compute for:

a. Interest income for 2013 and 2014 and 2015,
b. Book value of the investment at the end of 2014.

PROBLEM 7
In auditing the books for the Seletaria Corporation as of December 31, 2014, before the accounts are closed, you find the
investment account balance.

INVESTMENT IN PEARL 9% BONDS (Due date, June 1, 2019)

Balance
Date Item Debit Credit Debit Credit
Bonds, P200,000 par acquired at 102 plus
Jan. 21 accrued interest 206,550 206,550
Proceeds from sale of bonds, P100,000 par and
Mar. 1 accrued interest. 106,000 100,550
June 1 Interest Received 4,500 96,050
Amount received on call of bonds, P40,000 par, at
Nov. 1 101 and accrued interest 41,900 54,150
Dec. 1 Interest received 2,700 51,450

11. Give the entries that should have been made relative to the investment in bonds, including any adjusting entries that
would be made on December 31, the end of fiscal year assuming the investments are classified as financial assets at fair
value through profit or loss. The market value of the Shala 9% bonds at December 31, 2014 is 103.

12. Give the audit adjustments at December 31, 2014.

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 Accounting 43 Auditng and Assurance – Concepts and Applications
Audit of Investments in Financial Instruments

PROBLEM 8
The investment accounts maintained by Tercero Company were shown below:

Kriza Company Ordinary (FAFV OCI)

Date Particulars Debit Credit
1/1/2014 Beginning balance, 3,000 shares 30,000
2 for 1 share split (market price after the share split is
1/12/2014 P7) 12,000
3/17/2014 Sold 1,000 shares at P8 8,000
Purchased 2,000 additional shares of Y Ordinary at P8
10/1/10 per share plus transaction costs of P0.50 per share 17,000
11/30/2014 Sold 1,000 shares at P8.50 8,500

Mae Company Ordinary (FAFV PL)

Date Particulars Debit Credit
Received dividend of 1 share of Mae Company ordinary
for every 5 shares of Kriza Company Ordinary. Market
Price on this date of Kriza Company Ordinary is P2.50.
6/30/2014 The shares have par value of P1. 1,000
9/10/2014 Sold 500 shares for P2.80 per share. 1,400
12/31/2014 Adjustment to market; market price is P3.20 per share 2,000

Market Adjustment - Kriza Company Ordinary

Date Particulars Debit Credit
1/1/2014 Beginning Balance 6,000
Adjustment to market (Market price of Y ordinary is
12/31/2014 P9.20) 6,700

Additional Information:
∑ You trace the beginning balances to your prior year’s working paper.
∑ Upon receipt of the shares as a result of the share split, the company credited Income from FAFV OCI for
P12,000.
∑ The company incurred and paid P500 transaction cost upon sale of 1,000 shares on March 17, charging this
amount to Selling and Administrative Expenses.
∑ The company credited dividend income for the shares of Mae Company ordinary received as dividends. The
shares were designated as FVPL.
∑ The company received P0.80 per share cash dividends on Kriza Company ordinary on October 20, 2014. The
shares were declared on September 20, payable to stockholders of record as of October 10. Upon receipt of the
cash dividends, the company credited dividend income.
∑ On the December 31, 2014, the company credited the adjustments to market to Gain on Investment. The total
amount of P8,700 formed part of the balance of the Other Operating Income on the company’s draft of statement
of comprehensive income.

13. Prepare all audit adjusting entries and compute the following items:
a. The market value of Kriza Company ordinary on December 31, 2014.
b. The correct amount of the gain or loss on March 17 sale.
c. The correct amount of the gain or loss on November 30 sale.
d. The total amount of dividend income in Kriza Company shares for the year 2014.
e. The correct balance of the Market Adjustment- FAFV OCI at December 31, 2014.
f. The unrealized gain or loss from the investments above taken as part of other operating income in the Income
Statement.
g. The unrealized gain or loss from the investments above taken directly as an increase or decrease in equity at
December 31, 2014.
h. The amount at which the FAFV OCI is shown on December 31, 2014 Statement of Financial Position.
i. The amount at which the FPL be shown on the December 31, 2014 Statement of Financial Position.

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 Accounting 43 Auditng and Assurance – Concepts and Applications
Audit of Investments in Financial Instruments

PROBLEM 9
On January 2, 2013, Trinidad Company purchased Korina Company, 9% bonds with a face value of P4,000,000 for
P3,760,000. The company intends to collect the contractual cash flows from the bond investments until maturity and did
not exercise its option to measure the debt investments at fair value. The effective interest rate on this investment is 10%.
The bonds are dated January 1, 2008 and mature on December 31, 2022. The bonds pay interest semiannually on June
30 and December 31. Trinidad’s accounting year is the calendar year.

On November 30, 2015, P1,800,000 of the bonds were sold at 98 plus accrued interest.

Market value of the bond is 98 on December 31, 2012, 96 on December 31, 2013 and 98 1/2 at December 31, 2014.

14. Provide the following:

a. What is Trinidad’s interest revenue for the year ended December 31, 2013?
b. At what amount should this investment be presented on December 31, 2013 statement of financial position?
c. What amount of financial asset shall be presented as part of current assets on December 31, 2014 as a result of
above investment?
d. What amount gain or loss shall be recognized upon sale of the securities at November 30, 2015?
e. At what amount should the investment be shown on December 31, 2014 Statement of Financial Position?
f. How much interest revenue shall be presented on the Statement of Comprehensive Income for the year 2014?

15. Provide the following assuming the investment is classified as FAFV PL:
a. What is Trinidad’s interest revenue for the year ended December 31, 2013?
b. At what amount should this investment be presented on December 31, 2013 statement of financial position?
c. What amount of financial asset shall be presented as part of current assets on December 31, 2014 as a result of
above investment?
d. What amount gain or loss shall be recognized upon sale of the securities at November 30, 2015?
e. At what amount should the investment be shown on December 31, 2014 Statement of Financial Position?
f. How much interest revenue shall be presented on the Statement of Comprehensive Income for the year 2014?

PROBLEM 10
Verba Company invested in debt instrument on July 1, 2013. At this date, the cost and fair value of the instrument is
P1,000,000. The company’s practice is to buy securities to be available for sale when circumstances warrant, not to profit
from short-term differences in price and not necessarily to held them to maturity. Hence, the debt instrument acquired is
classified as financial asset measured at fair value, and changes in fair value are classified as component of other
comprehensive income.

The following table sets out the changes in the fair value of the debt instrument, and the nature of the change in each
year:

Year Fair Value Change Nature of Change

2014 P(100,000) No objective evidence of impairment
2015 P(200,000) Objective evidence of impairment
2016 P15,000 Objective evidence of reversal of impairment

16. The impairment loss to be recognized in 2014 is

17. The impairment loss to be recognized in 2015 is

18. The amount or reversal of impairment loss to be recognized in profit or loss in 2015 is

19. At the end of 2016, the available-for-sale debt security should be stated at

20. Assume the same facts, except that the investment is in equity security. At the end of 2016, the amount of impairment
loss reversal to be recognized in profit and loss is

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 Accounting 43 Auditng and Assurance – Concepts and Applications
Audit of Investments in Financial Instruments

PROBLEM 11
On April 1, 2014, Redo Company acquired a 25% interest in the voting shares of Blado Company for P1,800,000. The net
assets of Blado on this date were P6,000,000. Redo received P100,000 dividends from Blado, which the former credited
to Dividend Income.

Blado reported profit after income tax of P800,000 during the year, P160,000 of which was earned during the first quarter
of 2014. Total market value of the shares of Blado held by Redo was P2,300,000 at December 31, 2014.

Redo Company recorded the acquisition of the securities at April 1 by a charge to Investment. Dividends received during
the year were credited to Dividend Income and an Unrealized Gain for P500,000 was reported on its draft of statement of
comprehensive income for the year 2014.

Redo had no intention of selling the shares of Blado, as Blado is one of Redo’s valued suppliers. As a result of this
acquisition, Redo has the ability to exercise significant influence over the operating and financial policies of Blado.

Blado’s assets and liabilities at April 1, 2014 had market values approximating carrying amounts, except for land which
had fair value of P750,000 more than its carrying amount, equipment with fair value at April 1 of P200,000 more than their
carrying amounts and inventories which showed carrying values less than fair values by a total of P30,000 at April 1.
Equipment had a remaining life of 5 years at April 1, 2014.

21. How much goodwill from acquisition should be reported by Redo Company at the date of acquisition?
22. How much total income from investment shall Redo recognize for the year 2014 as a result of this investment?
23. How much Dividend Income shall Redo report for the year 2014 as a result of its investment in Blado?
24. At what amount should this investment be shown on the December 31, 2014 statement of financial position?

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