Quiz 04: Audit of Investment

Name: __________________________ Score: _________ Rating: _______

Problem 01:
LEN COMPANY completed the following transactions in relation to its long-term investments in Lyn Company.
On January 1, 2019, Len Company purchased 20,000 shares of Lyn Company, P100 par, at P110 per share. This was debited to the investment
account.
On March 1, 2019, Lyn Company issued rights to Len Company, each permitting the purchase of 1/4 share at par. No entry was made. The bid
price of the share was 140 and there was no quoted price for the rights.
Len Company was advised that it would “lose out on the investment if it did not pay in the money for the rights.” Thus, on April 1, 2019, Len
Company paid for the new shares charging the payment to the investment account.
Since Len Company felt that it had been assessed by Lyn Company, the dividends received from Lyn Company in 2019 and 2020 (10% on
December each year) are credited to the investment account until the debit was fully offset.
On January 1, 2021, Len Company received 50% stock dividend from Lyn Company. On the same date, the shares received as stock dividend
were sold at P160 per share and the proceeds were credited to income.
On December 31, 2021, the shares of Lyn Company were split 2-for-1. Len Company found that each new share was worth P5 more than the
P110 paid for the original shares.
Accordingly, Len Company debited the investment account with the additional shares received at P110 per share and credited to income.
On June 30, 2022, Len Company sold one-half of the investment at P92 per share and credited the proceeds to the investment account.
Required:
1. Determine the balance of the investment account as it was kept by Len Company.
2. Determine the correct balance of the investment account as the transactions should have been recorded using the average method. (Any
stock rights are not accounted for separately.)
3. The gain on sale on June 30, 2022 amounts to
4. The adjustment to retained earnings-beginning on December 31, 2022 amounts to (dr/cr)
5. Prepare adjusting entries for 2022.

Problem 02:
OCAMPO
PROBLEM 24 1.2
INVESTMENTS
Your audit of Len Corporation disclosed that the company owned the following securities on December 31, 2021:
FAFV-PL
Security Shares Cost Market
Lea, Inc. 4,800 P 86,400 P 110,400
Lei, Inc. 8,000 259,200 172,800
10%, P100,000 face value, Lyn bonds (interest payable
semiannually on Jan. 1 and Jul. 1) 95,040 98,064
Total 440,640 381,264

FAFV-OCI
Security Shares Cost Market
Score Products 16,000 825,600 864,000
Jireme, Inc. 120,000 3,744,000 3,504,000
Jericho, Inc. 40,000 576,000 768,000
Total 5,145,600 5,136,000

Financial Assets at Amortized Cost

Cost CA
12%, 1000,000 face value, Disco bonds (interest payable
Annually every Dec. 31) 950,000 963,000
During 2022 the following transactions occurred:
Jan. 1 Received interest on the Lyn bonds.
Mar. 1 Sold 4,000 shares of Lei Inc. stock for P91,200
May 15 Sold 1,600 shares of Jericho, Inc. for P18 per share.
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Quiz 04: Audit of Investment
Name: __________________________ Score: _________ Rating: _______
July 1 Received interest on the Lyn bonds.
Dec. 31 Received interest on Disco Bonds
31 Transferred the Disco bonds to FAFV-OCI portfolio. The bonds were selling at 101 on this date. The bonds were purchased on
January 2, 2021. The discount was amortized using the effective interest method.
The market values of the shares and bonds on December 31, 2022, are as follows:
Lea, Inc. P 26.40
Lei P 18.00
10% Lyn bonds P 90,720.00
Score Products P 50.40
Jireme, Inc. P 33.60
Jericho, Inc. 21.60
Based on the above and the result of your audit, determine the following:
1. Gain or loss on the sale of 4,000 Lei, Inc. shares on March 1, 2022
2. Gain or loss to be recognized in profit or loss of on the sale 1,600 Jericho, Inc. shares on May 15, 2022
3. Total interest income for the year 2017
4. The total amount that should be reported as unrealized gain in the statement of changes in equity regarding transfer of Disco bonds to
FAFV-OCI
5. The carrying amount of FAFV-PL and FAFV-OCI on December 31, 2022 should be
6. Prepare adjusting entries for 2022.

Problem 03:
On July 1, 2023, Len Corporation acquired 25% of the shares of Lyn, Inc. for P1,000,000. At that date, the equity of Lyn was P4,000,000, with
all the identifiable assets and liabilities being measured at amounts equal to fair value. The table below shows the profits and losses made by
Lyn during 2003 to 2007:
Year Profit (Loss)
2023 P200,000
2024 (2,000,000)
2025 (2,500,000)
2026 160,000
2027 300,000
Questions:
Based on the above and the result of your audit, determine the following:
1. The carrying amount of the investment in Lyn, Inc. as of December 31,2024 is
2. The amount to be recognized in 2025 profit or loss related to the investment in Lyn, Inc. is
3. The amount to be recognized in 2026 profit or loss related to the investment in Lyn, Inc. is
4. The amount to be recognized in 2027 profit or loss related to the investment in Lyn, Inc. is
5. The amount of the investment in Lyn, Inc. as of December 31,2027 is
6. Prepare all journal entries from 2023 to 2027.

Problem 04:
During 2019 and 2020, PINEAPPLE COMPANY’s inexperienced accountant prepared the following journal entries to account for transactions
relating to the company’s trading securities:
2019
(1) Nov. 2 Investment in trading securities 3,206,500
Cash 3,206,500
To record the purchase of P3 million of Z co. 10% bonds at 103.25. Brokerage fees were
P9,000. Interest is payable semiannually on January 1 and July 1
(2) Dec. 31 Investment in trading securities 612,500
Unrealized gain-trading securities 612,500
To record the increase in market value of the current marketable securities based on the
information below:
Cost Market Value
X Co. Stock P 757,500 P 800,000
Y Co. Stock 973,500 950,000

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Quiz 04: Audit of Investment
Name: __________________________ Score: _________ Rating: _______
Z Co. 10% bonds 3,206,500 3,800,000
Total 4,937,500 5,850,000
The aggregate market value of X Co. and Y Co. securities was P1,800,000 at December 31, 2018. No other entries were made by the
accountant in 2019
2020
(3) Jan. 1 Cash 150,000
Interest revenue 150,000
To record interest revenue for 6 months
(4) July 1 Cash 150,000
Interest revenue 150,000
To record interest revenue for 6 months
(5) Dec. 6 Investment in Available-available-for-sale securities-
X Co. 757,000
Investment in trading securities- X Co. 757,000
To reclassify X Co. stock from trading securities to available-for-sale securities. Market value was
P735,000 at the date of transfer.
(6) Dec. 31 Unrealized loss- available-for-sale securities 104,500
Investment in available-for-sale securities 9,000
Investment in trading securities 95,500
To record the decrease in market value of available-for-sale securities based on the data below:
Cost Market Value
Y Co. Stock P 973,000 P 979,500
Z Co. 10% bonds 3,206,500 3,105,000
X Co. stock 757,500 748,500
Totals 4,937,500 4,383,000
The accountant made no other entries in 2020.
1. The purchase of Z Co. bonds should be initially measured and recognized at
2. The 2019 interest income on Z Co. bonds is
3. The unrealized gain on trading securities in 2019 amounts to
4. How much interest income on Z Co. bonds should be reported in 2020?
5. The unrealized gain on available-for-sale securities to be classified as a component of other comprehensive income on December 31,
2020, is

end of quiz 04