AUDITING REVIEW

Audit of Investment

Problem 1
Pau Corporation had the following portfolio of equity investment at fair value through other comprehensive income at December 31,
2023:

Purchase Price FV 12/31/2023

Dune ordinary shares (10,000 shares) Php 450,000 Php 500,000
Monte preference (7,000 shares) 266,000 280,000
Grace ordinary shares (2,000 shares) 360,000 356,000

On April 30, 2024, Pau Corporation sold all the Dune shares at Php54 per share. In addition, on July 31, 2024, 6,000 of Bread
Corporation shares acquired at Php59.

The December 31, 2024 fair values were: Monte, Php270,000, Grace, Php380,000; and Bread, Php400,000.

Pau Corporation has the policy of transferring the equity account to retained earnings at the date the equity investment is
derecognized.

Required:
a. How much gain or loss shall be recognized on the sale of Dune ordinary shares on April 30, 2024?
b. What should be the cumulative balance of Unrealized Gains and Losses on Equity Investments at December 31, 2024?

Problem 2
Angel Company purchased 20,000 shares of Pau Company at Php60 per share. The shares represent less than 5% ownership in
Pau Company. The shares are classified as financial assets at fair value through profit or loss. Market value at December 31, 2023
was Php66 . At the beginning of 2024, Pau Company issued rights to purchase one ordinary share for every five rights submitted
plus Php50. Immediately after the rights were issued, the ordinary share was selling for Php70 per share.

Required:
a. Assume that all rights were sold at the market price of Php5. Give the entry to record this sale.
b. Assume that Angel Company exercised all the rights, when the market price of each Pau Company ordinary shares was
Php75. Give the entry to record the exercise of the rights and the valuation entry at year end, assuming that each share of
Pau Company sells at Php78 at December 31.
Problem 3
The following chronological transactions were completed by Camil Company during 2024:

January Bought 1,000 ordinary shares of Diner Company for Php108,000 to be measured at fair value through other
comprehensive income.

February Received additional shares from Diner Company as a result of 2-for-1 share split.

March Bought 2,000 shares 8% Php100 par preference of Sam Company at Php120 per share plus broker’s fee of
Php2,400. The shares are classified as fair value through other comprehensive income.

April 500 ordinary shares of Diner were sold for Php30,000.

May Received one right from Diner Company for every ordinary share held. The rights entitle their holders to buy one
ordinary share at Php55 for every two rights submitted.

June Camil Company exercised 60% of the rights received from Diner when each ordinary share of Diner Company
sells at Php61. The remaining rights were sold at Php3 each.

September Sold 200 shares of Diner Company for Php64 per shares. The shares are identified to be those acquired in June.

October Received the annual dividends on Sam Company preference shares.

December 31 Market value of the securities at year-end are: Diner Company ordinary : Php62 and Sam Company preference:
Php115.

Required:
1. Prepare entries for the foregoing in the books of Camil Company. (see above)
2. Determine the total income recognized in profit and loss as a result of the foregoing.
Problem 4
Camil Company had the following investment securities at December 31, 2023:
Cost Fair Value
20,000 ordinary shares of Lacoste Co. 640,000 556,000
40,000 shares of Diner 728,000 740,000

All of the above securities had been purchased in 2015. During 2024, Camil completed the following securities transactions:
April Sold 10,000 shares of Lacoste Company at Php25.

May Bought 1,200 shares of Giordano Corp preference shares at Php50 plus fees of Php1,100.

July Received a 20% bonus issue on Diner’s ordinary shares.

Nov Received Php1 cash dividend on Diner’s ordinary shares.

Dec The market values on December 31, 2024 are

Lacoste Company Php 26
Diner Company 20
Giordano Corp. 52

Required:
Give the entries to record the foregoing, including the appropriate adjusting entries on December 31, assuming that Camil classifies
Lacoste Co. ordinary shares at fair value through profit and loss and Diner’s ordinary shares and Giordano’s preference shares as
at fair value through other comprehensive income.

Problem 5
The following transactions pertain to Shang Company
a. Purchased 40,000 ordinary shares of Php100 of Singa Company for Php4,000,000 on January 1, 2024. This purchase
represents 20% interest in the net assets of Singa, which are fairly valued at Php80,000,000. The shares give Shang
Company significant influence over Singa.

b. Singa reported profit of Php3,000,000 for 2024.

c. In 2025, Shang received a 10% bonus issue from Singa.

d. Singa reported profit of Php6,000,000 for 2025.

e. Singa paid a cash dividend of Php2,000,000 on the ordinary shares at December 15, 2025.

Required:
1. Journal entries to record the given transactions above.
2. Carrying amount of the investments at December 31, 2025.

Problem 6
On March 1, 2023, Legoland Inc. acquired a 30% ownership in one of its customers, Hello Kit Company, for Php2,730,000, when
the net assets of Hello Kit had carrying value of Php7,100,000. Because of this acquisition, Legoland exercises significant influence
over Hello Kit Company. Legoland has no intention of selling Hello Kit’s shares within twelve months from the date of acquisition.

All the identifiable assets and liabilities of Hello Kit, on March 1, 2016, show carrying values equal to their fair values, except for
inventory which had fair value in excess of carrying amounts by Php100,000 and some depreciable assets which had total fair
values in excess of carrying amounts by Php1,500,000. These depreciable assets, at March 1, 2023, have remaining useful lives of
5 years.

During 2023, Hello Kit declared and paid cash dividends of Php1,600,000 and reported net profit of Php2,400,000. On December
31, 2023, the shares of Hello Kit held by Legoland have total market value of Php1,300,000.

Required:
1. Prepare journal entries during 2023 in the books of Legoland Inc. to record the foregoing.
2. Compute the carrying value of the investment at December 31, 2023 and the income reported by Legoland as a result of
the investment during the year 2023.
Problem 7
During your audit of the financial statements of the Sipaganmo Corporation for the year 2023, you found the following postings to
the Financial Assets at Fair Value through Profit or Loss (FVPL) account:
Date Particulars Debit Credit
Feb 5 Purchased 2,000 shares, Angel Corp 108,000
10 Purchased 2,000 shares, Brainless Corp 120,000
May 4 Cash Dividends, Angel Corp 2,000
7 Sold 1,000 shares, Angel Corp 56,000
10 Purchased 2,000 shares, Cam Corp 60,000
10 Purchased 2,000 shares, Danis Corp 72,000
Aug 17 Purchased 400 shares, Sipaganmo Corp 66,000
17 Purchased 1,000 shares, Englang Corp 40,000
Sept 17 Sold 200 shares, Sipaganmo Corp 40,000
Dec 10 Received 10% bonus issue from Englang Corp 4,000
12 Cash Dividend, Cam Corp 2,400

The following information was discovered from your audit procedures:

a. The Sipaganmo Corporation purchased 400 shares of its own ordinary shares held by a deceased shareholder at
Php165 per share. 200 of these shares were sold at its market price of Php200 per share on September 17.
b. On December 10, 100 shares of Englang Corporation were received. Sipaganmo credited dividend income equal to the
market price of the shares received.
c. On December 17, Danis Corporation declared a Php5 cash dividend per share, payable on January 12, 2024 to
shareholders of record as of December 31, 2023. No accrual has yet been taken up by Sipaganmo .
d. The market price of the shares are as follows at December 31, 2023:
Angel Corporation Php 55
Brainless Corporation 54
Cam Corporation 32
Danis Corporation 39
Englang Corporation 38
Required:
1. Prepare all audit adjusting entries as a result of the foregoing.
2. Compute the following
a. Carrying amount of FVPL at December 31, 2023
b. Gain or loss on the sale of FVPL
c. Dividend income
d. Unrealized gain or loss taken to profit or loss

Problem 8
The Investments and Dividends Income accounts of Sugar Company are shown below:

Trading Securities
Date Description Ref Debit Credit
06/22/23 10,000 ordinary shares par value, Php100, Apple Co. CD-30 1,040,000
12/31/23 Adjustment to fair value 160,000
05/31/24 1,000 shares Apple Co. received as bonus issue G-J12 24,000
07/10/24 Sold 2,000 shares@Php130 net CR-23 260,000
12/06/24 Sold 2,000 shares@Php140 CR-22 280,000
Dividend Income
05/31/24 Bonus issue (stock dividend) GJ-12 24,000
08/01/24 Cash dividend on Apple Ordinary share CR-22 45,000

The following information was obtained during your examination:

1. The December 31, 2023 statement of financial position of Sugar Company showed, among current assets, Trading
Securities of Php1,200,000.

2. You obtained the following information relating to dividends declared by Apple Company

Type of Dividend Date Declared Date of Record Date of Payt Rate

Stock 04/16/24 05/10/24 05/29/24 10%
Cash 10/16/24 11/16/24 11/30/24 Php5/share
Cash 12/10/24 12/28/24 01/16/25 Php10/share
Closing market quotation is Php85 as at December 31, 2024

Required:
1. Compute the following:
a. Gain or Loss on the July 10 sale
b. Gain or Loss on the December 4 sale
c. Dividend revenue for the year 2024
d. Unrealized gain or loss taken to profit or loss as a result of the measurement of the investments at December
31, 2017
e. Adjusted balance of the investment account at December 31, 2024.
2. Audit adjustments at December 31, 2024.

Problem 9
Mari Company holds shares in Vanny Company, which it acquired in 2024. You were engaged to audit the financial
statements of Mari Company for the year 2026, and you found the following accounts in the general ledger:

Investment in Vanny Company

Debit Credit Balance
June 4, 2024 6,000 shares @P80 480,000 480,000
Oct 13, 2025 16,000 shares @P100 1,600,000 2,080,000
May 31, 2026 8,000 shares @P120 960,000 3,040,000
Oct 31, 2026 10,000 shares @ P110 1,100,000 1,940,000

Investment in Aman Company

Debit Credit Balance
August 31, 2026 30,000 30,000

Dividend Revenue
Debit Credit Balance
January 4, 2026 110,000 110,000
June 24, 2026 150,000 260,000
August 31, 2026 30,000 290,000

Transactions of the audit year 2026 are described as follows:

Jan. 3 The company made an early adoption of IFRS 9 and exercised its
option to classify the investments as at Fair Value through Other
Comprehensive Income. The fair value of Vanny Company shares at
January 1, 2026 was determined to be P105 per share.

Jan. 17 Received a cash dividend (declared on December 1, 2025 to

shareholders of record as of January 6, 2026) P5 per share. No entry
was made by the company to accrue the dividends at December 31,
2025.

May 31 Purchased 8,000 shares @P120 per share.

June 24 Received a cash dividend (declared on May 15 to shareholders of record as of June

10) of P5 per share.

Aug 31 Received dividend of one share P10 par of Aman Company for each
10 shares of Vanny Company. Aman Company had a fair value based
on published price quotation of P16 per share on this date.

Oct 31 Sold 10,000 shares @P110.

Dec 22 Sold 4,000 shares @ P140. Cash was received on January 5, 2027.

Dec. 31 Fair values per share are as follows: Vanny, P142; Aman, P17.

Required:
Audit Adjusting Entries.
Problem 10
On August 1, 2025, Bay Inc. purchased 500 of the 1,000 face value, 10% bonds of Waview Corporation for
Php547,778 a price which includes accrued interest and yields an effective interest rate of 8%. Interest is payable
semiannually on November 30 and May 31. The bonds mature on May 31, 2030.

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.

Required:
Compute the following:
1. Interest revenue for years 2025 and 2026.
2. Interest receivable at December 31, 2026.
3. Carrying value of the investments at December 31, 2025 and December 31, 2026.

Problem 11
In auditing the books of Rose Corporation as of December 31, 2026, before the accounts are closed, you find the
investment account balance:

Investment in Gold 9% Bonds ( Due date , June 1, 2031)

Date Particulars Debit Credit Balance

Jan 20 Bonds, Php500,000 par acquired at 102
Plus accrued interest 516,250 516,250

March 1 Proceeds from sale of bonds , Php100,000

face and accrued interest 106,000 410,250

June 1 Interest Received 18,000 392,250

Nov 1 Amount received on call of bonds, Php100,000

Face at 101 and accrued interest 104,750 287,500

Dec 1 Interest Received 13,500 274,000

The investments were held for trading purposes. Gold 9% bonds were quoted in the market at 103 at December 31,
2066.

Required:

1. Give the entries that should have been made relative to the investment in bonds, including any
entries that would be made on December 31, the end of the fiscal year.

2. Give the audit adjustments at December 31, 2026

Problem 12
On January 1, 2025, Poorman Corporation acquired 10% of the outstanding voting shares of Pau Company for Php1,800,000.
These shares were designated as equity investments at fair value through other comprehensive income.

On January 2, 2026, Poorman gained the ability to exercise significant influence over financial and operating policies of Pau
Company by acquiring an additional 20% of Pau’s outstanding shares for Php5,200,000. The two purchases were made at prices
proportionate to the value assigned to Pau’s net assets, which equalled their carrying amounts. For the years ended December 31,
2015 and 2016, Pau reported the following:
2025 2026
Dividends paid Php 4,000,000 Php 6,000,000
Profit for the year 12,000,000 13,000,000

The fair values of the investments on December 31, 2025 and December 31, 2026 were Php 2,760,000 and Php10,200,000,
respectively.

Required:
1. Prepare journal entries to record the above data.
2. Determine the investment carrying value at December 31, 2026.
Problem 13
Erly Corporation purchased 100,000 ordinary shares of Fury Company on January 1, 2025 at Php165 per share, which reflected
carrying value as of that date. Fury Company had 400,000 ordinary shares outstanding at the time of purchase. Prior to this
purchase, Erly Corporation had no ownership interest in Fury Company. Fury Company reported profit of Php1,360,000 in 2025 and
Php2,000,000 in 2026. Erly Company received a cash dividend from Fury Company of Php420,000 on August 1, 2025 and
Php480,000 on December 31, 2026. Because of significant influence acquired by Erly Company over Fury Company, the
investment was accounted for using the equity method.

Market values of each share on December 31, 2025 and December 31, 2026 were Php160 and Php175, respectively.

On January 2, 2027, Erly Company sold 40,000 ordinary shares of Fury Company for Php175 per share. On January 2, 2027, Erly
exercised its option to measure the remaining securities at fair value through other comprehensive income. Fury Company reported
profit of Php7,440,000 for the year ended December 31, 2027 and paid Erly Company dividends of Php240,000. Market value of
Fury Company shares on December 31, 2027 was Php190 each. As a result of this sale, Erly Company lost its ability to exercise
significant influence over Fury Company.

Required:
1. Give the entries in the books of Erly Company to account for the investment in Fury Company during year 2025 to 2027.
2. Determine the amount at which the investment will be carried in the statement of financial position on December 31, 2025, 2026
and 2027.

Problem 14
On January 1, 2023, Sunrise Company purchased Php2,000,000 12% bonds of Sunrise Company for Php2,126,788, a price that
yields 10%. Interest on these bonds is payable every December 31. The bonds mature on December 31, 2016. On April 1, 2025, to
pay a maturing obligation, Sunrise sold Php1,200,000 face value bonds at 101 plus accrued interest. Market value of the bonds on
different dates is as follows:
December 31, 2023 108
December 31, 2024 106
December 31, 2025 104
Required:
1. Assume that the bonds were classified as debt investments at fair value through profit or loss.
a. How much is interest income for the year ended December 31, 2023?
b. What amount of gain or loss should Sunrise report on the sale of the bond
investments on April 1, 2025?
c. At what amount should the investments be shown on December 31, 2024 and
December 31, 2025 statement of financial position?

2. Assume that the company intended to collect the principal and interest over the term of the bonds and did not choose the fair
value option.
a. At what amount should the bond investments be shown on December 31, 2024 statement of financial position?
b. What amount of gain or loss should Sunrise recognize on the sale of investments on April 1, 2025?
c. What amount of interest income will be taken to profit and loss for the year ended December 31, 2025?
d. At what amount should the bond investments be shown on December 31, 2025 statement of financial position?

Problem 15
On January 1, 2024, Nasanka Company purchased Php100,000 face value 5-year bond of Walana Company for Php108,660, a
price that yields 5% on a stated interest rate of 7%. Interest is payable annually at December 31.

The bond investment is measured at amortized cost.

On December 31, 2025, after paying the periodic interest, Nasanka negotiated for a modification of interest from 7% to 4.5% for the
remaining term of the bonds, due to continuous decline in the market rate of interest.

Required:

Give all entries in the books of Nasanka Company for 2024 through 2027 as a result of the foregoing.
Problem 16
On June 1, 2025, Pau Company purchased for Php5,353,150 (including transaction costs) plus accrued interest Php5,000,000 12%
bonds of Camil Company. These investments are classified as held to maturity securities. The bonds, which mature on December
31, 2029 pay interest annually on December 31. Using a financial calculator and an excel worksheet, the yield is computed at 10%.

On September 1, 2028, in response to some liquidity problems, Pau Company sold Php3,000,000 of the bonds at 103 plus accrued
interest. The bonds are quoted in the market at the following prices, at selected dates.

June 1, 2025 107 December 31, 2027 104

December 31, 2025 105 September 1, 2028 103
December 31, 2026 106 December 31, 2028 103.5

Required:
Prepare entries in the books of Pau Company for years 2025 through 2028 as a result of the foregoing. (Pau Company reports on a
calendar basis)