AUDIT OF INVESTMENTS

Problem 1: EDZEL CORP. invested its excess cash in equity securities during 2014. The business model for
these investments is to profit from trading on price changes.
(a.) As of December 31, 2014, the equity investment portfolio consisted of the following:
Investment
LJ, Inc
Polland Co.
Alabang Corp
Totals

Quantity
1.000 shares
2,000 shares
2,000 shares

Cost
P45,000
120,000
216,000
P381,000

Fair Value
P63,000
126,000
180,000
P369,000

1.) In the December 31, 2014, statement of financial position, what should be reported as carrying amount
of the investments?
A. P369,000
B. P345,000
C. P381,000
D. P405,000
2.) In the 2014 income statement, what amount should be reported as unrealized gain or loss?
A. Unrealized gain of P12,000
B. Unrealized loss of P12,000
C. Unrealized loss of P36,000
D. Unrealized gain of P24,000
(b.) During the year 2015, Edzel Corp. sold 2,000 shares of Polland Co. for P114,600 and purchased 2,000
more shares of LJ Inc., and P1,000 shares of Dwarfy Company. On December 31, 2015, Edzels equity
securities portfolio consisted of the following:
Investment
LJ, Inc
LJ, Inc.
Dwarfy Company
Alabang Corp
Totals

Quantity
1.000 shares
2,000 shares
1,000 shares
2,000 shares

Cost
P45,000
99,000
48,000
216,000
P408,000

Fair Value
P60,000
120,000
36,000
66,000
P282,000

3.) What is the gain or loss on the sale of Polland Co. Investment?
A. P5,400 gain
B. P5,400 loss
C. P11,400 gain
D. P11,400 loss
4.) What is the carrying amount of the investments on December 31, 2015?
A. P408,000
B. P444,000
C. P282,000
D. P246,000
5.) What amount of unrealized gain or loss should be reported in the income statement for the year ended
December 31, 2015?
A. P126,000 unrealized gain
B. P126,000 unrealized loss
C. P108,000 unrealized gain
D. P108,000 unrealized loss
(c.) During the year 2016, Edzel sold 3,000 shares of LJ, Inc. for P119,700 and 500 shares of Dwarfy
Company at a loss of P8,100. On December 31, 2016, Edzels equity investment portfolio consisted of
the following:
Investment
Dwarfy Company
Alabang Corp
Totals

Quantity
500 shares
2,000 shares

Cost

6.) What should be reported as loss on sale of trading securities?

A. P60,300

Fair Value
24,000
216,000
P240,000

18,000
246,000
P264,000

B. P32,400
C. P24,300
D. P68,400
7.) What amount of unrealized gain or loss should be reported in the income statement for the year ended
December 31, 2016?
A. P180,000 unrealized gain
B. P180,000 unrealized loss
C. P24,000 unrealized gain
D. P24,000 unrealized loss
8.) In the December 31, 2016, statement of financial position, what should be reported as carrying amount
of trading securities?
A. P240,000
B. P234,000
C. P264,000
D. P270,000
Problem 2: During the course of your audit of the financial statements of KENNETH CORPORATION for the
year ended December 31, 2014, you found a new account, Investment in Equity Securities. Your audit
revealed that during 2014, Kenneth began a program of Investments, and all investment-related transactions
were entered in this account. Your analysis of this account for 2014 follows:
KENNETH CORPORATION
Analysis of Investment in Equity Securities
For the year ended December 31, 2014
Debit

Feb. 14
July 26

Sept. 28

SALMON
COMPANY
ORDINARY SHARES
Purchased 36,000 shares
@ P55 per share
Received 3,600 ordinary
shares
of
Salmon
Company as a share
dividend (*Memorandum
entry was made in
general ledger)
Sold the P3,600 ordinary
shares
of
Salmon
Company received July
26 @ P70 per share

P1,980,000

P252,000

Debit

April 30
Oct. 28

TAMBAN
INC,
ORDINARY SHARES
Purchased
180,000
shares @ P40 per share
Received dividend of
P1.20 per share

Credit

Credit

P7.200.000
P216,000

Additional Information:
a. The fair value for each security as of the 2014 date of each transaction follow:
Security
Feb.14
April 30
July 26
September 28
Salmon
P55
P62
P70
Company
Tamban, Inc.
P40
Kenneth Corp.
25
28
30
33

December 31
P74
32
35

b. All of the investments of Kenneth Corporation are nominal in respect to percentage of ownership (5% or
less)

c. Each investment is considered by Kenneth Corporation to be non-trading. Kenneth 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 2014?
A. P72,000
B. P18,000
C. P54,000
D. P0
2.) The receipt of 3,600 share dividend would cause the investment balance to increase by
A. P223,200
B. P252,000
C. P198,000
D. P0
3.) What is the entry necessary to correct the recording of the cash dividend received from Tamban Inc.?
A. (Dr) Cash, P216,000; (Cr) Dividend Income, P216,000
B. (Dr) Cash, P216,000; (Cr) Investment in equity securities, P216,000
C. (Dr) Investment in equity securities, P216,000; (Cr) Dividend Income, P216,000
D. (Dr) Dividend Income; (Cr) Investment in equity securities, P216,000
4.) What amount of unrealized gain or loss should be reported in the 2014 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, 2014?
A. P9,000,000
B. P8,424,000
C. P7,560,000
D. P9,864,000
Problem 3: Shown below is an amortization schedule related to ERIKA COMPANYs 5- year, P500,000 bond
with a 7% interest rate and a 5% yield, purchased on December 31, 2014, for P543,300.
Date
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19

Interest Received

Interest Income

P35,000
35,000
35,000
35,000
35,000

Amortization

P27,165
26,773
26,362
25,930
25,470

P7,835
8,227
8,638
9,070
9,530

Carrying Amount
P543,300
535,465
527,238
518,600
509,530
500,000

The following shows a comparison of the amortized cost and fair value of the bonds at year-end.
Amortized Cost
December 31, 2015
December 31, 2016
December 31, 2017
December 31, 2018
December 31, 2019

Fair Value
P535,465
527,238
518,600
509,530
500,000

P532,500
537,500
528,250
515,000
500,000

Required:
a. Prepare the journal entry to record the purchase of these bonds on December 31, 2014, assuming the
bonds are held as financial assets at amortized cost.
b. Prepare the journal entry(ies) related to these bonds for 2015
c. Prepare the journal entry(ies) related to these bonds for 2017
d. What should be reported as the carrying amount of these bonds in the statement of financial position on
December 31, 2015?
Problem 4: On January 1, 2014, CAMILLE B. CORP. purchased debt securities for cash of P765,540 to be
held as financial assets at amortized cost. The securities have a face value of P600,000, and they mature in 15
years. The securities carry fixed interest of 10% that is receivable 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, 2014,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 2014 using the effective interest rate method is
A. P66,524
B. P6,524
C. P60,000
D. P53,476
Problem 5: MARA INC, received dividends from its investments in ordinary shares during the year ended
December 31, 2014, as follows:
(a) A cash dividend of P720,000 is received from JJ Corporation. (Mara owns a 2% interest in JJ.)
(b) A cash dividend of P3,600,000 is received from VV Corporation. (Mara owns a 30% interest in VV)
(c) A stock dividend of 18,000 shares from YY Company was received on December 31, 2014, on which
date the quoted market value of YYs shares was P20 per share. (Mara owns less than 1% of YYs
ordinary shares)
1.) What amount of dividend income should be reported by Mara in its 2014 income statement?
A. P1,080,000
B. P4,680,000
C. P4,320,000
D. P720,000
Problem 6: KENNETH D. INC. purchased 40% of MU Corp. on April 1, 2014, for P500,000 when MUs book
value was P1,260,000. On the date of acquisition, the market value of MUs net assets equalled their book
values except for the following:

MUs equipment has a fair value of P50,000 less than the book value. The equipment has a remaining
useful life of 10 years.
MUs building has a fair value of P40,000 more than the book value. The building has a remaining life of
20 years.

MUs results of operations in 2014 and 2015 are as follows:

2014 net income amounted to P150,000 while 2015 saw a net loss of P30,000
MU paid cash dividends of P20,000 and P10,000 in 2014 and 2015 respectively
1.) What amount of investment income should be reported on Kenneth Ds income statement for the year
ended December 31, 2014?
A. P44,100
B. P58,800
C. P61,200
D. P45,900
2.) The investment loss to be reported on Kenneth Ds 2015 income statement is
A. P10,800
B. P8,100
C. P13,200
D. P12,000
3.) What is the carrying value of the stock investment on December 31, 2014?
A. P536,100
B. P537,900
C. P553,200
D. P500,000
4.) What is the carrying value of the stock investment on December 31, 2015?
A. P521,300
B. P536,000
C. P523,100

D. P500,000
Problem 7: On January 2, 2014, WAYNE INC. acquired a 15% interest in CPS Corp by paying P8,000,000 for
150,000 ordinary shares. On this date, the net assets of CPS Corp. totalled P40,000,000. The fair values of
CPS Corps identifiable assets and liabilities were equal to their book values. Wayne did not have the ability to
exercise significant influence over the operating and financial policies of CPS. Wayne received dividends of
P1.40 per share from CPS on October 1, 2014. CPS reported net income of P5,000,000 for the year ended
December 31, 2014. Wayne 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, 2014.
Wayne paid P30,000,000 on January 1, 2015, for 250,000 additional ordinary shares, which represents a 25%
interest in CPS. The fair value of CPS Corps identifiable assets, net of liabilities were equal to their book
values of P92,000,000. As a result of this additional acquisition, Wayne has the ability to exercise significant
influence over the operating and financial policies of CPS. Wayne received a dividend of P2.70 per share on
October 5, 2015. CPS reported net income of P6,000,000 for the year ended December 31, 2015. The
investments fair value on December 31, 2015, is P45,000,000.
1.) In the December 31, 2014 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 revenue that should be reported in the 2014 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 2015 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, 2015?
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, 2015?
A. P45,000,000
B. P40,320,000
C. P38,120,000
D. P39,000,000

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