FAR EASTERN UNIVERSITY

INSTITUTEOF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

AUDITING PROBLEMS
First Semester AY 2017-2018
LECTURE GUIDE – AUDIT OF INVESTMENTS
Name Date
(Family Name) (First Name) (Middle Name) Section
Professor Day/Time
Stud. No. Score
Room Rating

Review Problem 1 (Trading Securities Review)

On January 1, 2017, Filipinas Home Products Corporation acquired marketable equity securities for P 30,000,000 which
are qualified as financial assets held for trading. During acquisition, it paid P 300,000 as broker’s commission.

At December 31, 2017 and December 31, 2018, the fair market value of the marketable equity securities are P
36,000,000 and P 27,000,000, respectively.

At December 31, 2019, Filipinas Home Products Corporation decided to sell the trading securities for P 31,200,000.

Required:
Prepare the necessary journal entries for the years 2017, 2018 and 2019. Use the solution guide provided below.

SOLUTION GUIDE:
JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Jan. 1

Dec. 31

2018
Dec. 31

2019
Dec. 31

Review Problem 2 (Trading Securities Review)

On June 1, 2017, Manila Quality Furniture, Inc. purchased trading securities as follows with related market value at
December 31, 2017.

Cost Market
06/01/2017 12/31/2017
Cebu Corporation preference shares 1,200,000 900,000
Davao Company, Inc. Ordinary shares 4,800,000 5,700,000
Bacolod Corporation Ordinary shares 6,000,000 6,600,000
Legazpi Corporation Bonds 18,000,000 15,000,000
30,000,000 28,200,000

On April 1, 2018, Cebu Corporation preference shares are sold for P 480,000.
At December 31, 2018, the market value of the trading securities are as follows:

Market
12/31/2018
Davao Company, Inc. Ordinary shares 6,000,000
Bacolod Corporation Ordinary shares 9,000,000
Legazpi Corporation Bonds 14,400,000
29,400,000

1
Required: Prepare the necessary journal entries.

SOLUTION GUIDE:
JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Jun. 1

Dec. 31

2018
Apr. 1

Dec. 31

Review Problem 3 (Equity Investment at fair value through OCI - Review)

On August 1, 2017, the Timber Lake Corporation acquired marketable equity securities for P 10,000,000. Related
expenses include P 1,000,000 for broker’s commission and taxes. These securities do not qualify as financial asset
held for trading. In addition, Timber Lake Corporation made an irrevocable election to present unrealized gain and loss
in other comprehensive income.

At December 31, 2017 the marketable equity securities have market values of P 13,000,000 and at December 31,
2018, P 16,000,000. On July 1, 2019, the securities are sold for P 20,000,000.

Required: Prepare the necessary journal entries.

SOLUTION GUIDE:
JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Jun. 1

Dec. 31

2018
Dec. 31

2019
Jul. 31

31

Review Problem 4 (Equity Investment at fair value through OCI)

La Jota Corporation purchased marketable equity securities for P 4,000,000 on August 31, 2017 in which these
securities do not qualify as financial asset held for trading. The entity elected to present changes in fair value in other
comprehensive income.

On December 31, 2017, the market value of these securities is P 3,600,000 while on December 31, 2018 was P
2,600,000. On July 1, 2019, the securities are sold for P 2,400,000.

Required: Prepare the necessary journal entries.

2
SOLUTION GUIDE:
JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Aug. 31

Dec. 31

2018
Dec. 31

2019
Jul. 11

31

Review Problem 5 (Dividend Income from Equity Investments and other cases - REVIEW)
Using the following independent assumptions, prepare the necessary journal entries regarding dividends.

Case 1:
ABC Company owned 10,000 shares of Alpha Corporation costing P 1,000,000. On October 15, ABC Company
receives cash dividend of P 2 per share.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Oct 15

Case 2:
DEF Company owns 10,000 shares of Beta Corporation costing P 2,000,000. On October 30, DEF Company receives
a notice of cash dividend declaration of P 3 per share. No entry has been made on this date. Prior to record date, on
November 2, ABC Company sells its investments in Beta Corporation for P 2,100,000 inclusive of dividend.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Nov. 2

Case 3:
GHI Company owns 20,000 shares of Charlie Corporation costing P 2,000,000. On December 1, Charlie Company
distributes its holding of 100,000 shares in Zeta Corporation as property dividends. The share of Zeta Corporation have
a market value of P 10 per share. A shareholder receives 2 shares of Zeta Corporation as property dividends from
Charlie Company for each share held.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Dec. 1

3
Case 4:
JKL Company owns 5,000 shares of Delta Corporation at a cost of P 100,000. On October 20, Delta Corporation paid
liquidating dividend of P 3 per share and P 2 per share as cash dividend.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Oct. 20

Case 5:
MNO Company owns 30,000 shares of Echo Corporation at a cost of P 600,000. On October 31, MNO Company
receives 10% stock dividend.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Oct. 31

Case 6:
PQR Company owns 10,000 ordinary shares of Fox Corporation at a cost of P 136,000. On October 31, PQR Company
receives 20% stock dividend in the form of preference shares. On this date, the market value of ordinary shares is P
12 while the preference shares is P 8.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Oct. 31

Case 7:
STU Company owns 20,000 shares of Halcon Corporation at a cost of P 1,000,000. On October 31, STU Company
receives 1,000 shares in lieu of cash dividend P 5 per share. The market value per share on this date is P 80.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Oct. 31

Case 8:
Using the same information in case 7 above except that no known market value is available on October 31.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Oct. 31

4
Case 9:
Mayon Company owns 50,000 shares of Kanlaon Corporation at a cost of P 5,000,000. On November 21, Mayon
Company receives P 600,000 cash in lieu of 10% stock dividend.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017 (as if approach)
Nov. 21

(BIR approach)
21

Case 10:
Batanes Company owns 100,000 shares of Abra Corporation at a cost of P 2,000,000. On November 5, Abra Company
declares a split-up of 5-for-1.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Nov. 5

Case 11:
Batanes Company owns 100,000 shares of Abra Corporation at a cost of P 2,000,000. On November 5, Abra Company
declares a split-down of 2-for-1.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Nov. 5

Case 12:
Cagayan Company owns 20,000 shares of Ilocos Corporation at a cost of P 2,000,000. On November 25, the Board of
Directors of Ilocos Corporation pass a resolution to the effect that the shareholders shall contribute P2 per share held
to the corporation.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Nov. 25

Case 13:
Pampanga Company owns 50,000 preference shares of Pangasinan Corporation at a cost of P 500,000. On December
10, Pangasinan Corporation called in the preference shares at P 15.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Dec. 10

5
Case 14:
Bulacan Company owns 10,000 preference shares of Tarlac Corporation at a cost of P 500,000. On October 10, the
Board of Directors of Tarlac Corporation approved the issuance of stock rights to shareholders of record on November
10, entitling the shareholders to acquire one share at P 50 par for every 10 shares held. The market value of shares on
this date is P 55 while the stock right is P 20. The right will expire on December 31. Stock rights are accounted
separately.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017 (Accounted for separately)
Dec. 10

Case 15:
Using the same information in Case 14 except that the rights are exercised on December 10.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017 (Accounted for separately)
Dec. 10

Case 16:
Using the same information in Case 14 except that only 8,000 stock rights are exercised and the remaining 2,000 stock
rights are then expired.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017 (Accounted for separately)
Dec. 10

31

Case 17:
Using the same information in Case 16 except that the remaining 2,000 stock rights are then sold for P 50,000..

JOURNAL ENTRIES
Date Account Names Debit Credit
2017 (Accounted for separately)
Dec. 31

Case 18:
Bulacan Company owns 10,000 preference shares of Tarlac Corporation at a cost of P 500,000. On October 10, the
Board of Directors of Tarlac Corporation approved the issuance of stock rights to shareholders of record on November
10, entitling the shareholders to acquire one share at P 50 par for every 10 shares held. The market value of shares on
this date is P 55 while the stock right is P 20. The right will expire on December 31. Stock rights are not accounted
separately.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017 (Not accounted for separately)
Oct. 10

6
Case 19:
Using the same information in number 18 except that all rights are exercised on December 10.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017 (Not accounted for separately)
Dec. 10

Case 20:
Using the same information in number 18 except that all rights are sold on December 10 for P 60,000.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017 (Not accounted for separately)
Dec. 10

Review Problem 6 (Investment in Associate – EQUITY METHOD - REVIEW)

Journalize the following business transactions.

1. On January 1, 2017, Sumsang Corporation purchased 40,000 shares of the 200,000 outstanding shares of Kiano
Corporation at P 200 per share. The acquisition has a significance influence over Kiano Corporation. The carrying
amount if the net assets acquired is P 8,000,000.
2. For the year ended December 31, 2017, Kiano Corporation reported a net income of P 10,000,000.
3. On January 31, 2018, received a 25% stock dividend from Kiano Corporation.
4. For the year ended December 31, 2018, Kiano Corporation reported a net loss of P 2,000,000.
5. On January 15, 2019, Kiano declared and paid a cash dividend of P 5,000,000 on its ordinary shares.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Jan. 1

Dec. 31

2018
Jan. 31

Dec. 31

2019
Jan. 15

Review Problem 7 (Investment in Debt Securities as Trading Securities - REVIEW)

Journalize the following business transactions.

Apr. 1 - Purchased P 2,000,000, 12% bonds at 96 plus accrued interest. Interest is payable January 1 and
July 1. The bonds are held as trading investment.
Jul. 1 - Received semi-annual interest.
Oct. 31 - Sold P 1,200,000 face value bonds for 101 plus accrued interest.
Dec. 31 - Accrual of interest on the remaining bonds.
Dec. 31 - The bonds are quoted at 120.

7
 JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Apr. 1

Jul. 1

Oct. 31

Dec. 31

31

Review Problem 8
(Investment in Debt Securities as Non-Trading Securities or at Amortized Cost - REVIEW)
Journalize the following transactions:

2017
Apr. 12 - Purchased P 2,000,000 face value 12% bonds at 94%. Bonds pay interest semiannually April 1 and
October 1 and mature on April 1, 2022.
Oct. 1 - Received semi-annual interest.
Dec. 31 - Accrual of interest.
- Amortization of bond discount using the straight line method.

2018
Jan. 1 - Reversing journal entry.
Apr. 1 - Received semi-annual interest.
Oct. 1 - Received semi-annual interest.
Dec. 31 - Accrual of interest.
31 - Amortization of bond discount.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Apr. 1

Oct. 1

Dec. 31

31

2018
Jan. 1

Apr. 1

8
 JOURNAL ENTRIES
Oct. 1

Review Problem 9
(Investment in Debt Securities as Non-Trading Securities or at Amortized Cost - REVIEW)
Journalize the following transactions:

2017
Apr. 12 - Purchased P 2,000,000 face value 12% bonds at 105%. Bonds pay interest semiannually April 1
and October 1 and mature on April 1, 2022.
Oct. 1 - Received semi-annual interest.
Dec. 31 - Accrual of interest.
- Amortization of bond discount using the straight line method.

2018
Jan. 1 - Reversing journal entry.
Apr. 1 - Received semi-annual interest.
Oct. 1 - Received semi-annual interest.
Dec. 31 - Accrual of interest.
31 - Amortization of bond discount.

JOURNAL ENTRIES
Date Account Names Debit Credit
2017
Apr. 1

Oct. 1

Dec. 31

31

2018
Jan. 1

Apr. 1

Oct. 1

Dec. 31

31

9
 PRACTICAL AUDITING - STRAIGHT PROBLEMS

Problem 1
The following transactions appear on the “Trading Securities” account of CHICKER Corporation:

Date Particulars Debit Credit

03/01/2017 Purchased 40,000 shares of PLDT at P30.75/share and 1,690,000

20,000 shares of Benpres at P23/share

07/03/2017 Purchased PAG-IBIG 15% bonds, face value P 4,000,000.

Interest dates July 1 and Jan 1. Maturity date July 1, 2009 4,000,000

11/05/2017 Sold 14,400 shares of PLDT at P30/share and 4,000

shares of Benpres at P25/share 532,000

12/31/2017 Sold PAG-IBIG bonds at 98 plus accrued interest 4,220,000

Your audit revealed the following additional information:

1. CHICKER received on October 1, 2017, 8,000 shares of PLDT as stock dividend.

2. Benpres declared a 15% stock dividend to all stockholders of record as of November 15, 2017 payable
December 1, 2017.

Note: Disregard broker’s commission and stock transfer tax in your solution.

QUESTIONS:
Based on the above and the result of your audit, answer the following:

1. How much is the adjusted balance of CHICKER’s “trading securities” as of December 31, 2017?
a. P 935,200
b. P 1,155,200
c. P 1,158,000
d. P 1,229,000

2. How much is the average cost per share of PLDT’s stocks as of December 31, 2017?
a. P 23.43
b. P 25.63
c. P 29.50
d. P 30.75

3. How much is the average cost per share of Benpres stocks as of December 31, 2017?
a. P 20.00
b. P 22.50
c. P 23.00
d. P 25.00

4. How much is the total gain (loss) on sale of trading securities for the year 2017?
a. P 291,000
b. P 3,000
c. (P 82,800)
d. (P 9,000)

Problem 2
In connection with your audit of the financial statements of the Pin Shop Company for the year 2017, the following
Available for Sale Securities and Dividend Income accounts were presented to you:

TRADING SECURITIES
Date Particulars Ref. Debit Credit

01/15/2017 10,000 shares common, par value P 50, SPIKES Co. VR-18 390,000
04/30/2017 5,000 shares SPIKES Co. received as stock dividend CJ-7 250,000
05/20/2017 Sold 5,000 shares @ P 25 CR-21 125,000
12/10/2017 Sold 2,000 shares @ P 60 CR-S2 120,000

DIVIDEND INCOME
Date Particulars Ref. Debit Credit

04/30/2017 Stock dividend SJ-7 250,000

11/30/2017 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:

10
 Type of Dividend Date declared Date of Record Date of Payment Rate
Stock March 15, 2017 April 1, 2017 April 30, 2017 50%
Cash November 1, 2017 November 15, 2017 November 28, 2017 P 5 per share
Cash December 1, 2017 December 15, 2017 January 2, 2018 20%

2. Closing market quotation as at December 31, 2017:

Particulars Bid Asked

SPIKES 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 (loss) on the May 20, 2017 sale?
a. (P 5,000)
b. (P 70,000)
c. P 5,000
d. P 0

2. How much is the gain on the December 10, 2017 sale?

a. P 68,000
b. P 42,000
c. P 48,000
d. P 0

3. How much is the total dividend income for the year 2017?
a. P 300,000
b. P 50,000
c. P 400,000
d. P 150,000

4. How much is the adjusted balance of Available for Sale Securities as of December 31, 2017?
a. P 145,000
b. P 110,000
c. P 132,000
d. P 208,000

5. How much is the Unrealized Loss on trading securities as of December 31, 2017?
a. P 98,000
b. P 76,000
c. P 35,000
d. P 0

Problem 3
Your client, UK Company, showed the following details of its Investment in Stock account for the year 2017:

INVESTMENT IN STOCKS
Date Particulars Debit Credit
Jan. 1 Audited balance, 40,000 shares 800,000
Feb. 14 Cash dividend 20,000
Mar. 31 Shares purchased 90,000
Apr. 1 Sale of rights 60,000
Jun. 30 Sale of shares 110,000
Dec. 31 Balance 700,000

The following transactions occurred:

1. A cash dividend of P0.50 per share was received on Feb. 14. What would be the adjusting journal entry?
Debit Credit
a. Investment in stocks 20,000 Dividend Income 20,000
b. Retained Earnings 20,000 Dividend Income 20,000
c. Dividend Income 20,000 Investment in stocks 20,000
d. None

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. What would be the adjusting entry to recognize
the cost allocated to the rights?
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

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3. On March 31, 6,000 shares were purchased with the partial exercise of the rights. What would be the adjusting
entry, after the adjustment in No. 2 above has been effected?

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 P 60,000. 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 P 110,000. What would be the adjusting entry?
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, 2017?
a. P 765,000
b. P 700,000
c. P 776,400
d. P 801,000

Problem 4
The following two subsidiary accounts reflect the trading securities of Jordano Company for the year 2017:

LOYAL COMPANY
Date Particulars Shares Ref. Debit Credit
Jan. 16 Purchase 20,000 CD 1,900,000
31 Raised to market value, offset credit to
Retained Earnings GJ 100,000
Mar. 30 Sale at P 150 10,000 CR 1,500,000
Jun. 10 Stock Dividend at par 10,000 GJ 1,000,000
Jul. 29 Sale at P 110 10,000 CR 1,100,000
Totals 3,000,000 2,600,000

FAITHFUL CORPORATION
Date Particulars Shares Ref. Debit Credit
Sep. 5 Purchase 20,000 CD 1,000,000
28 Cash dividends to stockholders of record
September 15, declared August 15 CR 50,000
Oct 1 Purchase 50,000 CD 2,500,000
5 Sale at P 65 20,000 CR 1,000,000
Nov. 30 Cash collected for sale made on November
10 after a November 1 declaration of P 5
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
3,500,000 4,500,000

On January 2, 2017, Jordano Company purchased 39,000 shares of Trustworthy Co.’s 200,000 shares of outstanding
common stock for P 1,170,000. On that date, the carrying amount of the acquired shares on Trustworthy Co.’s books
was P 810,000. Jordano attributed the excess of cost over carrying amount to goodwill.

During 2017, Jordano’s president gained a seat on Trustworthy’s board of directors. Trustworthy reported earnings of
P 800,000 for the year ended December 31, 2005, and declared and paid cash dividends of P 200,000 during 2017.
On December 31, 2017, Trustworthy’s common stock was trading at P30 per share.

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QUESTIONS:
1. The gain on sale of 10,000 shares of Loyal Company on March 30 is:
a. P 500,000
b. P 1,500,000
c. P 550,000
d. None

2. The gain on sale of 10,000 shares of Loyal Company on July 29 is:

a. P 625,000
b. P 337,500
c. P 525,000
d. P 150,000

3. The correct acquisition cost of 20,000 shares of Faithful Corp. acquired on September 5 is:
a. P 3,500,000
b. P 950,000
c. P 1,000,000
d. P 3,450,000

4. The gain on sale of 20,000 shares of Faithful Corp. October 5 is:

a. P 350,000
b. P 300,000
c. P 1,028,500
d. P 314,300

5. The gain on sale of 20,000 shares of Faithful Corp. on November 10 is:

a. P 1,000,000
b. P 2,400,000
c. P 2,300,000
d. P 2,200,000

6. The balance of the Company’s investment in Loyal Company before mark-to-market on December 31, 2017 is:
a. P 475,000
b. P 500,000
c. P 1,475,000
d. P 525,000

7. The adjusted balance of the Company’s investment in Faithful Corp. before mark-to-market on December 31,
2017 is:
a. P 1,500,000
b. P 1,350,000
c. P 1,200,000
d. P 1,000,000

8. The income from investment in common stock of Trustworthy Company to be reported on the income statement
for the year ended December 31, 2017 is:
a. P 156,000
b. P 159,000
c. P 120,000
d. P 39,000

9. The adjusted balance of investment in Trustworthy Company at December 31, 2017 is:
a. P 1,326,000
b. P 1,170,000
c. P 1,287,000
d. P 1,251,000

Problem 5
You were engaged by MISMO COMPANY to audit its financial statements for the year 2017. During the course of your
audit, you noted that the following trading securities were properly reported as current assets at December 31, 2016:

Cost Market
Aquata Corporation, 10,000 shares, convertible
preferrence shares P 900,000 P 975,000
Andrina, Inc., 60,000 ordinary 1,350,000 1,485,000
Attina Co., 20,000 ordinary shares 1,237,500 900,000
P 3,487,500 P 3,360,000

The following sale and conversion transactions transpired during 2017:

Mar. 27 - Sold 25,000 shares of Andrina for P33.75 per share.

Apr. 15 - Sold 5,000 shares of Attina for P45 per share.
Sep. 21 - Converted 5,000 preference shares of Aquata into 15,000 ordinary shares of
Aquata, when the market price was P 78.75 per preference share and P
47.25 per ordinary share.

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The following 2017 dividend information pertains to shares owned by MISMO:

Jan. 12 - Attina issued a 10% stock dividend when the market price of Attina’s ordinary
shares was P49.50 per share.

Mar. 31 - Aquata paid dividends of P2.50 per preference share to stockholders of

Sep. 30 - record on March 15 and September 15, respectively. Aquata did not pay
dividends on its ordinary shares during 2017.

Jul. 01 - Andrina paid a P2.25 per share dividend on its ordinary shares.

Jun. 30 -
Adella paid semi-annual dividends of P1.50 on each of these dates.
Dec. 31 -

Dec. 31 - Adella’s net income for the year ended December 31, 2017 was P 2,400,000.

On January 2, 2017, MISMO purchased 100,000 shares of Adella Corporation ordinary shares for P 3,600,000,
representing 20% of Adella’s outstanding preference shares and an underlying equity of P 3,150,000 in Adella’s net
assets on January 2, 2017.

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:

12/31/2017 12/31/2016

Aquata Corp., preference shares P 92.25 P 97.50

Aquata Corp., ordinary shares 42.75 38.25
Andrina, Inc., ordinary shares 22.50 24.75
Attina Co., ordinary shares 40.50 45.00
Adella Corp., ordinary shares 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.

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. P 225,000
b. P 281,250
c. P 562,500
d. P 0

2. How much is the gain or loss on sale of Attina shares?

a. P 20,455 gain
b. P 56,250 gain
c. P 56,250 loss
d. P 0

3. How much is the gain or loss on conversion of 5,000 Aquata preference shares into 15,000 ordinary shares?
a. P 93,750 loss
b. P 258,750 gain
c. P 56,250 loss
d. P 0

4. How much is the total dividend income for the year 2017?
a. P 128,750
b. P 103,750
c. P 202,750
d. P 728,750

5. How much is the net investment income on investment in Adella Corp. in 2017?
a. P 480,000
b. P 457,500
c. P 577,500
d. P 502,500

6. How much is the carrying amount of MISMO’s investment in Adella Corp. as of December 31, 2017?
a. P 3,780,000
b. P 3,600,000
c. P 3,757,500
d. P 4,000,000

14
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, 2017?
a. P 4,000,000
b. P 3,600,000
c. P 3,757,500
d. P 3,780,000

8. Assuming MISMO has no significant influence on Adella Corp. and the share of Adella has no reliable fair value,
how much is the carrying amount of MISMO’s investment in Adella Corp. as of December 31, 2017?
a. P 3,600,000
b. P 3,780,000
c. P 3,757,500
d. P 4,000,000

9. Using the same assumptions in no. 8 and that Adella Corp. declared semi-annual cash dividends of P 3 per
share, how much is the carrying amount of MISMO’s investment in Adella Corp. as of December 31, 2017?
a. P 3,480,000
b. P 3,757,500
c. P 3,235,000
d. P 3,600,000

10. The trading securities should be reported on MISMO’s December 31, 2017 statement of financial position at:
a. P 2,578,500
b. P 2,587,500
c. P 5,813,500
d. P 2,421,000

11. How much should be reported as unrealized gain on trading securities?

a. P 135,545
b. P 9,000
c. P 118,500
d. P 0

Problem 6
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 2017, which was a first audit, you obtained the following:

INVESTMENT IN SILVER TAB COMPANY

01/02/2015 30,000 Sh. @ P 35 1,050,000 07/15/2017 50,000 Sh. @ P 40 2,000,000
07/02/2016 90,000 Sh. @ P 60 5,400,000
03/02/2017 30,000 Sh. @ P 70 2,100,000

INVESTMENT IN RED TAB COMPANY

08/10/2017 10,000

DIVIDEND INCOME
01/02/2017 120,000
04/01/2017 150,000
08/10/2017
12/20/2017
The transactions pertaining to the foregoing for 2017 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.

Jul. 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, 2018.

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QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Loss on sale of 50,000 Silver Tab Company shares on July 15, 2017
a. P 250,000
b. P 1,300,000
c. P 850,000
d. P 0

2. Gain on sale of 10,000 Silver Tab Company shares on December 29, 2017
a. P 330,000
b. P 310,000
c. P 300,000
d. P 0

3. Adjusted balance of Investment in Silver Tab Company as of December 31, 2017.

a. P 5,570,000
b. P 5,130,000
c. P 5,580,000
d. P 5,640,000

4. Adjusted balance of Investment in Red Tab Company as of December 31, 2017.

a. P 10,000
b. P 20,000
c. P 30,000
d. P 0

5. Dividend income for the year ended December 31, 2017.

a. P 180,000
b. P 160,000
c. P 150,000
d. P 280,000

Problem 7
On July 1, 2017, Pir Carding Company acquired 25% of the outstanding ordinary shares of Cindyrela Corporation at
a total cost of P 7,000,000. The underlying equity of the shares acquired by Pir Carding was only P 6,000,000. Pir
Carding is willing to pay more than the book value for the following reasons:

a) Cindyrela owned depreciable plant assets (10-year remaining economic life) with a current fair value of P
600,000 more than their carrying amount.
b) Cindyrela owned land with current fair value of P 3,000,000 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.

Cindyrela earned net income of P 5,400,000 evenly over the year ended December 31, 2017. On December 31,
Cindyrela declared and paid a cash dividend of P 1,050,000 to ordinary shareholders. Market value of Pir Carding’s
share of the stock at December 31, 2017 is P 7,500,000. Both companies close their accounting records on December
31.

QUESTIONS:
Based on the above and the result of your audit, determine the following:

1. Total amount of goodwill of Cindyrela Corporation based on the price paid by Pir Carding.
a. P 4,000,000
b. P 400,000
c. P 1,000,000
d. P 100,000

2. Net investment income from Investment in Cindyrela Corporation.

a. P 675,000
b. P 667,500
c. P 1,335,000
d. P 662,500

3. Carrying value of Investment in Cindyrela Corporation as of December 31, 2017

a. P7,412,500
b. P7,667,500
c. P7,405,000
d. P7,662,500

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Problem 8
Select the best answer for each of the following:

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.
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. Re-computing 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.
b. Completeness
c. 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.

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 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. Re-computing 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. Re-computation of interest expense, interest payable, and amortization of bond discount or premium.
d. Examination and count of the bonds retired during the year.

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

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