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AUDITING PROBLEMS – REVIEW


INVESTMENT

PROF. U.C. VALLADOLID


Multiple Choice:
Identify the letter of the choice that best completes the statement or answers the question.

1. You were engaged by Steven Company to audit its financial statements for the year 2018. During the course of your
audit, you noted that the following trading securities were properly reported as current assets at December 31, 2017:
Cost Fair value
Anaheim Corporation, 5,000 shares,
convertible preference shares P 450,000 P 487,500
Lakers, Inc., 30,000 ordinary shares 675,000 742,500
Mississauga Co., 10,000 ordinary shares 618,750 450,000
P1,743,750 P1,680,000

The following sale and conversion transactions transpired during 2018:

Mar. 1 Sold 12,500 shares of Lakers for P33.75 per share.

April 1 Sold 2,500 shares of Mississauga for P45 per share.

Sept. 21 Converted 2,500 shares of Anaheim’s preference shares into 7,500


ordinary shares of Anaheim, when the market price was P80.25
per share for the preference shares and P40.50 per share for the
ordinary shares.

The following 2018 dividend information pertains to shares owned by Steven:

Jan. 2 Mississauga issued a 10% share dividend when the market price
of Mississauga’s ordinary share was P49.50 per share.

March 31 and Anaheim paid dividends of P2.50 per share on its preference
Sept. 30 shares, to shareholders of record on March 15 and September 15,
respectively. Anaheim did not pay dividends on its ordinary shares
during 2018.

July 1 Lakers paid a P2.25 per share dividend on its ordinary shares.

Market prices per share of the securities were as follows:


12/31/2018 12/31/2017
Anaheim Co., preference 92.25 97.50
Anaheim Co., ordinary 42.75 38.25
Lakers, Inc., ordinary 22.50 24.75
Mississauga Co., ordinary 40.50 45.00

All of the foregoing shares are listed in the BSP Stock Exchange. Declines in market value from cost would not be
considered permanent.

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 12,500 Lakers shares?


a. P112,500 c. P140,625
b. P281,250 d. P 0

2. How much is the gain or loss on sale of 2,500 Mississauga shares?


a. P28,125 gain c. P28,125 loss
b. P10,227 gain d. P 0

3. How much is the gain or loss on conversion of 2,500 Anaheim preference shares into 15,000 ordinary shares?
a. P43,125 loss c. P60,000 gain
b. P78,750 gain d. P 0
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4. How much is the total dividend income for the year 2018?
a. P 64,375 c. P 51,875
b. P101,375 d. P364,375

5. How much should be reported as unrealized loss on trading securities in the company’s income statement for the
year 2018?
a. P47,625 c. P75,750
b. P39,102 d. P 0

2. Shawn Marketing Company made investments in trading securities. An analysis of these investments on December 31,
2017 showed the following:

Security Cost Fair value


Asturias Textile shares 6,000 shares P307,500 P270,000
Mavis, Inc. shares 2,250 shares 76,500 90,000
Loeb Co. 12% Bonds P300,000 269,500 280,600
Total P653,500 P640,600

On April 1, 2018, the company purchased as a temporary investment, P200,000 face value, 9% BSP treasury notes for
P198,500, which includes accrued interest. The notes mature on July 1, 2019 and pay interest semiannually on January
1 and July 1. The notes were sold on December 1, 2018 for P206,500, which includes accrued interest.

On July 1, 2018, the shares of Mavis were sold for P70,000. On December 31, 2018, Asturias Textile shares were quoted
at P44 per share; Loeb bonds were quoted at P950 per P1,000 bond.

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

1. The gain on sale of BSP Treasury Notes on December 1, 2018 is


a. P 500 c. P 5,000
b. P8,000 d. P12,500

2. The realized loss on sale of Mavis shares on July 1, 2018 is


a. P 0 c. P20,000
b. P18,650 d. P 6,500

3. The interest income for the year 2018 is


a. P36,000 c. P37,500
b. P48,000 d. P24,000

4. The carrying amount of the trading securities on December 31, 2018 is


a. P533,500 c. P520,025
b. P577,000 d. P549,000

5. The net unrealized loss that will be recognized in the 2018 profit or loss is
a. P2,800 c. P15,100
b. P1,600 d. P 0

3. The following transactions of the Shawn Company were completed during the year 2018:

Jan. 2 Purchased 20,000 shares of Canadian Auto Co. for P40 per share plus
brokerage costs of P4,500. These shares were classified as held for
trading.

Feb. 1 Purchased 20,000 shares of Lake Shore Company ordinary shares at


P125 per share plus brokerage fees of P19,000. Shawn classifies these
shares as available for sale.

Apr. 1 Purchased P2,000,000 of BSP Treasury 7% bonds, paying 102.5 plus


accrued interest of P35,000. In addition, the company paid brokerage
fees of P18,000. Shawn classified these bonds as held for trading.
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Jul. 1 Received semiannual interest on the BSP Treasury Bonds.

Aug. 1 Sold P500,000 of BSP Treasury 7% bonds at 103 plus accrued interest.

Oct. 1 Sold 3,000 shares of Lake Shore at its fair value of P132 per share.

The market values of the shares and bonds on December 31, 2018, are as follows:

Canadian Auto Co. P45 per share


Lake Shore Company P130 per share
BSP Treasury 7% bonds 102

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

1. Gain or loss on sale of P500,000 BSP Treasury Bonds on August 1, 2018


a. P15,000 gain c. P2,000 loss
b. P 2,500 gain d. P7,500 loss

2. Gain or loss on sale of 3,000 Lake Shore shares on October 1, 2018


a. P18,150 loss c. P 0
b. P18,150 gain d. P21,000 gain

3. Gain or loss arising from change in the fair value of securities to be recognized in 2018 profit or loss
a. P92,500 c. P74,500
b. P97,000 d. P80,000

4. Net unrealized gain in accumulated other comprehensive income in equity as of December 31, 2018
a. P68,850 c. P66,000
b. P85,000 d. P 0

4. During 2017, Shawn Company purchased 9,000 ordinary shares of Hurontario Company for P16 per share, 6,000
ordinary shares of Eglinton Company for P33 per share and P120,000 of treasury notes at 101. These investments are
intended to be held as ready sources of cash and are classified as held for trading.

Also in 2017, Shawn purchased 10,500 ordinary shares of Dundas Company for P29 per share. The securities are
classified as available for sale.

During 2017, Shawn received the following interest and dividend payment on its investments:

Hurontario Company P1 per share dividend


Eglinton Company P3 per share dividend
Dundas Company P2 per share dividend
Treasury notes 6% annual interest earned for 6 months

Fair values of the securities at December 31, 2017, were as follows:

Hurontario Company P20 per share


Eglinton Company P22 per share
Dundas Company P26 per share
Treasury notes 102

On March 23, 2018, the 6,000 ordinary shares of Eglinton were sold for P17 per share. On June 30, 2018, the treasury
notes were sold 100.5 plus accrued interest.

Fair values of remaining securities at December 31, 2018, are as follows:

Hurontario Company P20 per share


Dundas Company P33 per share

Based on the above and the result of your audit, determine the following:
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1. Total dividend income in 2017


a. P48,000 c. P27,000
b. P21,000 d. P 0

2. Carrying amount of Trading Securities as of December 31, 2017


a. P434,400 c. P463,200
b. P342,000 d. P717,900

3. Unrealized loss to be recognized in 2017 profit or loss


a. P49,800 c. P27,600
b. P28,800 d. P 0

4. Total realized loss on sale of securities in 2018


a. P96,600 c. P29,400
b. P 5,400 d. P31,800

5. Net unrealized gain in accumulated other comprehensive income in equity as of December 31, 2018
a. P42,000 c. P63,000
b. P73,500 d. P 0

5. On July 1, 2018, Jeffrey Company acquired 25% of the outstanding ordinary shares of Omar Corporation at a total cost
of P7,000,000. The underlying equity of the shares acquired by Jeffrey was only P6,000,000. Jeffrey is willing to pay
more than the book value for the following reasons:

a) Omar owned depreciable plant assets (10-year remaining economic life) with a current fair value of P600,000 more
than their carrying amount.

b) Omar owned land with current fair value of P3,000,000 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.

Omar earned net income of P5,400,000 evenly over the year ended December 31, 2018. On December 31, Omar
declared and paid a cash dividend of P1,050,000 to ordinary shareholders. Market value of Jeffrey’ shares at December
31, 2018 is P7,500,000. Both companies close their accounting records on December 31.

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

1. Total amount of goodwill of Omar Corporation based on the price paid by Jeffrey
a. P4,000,000 c. P400,000
b. P1,000,000 d. P100,000

2. Net investment income from Investment in Omar Corporation


a. P675,000 c. P667,500
b. P1,335,000 d. P662,500

3. Carrying amount of Investment in Omar Corporation as of December 31, 2018


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

6. Your audit of the Theresa Corporation disclosed that the company owned the following securities on December 31, 2017:

Trading securities:
Security Shares Cost Fair value
Kristina, Inc. 4,800 P 72,000 P 92,000
Kelly, Inc. 8,000 216,000 144,000
10% , P100,000 face value , Kimberly
bonds (interest payable semiannually on
Jan. 1 and Jul. 1)
79,200 81,720
P367,200 P317,720
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Total

Available-for-sale securities:

Security Shares Cost Fair value


Ivan Products 16,000 P 688,000 P 720,000
Cleo, Inc. 120,000 3,120,000 2,920,000
Cooper, Inc. 40,000 480,000 640,000
Total P4,288,000 P4,280,000

Held to maturity:
Carrying
Cost amount
12%, 1,000,000 face value, Emer bonds (interest
payable annually every Dec. 31)
P950,000 P963,000

During 2018, the following transactions occurred:

Jan. 1 Receive interest on the Kimberly bonds.

Mar. 1 Sold 4,000 shares of Kelly Inc. for P76,000.

May 15 Sold 1,600 shares of Cooper, Inc. for P15 per share.

July 1 Received interest on the Kimberly bonds.

Dec. 31 Received interest on the Emer bonds.

31 Transferred the Emer bonds to the available-for-sale portfolio. The bonds


were selling at 101 on this date. The bonds were purchased on January
2, 2017. The discount was amortized using the effective interest method.

The quoted prices of the shares and bonds on December 31, 2018, are as follows:

Kristina, Inc. P22 per share


Kelly, Inc. P15 per share
10% Kimberly bonds P75,600
Ivan Products P42 per share
Cleo, Inc. P28 per share
Cooper, Inc. P18 per share

Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of 4,000 Kelly, Inc. shares on March 1, 2018
a. P4,000 loss c. P32,000 loss
b. P4,000 gain d. P32,000 gain

2. Realized gain or loss on sale of 1,600 Cooper, Inc. shares on May 15, 2018
a. P4,800 loss c. P1,600 loss
b. P4,800 gain d. P1,600 gain

3. Total interest income for the year 2018


a. P130,000 c. P144,820
b. P125,560 d. P143,000

4. The amount to be recognized in other comprehensive regarding transfer of Emer bonds to available-for-sale
securities
a. P47,000 c. P61,820
b. P32,180 d. P 0

5. Carrying amount of Trading Securities and Available-for-sale securities as of December 31, 2018 should be
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Trading securities Available-for-sale securities


a. P241,200 P5,733,200
b. P301,200 P4,723,200
c. P241,200 P5,762,000
d. P301,200 P5,720,800

7. On June 1, 2017, Edna Corporation purchased as a long term investment 4,000 of the P1,000 face value, 8% bonds of
Mayet Corporation. The bonds were purchased to yield 10% interest. Interest is payable semi-annually on December 1
and June 1. The bonds mature on June 1, 2023. Edna uses the effective interest method of amortization. On November
1, 2018, Edna sold the bonds for a total consideration of P3,925,000. Edna intended to hold these bonds until they
matured, so year-to-year market fluctuations were ignored in accounting for bonds.

Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal
places)

1. The purchase price of the bonds on June 1, 2017 is


a. P3,645,328 c. P3,696,736
b. P3,691,132 d. P3,624,596

2. The interest income for the year 2017 is


a. P215,850 c. P212,829
b. P215,521 d. P211,612

3. The carrying amount of the investment in bonds as of December 31, 2017 is


a. P3,725,919 c. P3,719,986
b. P3,649,541 d. P3,671,491

4. The interest income for the year 2018 is


a. P306,608 c. P311,218
b. P310,715 d. P304,748

5. The gain on sale of investment in bonds on November 1, 2018 is


a. P21,196 c. P 27,632
b. P80,235 d. P104,045

8. On January 2, 2016, Kristine Company purchased Trisha Company, 9% bonds with a face value of P4,000,000 for
P3,760,000. Kristine Company intends to collect contractual cash flows from the bonds, and as such the instruments are
designated as Held for Collection. The effective interest rate on this investment is 10%. The bonds are dated January 1,
2016 and mature on December 31, 2025. The bonds pay interest semi-annually on June 30 and December 31. Kristine’s
accounting year is the calendar year.

On November 30, 2018, P1,800,000 of the bonds were sold at 98 plus accrued interest. This portion sold is considered to
be more than an insignificant portion of the investment. As a result of the change in business model, Kristine reclassified
the Trisha Company bonds as at fair value through profit or loss.

The market value of the bonds was 98 on December 31, 2016, 96 on December 31, 2017 and 98 ½ at December 31,
2018.

1. What is Kristine’s interest revenue for the year ended December 31, 2016?
a. P376,400 c. P498, 920
b. P 349,800 d. P 374, 600

2. At what amount should this investment be presented on December 31, 2016 statement of financial position?
a. P3, 785, 220 c. P 3, 791, 200
b. P 3, 776, 400 d. P 3, 744, 600

3. What amount of financial asset shall be presented as part of current assets on December 31, 2017 as a result of
the above investment?
a. P3, 785, 220 c. P 3, 791, 200
b. P0 d. P 3, 744, 600
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4. What amount of gain or loss shall be recognized upon sale of the securities at November 30, 2018?
a. P48, 279 c. 47, 900
b. P47, 829 d. P 34, 600

5. At what amount should the investment be shown on December 31, 2018 statement of financial position?
a. P2, 167,000 c. P 2,000,000
b. P4, 000,000 d. P 2,200,000

6. How much interest revenue shall be presented on the Statement of Comprehensive Income for the year 2018?
a. P16,500 c. P 366, 879 e. P364,732
b. P365, 218 d. P 158, 808

9. On January 2, 2016, Kristine Company purchased Trisha Company, 9% bonds with a face value of P4,000,000 for
P3,760,000. The bonds are designated as “Financial Asset at Fair Value Through Profit and Loss”. The effective interest
rate on this investment is 10%. The bonds are dated January 1, 2016 and mature on December 31, 2025. The bonds
pay interest semiannually on June 30 and December 31. Kristine’s accounting year is the calendar year.

On November 30, 2018, P2,000,000 of the bonds were sold for P1,960,000 inclusive of accrued interest.

The fair value of the bonds is 98 on December 31, 2016, 96 on December 31, 2017, 98 ½ at December 31, 2018.

1. What amount of interest revenue shall be presented in profit and loss for the year 2016?
a.P376,000 c. P360,000
b. P338,400 d. P400,000

2. What amount of unrealized gain or loss shall be taken to profit or loss for the year 2016?
a. Unrealized Gain P160,000 c. Unrealized Gain P1,800,000
b. Unrealized Gain P240,0000 d. Unrealized Gain P80,000

3. How much gain or loss would be recognized upon the sale of the securities on November 30, 2018?
a. Gain of P40,000 c. Loss of P40,000
b. Gain of P35,000 d. Loss of P35,000

4. At what amount should the investment be shown on December 31, 2018 statement of financial position?
a. P4,000,000 c. P1,920,000
b. P3,940,000 d. P,1970,000

5. What amount of unrealized gain/loss shall be presented in profit or loss for the year ended December 31,
2018?
a. Gain of P60,000 c. Loss of P60,000
b. Gain of P50,000 d. Loss of P50,000

10. On April 1, 2018, Kristina Company acquired 20% interest in the voting shares of Trisha Company for P1, 800, 000. the
net assets of Trisha on this date were P6,000,000. Kristina received P100,000 dividends from Trisha Company, which the
former credited to Dividend Income.

Trisha reported profit after income tax of P800, 000 during the year, P160, 000 of which was earned during the first
quarter of 2018. Total market value of the shares of Trisha held by Kristina was P2, 300,000 at December 31, 2018.

Kristina Company recorded the acquisition of the securities at April 1 by a charge to Investment. Dividends received
during the year credited to Dividend Income and an Unrealized Gain for P500, 000 was reported on its draft of statement
of comprehensive income for the year 2018.

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

Trisha’s assets and liabilities at April 1, 2018 had market values approximating carrying amounts, except 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 total of P30,000 at April 1.
Equipment had a remaining life of 5 year at April 1, 2018.
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1. How much total income from investment shall Kristina recognize for the year 2018 as a result of this investment?
a. P116, 000 c. P100, 000
b. P148, 000 d. P248, 000

2. How much Dividend Income shall Kristina report for the year 2018 as a result of its investment in Trisha?
a. P100, 000 c. P500, 000
b. P116, 000 d. P0

3. At what amount should this investment be shown on the December 31, 2018 statement of financial position?
a. P1, 848, 000 c. P1, 816, 000
b. P1, 948, 000 d. P2, 300, 000

11. The records of Tris Company showed the following entries for its investment “Financial Assets at Fair value through Profit
or Loss” account.
Date Particulars Debit Credit
2018
Jan1 Beginning balances (at market value)
1,000 shares-Boracay Company Ordinary Shares P25,000
3,000 shares-Bohol Company ordinary shares 18,000
P50,000 par value-8% treasury bonds purchased 5/1/13, 50,000
Interest dates-February 1 and August 1
Jan 31 Sold 200 shares of Boracay, net of commission P6,000
Feb1 Interest on treasury bonds 2,000
June 30 Par value of 20% bonus issue from Bohol Company 4,000
July 8 Sold 300 of Bohol shares, net of commission 2,000
Aug 1 P20,000 face value treasury bonds sold at 101 plus accrued 21,000
interest
Aug 1 Interest on remaining treasury bonds 1,200
N0v 1 Cash dividends from Boracay 2,500
Totals P97,000 P34,700
Balance 62,300
Totals P97,000 P97,000

The fair values at December 31, 2018 are as follows:


Boracay Company P30.00
Bohol Company P7.00
Treasury Bonds 100%

1. How much interest income was earned by Tris Company on its investment in treasury bonds for the year 2018?
a. P3,333 b. P4000 c. P2,333 d. P3,000

2. How much is the gain or loss on the sale of Boracay Shares on January 31?
a. P3,000 loss b. P1,000 gain c. P 1,500 gain d. P500 loss

3. How much is the gain or loss on the sale of Bohol shares on July 8?
a. P500 gain b.P1,500 gain c. P 2,000 loss d. P3,500 gain

4. How much is the gain or loss on the redemption of Treasury Bonds on August 1?
a. P 1,000 b.P 200 gain c. P800 gain d. P 200 loss

5. How much unrealized gain or loss to be taken to profit or loss for the year 2018 as a result of holding the
investments?
a. P10,600 loss b. P 10,600 gain c. P6,600 loss d. P6,600 gain

6. At what amount should the Trading Securities be presented on the December 31, 2018 statement of financial position?
a. P 66,500 b. P 77,100 c. P 70,500 d. P67,100
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12. During your audit of the financial statements of the Angel Corporation for the year 2018, you found the following postings
to the FVPL (Financial Assets at Fair Value through Profit or Loss ) account

Date Particulars Debit Credit


Jan 3 Purchased 1,000 shares, A Corporation P 54,000
8 Purchased 1,000 shares, B 60,000
Corporation
Apr 2 Cash dividends, A corporation P1,000
5 Sold 500 shares, A Corporation 28,000
8 Purchased 1,000 shares, C 30,000
Corporation
8 Purchased 1,000 shares, D 36,000
Corporation
July 15 Purchased 200 shares, Angel 33,000
Corporation
15 Purchased 500 shares, E Corporation 20,000
Aug 15 Sold 100 shares, Angel Corporation 20,000
Dec 8 Received 10% bonus issue from E 2,000
Corporation
10 Cash dividend, C Corporation 1,200

The following information was discovered from your audit procedures:

 The Angel Corporation purchased 200 of its own ordinary shares held by a deceased shareholder at P165 per
share. 100 of these shares were sold at its market price of P200 per share on August 15.
 On December 8, fifty shares of e Corporation were received. Angel credited dividend income equal to the market
price of the shares received
 On December 2018, D Corporation declared a P5 cash dividend per share, payable on January 10, 2019 to
shareholders of record as of December 29, 2018. No accrual has yet been taken up by Angel.

 The market price of the shares are as follows at December 31, 2018:
A Corporation P55
B Corporation 54
C Corporation 32
D Corporation 39
E Corporation 38

Based on the foregoing, compute for the following:

1. Carrying amount of FVPL at December 31, 2018


a. P 200,900 c. P 173,400
b. P 171, 500 d.P 183,900

2. Gain or Loss on sale of FVPL


a. P 2,000 gain c. P 5,500 gain
b. P 1,000 gain d. P 4,500 gain

3. Total dividend income


a. P 1,000 c. P2,200
b. P 9,200 d.P 7,200

4. Unrealized gain or loss taken to profit or loss


a. P 5400 unrealized gain c. P 0
b. P 400 unrealized gain d. P 780 unrealized loss