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AUDITING REVIEW

Investment

Problem 1

Pau Corporation had the following portfolio of equity investment at fair value through other comprehensive income
at December 31, 2015:

Purchase Price FV 12/31/2015


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, 2016, Pau Corporation sold all the Dune shares at Php54 per share. In addition, on July 31, 2016,
6,000 of Bread Corporation shares acquired at Php59.

The December 31, 2016 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, 2016?

Sales price (10,000 x 54) P540,000


CV at date of sale 500,000
--------------
Gain on sale of Dune shares P 40,000
========

b. What should be the cumulative balance of Unrealized Gains and Losses on Equity Investments at
December 31, 2016?

Cumulative balance of Unrealized Gains and Losses


(in equity) - see below P 70,000

# of FV, 12/31/ Unrealized


shares Cost Year 2016 Gain (Loss)
Monte Preference 7,000 P266,000 P270,000 P 4,000
Grace Ordinary 2,000 360,000 380,000 20,000
Barney 6,000 354,000 400,000 46,000
Corporation(6,000x59=354,000)
P980,000 P1,050,000 P70,000

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, 2015 was Php66 . At the beginning of 2016, 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.

Cash 100,000
Investment Income 100,000
20,000 x 5 = 100,000

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.

Equity Investments at FVPL (20,000/5 x 75) 300,000


Cash (4,000 x 50) 200,000
Investment Income 100,000
Equity Investments at FVPL 252000
Unrealized Gain on Equity
Investments – Profit or Loss 252,000

Market value (24,000 shares x 78) 1,872,000


Carrying value before this
Adjustment [ (20,000x Php66) + 300,000] 1,620,000
Unrealized gain 252,000

Problem 3

The following chronological transactions were completed by Camil Company during 2016:

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

Financial Assets at FV through OCI-Diner ordinary 108,000


Cash 108,000

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

Memorandum entry. Received 1,000 additional shares of Diana ordinary shares as a result of 2-for-1 split.
(new shares 2,000@Php54)

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.

Financial Asset at FV through OCI –Sam preference 242,400


Cash 242,400
(2,000 x Php120) + Php2,400 = 242,400

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

Financial Asset at FV through OCI-Diner ordinary 12,000


Unrealized Gains and Losses- OCI 12,000

(30,000/500=PHP60-Php54)x2,000 shares = 12,000

Cash 30,000
Financial Asset at FV through OCI 30,000
- Diner ordinary shares
[2,000 x (30,000/500)/2,000 shs] x 500 = 30,000

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.

Memorandum entry. Received (2,000-500) 1,500 stock rights from Diana for the purchase of one share for
every two rights submitted at P55 per share.

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.

Financial Assets at FV through OCI-Diner ordinary 27,450


Cash 24,750
Investment income 2,700

Cash: 1,500 x 60% = 900; 900/2 x Php55 = Php24,750


Rights (450 x Php61= Php27,450) – 24,750 = 2,700

Cash 1,800
Investment income 1,800

(1500 x 40% = 600) x Php3 = 1,800


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

Financial Asset at FV through OCI-Diner ordinary 1,350


Unrealized Gains and Losses –OCI 1,350

(64-61) x 450 = 1,350

Cash (200 x Php64) 12,800


Financial Asset at FV through OCI
-Diner ordinary 12,800

October Received the annual dividends on Sam Company preference shares.


Cash (2,000 x 8% x Php100) 16,000
Dividend revenue 16,000

December 31 Market value of the securities at year-end are: Diner Company ordinary : Php62 and Sam Company
preference: Php115.
Unrealized Gains and Losses on Equity
Investments – OCI 9,900
Equity Investments at FV through OCI – Diana
ordinary 2,500
Equity Investments at FV through OCI – Smith 12,400
Market CV Unreal
Diana (1,750sh) 108,500 106,000* 2,500
Smith (2,000) 230,000 242,400 (12,400)
Total 338,500 348,400 (9,900)
*Original Diana shares 1,000 shares at P108 P108,000
2-for-1 split 1,000 shares -____
2,000 shares at P54 P108,000
Adjust prior to sale 12,000
Balance 2,000 shares at P60 P120,000
Sale (500 )shares at P60 ( 30,000)
Balance 1,500 shares at P60 P 90,000
Exercise of rights 450 shares at P61 27,450
Adjust prior to sale 1,350
Sale (200 shares) at P64 ( 12,800)
Balance 1,750 shares P106,000

1,750 x Php62=108,500 ; 2,000 x Php115 = 230,000

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.

Investment income (2,700 + 1,800) 4,500


Dividend revenue 16,000
----------
Total Income 20,500
======
Problem 4

Camil Company had the following investment securities at December 31, 2015:
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 2016, Camil completed the following securities transactions:
April Sold 10,000 shares of Lacoste Company at Php25.

Cash (10,000 x 25) 250,000


Loss on Sale of Equity Investments 28,000
Equity Investments at FVPL – Lacoste Ordinary 278,000
(556,000/20,000 x 10,000 = 278,000

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

Equity Investments at FV through OCI – Giordano


Preference 61,100
Cash (1,200 x 50) + 1,100 61,100
July Received a 20% bonus issue on Diner’s ordinary shares.

Memorandum entry. Received 8,000 additional shares of Diner ordinary representing a 20% bonus issue. Shares
now held are 48,000. 40,000 + (40,000 x 20% = 8,000) = 48,000

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

Cash (1 x 48,000) 48,000


Dividend Revenue 48,000

Dec The market values on December 31, 2016 are


Lacoste Company Php 26
Diner Company 20
Giordano Corp. 52

Unrealized Loss on Equity Investments – Profit or 18,000


Loss
Equity Investments at FVPL – Lacoste Ordinary 18,000
10,000 x 26 = 260,000; 260,000 – 278,000
= 18,000

Equity Investments at FV through OCI - Darrel 220,000


Equity Investments at FV through OCI - Ghio 1,300
Unrealized Gains and Losses on Equity
Investments – OCI 221,300
FV CV Change in FV
Diner 960,000 740,000 220,000
Giord 62,400 61,100 1,300
Total 1,022,400 801,100 221,300

48,00 x 20 = 960,000; 1,200 x Php52 = 62,400

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, 2016. 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.

Investment in Associates 4,000,000


Cash 4,000,000

b. Singa reported profit of Php3,000,000 for 2016.

Investment in Associates 600,000


Share in Profit of Associates 600,000
20% x 3,000,000

c. In 2017, Shang received a 10% bonus issue from Singa.

Memo. Received 4,000 additional shares of Atlanta ordinary as 10% bonus issue. Shares now held are 44,000.
d. Singa reported profit of Php6,000,000 for 2017.

Investment in Associates 1,200,000


Share in Profit of Associates 1,200,000
20% x 6,000,000

e. Singa paid a cash dividend of Php2,000,000 on the ordinary shares at December 15, 2017.
Cash 400,000
Investment in Associates 400,000
20% x 2,000,000
Required:
1. Journal entries to record the given transactions above.
2. Carrying amount of the investments at December 31, 2017.

Investment cost P4,000,000


Share in profit – 2016 600,000
Share in profit – 2017 1,200,000
Share in dividends (400,000)
Carrying amount, December 31, 2015 P5,400,000

Problem 6

On March 1, 2016, 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, 2016, have remaining useful lives of 5 years.

During 2016, Hello Kit declared and paid cash dividends of Php1,600,000 and reported net profit of Php2,400,000.
On December 31, 2016, the shares of Hello Kit held by Legoland have total market value of Php1,300,000.

Required:
1. Prepare journal entries during 2016 in the books of Legoland Inc. to record the foregoing.
2. Compute the carrying value of the investment at December 31, 2016 and the income reported by
legoland as a result of the investment during the year 2016.
(a)
2016
Mar. 1 Investment in Associates – Hello Kit 2,730,000
Cash 2,730,000
Dec. 31 Cash (30% x 1,600,000) 480,000
Investment in Associates – Hello Kit 480,000
31 Investment in Associates – Hello Kit 600,000
Share in Profit of Associates 600,000
(2.4M x 10/12) x 30%
31 Share in Profit of Associates –Hello Kit 105,000
Investment in Associates – Hello Kit 105,000
Amortization of undervaluation of assets
(30% x 1,500,000) / 5 yrs. = 90,000
90,000 x 10/12 = 75,000
100,000 x 30% = 30,000
75,000 + 30,000 = 105,000
(b) Acquisition cost, March 1, 2016 P2,730,000
Cash dividends received ( 480,000)
Share in reported profit of associate 600,000
Adjustment in reported profit ( 105,000)
Investment carrying value, December 31, 2016 P2,745,000

Income reported by Legoland from its investment in associates:


(600,000 – 105,000) P 495,000

Problem 7
During your audit of the financial statements of the Sipaganmo Corporation for the year 2016, 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 purcjased 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, 2017 to shareholders of record as of December 31, 2016. No accrual has yet been taken
up by Sipaganmo .
d. The market price of the shares are as follows at December 31, 2016:
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, 2016
b. Gain or loss on the sale of FVPL
c. Dividend income
d. Unrealized gain or loss taken to profit or loss
A n g e l Corporation Brainless Corporation Cam Corporation Danis Corporation Englang Corporation
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
Feb 5 2,000 108,000

10 2,000 120,000
May 7 (1,000) (54,000)

10 2,000 60,000 2,000 72,000


A ug 17 1,000 40,000

Dec 10 100

Bal.
before
adj to
FV 1,000 54,000 2,000 120,000 2.000 60,000 2,000 72,000 1,100 40,000

Adj 1,000 (12,000) 4,000 6,000 1,800


Per
audit 1,000 55,000 2,000 108,000 2,000 64,000 2,000 78,000 1,100 41,800

(1) Audit Adjusting Entries:

May 4
Financial Assets at FV through P&L 2,000
Dividend Income 2,000
May 7
Financial Assets at FV through P&L 2,000
Gain on Sale of FVPL 2,000
August 17
Treasury Shares 66,000
Financial Assets at FV through P&L 66,000
September 17

Financial Assets at FV through P&L 40,000


Treasury Shares 33,000
Paid in Capital from Treasury Shares 00
7,000

December 10( bond issue, reverse entry)


Dividend Income 4,000
Financial Assets at FV through P&L 4,000
December 12
Financial Assets at FV through P&L 2,400
Dividend Income 2,400
December 12
Dividend Receivable 10,000
Dividend Income 10,000
(2,000 shares x Php5)

Financial Assets at FV through P&L 800


Unrealized Gain on FVPL 800
(1,000-12,000+4,000+6,000+1,800 = 800)

(2) (a) Carrying amount of FVPL (see worksheet above) P346,800


(b) Gain on sale of FVPL = 56,000 – 54,000 = 0
P 2 ,000
(c) Dividend Income = 2,000 + 2,400 + 10,000 = P 14,400
(d) Unrealized gain or loss on FVPL P 800

Problem 8

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

Trading Securities
Date Description Ref Debit Credit
6/22/16 10,000 ordinary shares, par
Value Php100, Apple Co. CD-30 1,040,000
12/31/16 adjustment to fair value 160,000
5/31/17 1,000 shares Apple Co. received
as bonus issue GJ-12 24,000
7/10/17 Sold 2,000 shares @Php130 net CR-23 260,000
12/6/17 Sold 2,000 shares @Php140 CR-42 280,000

Dividend Income
Date Description Ref Debit Credit
5/31/17 Bonus issue (stock dividend) GJ-12 24,000
8/01/17 Cash dividend on Apple
Ordinary shares CR-22 45,000

The following information was obtained during your examination:

1. The December 31, 2016 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 Payment Rate


Stock 04/16/17 05/10/17 05/29/17 10%
Cash 10/16/17 11/16/17 11/30/17 P5/share
Cash 12/10/17 12/28/17 01/16/18 P10/share

Closing market quotation is Php85 as at December 31, 2017

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 2017
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, 2017.
2. Audit adjustments at December 31, 2017.

a. Selling price on July 3 P 260,000


Carrying value of shares sold 1 , 2 00,000 x 2000/11,000 shares (218,182)
Gain on Shares sold P 41,818
b. Proceeds from sale,12/6 P 280,000
Carrying value of shares sold = 981,818 x 2,000/9,000 (218,182)
Gain on December 6 sale P 61,818

c. Dividend Income for the year 2017:


November dividends 9,000 shares x P 5 P 45,000
Dividends accrued on December 31 ( 7,000 x P10) 70,000
Total dividend income P 115,000
=========
d & e.
Share Peso Balance
December 31, 2016 10,000 1,200,000
May 31, 2017-10% bonus issue 1,000
--------------------------------------
Balance, May 31, 2017 11,000 1,200,000
July 10, 2017-sold 2,000 shares ( 2,000) ( 218,182)
--------------------------------------
Balance, July 10, 2017 9,000 981,818
Dec 6, 2017-Sold 2,000 shares ( 2,000) ( 218,182)
---------------------------------------
Balance, December 6, 2017 7,000 763,636
Adjustment to market ( 168,636)
-----------------------------------------
Balance, December 31, 2017 7,000 595,000
(7,000shs x Php85 = Php595,000) ==========================

2. Adjusting Entries
a. Dividend Income 24,000
Trading Securities 24,000
Cancellation of GJ-12

b. Trading Securities 41,818


Gain on sale of Trading Securities 41,818
Recognition of gain on July 3, 2017 sale

c. Trading Securities 61,818


Gain on sale of Trading Securities 61,818
Recognition of gain on Dec 6, 2017 sale

d. Dividend receivable 70,000


Dividend Income 70,000
Accrual of dividend declared Dec 10, 2016 to be paid
January 16, 2017

e. Unrealized Gain or Loss-P&L 168,636


Trading Securities 168,636
Adjustments of Securities to Market

Problem 9

Mari Company holds shares in Vanny Company, which it acquired in 2014. You were engaged to audit
the financial statements of Mari Company for the year 2016, and you found the following accounts in
the general ledger:

Investment in Vanny Company

Debit Credit Balance


June 4, 2014 6,000 shares @P80 480,000 480,000
Oct 13, 2015 16,000 shares @P100 1,600,000 2,080,000
May 31, 2016 8,000 shares @P120 960,000 3,040,000
Oct 31, 2016 10,000 shares @ P110 1,100,000 1,940,000
Investment in Aman Company
Debit Credit Balance
August 31, 2016 30,000 30,000

Dividend Revenue
Debit Credit Balance
January 4, 2016 110,000 110,000
June 24, 2016 150,000 260,000
August 31, 2016 30,000 290,000

Transactions of the audit year 2016 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, 2016 was determined to be P105 per share.

Investment in Vanny Company 230,000


Unrealized Gain or Loss – OCI 230,000
(6,000+16,000 =22,000) x Php105 = 2,310,000
2,310,000 – (480,000 + 1,600,000) = 230,000
Jan. 17 Received a cash dividend (declared on December 1, 2015 to
shareholders of record as of January 6, 2016) P5 per share. No entry
was made by the company to accrue the dividends at December 31,
2015.
Omitted entry in 2015 Dividend Receivable 110,000
Dividend Revenue 110,000
2015 INC (U) – NI(U) – RE(U)
2016 INC (O)-NI(O)-RE(O)

ADJ 2016 : Dividend Revenue 110,000


Retained earnings, beg 110,000

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.
Entry made : Investment in Vanny 960,000
Cash 960,000

Correct entry: Investment in Vanny (960,000-40,000) 920,000


Dividend revenue (8,000 x P 5) 40,000
Cash 960,000

AdJ: Dividend revenue 40,000


Investment in Vanny 40,000
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.

Entry made
Investment in Aman 30,000
Dividend revenue 30,000

Correct entry
Investment in Aman 48,000
Dividend revenue 48,000
(30,000/10x Php16 = 48,000)

Adjusting entry
Investment in Aman 18,000
Dividend revenue 18,000
Oct 31 Sold 10,000 shares @P110.

Investment in Vanny Company 50,000


Unrealized Gain/Loss-OCI 50,000

Selling Price (10,000 x P110) 1,100,000


Previous Carrying Value, Jan 1
10,000 x P105 1,050,000
--------------
Unrealized Gain/Loss-OCI 50,000
=========

Unrealized Gain/Loss-OCI 220,000


Retained earnings 220,000
6,000 x (110-80) + 4,000 ( 110-100) = 220,000

Dec 22 Sold 4,000 shares @ P140. Cash was received on January 5, 2017.
Investment in Vanny Company 140,000
Unrealized Gain/Loss – OCI 140,000
Selling price (4,000 x P140) 560,000
Carrying Value, Jan 1 (4,000 x P105) 420,000
------------
140,000
========

Miscellaneous receivable 560,000


Investment in Vanny Company 560,000

Unrealized Gain/Loss – OCI 160,000


Retained Earnings 160,000
4,000 x (140-100) = 160,000

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

Investment in Vanny Company 512,000


Unrealized Gain/Loss – OCI 512,000
FV, 12/31/16 16,000 x P142 2,272,000
Carrying Value
8,000 x P100 800,000
8,000 x P120 960,000
------------- 1,760,000
----------------
512,000
=========

Investment in Aman Company 3,000


Unrealized Gain/Loss-OCI 3,000
3,000 x (17-16) = 3,000

Required:

Audit Adjusting Entries.

Problem 10

On August 1, 2015, 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, 2020.
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 2015 and 2016.
2. Interest receivable at December 31, 2016.
3. Carrying value of the investments at December 31, 2015 and December 31, 2016.

Amortization Table

Date Nominal Effective Interest Premium Carrying Value, end


Interest(5%) (4%) Amortization
08/1/15 P539,445
11/30/15 P16,667 P14,385 P2,282 537,163
05/31/16 25,000 21,487 3,513 533,650
11/30/16 25,000 21,346 3,654 529,996
05/31/17 25,000 21,200 3,800 526,196

Accrued interest 500,000 x 10% x 2/12 = 8,333


CV/Proceeds = 547,778 – 8,333 = 549,445

(a) Interest Revenue:


2015: P14,385 + 1/6(P21,487) = P17,966
2016: 5/6(21,487) + 21,346 + 1/6(21,200) = P42,785

(b) Interest Receivable, December 31, 2014


P500,000 x 8% x 1/12 = P4,167

(c) Carrying value


Dec. 31, 2015: P537,163 – 1/6(3,513) = P536,577
Dec. 31, 2016: P529,996 – 1/6(3,800) = P529,363

Problem 11

In auditing the books of Rose Corporation as of December 31, 2016, before the accounts are closed,
you find the investment account balance:

Investment in Gold 9% Bonds ( Due date , June 1, 2021)

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, 2016.

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.
Entries that should have been made:
Jan. 21 Investment in Pearl 510,000
Interest Income 6,250
Cash 516,250

Mar. 1 Cash 106,000


Investment in Pearl (510,000 x 100/500) 102,000
Interest Income (100,000 x 9% x 3/12) 2,250
Gain (Loss) on Sale of Trading Securities 1,750

June 1 Cash 18,000


Interest Income 18,000

Nov. 1 Cash 104,750


Gain (Loss) on Sale of Trading Securities 1,000
Investment in Pearl (510,000 x 100/500) 102,000
Interest Income (100,000 x 9% x 5/12) 3,750

Dec. 1 Cash 13,500


Interest Income 13,500
300,000 x 9% x 6/12

31 Interest Receivable 6,750


Interest Income 6,750
300,000 x 9% x 1/12

31 Investment in Pearl 3,000


Unrealized Gains on Trading Securities 3,000
(300,000 x 1.03) – 306,000

2. Give the audit adjustments at December 31, 2016

Interest Income 6,250


Investment in Pearl 6,250

Investment in Pearl 4,000


Interest Income 2,250
Gain on Sale of TS 1,750

Investment in Pearl 18,000


Interest Income 18,000

Investment in Pearl 2,750


Loss on Sale of TS 1,000
Interest Income 3,750

Investment in Pearl 13,500


Interest Income 13,500

Dividend Receivable 6,750


Interest Income 6,750

Investment in Pearl 3,000


Unrealized Gains on TS 3,000

Problem 12

On January 1, 2015, 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, 2016, 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:
2015 2016
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, 2015 and December 31, 2016 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, 2016.

2015
Jan. 1 Equity Investments at FV through OCI – Pen 1,800,000
Cash 1,800,000
Dec. 31 Cash 400,000
Dividend Revenue 400,000
10% x 4,000,000
31 Equity Investments at FV through OCI – Pen 960,000
Unrealized Gains and Losses on Equity
Investments – OCI (2,760,000-1,800,000) 960,000
2016
Jan. 1 Investment in Associates – Pen, Inc. (at FV) 2,760,000
Equity Investments at FV through OCI – Pen 2,760,000

Unrealized Gains and Losses on Equity


Investments at FV – OCI 960,000
Retained Earnings 960,000
1 Investment in Associates – Pen, Inc. 5,200,000
Cash 5,200,000
Dec. 31 Investment in Associates – Pen, Inc. 3,900,000
Share in Profit of Associates (30% x 13,000,000) 3,900,000
31 Cash 1,800,000
Investment in Associates (30% x 6,000,000) 1,800,000

(b) Cost transferred from Equity Investments at FV 2,760,000


Additional investment 5,200,000
Share in profit 3,900,000
Cash dividends received (1,800,000)
Carrying amount, December 31, 2016 10,060,000

Problem 13

Erly Corporation purchased 100,000 ordinary shares of Fury Company on January 1, 2015 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 2015 and Php2,000,000 in 2016. Erly Company received a cash dividend from
Fury Company of Php420,000 on August 1, 2015 and Php480,000 on December 31, 2016. 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, 2015 and December 31, 2016 were Php160 and Php175,
respectively.

On January 2, 2017, Erly Company sold 40,000 ordinary shares of Fury Company for Php175 per share. On January
2, 2017, 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, 2017 and paid Erly
Company dividends of Php240,000. Market value of Fury Company shares on December 31, 2017 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 2015 to 2017.
2. Determine the amount at which the investment will be carried in the statement of financial position
on December 31, 2015, 2016 and 2017.
(a)
2015
Jan. 1 Investment in Associates – Fury Company 16,500,000
Cash (100,000 x 165) 16,500,000
Aug. 1 Cash 420,000
Investment in Associates – Fury Company 420,000
Dec. 31 Investment in Associates – Fury Company 340,000
Share in Profit of Associates 340,000
25% x 1,360,000
2016
Dec. 31 Cash 480,000
Investment in Associates – F Company 480,000
31 Investment in Associates – F Company 500,000
Share in Profit of Associates – F Company 500,000
25% x 2,000,000
2017
Jan. 2 Cash (40,000 x 175) 7,000,000
Investment in Associates – F Company 6,576,000
Gain on Sale of Investment in Associates 424,000
Acquisition cost 16,500,000
Share in profit (2015) 340,000
Cash dividends received (2015) ( 420,000)
Cash dividends received (2016) (480,000)
Share in profit (2016) 500,000
Investment carrying amount 16,440,000
Portion sold 40/100
CV of investment sold 6,576,000

2 Equity Investments at FV through OCI 10,500,000


Investment in Associates – F Company 9,864,000
Investment Income 636,000
60,000 x 175 = 10,500,000
16,440,000 – 6,76,000 = 9.864,000
10,500,000 –9,864,000 = 636,000
Dec. 31 Cash 240,000
Dividend Revenue 240,000
31 Equity Investments at FV through OCI 900,000
Unrealized Gains and Losses on Equity
Investments – OCI 900,000
60,000 x (190 - 175) =
(b) Year 1 Year 2 Year 3
Cost/Carrying Value, beg of year P16,500,000 P16,420,000
Income from associates 340,000 500,000
Cash dividends received (420,000) (480,000)
Sale of shares
Carrying value, end of year P16,420,000 P16,440,000
Market value 60,000 x 190 P11,400,000

Problem 14

On January 1, 2013, 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, 2015, 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, 2013 108
December 31, 2014 106
December 31, 2015 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, 2013?
b. What amount of gain or loss should Sunrise report on the sale of the bond
investments on April 1, 2015?
c. At what amount should the investments be shown on December 31, 2014 and
December 31, 2015 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, 2014
statement of financial position?
b. What amount of gain or loss should Sunrise recognize on the sale of investments
on April 1, 2015?
c. What amount of interest income will be taken to profit and loss for the year
ended December 31, 2015?
d. At what amount should the bond investments be shown on December 31, 2015
statement of financial position?
1) Classified as Debt Investments at FV through Profit or Loss
(a) Interest income (2,000,000 x 12%) P 240,000
(b) Sales price (1,200,000 x 1.01) P 1,212,000
Carrying value, 12/31/2014 (1,200,000 x 1.06) 1,272,000
Loss on sale P 60,000
(c) Carrying value, 12/31/2014 (FV) (2,000,000 x 1.06) P 2,120,000
Carrying value, 12/31/2015 (800,000 x 1.04) P 832,000
(2) Classified as at Amortized Cost
Amortization Table
Date Nom Int Effect Int Prem Amort Amortized cost, end
1/1/2013 2,126,788
12/31/2013 240,000 212,678 27,322 2,099,466
12/31/2014 240,000 209,947 30,053 2,069,413
12/31/2015 240,000 206,941 33,059 2,036,354
(a) Carrying value, 12/31/2014 (see table) P2,069,413
(b) Sales price P1,212,000
Carrying value, 1/1/2015 (2,069,413 x 12/20)P1,241,648
Amortization 1/1/2015 – 4/1/2015
33,059 x 3/12 x 1,200/2,000 (4,959) 1,236,689
Loss on sale P 24,689
(c) Interest income for 2015:

Jan 1 to Mar 31 206,941 x 3/12 P 51,735


Apr 1 to Dec 31 206,941 x 800/2000 x 9/12 62,082
------------
Total interest income for Year 3 P 113,817
(d) Carrying value, 12/31/2015 (2,036,354 x 800/2000) P 814,542

Problem 15

On January 1, 2014, 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, 2015, 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 2014 through 2017 as a result of the foregoing.

Amortization Table
Nominal Effective Premium Amortized Cost,
Date Interest Interest Amortization End
Jan. 1, 2014 108,660
Dec. 31, 2014 7,000 5,433 1,567 107,093
Dec. 31, 2015 7,000 5,355 1,645 105,448
Dec. 31, 2016 7,000 5,272 1,728 103,720
Dec. 31, 2017 7,000 5,186 1,814 101,906
Dec. 31, 2018 7,000 5,094 1,906 100,000

2014
Jan. 1 Debt Investments at Amortized Cost – Wolf Bonds 108,660
Cash 108,660
Dec. 31 Cash 7,000
Debt Investments at Amortized Cost – Wolf Bonds 1,567
Interest Income 5,433

2015
Dec. 31 Cash 7,000
Debt Investments at Amortized Cost – Wolf Bonds 1,645
Interest Income 5,355
2016
Dec. 31 Cash 7,000
Debt Investments at Amortized Cost – Wolf Bonds 1,728
Interest Income 5,272
Impairment Loss on Debt Investments 4,653
Debt Investments at Amortized Cost – Wolf Bonds 4,653
Carrying value, Dec. 31, Year 3 P103,720
Present value of future cash inflows
100,000 x 0.9070 90,700
4,500 x 1.8594 8,367 99,067
Impairment Loss P 4,653
2017
Dec. 31 Cash 4,500
Debt Investments at Amortized Cost – Wolf Bonds 453
Interest Income 4,953
2018
Dec. 31 Cash 4,500
Debt Investments at Amortized Cost – Wolf Bonds 480
Interest Income 4,980
Revised Amortization Table
Nominal Effective Discount Amortized Cost,
Date Interest Interest Amortization End
Dec. 31, 2016 99,067
Dec. 31, 2017 4,500 4,953 453 99,520
Dec. 31, 2018 4,500 4,980* 480* 100,000

Problem 16

On June 1, 2015, 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, 2019 pay interest annually on December 31. Using a financial calculator and
an excel worksheet, the yield is computed at 10%.

On September 1, 2018, 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, 2015 107 December 31, 2017 104


December 31, 2015 105 September 1, 2018 103
December 31, 2016 106 December 31, 2018 103.5

Required:

Prepare entries in the books of Pau Company for years 2015 through 2018 as a result of the foregoing. (Pau
Company reports on a calendar basis)

To facilitate computation, a partial amortization table is presented below.


Interest Interest Amortization HTM
Date Received Revenue of Discount Carrying Value
June 1, 2015 5,353,150
Dec. 31, 2015 350,000 312,267 37,733 5,315,417
Dec. 31, 2016 600,000 531,542 68,458 5,246,959
Dec. 31, 2017 600,000 524,696 75,304 5,171,655
Dec. 31, 2018 600,000 517,166 82,834 5,088,821
2015
June 1 Held to Maturity Securities – Blessie Corp. Bonds 5,353,150
Interest Revenue (5M x 12% x 5/12) 250,000
Cash 5,603,150
Dec. 31 Cash 600,000
Interest Revenue 562,267
Held to Maturity Securities – Blessie 37,733
2016
Dec. 31 Cash 600,000
Interest Revenue 531,542
Held to Maturity Securities – Blessie 68,458
2017
Dec. 31 Cash 600,000
Interest Revenue 524,696
Held to Maturity Securities – Blessie 75,304
2018
Sept. 1 Interest Receivable (3M x 12% x 8/12) 240,000
Held to Maturity Securities – Blessie 33,134
Interest Revenue (517,166 x 3/5 x 8/12) 206,866
1 Cash (3,090,000 + 240,000) 3,330,000
Gain on sale of HTM Securities 20,141
Interest Receivable 240,000
Held to Maturity Securities – Blessie 3,069,859
CV of HTM securities sold:
As of 12/31/11 (5,171,655 x 3/5) 3,102,993
Amort from 1/1/12-9/1/12 33,134
CV as of 9/1/12 3,069,859
Sales price 3,090,000
Gain on sale 20,141
Sept. 1 Available for Sale Securities – Blessie 2,068,662
Held to Maturity Securities 2,068,662
5,171,655 – 3,102,993 = 2,068,662
Dec. 31 Cash 240,000
Interest Revenue 206,866
Available for Sale Securities – Blessie 33,134
2M x 12% = 240,000
5,171,655 – 3,102,993 = 2,068,662
2,068,662 x 10% = 206,866
240,000 – 206,866 = 33,134
Dec 31 Market Adjustment – AFS 34,472
Unrealized Gain or Loss on AFS 34,472
Amortized cost
2,068,662 – 33,134 P2,035,528*
Market value 2M x 103.5% 2,070,000
Market Adjustment P 34,472
*or 5,088,821 x 2/5 = P2,035,528