I

V – AU
DIT OF I
NVE
STM
ENTS

PRO
BLEM NO.1

Thef
oll
owi
ngtr
ansact
ionsoft
heAngatCompanywer
ecompl
eteddur
ing
the y
ear2006:

Jan.2 Pur
chased 20,
000 shar
esofBul
acan Auto Co.f
orP40 pershar
e
pl
us b roker
agecosts o
f P4,500. These are
sh
s w er
e classi
fied
as rad
t ing securi
t
ies.

Fe
b.1 Pu
rchas
ed 20,
000shar
es ofMal
olos om
C pany com
mon st
ock at
P125 pershare pl
us broke
rage fees of P19
,
000. Angat
class
i
fies ht
is st
ockas a
nd ava
il
abl
e-for
-sa
l
e se
curi
ty.

Apr
.1Pur
chasedP2, 000,000ofRPTreasury7% bonds,paying102.
5plus
accrued int er
est ofP35,000. I
n ad dit
ion,t he company pai
d
brokeragefeesofP18,
000.Angatclassi
fied thesebondsasa
tradi
ng sec uri
ty.

Jul
.1 Rec
eve
id se
mian
nuali
nter
es
t ont
he R
P Tr
easu
ry B
onds.

Aug.1 Sol
d P500,
000 ofRP Tr
easur
y 7% bonds at103 pl
us accr
ued
i
ntere
st.

Oct
. 1 Sol
d 3,
000 sh
ares of
Mal
ol
os at
P132 persh
are.

Themar
ketval
uesoft
hest
ocksandbondsonDecember31,2006,ar
eas
f
oll
ows:
Bul
acanAutoCo. P45pershar
e
Mal
olosCompany P130pershare

RPTr
easur
y7%bonds 102
QUE
STI
ONS:

Based
ont
he ab
ove d
ant
he e
rsu
l
t ofyou
r au
dit
, det
er
mine h
te ol
fl
owi
ng:
1.Gai
n orl ossnosal
e of
P500
,00
0 RP Treasury Bon
ds on
Augu
st1,20
06
a. P15,
000gai
n c. P2,000loss
b. P 2,
500gai
n d. P7,500loss
n orl
2.Gai oss onsal
e of
3,000 Mal
ol
os shar
es on Oct
ober1, 2006
a. P18,
150loss c. P 2,
000gai
n
b. P18,
150gain d. P21,
000gain
103
3. Whatamountofunreal
ized gai
n shoul
d be shown as componentof
inco
me ni 2006?
a. P92,500 c. P7
4,50
0
b. P97,000 d. P8
0,00
0
4.Whatamou
nt ofunr
eal
i
zed ai
gn shou
ld b
e show
n as om
c pon
ent
of
equ
i
ty as of
Dec
ember31,2006?

a.
b.PP6
88
5,
8
,05
00
0 c.
d.PP66,
0000

Sugg
est
edSol
ut
ion
:

Quest
ionNo.1
Salesproceeds(P500,000x1.03) P515,
000
Less cost ofRP Tr easur
y bonds sol
d P(500
,000x 1.
025)
* 512
,500
Gain on sale ofP500,000 RPTreasur
y Bonds P 2,
500

* PAS 39 par. 43 stat

est hat when a financial asset or nfi
anci
al l
iabi
li
ty i
s
r
ecogni
zed i
nit
ial
ly, an ent
it
y sh all measur
e it at ti
s fair va
l
ue plus, i
n the
caseofa financi al ass
etor n fianci
al ln
ao
ibt
i
li
ty
a
tfair val
ue thr
ough pr
ofi t
orloss, t
ransa
cti
on cost
s that are di
rect
ly attri
butabl
e to the acqu
i
sit
ion or
i
ssue of n fi
anci
al ass
et or nan
fici
al l
iabi
li
ty. Theref
ore, he
tt r
ansa
ct
ion cost
s
(
e.g.brok
eragefees)shoul
d be expense
d for r a
tdi
ng se cu
rit
ies
.

Quest
ionNo.2
Sal
es proceeds (3,
000 shares x P132) P396,
000
Lessostc ofsh ares so
ld
{[
(20,000x P12 5)+ P19,000]x 3/20} 377,
850
Gai
n on sal e of3,000 Malol
os shares P 18,
150

Quest
ionNo.3
Cost
ofBul
acan
Aut
o C
o.sh
ares(
20,
000 x 4
P0) P 80
0,00
0

C
Cost
ost of
ofR P00,
P5 Tr
0eas
00ur
Ry 7%
P Treb on
asu
rds
y bP(
2
on,
d00
s 0sol
,0d
00(xe 1.
se 02
n
o. 2
5)
(
1),
0
5510
2,
0
,50
00
0)
Tradi
ngsecurit
ies,12/31/06befor
emar k-t
o-market 2,337,500
Fair avl
ue oft radi
ng securi
ties,12/31/06 (seeel b)
ow2,430,000
Unreali
zed gai
n onTS t o b e e
rport
edont he SI P 92, 500

Bulacan Auto Co.(20

,00
0x P 45) P 900,
000
RP Treasury 7%bon ds P1
(,500,
000 x . 1
02) 1,
530,
200
Fai
r val
ueoft radi
ngsecurit
ies,12/31/06 P2,
430,
000
104
Quest
i
onNo.4
Cost ofMal ol
os om C pany shares
[
(20,000 x P 125) + P19,000] P2,519,000
Costof3, 000 sharessold(seeno.2) (
377,850)
AFS,12/31/06bef oremar k-
to-marke
t 2,141,
150
Fai
r value ofAFS , 12/31/06( 20,
[000 -3,00
0)x P130 ] 2,
210,00
0
Unreal
iz
ed gain-AFS, 12/31/06t o be e
rport
ed nu
derSHEP 6 8,85
0

s:1)B;2)B;3)A;4)A
Answer

PRO
BLEM NO.2

Youwer
eengagedbyBal
agt
asCompanytoaudi
titsfinanci
alst
atementsf
or
the year0062
. Dur
ing h
te cour
se ofyour audit
, younotedt hatthe ol
fl
owing
trad
i
ng secu
rit
ies er
we p
rop
erl
y report
edascu r
rent asset
s at December31,
2005:
Cos
t Mar
ket
Fr
an ce orpo
C r ati
on, 5,000 share
s,
convert
ibl
e pref
erred shar
es P 450,000 P 487,500
Ces,Inc .
,30,000 shares ofcommon st
ock 675,000 742,
500
Coo Co .
,10,000 shares ofcommon s
tock 618,750 450,000
P1,
743,750 P1,
680,000

Thef
oll
owi
ngsal
eandconv
ersi
ont
ransact
ionst
ranspi
reddur
ing2006:

Mar
. 1 Sol
d 12,
500 sh
ares of
Ces or
f P3
3.
75 persh
are.

Apr
il1 Sol
d 2,
500 sh
ares of
Coo or
f P45 persh
are.

Sept
. 21 Conve
rt
ed 2,
50
0 shar
esofFr
ance’
s pr
eer
fr
ed st
ock n
ito
7,
500 shar
es ofFr
ance’
s commonstock, whent
he m ar
ket
pr
icewas P78.
75 per h s
are f
or ht
e pr ef
er
red st
ockand
P47.
25 persh
are or
f t
he commons t
ock.

Thef
oll
owi
ng2006di
videndi
nfor
mat
ionper
tai
nst
ost
ocksownedby
Bal
agtas:

Jan.2Cooi
ssueda10% s
toc
kdivi
dendwhent
hemar
ketpr
iceofCoo’
s
common st
ock wasP49.
50pershar
e.

Marc
h 3
1 Fr
ancepaid di
vi
dends ofP2.
50 persh
areon t
si pr
efer
r
ed
an
d Sept
. 30 st
ock, to st
ockhol
der
s ofrecor
d on Marc
h 15 an d
Sept
ember 15, resp
ect
i
vel
y. Fr
ance di
d not pay
 di
vd
ien
ds ont
si c
ommons
tock ur
d
ing 20
06.

105
Jul
y1 Ces pai
d a P2.
25 per shar
e di
vidend on i
ts common
stock.

Mar
ketpri
ceser
p sh
ar
e o
fthe secu
ri
t
ies er
we a
s ol
fl
ows:
12/31/2005
12/31/2006
France Co rp.
,pref
err
ed 92.25 97.
50
FranceCor p.,common 42.75 38.
25
Ces,Inc.,common 22.50 24.
75
CooCo. ,
common 40.50 45.
00

Al
lofthef
oregoi
ngstocksar
elist
edi
nthePhil
ippi
neSt
ockExc
hange.
Decl
i
nes nimar ketval
ue rf
om cost wou
ld notbe con
si
der
ed erpman
ent
.

QUE
STI
ONS:

Basedont he ab
ove dan
the e
rsu
l
t ofyou
r au
dit
, youareo tp
rovi
de h
te
answ
ers o
t hte ol
fl
owi
ng:
1.How much si h
te g
ani onsal
e of
12,
500Cessha
r
es?
a. P112,
500 c. P140,
625
b. P281,
250 d. P 0
2.How much si hte gai
n orl
oss on
sale of2,
500 Coo sh
ar
es?
a. P28,
125gai
n c. P28,
125loss
b. P10,
227gai
n d. P 0
3.How muchi s h te gai
n orl
oss on
conver
sionof2,500 Fr
ance pre
f
err
ed
st
ocknt o
i 15,000 com
mons t
ock?
a. P 28,
125loss c. P46,
875loss
b. P129,
375gain d. P 0
4.How muchi s h
te ot
taldi
viden
d i
ncome or
f the ye
ar 20
06?
a. P64,
375 c. P 51,875

b. P101,
375 d. P364,
375
5. How muchsh
oul
d be r
eport
edasunr
eal
i
zedgai
n on t
rad
i
ng secu
r
iti
es
in t
he compan
y’
s n
icom
e s
t
atem
entf orthe year 20
06?
a. P4,500 c. P59,
250
b. P67,773 d. P 0

Sugg
est
edSol
ut
ion
:
Quest
ionNo.1
Sales pr
oceeds (
12,
500 shares x P33.
75) P421,875
Less CV of Ces shar
es sol
d 1(2.5/30x P7
42,
500) 30 9,
375
Gain on sal
eof12,500 Cesshares P112,500
 106
Quest
ionNo.2
Salespr
oceeds(2,500 sharesx P45) P112,500
Less CV ofCooshar es sol
d P(450,000 x 500/11,
2, 000*
) 102,273
Gainonsaleof2,500Cooshar es P 10,227
*t
otal numberofsh
ares f
a
ter10% st
ocki
vi
dden
ds 1
(0,
000 x 1
.
1)

Quest
ionNo.3
Fair va
l
ue ofpref
erredstock (
2,500 shares x78 P75)P1
. 96,
875
Less CV o
fshar
es conver
ted P
(487,500 x2.5/5) 243,
750
Loss on onv
c er
sion f o2,
500 anc
Fre prefer
red shar
es P 46,875

Quest
ionNo.4
From France(5,000 sharesx P2.
50 x 2) P25,000
From Ces[ (
30,
000 -12, 500)xP2.25) 39,375
Totaldi
videndi
ncomei n2006 P64,375

Quest
i
onNo.5
Tradingsecuri
ties,1/1/06 P1,
680,000
CV ofCesshar essol d( seeno.1) (309,
375)
CV ofCooshar essol d(seeno.2) (102,
273)
CV of Fr ance preferred s hares converted s(ee no. 3) (
243,750)
Cost of7, 500 r ance
F common h sares recei
ved s(
ee no. 3) 196,
875
Tradingsecuri
ties,12/31/06bef or
emar k-t
o-mar ke
t 1,
221,477
Fair val
ue oft r
adi ng se curit
ies,12 /31 /06 s(eebelow) 1,289,
250
Un r
eali
zed gai
n on t rading securi
ties P 67,773

Fr
ance Cor
p,.pr
ef
err
ed (
[5,000 2,-500)x P92.
25] P 230,
625
Fr
anceCorp.–Common (
7,500 x P42.
75) 320,
625

Ce
Cos
o,C
Inc
.
o.
,,c
co
ommo
mmonn[(
[
{
(30,
000 - 1
10,
000 x21
1.,
50)0
-)x5P
2, 22.
00]50P40.
x ] 50} 39344,
3,75250
0
Fai
r val
ue of t
radi
ng securi
ti
es, 12/31/06 P1,
289,
250

s:1)A;2)B;3)C;4)A;5)B
Answer

PRO
BLEM NO.3

You wer
eabletoobt
aint
hefol
lowi
ngledgerde
tai
lsofTradi
ngSecur
iti
esi
n
connect
ion wi
th your au
dit ofthe B ocau
e Corporai
t
on for ht
e yearded
en
December31 , 200
6:
 107
Parti
cular
s Date Ref
. DR CR
PurchaseofGOOD Co.– 1-
14 CV P960,
000
4,
000 sh ar
es

Pur
chase ofLUCK Co.–
4,800shar
es 2-
20 CV 1,
200,
000
Sal
eofLUCK Co.–1,
600 shar
es 3-
01 CR 360,
000
Rec
ept
i ofGOOD Stock i vi
Dden
d
–Offsett
ingCr
edi
ttor
etai
ned
ear
nings 5-
31 JV 88,
000
Sal
e o
f GOOD St
ocks –
3,
200
shares 8-
15 CR 784,
000
Sal
e of GOOD St
ocks –
800
shares 10-
1 CR 184,
000

From t
he Ph
ili
ppi
ne S
tock xc
E
han
ge,the G
OOD divdi
end
s wer
e an
al
yz
ed s
a
f
oll
ows:
Ki
nd Decled Record
ar Payment Rat
e
Cash 01-02 01-15 01-31 P20/share
Stock 05-02 05-15 05-31 10%
Cash 08-01 08-30 09-15 P30/share

AtDecember31,2006,GOOD andLUCK shar

eswer
esel
li
ngatP210and
P240 persh ar
e,r esp
ect
i
vel
y.

QUE
STI
ONS:
Based
ont
he ab
ove d
ant
he e
rsu
l
t ofyou
r au
dit
, det
erm
i
ne h
te ol
fl
owi
ng:

1.Gai
n orl osson sal
e of
1,60
0 LUCK shareson March 1,20
06
a. P360,
000gain c. P40,
000loss
b. P200,
000loss d. P40,000gai
n
2.Gain onsal e o
f 3,
200 GOOD sharesonAugu st 15
, 20
06
a. P48,000 c. P16,
000
b. P144,000 d. P 0
3.Gai
n orl osson sal
e of
800 GOOD shareson October
1,20
06
a. P8,000gai
n c. P 8,000 loss
b. P24,000loss d. P24,
000gain
vi
4.Di den
d i
ncom
e or
f the ye
ar 20
06

a. P132,
000 c.P212,
000
 b. P300,
000 d. P 0

108
5. Carryi
ng val
ue of
Trad
i
ng S
ecu
r
iti
es as Decem
of ber31, 2006
a. P768,
000 c. P880,
000
b. P852,
000 d. P768,
000

Sugg
est
edSol
ut
ion
:

Quest
ionNo.1

Sales r
p
oceeds P360,
000
Less CV ofshare
s (
sol
d,
P1200,000 x 1,
600/4,
800) 400,
0 0
0
Loss on sal
e of1,
600 Luck shar
es on 3/1/06 P 40,
000

Quest
ionNo.2
Totalproceeds P784,000
Less divi
dends sold(3,200 shares x P30) 96,000
Sales
proceeds 688,
000
Less VCofi nves
tmen t sol
d
(P880,000*x3, 200/4,400**) 640,000
Gain on s ale of3,
200 G ood shares on 9/15/
06 P 48,000

Com
put
ati
onofadj
ust
edcost
ofGood
Co.sh
ares

Totalcashpaid P960,000
Less purchased di
vidend (
4,000 x P20) 80,000
Adjustedcost P880,000 *
*
*Af
ter10% st
ock
divi
den
d

Quest
ionNo.3
Sal
espr
oceeds P184,
000
Less VCofi nves
t
men t sol
( d80
P8 ,00
0 x 008/4 ,
400) 160,
000
Gai
n on sale of800 Good sha
res on 10/1/06 P 24,000

Quest
ionNo.4
Di
viden
d n
icom
e -Decl
ar
ed u
Ag.
( 1
4,
400sh
ar P)P1
es x30 32,
000

Quest
ionNo.5
Good C o.
[
(4,000 x 1.
1) - 3,
200 - 800] = 400 x PP0 8
21 4,00
0
Luck Co.(
4,800 - 1,
600) = 3,200 x P240 768,
000
Carryi
ng alvueof tradi
ngsecur it
ies, 12/31/
06 P852,
000

s:1)C;2)A;3)D;4)A, 5)B
Answer

109
PRO
BLEM NO.4

I
n connect
ion wi
th your audi
t ofthe financi
alstat
emen
ts oft
he G uigu
int
o
Company f
or hte yea
r 2006, the ol
flowi
ng Avai
l
abl
e or
f al
Se Secu
r
ities na
d
Divi
den
d nIcome acc
ounts wer
e prese
nted ot you
:
Avail
ablef
orSal
eSecur
iti
es
Dat
e Descri
ption Ref. Debi
t Cr
edi
t
01
/08 Purchased 2 0,
000 shar
es
com mon, parval
ue P5 0,
BUST OS Co. VR-
69 78
0,00
0
03/3010,
000 har
s es BUSTOS C o.
recei
ved as st
ockdi vi
den
d CJ-
30 50
0,00
0
04
/03Sol
d 10,
00 0 shares @ P25 CR-
44 250,
000
12
/02Sol
d 4,
000 sh ares@ P6 0 CR-
65 240,
000

Dividen
d Incom
e
Date Descri
pti
on Ref
. De
bit Credi
t
03/30 St
ock d
ividend SJ-8 50
0,000
08/30 BUSTOSCo mpany common CR-52 10
0,000

Thef
oll
owi
ngi
nfor
mat
ionwasobt
aineddur
ingyourexami
nat
ion:
1. From i
ndepen
den
t sou
r
ces,
youdet
er
mine h
te ol
fl
owi
ng d
i
viden
d
i
nform
ation
:
Typeof Dat
e Dateof Dat
eof
Divi
dend Decl
ared Record Payment Rate
Stoc
k 02/14/2006 02/28/2006 03/30/2006 50%
Cash 08/01/2006 08/15/2006 08/30/2006 P5
/share
Cash 12/01/2006 12/15/2006 01/02/2007 20%

2. Cl
osi
ng m
arket
quot
ai
tonas at
Dece
mber31, 2006:

BUSTOSCompanycommon B
13i
d
-
3/4 A
16s
-k
1e
/d
2

QUE
STI
ONS:

Based
ont
he ab
ove d
ant
he e
rsu
l
t ofyou
r au
dit
, an
swert
he ol
fl
owi
ng:
1.How muchi s hte gai
n orl
oss on
the A
pril 3, 2006 sal
e?
a. P10,
000l
oss c. P140,
000 l oss
b. P10,
000gai
n d. P 0
2.How much is h
te g
ani ont
he D
ec ember2,20 06sal
e?
a. P136,
000 c. P84,
000
b. P 96,
000 d. P 0
110
3.How muchi s h
te ot
taldi
viden
d i
ncom e or
f the ye
ar 20
06?
a. P600,
000 c.P100,000
b. P800,
000 d. P300,000
4.How muchi s h
te a
djust
edbal
ance ofAvai
lab
le or
f al
Se S
ecu
r
iti
es s
a of
December 31,
2006?
a. P290,
000 c.P220,000
b. P264,
000 d. P416,
000
5.How muc h i
s h
te U
nreal
i
zed Loss
onAFS as ofDec
ember
31, 20
06?
a. P196,
000 c.P152,
000
b. P 70,
000 d. P 0

C
Sugg
est
edSol
ut
ion
: a
r
Quest
ionNo.1 r
y
Sal
es pr
ocee
ds 1
(0,
000 sh
ares x25
P) i
LessV C
ofi
nve
smen
t t sol
d (P780,
000 x 1
0/3
0*) n
g
Lossn o
sal
e of
AFS on4/
3/06
*
Aft
er50% st
ock i
vi
dden
d v
a
Quest
ionNo.2 l
u
Tot
alpr
oceeds(
4,000shar
esxP60) e
Lessvid
di
en
ds sol
d (
4,000 shar
es x50Px 2 0%) Net
sal
es r
p
oceed
s o
LessV Cofi
nve
smen
t t sold (
P780,
000 x 4
/30) f
Gai
n onsal
e ofAFS on12 /2/06 A
F
S
Quest
ionNo.3
,
Cashdi
viden
ds d
ecl
ared,
8/1
/2006 1
(
20,
000 shar
esx P5) 2
/
Cashdi vi
den
ds decl
ared,12/1
/200
6 3
(
20,000 sh
aresx P50 x 0%
2) 1
Tot
aldivi
dendincome /
0
Quest
ionNo.4 6
Shar
espur
chased,
1/08
Shares ecei
rvedasst
ock
divi
den
d
Sol
d, 4/3
Sol
d, 12/2 Bal
ance,
12/31/06

Mul
ti
ply by ar
mket
val
ue/sh
ar
e,12/3
1/0
6
 P1
00,
000

P2
50,
000 200,
000
26
0,00
0 P10
,00
0 P300,
000

20, 000
10, 000
P240,
000
(
10, 000)
40,
000
(4,000)
200,
000
16, 000
10
4,00
0 P96
,00
0 13.75
P2
20 ,
00 0

111
 Not
e:Applica
t
iongu i
dance ap
r. 72 ofPA S 39 st
atesthat t
he appropri
ate
mar
ket pri f aan
ce or sse
t hel
d or i a
lbi
li
ty t
o be issued i
s usu al
ly the
bi
currentd pricea
nd, for n
a assett o be acqu
ir
ed or ial
bil
it
y held, t
he
ask
ing pr
ice.

Quest
ionNo.5
Acquisi
ti
oncos t P780,000
CV o f10,000 shares sol
d,4/3 (
see no
.1) (
260,000)
CV o f4,000 shar
es sold,12/2 (
see no
.2) (
104,000)
AFS,12/31/06bef oremar k-
to-
mar
ket 416,000
Fairval
ueofAFS,12/31/06 220,
000
Unreali
zed l
osson AFS,12/31/06 P196,000

s:1)A;2)B;3)D;4)C,5)A
Answer

PRO
BLEM NO.5

Youraudi
toftheBal
iuagCor
porat
iondi
scl
osedthatt
hecompanyowned
the ol
flowing secu
r
iti
es on Decem
ber31, 2005:

Tr
adi
ng se
cu
ri
ti
es:
Security Shares Cos t Mar ket
Sputnik,I
nc. 4,800 P 7 2,000 P 92, 000
Explorer,
Inc. 8,
000 216,000 144,000
10% , P100, 000 f
aceal v
ue ,
Vanguar dbonds(i
nter
estpayable
semi annuall
yon Jan.1 and Jul.1) 79, 200 81,720
Total P367,200 P317,720

Avai
labl
e-f
or-
sal
esec
uri
ti
es:
Securit
y Shares Cost Market
ScorePr oduct
s 16,
000 P 688,
000 P 720,
000
Tir
os,Inc. 120,
000 3,
120,000 2,
920,
000
Midas,Inc. 40,
000 480,
000 640,
000
Total P4,
288,000 P4,
280,00
0

Hel
d t
o m
atur
ity:
Cos
t Book val
ue
12%, 1,
000,000 f
ace uval
e,Di
scov
ererbonds
(
int
erest pay
abl
e ann
ual
l
y ev
ery Dec. 31) P9
50,0 P9
00 63,
000
112
Dur
ing 2
006, t
he ol
fl
owi
ng r
t
ansact
i
ons occu
rr
ed:
Jan.1 Recei
vei
nter
estont
heVanguar
dbonds.
Mar
.1 Sol
d 4
,000shar
es o
f Expl
or
er I
nc. s
toc
kforP76,
000.
May 15 Sol
d 1,
600 shar
es ofMi
das
,Inc. f
orP15 per
shar
e.
Jul
y 1 Recei
vedi
nter
estont
heVanguar
dbonds.
Dec.31 Recei
ved i
nter
est on he
t Di
scover
er bond
s.
31 Transf
err
ed the D isco
ve
rer bonds ot hte avai
labl
e-f
or-
sal
e
port
fol
io.The b onds wer
e sel
l
ing at 101 on t
his date.The
bondswerepurc
hasedonJanuary2,2005.Thediscountwas
amorti
zed usi
ng hte effect
i
ve nti
erestmethod
.

Themar
ketvaluesoft hestocksandbondson December31,2006,ar
eas
f
oll
ows:
Sputnik, I
nc. P22pershare
Explorer,Inc. P15pershare
10%Vanguar dbonds P75,600
ScorePr oducts P42pershare
Tir
os,Inc. P28pershar e
Midas,Inc. P18pershare

QUE
STI
ONS:

Based
ont
he ab
ove d
ant
he e
rsu
l
t ofyou
r au
dit
, det
er
mine h
te ol
fl
owi
ng:
1. Gain orl
oss on sal
e of
4,000 Exp
l
orer,Inc.sh aresonMar
ch1, 2006
a. P4,
000l
oss c. P32,
000loss
b. P4,
000gai
n d. P32,000 gai
n

2. Real
ize
d gai
n or oss
l on
sal
e o
f 1,
600 Mi
das,
Inc.sh
ares on
May15,
2006

a. P4,
800l
oss c. P1,
600l
oss
b. P4,
800gai
n d. P1,
600 ga
in
3. Tot
al int
erest
incom
e or
f ht
e year06?20
a.P130,000 c.P144,820
b. P125,
560 d. P143,
000

4. The amount t
hat shoul
d be r
epor
ted as unr
eal
ized gai
n i
n t
he
stat
ement ofchangesn i
equ
i
ty e
rga
r
ding r t
ansferofDi
scoverer
bon
ds
to AFS?
a. P47,
000 c. P61,820
b. P32,
180 d. P 0
113
5. Carryi
ng va
l
ue o
f Tr
adi
ng Secu
ri
t
iesand Ava
i
labl
e-f
or-
sal
e secu
ri
t
iesas
ofDec
ember31 , 20
06shou
ld be
Tradi
ngsecuri
ti
es Avai
labl
e-f
or-
salesecuri
ties
a. P241,
200 P5,733,
200
b. P301,
200 P4,723,
200
c. P241,
200 P5,762,
000
d. P301,
200 P5,720,
800

Sugg
est
edSol
ut
ion
:

Quest
ionNo.1
Sales
proceeds P76,
000
Less CV o fshares sol
d(P144,000 x 4/8) 72,
000
Loss on s al
e of 4,
000 Explor
er,Inc.shares P 4,000

Quest
ionNo.2
Sal
espr oceed
s(
1,600 sh
aresx P
15) P24,
000
Unreal
i
zed gai
n on t he sh
ares
(
P16dsol
0,000x 1.
6/40) 6,
400
Tot
al 30,
400

L
Ress
eal
i CVo
zed fi
gas
nhar
onessa
so
ll
d(
e P64
of10
,,
0
600
00Mi
xd
1a.
6/4I
s, 0
n)c.sh
ares P 2
4
,5,
6
000
80
Al
ter
nat
ivec
omput
ati
on:
Salesproceed
s(
1,600 shar
esx P15) P24,
000
Cost ofshares ( sol
d80,
P4 000x 1.
6/40) 19,
200
Reali
zed g
ai
n on s al
e of1,60
0 Midas,I
nc.sha
res P 4,
800

Quest
ionNo.3
Vanguardbonds( P100,000x10%) P 10,
000
Discoverer bonds( P963,000 x 14%*
) 134,
820
Totalint
erestincomef or2006 P1
44,82
0

*C
omput
ati
onofeff
ect
i
vei
nter
est
rat
e:
Carr yi
ng v aule,12/3 1/05 P963 ,
000
Less carryingval ue,1/2/05 (Co
st) 950,000
Discountamor t
ization f
or2005 13,000
Addnomi nali nter es
t(P1,000,
000x12%) 120,000
Effect i
vei
nt er
est 133, 000
Divide by car r
ying value,1/2/05 950,000
Effect i
vei
nt er
estr ate 14%
114
Quest
i
onNo.4
Carr
yi
ng vaule,12/31/05 P 9
63,000
Adddi
scountamorti
zat
ionin2006:
Effecti
ve nt
ierest (
P963,
000 x 14%
) P134,
820
Nominalint
erest(P1,
000,
000 x 2%
1 ) (
120,
000) 14,820

Cai
Far
rryi
ng
valuv
eal
ue ,
of12/
Di 31/06
scover
erbonds on 977,820
12/31/06( P1,000,
000x1.01) 1,010,000
Unreal
ized ga in on transf
er ofsec
uri
t
ies
tobereportedunderSHE P 32,
180

Quest
ionNo.5
Tradingsecuri
ties
Sputnik, Inc.(4,800 x P 22) P1
05,
60 0
Explorer
,Inc.[(8,000 -4, 000)x P15] 60,000
10% ,P100, 000 a fce val
ue,Va ng ua
rd b
ond
s 75,600
Totalmarketvalue P2
41,
20 0
Avail
able-for-
salesecuri
ti
es
ScorePr oduct s(16,
000 xP42) P 672,000
Tir
os,Inc.( 120,000xP28) 3,
360,000
Midas,I nc.[ (
40,000 -1,600)x P18] 691,
200
Discoverer bond s(P1,
000,000 x 1.
01) 1,
010,000
Totalmar ketvalue P5,
733,200

s:1)B;2)B;3)C;4)B,5)A
Answer

PRO
BLEM NO.6

I
n con
nec
t
ion wi
th you
r au
dit ofHogon
oy om
C pan
y’
s fi
nan
cialst
at
emen
ts,

you we
marketr
el
ab a
ebl
e t
org
secu
ia
t
it
hert
es h
ofe
tf
hol
elowin
com
pg su
anybsi
di
or
f ar
y
htacc
e ountw0
year h6
ic
hr
20
: eflectt
he

HugoCorp.
Date Tr
ansact
ions Shares Debit Cred
it
9/01 Pur
chase 40,000 P2,000,
000
9/30 Cash di
vidends to
st
ockhol
ders of r
eco
rd
9/15,
declared8/15 P 100,
000
10/01 Pur
chase 10
0,00
0 5,
000,
000
10/15 Sal
eat
P65 40,
000 2,
000,
000
115
 HugoCor p.
Date Transact
ions Shares Debi
t Cr
edi
t
11/30Cashcoll
ectedf or sal
e
mad e on11 /10,aft
era
11/1 decl arat
i
onofP5
cash di
vidend persh ar
e
to stockholder
s on record
asof
12/1 40,000 6,
600,
000
12/
15 Cash di
vi
dend e
rcei
ved . 300,
000
Tot
als P7,
000,
000 P9,
000,
000

Hogon
oy
,Inc.acqu
ir
ed 0
3% ofPugo orporat
C i
on’
s vot
i
ng st
ockonJan
uary
1,20 05 for P5,
00
0,000.Dur i
ng 2 005,Pu go ear
ned P2
,000,
000 and pai
d
di
vidends of P1,
250,000. Hogon
oy’
s 30% interesti
n Pugo ves
gi Hogonoy ht
e
abi
lit
y t o exer
ci
sesi gni
ficantinfluenceoverugo’Ps oper
ait
ng and finan
cial
pol
ici
es . Duri
ng 20 06, Pugo earned P2,
50 0,
000 and paid di
vi
dends of
P750,000on Apr i
l 1 andP750, 000on Oct ober 1.On July 1,2006,
Hogonoy sold hal
f ofits ni
ves
tmen tin Pugo or
f P3,
300,
000 cash
.

QUESTI
ONS:
Basedonthe ab
ove d
ant
he e
rsu
l
t ofyou
r au
dit
, an
swert
he ol
fl
owi
ng:
1.Thegainonsal
eof40,
000shar
esofHugoCorp.onOctober15i
s
a. P628,
600 c.P 600,000
b. P700,
000 d. P2,
057,000
2.Thegai
nonsaleof40,
000shar
esofHugoCorp.onNovember10i
s
a. P4,400,
000 c. P2,
000,000
b. P4,800,
000 d. P4,
600,000
3.The carryi
ng value ofthe Company’
si nvest
ment i
n Hugo Corp.on
December 31, 2006i s
a. P2, 700,000 c. P2,400,
000
b. P2,000,000 d. P3,000,000
4.Thegainonsaleofi
nvest
menti
nPugoCorp.is
a. P1,312,500 c. P687,500
b. P 537,
500 d. P612,500

5. The carryi
ng val
ue oft
he Company’
sinvest
menti
n Pugo Cor
p.on
Decem
ber31 , 20
06i
s
a. P2,612,500 c. P2,
687,
500
b. P2,
762,500 d. P1,
987,
500
116
Suggest
edSol
ut
ion
:

Quest
ionNo.1
Sal
es pr
oceeds (
40,
000 shar
es x P65) P2,
600,
000
Less stcoofinvest
ment sol
d:
Cash aip
d P2,
000,
000
Lesspur
chased di
vidend 100,
000 1,900,
000
Gai
n
onsal
e P
700,
000

Quest
ionNo.2
Tot
alproceeds P6,600,000
Less vidi
dends sol
d (40,
000 sh are
s x 5
P) 200,000
Sal
espr
oceeds 6, 400,000
Less stco ofinvest
men t sol
( d
P5,
000,
000 x40/1
00) 2,000,000
Gain onsal e of40,
000 sh ar
esofHugo orCp. P4
, 11/10,400,000

Quest
ionNo.3
Acqui
sit
ioncos
t,10/1 pur
chase P5,
000,
000
Lessost
c ofinves
t
ment sol
d on1(1/10 o.
see n2) 2,
000,
000
Gai
n o
n sale of3,
200 G
ood sha
res on 9/15
/06 P3
,000,
000

Quest
ionNo.4
Pr
oceedson saleofinvest
me nt P3,
300,
000
Lessarr cyi
ng am ount ofinvest
men
t sold:
Acquisit
ioncost
,1/1/05 P5,000,000
Share n i netincome or
f 2005
(
P2,000,000x30%) 600,000
Divi
den ds ercei
vedn i 2005
(
P1,250,000x30%) (375,000)
Carrying val
ue,12/31/05 5,225,000
Share n i neti ncome u pt o 7/
1/06
(
P2,500, 000 x 6/12 x 30%) 375,000
Divi
den ds e rce
ived up to 7/1/0
6
(
P750, 000x30%) (225,000)
Carrying value,7/1/06 5,375,000
Multiply
by 1/2 2,
687,
500
Gai
non
sal
e P612,
500

Quest
ionNo.5
Car
ryi
ngvalue,7/1/06 P5,
375,
000
Les
s car
rying amou nt ofinve
s
tment sol
d s(
ee no.4) 2,687
,500
Gai
n on sale of3,200 Good s
har
es on 9/15/06 P2,
687,
500
117
 Not
e:Since he
t cl
i
en t
's eq
uit
y was edr ucedt
o 1 5%, i
t was a ssu
med t
hat t
he
cl
i
ent ost
l t siabi
li
ty to exerci
se si
gnifica
nt ni
fluence. u Th
s, he
t i
nve
smen
t t
wi
ll be a
ccou
ntedforusing cost met
hodf rom 7/1/06. Change r
om
f equi
ty t
o
costmet
hodis accountedfor curr
entl
y and prospect
i
vel
y.

s:1)B;2)A;3)D;4)D,5)C
Answer

PRO
BLEM NO.7

TheMar
ilaoCompanyhast
hef
oll
owi
ngt
ransact
ionsi
nthes
tocksoft
he
Sta.Mari
a Corp.

a) On Jan
uar
y 2,19
99,Mar
i
lao pu
rchas
ed 4,
000 shar
es ofP1
00 par
val
uecommons
toc
katP110pershar
e.

b) TheSt
a.Mar
iaCor
p.wasexpandi
ngand on Mar
ch 2,2000,i
tissued
st
ockr i
ght
s to it
s stockhol
der
s. The hol
der needs f
our ri
ght
s t o
purc
hase e onsh
are ofcommon stoc
k atpa r
. The mar
ketval
ue of t
he
s
tock on thatdat
e w as 1
P40 pershare.There w
as on qu
ot
edpr i
ce orf
t
he r igh
ts.No j
ou r
nalen t
ry was made to recor
d t
he rece
i
pt of the
ri
ghts.

c) On Apri
l 2, 2000, Mari
l
ao exerci
sedal
lit
s st
ockri
gh
ts.The n
Ivest
ment
i
n St
ock ccou
a nt was ch
ar
gedor
fthe am
ount pai
d.

d) Rob
i
nson
, Mari
lao’
s accou
nt
ant
,fel
t h
tat ht
e cash
pai
d f
or t
he new
shar
es as
w mer ey
l an asses
sment si
nce Mari
lao’
s prop
orti
on at
e shar
e
i
n St a.Mari
a wasnotchanged.Hence,he cr
ed
it
edall di
viden
ds 5(% i
n
December ofeach year
)t
o the I
nvesmen
t ti n Stockaccount unt
ilthe
debi
t was u
fl
ly offset
.

e) Mar
i
lao r
ecev
i
ed a 50
% s
toc
k di
vden
i d f
rom St
a.Mar
i
a i
n Dec
ember
2004. Becau
se the shar es r
ecevi
ed wer e expect
ed t
o be sold, h t
e
company’
s pr
esi
denti nst
ruct
edRob insonnott o make any en
try or
f ht
is
di
viden
d. The compan y di
d sel
lt he di
vidend shar
es niJanuary 005
2
f
or P150 pershare. The pr
oceeds rf
om the sal
e wer
e cred
it
edto nicom e.

f) I
n Decem
ber2005, St
a. Mar
ia’st
ock
s w
ere sp
l
it on a w
to-
f
or-
one b
asi
s
and the new shares er
we ssiuedas o n p
ar h s
ares. Mar
il
ao ou
fnd that
each new share was o
wrt
h P1 0 more h
tan t
he P1 10 pershar
e ori
ginal
acqui
sit
ion cost. For t
his r eason
, Mari
l
ao deci ded to debit the
Inve
smen
t t n i Stockaccount wit
h the addi
tion
alsh ar
es rec
eve
id at
P110 persh ar
e and cr
edi
tedr even
ue or
f t.i
118
g) I
n Augu
st2006, Mari
laosol
d on
e h
alf(
½) ofi
ts h
oldi
ngs niSt
a.Mari
a
at P1
20 per h
sar
e.The pr
ocee
ds wer
e cr
edi
t
ed t
o t
he I
nve
smen
t t i
n
St
ockaccou
nt
.

Mar
ilaouseshe
t aver
age m
ehtodi
n r
ecor
di
ng h
te sa
l
e of
it
s n
ivest
menti
n
stock.

QUE
STI
ONS:
1. The cost ofi nvest
mentt
o b
e al
loca
t
edt o st
ockri
gh
ts e
rcei
vedon Mar
ch
2, 2000 is
a. P 0 c. P3
1,42
9
b. P29,333 d. P2
5,14
3

2. Theunadj
ust
edbal
anceofI
nves
tmenti
nSt
a.Mar
ias
tockonDecember
31, 2006 is
a. P940,000 c. P3
90,
000
b. P490,000 d. P4
30,
000
3.Theadjust
edbal
anceofI
nves
tmenti
nSt
a.Mar
ias
toc
konDecember
31, 2006 is
a. P135,
000 c.P180,000
b. P360,
000 d. P270,
000
4.Thegainonthesal
eofst
ockdi
videndr
ecei
vedinDecember2004i
s
a. P100,
000 c. P80,000
b. P105,
000 d. P195,000
5.Thegainonsal
eoft
heshar
essol
dinAugust2006is
a. P240,
000 c.P120,000
b. P420,
000 d. P870,
000

Sugg
est
edSol
ut
ion
:

Quest
ionNo.1
Cost
all
oca
t
edt
o st
ockr
igh
ts P
(10*
/P150 x P
440, P2
000) 9,
333

Sincethe MV of i ght
rs is not avai
lab
le we must omcput
e for he
t
theo
ret
i
cal va
lue of he
t st
ockri
ght
s.Si
ncethe marketval
ue of he
t st
ock
givenis on t
he date ofi
ssu
anceofthe st
ockri
ghts,t
he marketval
ue i
s
consi
deredx- r
“e
i
ght
s”.

Theor
eti
calval
ueofst
ockr
ight
s=MV ofs
tockex-
ri s – su
ght bs.pri
ce
Numberofright
s o t p
urch
ase 1 ar
sh
e
=(
P 14
0 - P10
0)/4
= P10*
119
Quest
i
onNo.2
Debi
ts ot n
Ivest
men t account
:
Purc
hase, 1/2/99(
4,000 shar
es x 10P1
) P4
40 ,
000
Exerci
se ofri
ghts,4/2/0(000
4, 0/
4x P 0) 10
10 0,000
St
ock spl
it,12/2005 (5,
000 x P110) 550,
000 P1,
090,
000

Less
Divied
cr
deni
t
ds o
s tcei
e
r Invest
ved,men
200 t
0-acco
2003unt:
(5,
000xP100x5% x4) 100,
000
Sal
e,8/2006 (
5,000 shares x P120) 600,
000 700,000
Bal
ance, 12/3
1/06per books P 3
90,
00 0

Quest
ionNo.3
Cost/
Shares share Totalcost
Purchase,1/2/1999 4,
000 P110 P440,000
Receiptofstockri
ghts,3/2/2000 (29,333)
Balance 4,
000 103 410,667
Exercise of ri
ght
s,4/2/200(0
see el
ow
b) 1,
000 129 129,333
Balance 5,000 108 540,000
50% s toc
k di vi
dend,12/2004 2,500
Balance 7,500 72 540,000
Sale ofstock dividend,1/2005 (
2,500) 72 (
180,000)
Balance 5,000 72 360,000
Stocksplit,12/2005 5,000
Balance 10,000 36 360,000
Sale,
8/2006 (
5,000) 36 (
180,000)
Adjustedbal ance,12/31/06 5,000 36 P180,000

Cash paid (
4,000/
5 xP1
00) P 8 0,
000
Costof
stoc
kri
ght
s 29,333
Tot
alcost P1
29 ,33
3

Quest
ionNo.4
Sales proceeds (
2,500 shares x P150) P375,000
Less costofi nvestmentsol d(see no.3) 180,000
Gain o n sale ofstoc
k d i
videndr ecei
ved P195,000

Quest
ionNo.5
Sales pr
oceeds (5,000 shar
es x P120) P600,
000
Less costofi nvestmentsold(see no.3) 180,000
Gain on sale ofinvest
menti n 8/2006 P420,000

120
 s:1)B;2)C;3)C;4)D,5)B
Answer

PRO
BLEM NO.8

Mey
cauayan
I
nc.acqu
i
red 05
,000 sh
ares of
AAA st
ockor
fP5 pershar
e and
12
5,00
0 shar
es of
BBB st
ock forP10 pershar
e onJan
uar
y 2, 20
05. Bot
h
AAA I
nc.and BBB Corp.have 500,
000 shar
es ofno-
parcommon s
tock
out
standi
ng.Bot h secur
iti
es are being held as lon
g ter
m i nvesmen
t ts.
Changes ni r
etai
ned ear
nings or
f AAA an d BBB for2005 an
d 20 06 ar
e as
f
oll
ows:

AAA,I nc. BBB Cor p.

Retained earni
ngs (
defici
t)
,1/1/05 P1,
000, 000 (P175,000)
Cashdi vi
dends,2005 (
125,000) -
Netincome,2005 200,000 325,000
Retained earni
ngs,December31,2005 1,075,000 150,000
Cashdi vi
dends,2006 (
150,000) (
50,000)
Netincome,2006 300,000 125,000
Retained earni
ngs,December 31
,2006 P1,
22 5,000 P 2 25,000
Ma
rke
tval
ueofs
toc
k:12/31/05 P7.00 P12.00
12/31/06 6.
50 15.
00

QUE
STI
ONS:

Based
ont
he ab
ove d
ant
he e
rsu
l
t ofyou
r au
dit
, an
swert
he ol
fl
owi
ng:
1.Theincomef r
om i
nves
tmenti
nAAA,I
nc.i
n2006i s
a. P15,000 c. P12,
500
b. P 1,000 d. P 0
2.Theincomef r
om i
nves
tmenti
nBBB,I
nc.in2005is
a. P31,250 c. P2,
500
b. P81,250 d. P 0
3.Thecarryingval
ueofI
nves
tme
nti
nAAA,I
nc.asDecember31,2006i
s
a. P250,000 c.P325,000
b. P350,000 d. P252,
500
4.Thecarryi
ngvalueofI
nves
tme
nti
nBBB,Inc.asDecember31,2006i
s
a. P1,
250,000 c. P1,
875,000
b. P1,
268,750 d. P1,350,
000
5.How much i s hte unr
eal
i
zed gai
n or oss
l hatt wi
ll be n
icl
uded as
component ofequi
ty as of
Dec
ember31 , 20
06?
a. P75,
000gain c. P25,
000gai
n
b. P25,
000loss d. P 0
121
Sugg
est
edSol
ut
ion
:

Quest
ionNo.1
Meyca
uayan, I
nc.ow
ns 1
0% (50,000/500,
000) ofAAA, I
nc.st
ock; t
her
ef
or
e,
t
he cost
methodi
s used
and the divi
dend i
s comput
edas ol
fl
ow s:

Di
Muvi
ld
t
ien
pl
yd
bs
y%opa
wi
d by
ner AAA, I
shi
p nc.in 2006 P1
50
10,
%00
0
I
ncom e rf
om invesmen
t ti n AAA, I
nc.in 2006 P 15,
000

Quest
ionNo.2
Meyc
auayan
, n
Ic. owns 25% (
125,000/5
00,
000) ofBBBCor
p. t
s
ock;
t
her
eor
fe,t
he eq
ui
ty met
hodi
s used t
o ecor
r d t
he n
icom
e ea
r
ned
.
AAA,Inc.neti
ncomei n2005 P3
25,000
Mult
iplyby
%ownership 25%
I
ncom e rf
om invest
ment i
n BBB Cor
p. i
n 20
05 P 81,
250

Quest
ionNo.3

I
nvesmen
t ti n AAA, I
nc.st
ockwill be cl
ass
ifiedas avai
labl
e-f
or-
sale se
cur
iti
es
si
ncet he sharesar
e hel
d as long ter
m invest
men
t and there is rel
i
abl
e f ai
r
val
ue.Theref
ore,the car
r
ying va
lue as of12/31/P
03
625
i,
s000 5(
0,000
shar
es x6. P50)
.

Quest
ionNo.4
Acquisit
ioncost(125,
000shar esxP10) P1,
250,
000
Sharei n netinc ome for 20
05( P325,
000 x25%) 81,
250
Carryingval
ue,12/31/05 1,
331,
250
Divi
de ndsreceived n
i 2 006 P(5
0,00
0 x25 %) (
12,500)
Sharei n netinc ome for 20
06( P125,
000 x25%) 31,
250
Carrying vaule,12/3 1/06 P1,
350,
000

Quest
ionNo.5
Fair val
ue,12/31/06 (50,
000 shar 50) P 3
es x6.
P 25
,00
0
Acquisi
ti
oncost(
50,000sharesxP5) 250,
000
Unreali
zedgai
n,12/31/06 P 75,
000

s:1)A;2)B;3)C;4)D,5)A
Answer
122
PRO
BLEM NO.9

On Janu ar
y 2 , 2004,Nor
zagar
ay om
C pan
y acq
uir
ed 20% oft he 40
0,
000
shar
es ofou t
standi
ng common stoc
k ofI maw Corpor
ati
on for P30 per
sh
are. The purchase ri
ce
p as
w equ
alto maw
I ’s under
lyi
ng b ookval
ue.
Norzaga
rayplans ot hol
d t
his st
ockto n
ifluen
ce hte a
cti
vit
ies foI
maw.

Thef
oll
owi
ngdat
aar
eappl
icabl
efor2004and2005:
2004 2005
I
maw divi
dends(paid Oct
.31) P 40,000 P 48,
000
I
mawearnings 140,000 160,
000
I
maw st
ockmar ketpri
ceatyear
-end 32 31

On Jan uary 2,20 06,Norzag

aray o Cmpany sold 20, 000 shar
es of Imaw
st
ock for 31P per shar e. During 2006, maw
I report
ed net nicome of
P120,
000,an d on Oct ober 31,20 06
,I maw paid di vden
i ds ofP20,000.At
December31, 2006, aftera sign i
ficant st
ockdecl i
ne,whi ch i
s expect
ed t
o
betemporar
y,Imaw’
ss t
ockwassell
ingforP22pershare.Aftersel
li
ngt
he

20,
000 shares,Norz
aga
r
ay oes
d ot
nexpectt
o exerc
i
se gn
si
i
fican
tinfluen
ce
overmawI, and t
he sh
ares r
a
e cl
assi
fiedas ava
i
labl
e or
f sa
l
e.

QUE
STI
ONS:

Based
ont
he ab
ove d
ant
he e
rsu
l
t ofyou
r au
dit
, det
er
mine h
te ol
fl
owi
ng:
1.Carryi
ng val
ue ofI
nve
smten
tin I
maw as of Dec
ember31
, 2004
a. P12,
020,000 c. P2,
420,
000
b. P 2,500,000 d. P2,
388,
000
2.Carryi
ng val
ue of
Inve
smten
tin I
maw as of December31
, 2005
a. P2,
442,
400 c. P12,
042,400
b. P2,
612,
000 d. P 2,372,000
3.Gai
n orl oss on sal
e of
Inve
stmen
tin Imaw on January 2,
2006
a. P2,
390,600loss c. P33,
000 l
oss
b. P 9,400gain d. P27,
000gain
4.Theincomef
rom i
nves
tmenti
nBBB,I
nc.in2005i s
a. P 3,000 c. P4,
000
b. P24,000 d. P 0

5. Netunreal
izedl
oss
on avai
l
abl
e f
or sa
l
e secu
ri
tiesasofDecem
ber 1
3,
2006
a. P671,
800 c. P6
39,
000
b. P511,
800 d. P4
59,
000
123
Suggest
edSol
ut
ion
:

Quest
ionNo.1
Acquisit
ioncost(400,000x20% xP30) P2,
400,
00 0
Dividends r
eceiv
ed(P40,000 x 20%) (
8,000)
Investmentincome (P140,000 x 20%) 28,000
Carr yi
ng vaule,12/3 1/04 P2,
420,
00 0

Quest
ionNo.2
Carr yi
ng value,12/31/04 (see no.1) P2,
420,000
Dividends r
eceiv
ed (
P48,000 x 20%) (9,
600)
I
nv estmentincome (
P160,000 x 20%) 32,000
Carr yi
ng vaule,12/31/05 P2,
442,400

Quest
ionNo.3
Sal
espr
oceeds(20,000 xP31) P620,
000
Less rr
ca
ynig va
lue of invest
men
t sol
d
(
P2,
442,
400x20/80) 610,
600
Gai
nonsal
eofi
nvest
ment P 9,
400

Quest
ionNo.4
Di
vi
dend i
ncome(
P20,
000 x 15%*
) P3,
000
*[
20% - (
20,
000/4
00,
000 x 1
00%)
]

Quest
ionNo.5
Carryingvalue,12/31/05 P2,
442,400
Less carryi
ng value ofi
nvest
mentsold 610,600
Carrying vaule, 12/31/06 bef
- or
erecl
assific
ati
on 1,831,800
Fair value of AFS, 12/31/06[(80
,000 - 20,
000)x P2
2] 1, 320,
000
Unrealized l
oss on AFS P 511,800

s:1)C;2)A;3)B;4)A,5)B
Answer

PRO
BLEM NO.10

You were abl

eto gat
her t
he f
oll
owi
ng i
n connect
ion wi
th your audi
tof
Oban do,nc I
. On December 31 , 2005, O bando report
ed t he f
oll
owi
ng
avai
labl
ef or sa
l
e se cu
rit
ies
:
124
Unr
eal
ized
Cost Mar
ket loss
ERAP Cor
p,.10
,00
0 shar
es
ofcommon st
oc
k
(a 1% i
nt erest) P 250,000 P 220,000 P 3
0,00
0
GMA Cor p,
.20 ,
000 shar
es
ofco mmon st ock
(a2% interest) 320,000 300,000 20,
000
FVR Cor p., 50, 000 shar
esof
common t s
ock
(a10% int erest) 1,400,
000 1,350,
000 50,000
Tot
al P1,
970,000 P1,
870,000 P1
00,
00 0

Addi
ti
onali
nfor
mat
ion:

 On Apr
il 1,20
06, ERAP i
ssued10
% s t
ock di
vi
den
d when t
he mar
ket
pri
ce f
oits st
ockwas P24 persh
are.

On Sept
ember15, 20
06, ERAP pa
i
d cash
di
viden
d ofP0.
75 persh
are.

 On August30, 2006, GMA issued to al

l sharehol
der
s,stockri
ghts on
the basi
s ofone r i
ght per are
sh
. Marketpr i
ces ta dat
e ofissue wer
e
P13.
50 per hsare of st
ockand P1.
50 per i gh
rt . Oban
do sol
d allri
ght
s
onDec ember1, 2006 fornetpr
oceeds ofP37,600.

 On Ju ly 1, 2006, Oban do paid P3,04

0,000 for 100,000 addit
ional
shares of FV R Corp’.
s com mon s toc
k whi c
h r epr
esented a 20%
invest
men ti n FVR. The afi
r val
ue of al
l ofFVR’s dienti
fiable asset
s net
ofl i
ab i
li
ti
eswas equ alto thei
r carryi
ng amount ofP12, 700,
000. As a
result ofthis rt
ansacti
on, Obando owns 30% ofFVR an d canex ec
rse
i
signi
ficant influence overFVR’s oper
at
ing and finan
cial pol
ici
es.

 Obando’
s nii
ti
al10% inter
est of50,000 sh ares ofFVR’s common st
ock
wasacqui
redonJanuary2,2005forP1,400,000.Att
hatdate,thenet
ass
et
s of FV R tot
aed
l P1 1,60
0,000 an d the fai
r values of FVR‘s
i
dent
ifiabl
e assets etln
i
abil
it
ies ere
w u
eq
al to th
ei
r carryi
ng amount
.

 Market pri
cesper sh
areof ht
e secu
ri
ti
es whi
ch areal
lli
sted i
n t
he
Phi
li
ppi
ne St
ockExch
ange,
are a
s ol
fl
ows:
12/31/20
06 12
/31/20
05
ERAPCorp.–
common P23 P22
GMACorp–
c
.ommon 14 15
FVR
Corp–
c.
ommon 31 27
125
 FVR r
eport
ed et
n i
ncom
e an
d pai
d di
viden
ds of
:
Di
vidend
Netincome pe r share
YearendedDecember31,2005 P700,000 None
Sixmo nthsended June30,2006 400,000 None
Six months ended e D
cember 31, 2006
(
divi
dend was pai
d on 10/1/2006) 000 P1.
740, 30

 Ther
ewer
e no ot
heri
nter
company t
ransact
ionsbe
tween Obando and
FVR.

QUE
STI
ONS:

Based
ont
he ab
ove d
ant
he e
rsu
l
t ofyou
r au
dit
, det
er
mine h
te ol
fl
owi
ng:

1. Net n
ureal
ize
d gai
n or l
osson avai
l
abl
e f
or sal
e secu
ri
ties as of
December 31,2006
a. P95,000
gain c. P 5, 000 l
oss
b. P37,
000loss d. P55,
000 loss

2. Ne
oftt
had
ej
ust
p
umen
rch tt
aseofR
e
ot
adai
dn
i
ted
ion
alar
Esh
nings as
ares st
ofJa
of
ocknof
uary
FVR 1,
20
C 06
. as aes
orp r
ult
a. P70,000 c. P58,
000
b. P210,000 d. P 0

3. N
eti
nvesmen
t ti ncom
efr
om FVR Cor
p. f
oryearended ec
Dember
31,
2006
a. P237,
500 c. P2
62,
000
b. P225,
000 d. P3
05,
000
4. C
arry
ing am ou
nt ofI
nve
st
men
tin FVR Corp. as of
Dec
ember31, 20
06
a. P4,674,
500 c. P4,
577,000
b. P4,677,
000 d. P4,
540,500
5. Gain onsale of
stock gh
ri
t
s onDece
mber1, 2006
a. P 0 c. P7,
600
b. P2,050 d. P5,
600

Sugg
est
edSol
ut
ion
:

Quest
ionNo.1
Avail
able-f
or-
sal
esecur i
ties,1/1/06 P1,
870,
000
Receipt ofstock ri
gh t
s r fom GMA, 8/30
(P300,000x 1.5/1 5) (30,000)
Reclassi
ficati
on ofInvestmenti n FVR (
1, 350,000)
AFS,12/31/06bef oremar k-to-
market 490,000
126
Fai
r value of AFS, 12/3 1/0
6:
GMA [ (
10,000 x1.1)x23] P253,000
ERAP( 20,
000x14) 280,000 533,000
Decreaseinunr eal
izedlossonAFS 43,000
Unreali
zed oss
l onAFS, 12/3 1/05
(P100,000 - P2,000 - P50,
000)
(
see
not
e b
el
ow) 48,
000
Unr
eal
ized l
oss,12/31/06 -asadj
ust
ed P 5,
000

Not
e:Al ternati
vely,the unreal
izedl osson AFS canbe co mputed by
compar
ing t he ot
tal fai
r val
ue and t ot
al cost
ofAFS as of December31,
2006. I
ncidentall
y, t
he o j
urn
al ent
ries ot reco
rd the rece
ipt of st
ockri
ght
s
and recl
ass i
ficati
onoft he n
ivest
men tin FVR f
oll
ow:
St
ock
rights P32,000
Avail
ablef
orsal
esecuri
ties(
P300,
000x1. 5/15) P3
0,000
Unreali
zed l
oss on A
FS P(20,
000 x 1.
5/15) 2,
000

I
nves
tmenti
n associ
ate P1,
400,
000
Avai
lableforsalesecur
iti
es P1
,35
50
0,
,
000
Unreali
zedlossonAFS 000

Quest
ion
s N
o.2 t
o 4
Recl
assi
ficati
on ofi nvestmenti n FVR (
seeo.n1) P1,
400,
000
Ret
roact
ivead justment
(
cost o eq
tuit
y met hod)
:
Sharein NIfor2005 (P700,000 x10%) 70,000(
2)
Adj
ustedbalance,1/1/06 1,470,000
Costofadditi
onal100,000 shares 3,040,000
Netinvesmen
t ti ncome or
f 2006:
Share ni NI forsix m onths ended /3
60

(P400,
000x10%) P40,
000
Shar e n
i NI forsi x m ont
hs ended
12/31 [P740,
000 x (10%+20%)] 222,000 000 (
262, 3)

Di
viden ds recei
ved
[
(50,000 shares + 100,000 sh
ares
)x 1 .
3] (195,
000)
Carrying val
ue of invesmen
t ti n FVR, 12/31/06 P 4,
577,000 (
4)

Not
e:The excess ofcostover he tbookval
ue ofnetass
est acqu
i
red wil
l
be att
ributed t
o Goodwi
ll
. Ther
efore, he
t excesswi
ll notffect
a he t
i
nves
tmen t ni
come and the c
ar r
ying val
ue of he
t invest
ment nsic
e
Goo
dwilli s n
otamort
ized
.
127
Quest
i
onNo.5
Salesproceeds P37,
600
Less cost ofs t
ock r
ights(see no
.1) 32,
000
Gain on sale ofst
ockright
s P 5,
600

s:1)C;2)A;3)C;4)C,5)D
Answer

PRO
BLEM NO.11

Paom bong Corpor

ati
on purc
hased P20 0,0008% bonds for P184,557on
Januar y1,2004.Paombongclassi
fied t
hebondsasavailableforsale.The
bonds wer e purchased t
o yield 10% i nt
erest
.I nt
erest is payable
semi annual
ly onJu ly 1 an
d Jan uary 1. The bonds m atur
e onJan uar
y 1,
20 09. Paombong uses h
te effecti
ve nit
eres
t methodt o amor t
ize premi
um or
discount. On Jan uary 2
, 20 06, Paombong sold t
he b ond s ofr P185,
000

af
ter rece
i
ving i
nterest
o meet
t t
sil
iqui
dit
y nee
ds.
Themar
ketval
uesoft
hebondsar
easf
oll
ows:
December31,2004 P190,
449
December31,2005 186,
363

QUE
STI
ONS:

Based
ont
he ab
ove d
ant
he e
rsu
l
t ofyou
r au
dit
, det
erm
i
ne h
te ol
fl
owi
ng:
1.Int
erestincom
e or
f ht
e year
0042
a. P14,
869 c. P18,
517
b. P16,
000 d. P18,
456

2.Unreal
ized gai
n onAFS as of
Dec
ember31, 2004
a. P3,
436 c. P5,
892
b. P3,
375 d. P 0
3.Int
erestincom
e or
f ht
e year
0052
a. P18,
775 c. P16,
000
b. P15,
272 d. P18,
701
4.Unreal
i
zedgain orl
oss on
AFS as ofDecember ,31
2005
a. P8,
053gain c. P3,
351gain
b. P3,
486loss d. P1,806l
oss
5.Reali
zed gai
n orl
oss on
sal
e of
AFS onJan uary,2
2006
a. P6,861l
oss c. P4,
849l
oss
 b. P4,
714l
oss d. P9,
416gai
n

128
Sugg
est
edSol
ut
ion
:

Quest
ionNo.1

The f
oll
owi
ng amor
t
iza
t
ion sch
ed
ule wi
ll be usef
ul i
n com
put
ing f
or he
t
requ
i
rement
s:
Effect
ive Nomi
nal Di
scount Ca
rryi
ng
Date i
nter
est i
nter
est amor
tiz
ati
on val
ue
01/01/04 P184,557
07/01/04 P9,
228 P8,
000 P1,
228 185,785
12/31/04 9,
289 8,
000 1,
289 187,074
07/01/05 9,
354 8,
000 1,
354 188,428
12/31/05 9,
421 8,
000 1,
421 189,849
07/01/06 9,
492 8,
000 1,
492 191,341
12/31/06 9,
567 8,
000 1,
567 192,908
07/01/07 9,
645 8,
000 1,
645 194,553
12/31/07 9,
728 8,
000 1,
728 196,281
07/01/08 9,
814 8,
000 1,
814 198,095
12/31/08 9,
905 8,
000 1,
905 200,000

1/
7/1/0
1/ 4t
04 to12
o 6
/3
/30
1/0
4
/04(se
(
see
e aam
or
mo r
t
i
t
iz
zat
ai
t
ion
onssc
chedu
he l
e)
dul
e) P 9,
2928
,
289
Tot
alint
eresti
ncomefor2004 P1
8,517

Note:PA S 39 par . 55(

b) stat
est hat a gain or osls on an ava il
abl
e-f
or-
sal
e
financ i
al asset shal
l be rec
ognized di
rec
tlyin equit
y, through the
st
atem ent ofcha nges in equi
ty,exceptf or mp
iair
men tl ossesand f or
eign
exchangega i
ns a nd losses,untilthe financi
al asset i
s d er
ecognized
, at
whic h ti
me t he cumulativega i
n or oss
l pr evi
ously recogni
zedi n equity
shall ber ecogni
zedi n pr ofit orl oss.ow i
Hnt
erest
ever, alcu
clated
using eff ect
ive interest method sha ll be recognized i n profi t or
loss.

Quest
ionNo.2
Fai
rvaluethebonds,12/31/04 P190,
449
Carryi
ng vaule, 12/31/04( see a
mor
t
izat
i
on sc
hedu
le) 187,
074
Unreal
izedgain on AFS,12/31/04 P 3,375

Quest
ionNo.3
1/1/05 to 6/30/0
5 (see amor
tizat
ionschedul
e) P 9
,35
4
7/1/05t o 12
/31/0 s(
ee amor
tiz
ation s
chedul
e) 9,
421
Tot
alint
eresti
ncomefor2005 P1
8,775
129
Quest
i
onNo.4
Fai
rvaluethebonds,12/31/05 P186,363
Carryi
ng val
ue,12/31/05 ( see am
ort
izat
i
onsch
ed
ule) 18
9,849
Unreal
izedl
osson AFS,12/31/05 (
P 3, 486)
I
nci
den
t
all
y,t
he a
djust
i
ng e
ntr
y on12/31/05 f
oll
ows:
Unr
eal
izedgainon AFS P3,375
Unr
eal
izedl
ossonAFS 3,
486
Avail
ablef
orsalesecur
iti
es P6,
861

Quest
ionNo.5
Salesproceeds P185,000
Unr ealiz
edl ossonAFS ( 3,486)
Net 18 1,
514
Carryi ng va lue,12/31/05 (
fai
r a
vule) 18 6,
363
Real i
zedl ossonsaleofAFS (P 4,849)

Not
e:PA
S 39 par
. 26 st
at
est
hat onder
ecogn
i
ti
onofa financi
al asset
i
n
i
ts en t
iret
y,t he differen
cebet ween( a) t
he ca
rrying amount and (
b) the
sum of he t consider
ati
on r ec
eved
i and any cumul at
ive ga
in or oss
l
r
ecognizeddi rect
ly in equ ity, shal
l ber ecog
nizedi n profit orl oss.
I
ncidental
ly, t
he ojurnal ent
ry to reco
rd t
he s
al
e s: i
Cash P185,000
Real
ized l
osson sal eofAFS 4,849
Availableforsalesecur
iti
es P186,363
Unr eali
zedlossonAFS 3,486

s:1)C;2)B;3)A;4)B,5)C
Answer

PRO
BLEM NO.12

On Ju ne 1, 2005, PandiCor poration purchased as al on g e

tmr inves
tment
4,000 oft he P1,000 f ace val
ue,8% bon ds of Viol
etCorpo rat
ion
. The b onds
werepur c
hasedtoyi el
d10% i nt
erest.Inter
estispayablesemi-annual
lyon
December 1 andJu ne 1. The bonds atu
mre onJu ne 1, 2011.Pandi uses
the effective ni
ter
est method ofamor ti
zat
ion. On Nove mber1, 2006, Pa ndi
sold the b on
ds orf at
otalcon sider
aiton ofP3, 925,000. Pandi i
ntended to
hold these on b
ds u ntilt hey m autred, soyear -
to-yearar m
ketfluctuati
ons
wereignoredinaccountingforbonds.
130
QUE
STI
ONS:

Basedonthe above dan

the e
rsul
t ofyour au
dit
, det
er
mine h
te ol
fl
owi
ng:
(
Round off pr
ese
nt va
l
ue a
fct
or
s ot ou
fr deci
mal pl
aces)
1.Thepurchasepri
ceoft
hebondsonJune1,2005is
a. P3,
645,328 c. P3,
696,
736
b. P3,
691,132 d. P3,
624,
596
2.Theinter
estincomef
ort
heyear2005i
s
a. P215,850 c.P212,829
b. P215,521 d. P211,
612

3. Thecarryi
ngval
ueoft
hei
nves
tmenti
nbondsasofDecember31,2005
i
s
a. P3,
725,
919 c. P3,
719,
986
b. P3,
649,
541 d. P3,
671,
490
4.Theinter
estincomef
ort
heyear2006i
s
a. P306,607 c.P311,218
b. P310,715 d. P304,
748
5.Thegain on sal
eofi
nvest
menti
n bondson November1,2006i
s
a. P21,196 c. P27, 632
b. P80,235 d. P104, 045

Sugg
est
edSol
ut
ion
:

Quest
ionNo.1
PV ofprinci
pal(
P4,
000,
000 x0.
5568) P2,
227,200
PVof inter
est[(
P4,
000,
000 x4%)x 8.8633] 1,418,128
Pur
chasepri
ce P3,
645,328

Quest
ionNo.2
June1t
oNov
.30(
P3,
645,
328 x 10
% x 6/1
2) P1
82,
266
a
Dec.1 to Dec.33
(
P1,
667,
594 x10% x1/12) 30,
563
Tot
ali
nter
esti
ncomefor2005 P2
12,
829
a
Computati
onofc arrying val
ue,
12/1/05:
Carr
ying value,6/1/0 5 P3,
645,
328
Adddiscountamorti
zation,
6/1/05 to 11/3
0/05 :
Effective nt
ierest
(
P3 ,
64 5,
468 x 10
% x 6/12) P182,
266
Nom i
nali nter
est
(
P4 ,
00 0,
000 x 8% x 6/1
2) 160,
000 22,
266
Carr
ying value,12/1 /05 P3,
667,
594

131
Quest
ionNo.3
Carryi
ng value,12/1/05 (seeo.n2) P3,
667
,594
Adddi
scountamorti
zat
ion,
12/1/05 t
o 12/31/05:
Effecti
ve nt
ierest
(
P3,667,
594 x 10 2) P3
% x 1/1 0,
563
Nominalinter
est
(
P4,
00 0,
000 x %
8 x 1/1
2) 26,
667 3,
896
Carr
yi
ng v au
le,12/31/05 P3,
671,
490

Quest
ionNo.4
Jan.1toMay31( P3,
667,594x10% x5/12) P152,
816
b
June1 toNov.1(P3,
690,974 x 10%x 5/1 2) 153,
791
Tot
alint
eres
tincomefor2006 P306,
620
b
Computati
onofcar rying val
ue,
6/1/06:
Carr
ying value,12/1 /05 P3,
667
,594
Adddiscountamorti
zation,
12/1/0 5 o
t 5/31/0 6
Effective nt
ierest
(
P3 ,
66 7,
594 x 10 2) P1
% x 6/1 83,
380
Nom i
nali nt
erest
(
P4 ,
00 0,
000 x % 2) 160,
8 x 6/1 000 23,
380
Carr
ying value,6/1/0 6 P3,
690,
974

Quest
ionNo.5
Totalproceeds P3,925,000
Less ccru
a ed inter
e(st
P4,
000,
000 x 8%x 5/12) 133,333
Salespr
oceeds 3,791,667
Less carryingvalue,11 /1
/06 s(
ee be
low) 3,711,43
2
Gain on sale on i
nvest
mentin bonds P 80,235

Com
put
ati
onofcar
r
ying va
l
ue,
11/1/06:
Carryi
ng value,6/1/06 (seeo.
n4) P3,
690
,974
Adddi
scountamort
izat
ion,
6/1
/06t o 11/1/06
Effecti
ve nt
i
erest
(P3
,69
0,97
4 x 10
% x 5/1
2) P1
53,
791
Nomi
nali
nterest
(P4
,00
0,00
0 x % 2) 133,
8 x 5/1 333 20,
468
Carr
yi
ng val
ue,11/1/06 P3,
711,
432

s:1)A;2)C;3)D;4)A,5)B
Answer

132
PRO
BLEM NO.13

On May 1, 2003, Plar

idelCorporat
ion acq
uired P1,
600,00
0 ofJ & B
Cor
porai
t
on 9% bon ds at 97 plus accr
ued i
nt er
es
t.Int
eres
t on bonds is
payabl
e semi
annual
ly onMar ch 1 and Sept
ember 1,and bonds mat
ure on
Sept
ember 1, 00
2 6. lP
ari
delnt i s t
end o hold these bonds unt
il htey
mat
ured.

Due to an i
solat
ed even
t h
tat s
i beyon
d Plari
del
’s cont
rol,is non-r
ecurr
i
ng
and coul
d nothave eebn r
eason
ab l
y an
ti
cipat
ed by Plaridel
,the com pan
y
sol
d bonds ofP480,
000 f
or103 plus accr
ued nit
erest onMay , 12004.

On Jul
y 1, 2005,bonds ofP640,
000 wer
e ex
change
d for90,
000 sha
r
es ofJ
& B Corpor
ait
on, common
, no parvalue,qu
oted onthe mar
ketonthis da
t
e
atP8 persh are.I
nter
estwas rece
i
ved onbonds o
t date of
exch
ange.

On Sept
ember 1,
2006
, r
emai
ni
ng bonds
wer
e r
edee
med andac
crued
i
nter
estwas recei
ved
.

QUE
STI
ONS:

Basedonthe above d an
the ersu
l
t ofyou
r au
dit
, det
er
mine h
te ol
fl
owi
ng:
(
Usethe st
r
aigh
tl i
ne amort
iza
t
ionmethod
)
1. Tot
al interest
i
ncome or
f 02
03 i
s
a. P96,
000 c. P1
05,
600
b. P86,400 d. P1
06,
800
2. Thecarr
ying val
ueoft
hei
nvest
menti
n bondsasofDe
cember
31, 2003
c.P1,562,
800
d. P1,
564,
000
i
s
a.P1,561,600
b.P1,
540,000

3.Thegai
nonsal
eoft
hebondsonMay1,2004is
a. P 0 c. P 2,88
0
b. P4,
320 d. P24,
480
4.Thegainonexc
hanget
hebondsonJul
y1,2005is
a. P 0 c. P57,
920
b. P86,720 d. P73,
280
5.Tot
alcash r
ecei
vedbyt
hecompanyonSept
ember1,2006i
s
a. P501,
600 c.P480,000
b. P523,
200 d. P508,
800
133
Suggest
edSol
ut
ion
:

Quest
ionNo.1
Nomi nali
nterest(P1,600,
000 x 9% x 8/12) P 96,000
Discount amorti
zati
on ofr 2003(P48,
000 x8/40
) 9,60
0
Totali
nter
estincomef or2003 P1
05,600

Quest
ionNo.2
Carr
ying vaule,5/1/03 (P1,600,
000 x 9 7%) P1,
552,
000
Adddiscountamort
izat
ion f
or2003(seeno.1) 9,
600
Carr
ying vaule,12/31/03 P1,
561,
600

Quest
ionNo.3
Sel
li
ngpr i
ce(P480,000x1.03) P494,
400
Less carrying value ofbonds sold:
Face u val
e P480,
000
Less unamor ti
zed on
bd d iscou
nt, 5/1
/04
t
o 9/ 1/06(
P48,000 x480/ 1,
60 2 0) 10,
0 x 8/4 080 469,920
Gain on saleofinves
tmentin bonds P 24,480

PAS 39 par . 52 stat

est hat whenever sa l
esor ecl
rassificati
ons of mor
e than an
i
nsignificant amount ofhel d-t
o-mat
ur i
ty invest
ments do notmeet any of he t
condi
tions in par. 9 , any r emai
ning hel d-
to-
maturi
ty i nvest
ment
s sh al
l be
recl
assifiedas a vai
lable or
f sale.Since het sal
e oft he b onds on May 1, 2004 i
s
due to an i sol
ated event t
hat is bey ond Pl
aridel
’
s con t
rol
,i s non-
recu
rr
ing and
coul
d nothavebeenr ea
sonably antici
pated by Plar
idel,the invest
menti s not
requi
redt o be ecl
r assifiedas a vai
lable or
f sa
le.

Quest
ionNo.4

Fai
r va
Less lue
carr yio
f st
ng ock
val
ues of
recei
ved
(
P9
bon 0,
ds 000
x
echx
an P8
)
ged: P7
20,
000
Facevalue P640,
000
Less unamor ti
zed onbd d i
scount, 7/1/0
5
to 9/ 1/06(
P48,000 x64 0/1,600 x 4/4
1 0) 6,720 633,
280
Gainonexchangeof bonds P86,
720

Quest
ionNo.5

Face val
ue of remaining b
on ds
(P1,
600,000 - P480,000 - P640,
000) P4
80,
000
Int
erest
, 3/1/06 t o 9/1/0
(6 0,
P48 000x 9%x 6/12
) 21,
600
Tot
alcashr ecei
ved,9/1/06 P5
01,
600
 s:1)C;2)A;3)D;4)B,5)A
Answer

134
PRO
BLEM NO.14

Puli
lanCompany’
s accou
nt
ing r
ecor
ds sh
owedt
he ol
fl
owi
ng n
ives
t
men
ts at
Januar
y1,2006:

Common s tock:
JangCompany( 1,000shares) P 500, 000
Geum Company( 5,
000 shares) 5,000,000
Parking l
ot( l
eased t
o JewelCo mpany) 2,500,000
Trademar k 2,
000, 000
Totalinv
estments P10,
00 0,000

Addi
ti
onali
nfor
mat
ion:

 Pulil
an owns 1% ofJang and30% ofGeum. Dur i
ng t he yearende
d
December 31, 2006, Pulil
an r
ecei
ved cash di
viden
ds o f P350,
000 fr
om
Jang and P750,000 from Geum, whose 2006 net ear
nings were
P4,000,
000 and P 10,
000,000 res
pect
i
vel
y.

 TheJewell
easewhi
chcomme
ncedonJanuar
y1,2005i
sfor5year
sat
an annualren t
alofP1, 250,
000. I
n addit
ion, on January ,12005, Jew
el
pai
d a non r
efundabl
e deposi
t ofP400,000 aswel l asa securit
y deposi
t
ofP250,000, to be ref
unded upon expir
ati
on ofl ease.Pul
il
an r ecei
ved
P1,
250,000 rentfrom Jewelin 2006.

 Thetrademark wasl i
censed toPalaceCompanyf orroyalt
iesof10% of
sal
es oft he t r
ad em arki tems.Royal t
ies are ayab
p le sem i
an nual
l
y on
March 1, for sales niJu ly htrough Decemberoft he p r
ior ear
y, and on
Sept
em ber 1, orfsal es ni Jan uary through Ju ne ofsame year . On
Marc
h 1, 200 5 an d 200 6, Puli
lan recev
ied royatl
ies of 0P50,000 and
P750,
00 0, es
rpectively
. O n Sept ember , 1 2005 an d 20 06, Pul
ilan
recei
vedr oya
lti
es of 1 P
,000,000 an d P1,500,
000 r esp
ecti
vely
. Palace

C
l
aom
p
sthan
y’
fs
al ofsa
2l
es
006. of
t
he t
rad
emar
kedi
tem
s o
tated
l P4,
000,
000 f
or ht
e

QUE
STI
ONS:

Based
ont
he ab
ove d
ant
he e
rsu
l
t ofyou
r au
dit
, det
er
mine h
te ol
fl
owi
ng:

1.Tot
ali
ncomef r
om i
nves
tment
sinequi
tysecuri
ti
es
a. P3,350,
000 c. P4,
100,000
b. P1,100,
000 d. P3,
000,000
2.Ren
ti ncome or
f 2006
a. P1,250,
000 c. P1,
650,
000
b. P1,330,
000 d. P1,
380,
000
135
3. Royal
t
y n icomefor2006
a. P1,500,000 c. P2,
500,
000
b. P2,000,000 d. P1,
900,
000

Sugg
est
edSol
ut
ion
:

Quest
ionNo.1
Dividendincomef r
om Jang P 350,000
Investmenti ncome from Geum (
P10,000,
000 x 30%
) 3,000,
000
Totalincomefrom invest
mentsi
nequi
tysecur
iti
es P3,350,000

Quest
ionNo.2
Annualrental P1,
250,
000
Amorti
zati
onofleasebonus(
P400,
000/5) 80,
000
Rent i
ncom e or
f 2006 P1,
330,
000

Quest
ionNo.3
Januaryt
oJune2006 P1,
500,
000
Julyt
oDecember2006(
P4,
000,
000x10%) 400,
000
Royal
ty n
icome or
f 2006 P1,
900,
000

s:1)A;2)B; 3)D
Answer

PRO
BLEM NO.15

Sel
ect
the b
est
answ
erf
or ea
choft
he ol
fl
owi
ng:

1. Whi
ch oft
he f
oll
owi
ng i
s nota cont
rolt
hati
s desi
gned t
o pr
otect
i
nvest
ment secu
ri
t
ies?

a. Accesstosecur
iti
esshoul
dbeves
tedi
nmorethanoneindi
vidual
.
b. Securi
ti
es sh ould be prop
erl
y cont
rol
l
ed physical
ly in order t
o
pr
eve
nt unau
thori
ze
d usage.
c. Secu
ri
ti
es sh
ou
ld be ergi
st
eredin t
he name oft
he owner
.
d. Cust
ody overecu
sr
iti
es sh
oul
d be li
mit
ed t
o i
ndivi
dual
s who have
reco
rd
keep
i
ng resp
onsi
bi
li
ty ove
r h
te s
ecu
ri
t
ies
.

2. Whi
ch oft
he f
oll
owi
ng cont
rol
s woul
d a company mostl
ikel
y use t
o
saf
eguar
d i
nves
t
men
t secu
ri
ti
es h
wenan i
ndep
enden
ttr
ustagen
tis n
ot
em
ploy
ed?
a. Thechai
rman oft
heboar
dver
ifiest
hei
nves
tmentsecur
iti
es,whi
ch
are kept
in a b
ank saf
e dep
osi
t box,
each
year
on t
he b
alan
ce sh
ee
t
dat
e.
136
 b. The i
nves
tmentcommi
ttee oft
he boar
d ofdi
rect
ors per
iodi
cal
ly
revi
ew
s h
te n
ivest
ment deci
si
ons d
el
ega
t
edt
o h
te r
t
easu
rer
.
c. Two company offici
als hav
ejoi
ntcont
rolofi
nves
tmentsecur
iti
es,
whi
char
ekepti
nabanksaf
edeposi
tbox.
d. The i
nter
nalaudi
tor and t
he cont
rol
ler i
ndependent
lyt
race al
l
pur
chases and sal
es f
oinves
tmen
t secu
ri
ti
esf
rom t
he su
bsi
di
ary
l
edgers ott
he gen
eral
l
edger
.

3. Whi
choft
hef
oll
owi
ngcont
rol
swoul
danent
itymos
tli
kel
yuset
oassi
st
i
n sati
sfyi
ng t
he com
pl
eten
ess asser
t
ion r
elat
ed t
o l
ong-
t
erm
i
nves
t
ments?
a. The cont
rol
ler compar
es t
he cur
rent mar
ket pr
ices ofr
ecor
ded
i
nvest
ment
s w
ith t
he b
rok
ers’advi
cesnofil
e.
b. Sen
i
or a
mnagem
en
t ver
ifies ht
atsecu
ri
ti
es nit
he b
ank saf
e dep
osi
t
boxar
eregi
ster
edi
ntheent
ity’
sname.
c. The i
nter
nalaudi
tor compar
es t
he secur
iti
es i
nthe bank saf
e
dep
osi
t boxwi
th r
ecor
dedi
nvest
ment
s.
d. The t
reasur
ervouc
hes t
he acqui
sit
ion ofsecur
iti
es by compar
ing
br
oker
s’advi
ceswi
thcancel
edc
hecks.

4. Whi
ch oft
he f
oll
owi
ng cont
rol
s woul
d an ent
ity mostl
ikel
y use i
n
sa
f
egu
ar
ding a
gai
nstt
he os
ls of
i
nvest
ment secu
ri
t
ies?
a. A desi
gnat
ed member of t
he boar
d of di
rect
ors cont
rol
sthe
secu
ri
t
ies nia b
ank sa
f
e d
epos
i
t box
.
b. An i
ndependentt
rustcompanyt
hathasnodi
rectcont
actwi
tht
he
employeeshowhave rec
ord-
keep
i
ng r
esp
on
sibi
li
ti
es as
h possessi
on
of sec
uri
t
ies
.
c. Thei
nter
nalaudi
torver
ifiest
hei
nvest
mentsecur
iti
esi
ntheent
ity’
s
saf
e ea
chyear on
t
he b
alan
ce sh
eetdat
e.
d. The i
ndependent audi
tor t
races al
l pur
chases and sal
es of
i
n
lvest
ed men
. t secu
ger ri
ti
es ht
rou
gh t
he su
bsi
di
ary
led
ger
s o
tthe g
ener
al

5. Whennegot
iabl
esecur
iti
esar
eofconsi
der
abl
evol
ume,pl
anni
ngbyt
he
audi
tor si n
ecessa
ry ot gu
ar
d aga
i
nst
a. Subst
i
tut
ion ofsecu
ri
t
ies l
r
aea
dy co
unt
edf
or t
h
oer secu
ri
t
ies h
wi
ch
shoul
d be onhan d bu t ar
e not
.
b. Subst
ituti
on of aut
hen ti
c securi
t
ieswith co
unterf
ei
t se
curi
ti
es.
c. Unauthorizednegot
iati
onoft he secu
ri
ti
es ef
borehey
t r a
e count
ed.
d. Unrecordedsales f osecuri
t
ies ft
aert
hey ra
e counted
.

6. I
n au
dit
ing i
nvest
ment
s f
or r
p
oper val
uat
i
on,t
he au
dit
or sh
ou
ld do al
l
butt
hef
oll
owi
ng:
137
 a. Vouch purchases and sal
es ofsecur
iti
es by t
raci
ng t
o br
oker
s'
ad
vices d
ancan
cel
edch
ecks.
b. Compa
re cos
t an
d mar
ket
by r
efer
ence
otyearnd
e mar
ket
val
ues
f
or s
eec
lt
edse
curi
t
ies
.
c. Con
firm secu
ri
ti
es el
hd in sa
fekeep
i
ng offt
he cl
ien
t'
s p
rem
ises.
d. Reca
l
cul
ate ga
i
n or os
l
s on di
spos
als.

7. An audi
tpr
ocedur
ethatpr
ovi
des evi
dence aboutpr
operval
uat
ion of
t
radi
ng se
cu
ri
ti
es ri
asi
ng r
f
om a sh
ort
-
termi
nvest
ment ofexcess
ca
sh
i
s
a. Recal
cu
lat
i
on ofi
nvest
ment carryi
ng val
ue by ap
plyi
ng t
he equ
i
ty
met
hod.
b. Compari
sonofcarr
ying val
ue wi
th cur
ren
t marketqu
otai
t
ons.
c. Confirmat
ionofsecu
ri
t
ies el
hd bybroker
.
d. Cal
culat
i
onofpremi
um or scou
di nt amort
i
zat
i
on .

8. Theaudi
teehasacqui
red anot
hercompanybypur
chase.Whi
ch oft
he
f
oll
owi
ng w
oul
d be h
te b
est
audi
t pr
oced
ur
e o
ttest
the a
ppr
opri
at
eness
of t
he a
l
loca
t
ion of co
stt
o t
angi
bl
e a
sses?
t
a. Eval
uate p
roced
ur
es sed
u to est
imat
e a
nd r
ecor
d f
air m
arket
val
ues
f
or u
prch
ased
asset
s.
b. Det
er
mine w
het
herasset
s h
ave been
r
ecor
ded t
athei
r bookval
ue at
t
he d
ate of
pur
chase.
c. Eval
uate h
te e
raso
nabl
eness of
recor
dedval
ues y
b d
i
scu
ssi
on wi
th
op
erat
ing per
son
nel
.
d. Eval
uat
e t
he r
eas
onabl
eness of e
rcor
ded val
ues by use of
r
epl
acem
en
t cost
dat
a.

9. Theaudi
teehasj
ustacqui
red anot
hercompany by pur
chasi
ngal
lit
s
asset
s.As a resu
lt oft
he p
urch
ase,
"go
odwi
ll
" has b
eenr
eco
r
dedon t
he
audi
tee'
s b ook
s.Whi choft he ol
fl
ow i
ng com parison
s w ould be hte most
appropri
ate audi
tt estfor hte a
mou nt ofr ecordedgo odwil
l?
a. Thepurchasepriceandthefai
rmar ketval
ueofassetspur chased.
b. Thepurchasepriceandthebookvalueofasse t
spurchased.
c. Thefigureforgoodwil
lspeci
fiedinthecontractforpurchase.
d. Earnings niexcess15of % ofnetasset s orf hte past five years
.

10. Of t
he ol
fl
owi
ng,whi
ch i
s h
te most
effici
ent au
dit pr
oced
ur
e or
f est
ti
ng
accr
ued ni
t
erest
earn
ed n
o bon
d n
ives
t
men
ts?
a. Vouchingther eceiptanddeposi
tofinter
estchecks.
b. Traci
ngi nt
erestdeclarat
ionstoanindependentrecordbook.
c. Recom puti
ng i nterestearned
.
 d. Con
firm
ing n
iter
est
rat
e w
ith t
he ssu
i eroft
he b
onds.

s:1)D;2)C;3)C;4)B,5)A;6)C;7)B;8)A;9)A; 10)
Answer C

138