AUDIT OF CURRENT AND

4 NONCURRENT INVESTMENTS
AUDIT PROGRAM FOR INVESTMENTS
Audit Objectives
To determine that:
a. Investment exist and are owned by the client.
b. Valuation is in conformity with GAAP.
c. All recorded income from investments has accrued to the entiry at the end of reporting period.
d. All investments owned by the entity at the end of the reporting period are included in the
statement of financial position.
e. All income accruing from investments at the end of the reporting period has been recorded.
f. Investments are included in the statement of financial position at appropriate amount.
g. All investments are free of liens, pledges, or other security interest, or if not, are adequately
disclosed.
h. Investment and related investment income accounts are properly classified, described,
and disclosed in the financial statements in conformity with GAAP and IFRS.

Audit Procedures
1. Prepare or obtain an analysis of the investment account and:
a. Trace to applicable general ledger balances.
b. Vouch changes during the year by reference to board minutes and brokers' advices.
c. Verify completeness of dividend and interest income accounts and where necessary,
by reference to outside published sources.
d. Check footings and cross-footings.
2. Conduct securities count:
a. Inspect securities as to registered owner.
b. Reconcile and compare details with investment analysis.
3. For securities held by an outside custodian.
a. Arrange a visit to the custodian and conduct a count, or
b. Confirm from custodians the details of securities held for the account of the client.

4. Review minutes, agreements, and confirmation replies for evidence of liens, pledges, or other
security interests in the entity's investments and of commitments to acquire or dispose of
investments.
5. Inspect market quotations, financial statements of investee(s), and other evidence to determine
the current value of investments.

6. Discuss with the entity the process used by management in classifying its investments.

7. Determine whether the client's investment activities are consistent with its stated intent,
8. For investments included in the held-to-maturity category, determine if the client has the
ability to hold them to maturity.
9. Determine whether the decline in fair value of available-for sale or held-to-maturity investments
below amortized cost is other than temporary and is properly recognized.
 4 problems
Problem 4-1
Trading Securities

Supporting records of Maryon Company's trading securities portfolio show the following debt and
equity securities:

Security Cost

200 ordinary shares, Curverous Co. 127,250

$400,000 Typho Company, 7% bonds 398,250
$600,000 Tourist, Inc., 7.5% bonds 603,750

Interest dates on the bonds are January 1 and July 1.Maryon Company uses the income approac
to record the purchase of bonds with accrued interest. During 2018 and 2019 Maryon Company
completed the following transactions related to trading securities:

2018
Jan. 1. Received semiannual interest on bonds. Assume that the appropriate adjusting
entry was made on December 31, 2017.

April 1. Sold $300,000 of 7.5% Tourist Inc. bonds at 102 plus accrued interest. Brokerage
fees were $1,000.

May 21. Received dividend of $1.25 per share on the Curverous Co. ordinary share capital.
The dividend had not been recorded on the declaration date.

July 1. Received semiannual interest on bonds and then sold the 7% Typho Company
bonds at 97.5. Brokerage fees were $1,250.

Aug. 15. Purchased 100 shares of Nelson Company ordinary share capital at $580 per
share plus brokerage fees of $250.

Nov. 1. Purchased $250,000 of 8% Tesla Company bonds at 101 plus accrued interest.
Brokerage fees were $625. Interest dates are January 1 and July 1.

Dec. 31. Market prices of the securities:

Curverous Co. $ 550

7.5 % Tourist, Inc bonds 101.75
8% Tesla Company bonds 101
Nelson Company ordinary shares $ 583.75
2019
Jan. 2. Recorded the receipt of semiannual interests on bonds.

Feb. 1. Sold the remaining 7.5% Tourist bonds at 101 plus accrued interest. Brokerage
fees were $1,500.

Required:
1. What is the total interest and dividend income for 2018?

2. What amount should be reported as gain on sale of trading securities in 2018?

3. What amount of unrealized gain or loss should be reported in the income statement
for the year ended December 31, 2018?

4. What is the carrying amount of the remaining trading securities on December 31, 2018?

5. What is the gain/loss on the sale of the remaining Tourist , Inc. bonds on February 1,
2019?

6. Prepare journal entries for the preceding transactions and to accrue interest on
December 31, 2018. Ignore amortization of premium or discount on bonds.

SOLUTION

1 Curverous Co. (200 x 1,25) 250

Typho Co (Jan - July --> 400,000 x 7% x 6/12) 14,000
Tourist, Inc
Jan - Apr (600,000 x 7,5% x 3/12) 11,250
Apr - Dec (300,000 x 7,5% x 9/12) 16,875
Tesla Co bonds (250,000 x 8% x 3/12) 3,333
45,708

2 Sale to Tourist
Sale Price (300,000 x 102%) 306,000
Broker Fee 1,000
NET 305,000
Carrying value 304,725
Gain 275

Sale to Typho
Sales price (400,000 x 97,5%) 390,000
Brokage fee (1,250)
NET 388,750
Carrying value 387,000
 Gain 1,750

3 Carrying Fair Increase

Security
Value Value Declear
Curveous Co 121,500 110,000 (11,500)
Tourist, Inc 304,725 305,250 525
Tesla Co bonds 252,500 252,500 -
Nelson Co ordinary 58,000 58,375 375
736,725 726,125 (10,600)

6
2017

Jan. 1. Cash 36,500

Interest receivable

Typho (400,000 x 7% x 6/12)

Tourist (600,000 x 7 1/2% x 6/12)

Apr. 1. Cash (305,000 + 5,625) 310,625

Trading securities
Interest income
Gain on sale of trading securities

** Sales price (300,000 x 102%)

Less: Brokerage fees
Net selling price
Carrying amount (609,450 x 1/2)
 Gain on sale

May 21. Cash 250

Dividend income (1.25 x 200 shares)

July 1. Cash 25,250

Interest income

** Typho (400,000 x 7% x 6/12)

Tourist (300,000 x 7 1/2% x 6/12)

July 1. Cash 388,750

Trading securities
Gain on sale of trading securities

** Sales price (400,000 x 97%)

Brokerage fees
Net sales price
Carrying amount
Gain

Aug. 15. Trading securities (580 x 100 shares) 58,000

Brokerage fees 250
Cash

Nov. 1. Trading securties (250,000 x 101%) 252,500

Brokerage fees 625
Interest income (250,000 x 8% x 4/12) 6,667
Cash

Dec. 31. Interest receivable 21,250

Interest income

** Tourist (300,000 x 7.5% x 6/12)

Tourist (250,000 x 8% x 6/12)

Dec. 31. Unrealized loss on trading securities 10,600

Trading securities
2018

Jan. 2. Cash 21,250

Interest receivable
Feb. 1. Cash (301,500 + 1,875) 303,375
Loss on sale of trading securities 3,750
Trading securities
Interest income (300,000 x 7 1/2% x 1/12)

** Sales price (300,000 x 101%)

Brokerage fee
Net sales price
Carrying amount
Loss on sale

Problem 4-2

Problem 4-3

Problem 4-4
Investment in Debt Securities
Computation of Interest Income and Amortized Cos

On January 1, 2019, Rosedale Company purchased debt securities for cash of $765,540 to be
held as financial assets at amortized cost. The securities have a face value of $600,000, and
they mature in 15 years. The securities carry fixed interest rate of 10% that is receivable
semiannually, on June 30 and December 31. The prevailing market interest rate on these debt
securities is 7% compounded semiannually.

Required:
1. What is the carrying value of the debt securities on December 31, 2019 at amortized
cost using the effective interest rate method.

2. What is the interest income to be reported for 2019 using effective interest rate
method?

Problem 4-5
Financial Assets at Amortized cos
Senegal Company purchased $160,000,000 of 8% bonds, dated January 1, on January 1, 2019,
to be held as financial asset at amortized cost. On the acquisition date, the market yield of bonds
with similar risk and maturity was 10%. The company paid $132,000,000 of the price of the
bonds. Interest is received semiannually on June 30 and December 31. Due to the changes
in market conditions, the fair value of the bonds at December 31, 2019 was $140,000,000.

Required:
1. At what amount will Senegal Company report its investment in the December 31,
 2019 statement of financial position?

2 What is the unrealized holding gain or loss to be classified as component of other

comprehensive income at December 31, 2019?

3. What is the amount of interest income to be reported in Senegal Company's income

statement for the year ended December 31, 2019?

Solution:

1 Initial cost 132,000,000

Add: Discount amortization, Jan. 1-June 30:
Effective interest (132M x 5%) 6,600,000
Nominal interest (160M x 4%) 6,400,000 200,000
Carrying value, June 30 132,200,000
Add: Discount amortization, July 1-Dec. 31:
Effective interest (132.M x 5%) 6,610,000
Nominal interest (160M x 4%) 6,400,000 210,000
132,410,000

Problem 4-6
Accounting for Non-trading Equity Securities

Supersonic Company has the following non-trading equity securities on December 31, 2018:

Security Shares Cost

Denver Company, ordinary shares 4,500 $ 220,500

Renault, Inc., ordinary shares 15,000 540,000
Ashton Corporation, preference shares 1,200 180,000
$ 940,500

All of the above securities were bought in 2018. On initial recognition, Supersonic Company mad
an irrevocable election to present the securities at fair value through other comprehensive incom
In 2019, the company had the following transactions relating to its investments:

April 1. Sold the 4,500 ordinary shares of Denver Company for $65 per share.
May 1. Bought 2,100 ordinary shares of Ramsey Company at $75 plus broker's fee of $5,20

Supersonic Company's portfolio of non-trading equity securities appeared as follows on

December 31, 2019:
Security Shares Cost
 Renault, Inc., ordinary shares 15,000 $ 540,000
Ramsey Company, ordinary shares 2,100 157,500 *
Ashton Corporation, preference shares 1,200 180,000
$ 877,500

* The broker's fee was charged to expense.

Required:
1. What is the amount of gain/loss on the sale of Denver Company ordinary shares
to be reported in the 2019 income statement?

2. At what amount Ramsey Company ordinary shares be initially measured?

3. What is the total amount of investments in non-trading securities to be reported in

December 31, 2019 statement of financial position?

Problem 4-7

Problem 4-8
 Trading Securities

w the following debt and

Fair Value

121,500
387,000
609,450

ses the income approach

2019 Maryon Company

propriate adjusting

d interest. Brokerage

rdinary share capital.

Typho Company

pital at $580 per

s accrued interest.
nterest. Brokerage

me statement

cember 31, 2018?

on February 1,
 36,500

14,000
22,500
36,500

304,725
5,625
275

306,000
1,000
305,000
(304,725)
 275

250

25,250

14,000
11,250
25,250

387,000
1,750

390,000
(1,250)
388,750
(387,000)
1,750

58,250

259,792

21,250

11,250
10,000
21,250

10,600

21,250
 305,250
1,875

303,000
(1,500)
301,500
305,250
(3,750)

t in Debt Securities
nd Amortized Cost

ash of $765,540 to be
ue of $600,000, and
at is receivable
est rate on these debt

9 at amortized

s at Amortized cost
1, on January 1, 2019,
he market yield of bonds
0 of the price of the
Due to the changes
as $140,000,000.

cember 31,
ent of other

pany's income

g Equity Securities

ecember 31, 2018:

Fair Value

$ 207,000
525,000
184,800
$ 916,800

personic Company made

r comprehensive income.

us broker's fee of $5,200.

as follows on

Fair Value
 $ 525,000
151,200
174,000
$ 850,200

ary shares

reported in