AUDITING PROBLEMS

AUDIT OF INVESTMENTS (1)

PROBLEM 1

ABRIL CORP. invested its excess cash in equity securities during 2018. The business model for
these investments is to profit from trading on price changes.
(a) As of December 31, 2018, the equity investment portfolio consisted of the following
Investment Quantity Cost Fair Value
LJ Inc. 1,000 shares P 90,000 P 126,000
P Co. 2,000 shares 240,000 252,000
Alabang Corp. 2,000 shares 432,000 360,000
Totals P762,000 P738,000
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1. In the December 31, 2018, statement of financial position, what should be reported as carrying
amount of the investments?
2. In the 2018 income statement, what amount should be reported as unrealized gain or loss?
(b) During the year 2019, ABRIL Corp. sold 2,000 shares of P Co. for P229,000 and purchased
2,000 more shares of LJ, Inc., and 1,000 shares of D Co. On December 31, 2019, Magnolia’s
equity securities portfolio consisted of the following:
Investment Quantity Cost Fair Value
LJ Inc. 1,000 shares P 90,000 P 120,000
LJ, Inc. 2,000 shares 198,000 240,000
D Co. 1,000 shares 96,000 72,000
Alabang Corp. 2,000 shares 432,000 132,000
Totals P816,000 P564,000
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3. What is the gain or loss on the sale of P Co. investment?
4. What is the carrying amount of the investments on December 31, 2019?
5. What amount of unrealized gain or loss should be reported in the income statement for the year
ended December 31, 2019?
(c) During the year 2015, ABRIL sold 3,000 shares of LJ inc. for P239,400 and 500 shares of D
Co. at a loss of P16,200. On December 31, 2020, Magnolia’s equity investment portfolio
consisted of the following
Investment Quantity Cost Fair Value
D Co. 500 shares P 48,000 P 36,000
Alabang Corp. 2,000 shares 432,000 492,000
Totals P480,000 P528,000
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6. What should be reported as loss on sale of trading securities in 2020?
7. What amount of unrealized gain or loss should be reported in the income statement for the year
ended December 31, 2020?
8. In the December 31, 2020, statement of financial position, what should be reported as carrying
amount of trading securities?

PROBLEM 2

Supporting records of ARACENA CORPORATION trading securities portfolio show the following
debt and equity securities:

Security Cost Fair Value

400 ordinary shares Concave Co. P 254,500 P 243,000
P800,000 Tipo Co. 7% bonds 796,500 774,000
P1,200,000 Turkey Co. 7 ½ % bonds 1,207,500 1,128,900
TOTALS P 2,258,500 P 2,235,900
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Interest dates on the bonds are January 1 and July 1. ARACENA Corporation uses the income
approach to record the purchase of bonds with accrued interest. During 2019 and 2020,
ARACENA completed the following transactions related to trading securities:

2019
Jan. 1 Received semi annual interest on bonds. Assume that the appropriate adjusting
entry was made on December 31, 2018.

April 1 Sold P600,000 of 7 ½ % Turkey bonds at 102 plus accrued interest. Brokerage fees
were P2,000.

May 21 Received dividend of P1.25 per share on the Concave ordinary share capital. The
dividend had not been recorded on the declaration date.

July 1 Received semi annual interest on bonds and then sold the 7% Tipo bonds at 97 ½ .
Brokerage fees were P2,500.

Aug. 15 Purchased 200 shares of Newman, Inc., ordinary share capital at P580 per share
plus brokerage fees of P500.

Nov. 1 Purchased P500,000 of 8% Toll Co. bonds at 101 plus accrued interest. Brokerage
fees were P1,250. Interest dates are January 1 and July 1

Dec. 1 Market prices of securities were:

Concave ordinary shares P 550
7 ½ % Turkey bonds 101 ¾
8% Toll bonds 101
Newman ordinary shares P583.75

2020
Jan 2 Recorded the receipt of semi annual interest on bonds

Feb. 1 Sold the remaining 7 ½% Turkey bonds at 101 plus accrued interest. Brokerage
fees were P3,000.

(a)
1. What is the total interest and dividend income for 2019?

2. What amount should be reported as gain on sale of trading securities in 2019?

3. What amount of unrealized gain or loss should be reported in the income statement for the year
ended December 31, 2019?

4. What is the carrying amount of the remaining trading securities on December 31, 2020?

5. What is the loss on the sale of the remaining Turkey bonds on February 1, 2020?

(b) Prepare journal entries for the preceding transactions and to accrue interest on December 31,
2019. Ignore amortization of premium or discount on bonds.

PROBLEM 3

During the course of your audit of the financial statements of DELA VEGA Corporation for the year
ended December 31, 2019, you found a new account, “Investment in Equity Securities”. Your audit
revealed that during 2019, Fishing began a program of investments, and all investment-related
transactions were entered in this account. Your analysis of this account for 2019 follows:
 DELA VEGA Corporation
Analysis of Investment in Equity Securities
For the Year Ended December 31, 2019

Debit Credit
(a)
Salmon Company Ordinary Shares
Feb. 14 Purchased 24,000 shares @ P55 per share P1,320,000
July 26 Received 2,400 ordinary shares of Salmon
Company as a share dividend
(Memorandum entry in general ledger)
Sept. 28 Sold 2,400 ordinary shares of Salmon Company
Received July 26 @ P70 per share. P 168,000

(b)
Debit Credit
Tamban, Inc. Ordinary Shares
April 30 Purchased 120,000 shares @ P40 per share P4,800,000
Oct. 28 Received dividend of P1.20 per share P144,000

Additional Information:
a. The fair value for each security as of the 2019 date of each transaction follow:
Security Feb 14 April 30 July 26 Sept. 28 Dec. 31
Salmon Company P 55 P 62 P 70 P 74
Tamban, Inc. P 40 P 32
Fishing Corp. P 25 P 28 P 30 P 33 P 35

b. All of the investments of DELA VEGA Corporation are nominal in respect to percentage of
ownership (5% or less).

c. Each investment is considered by DELA VEGA Corporation to be non-trading. DELA VEGA

Corporation has made an irrevocable election to present in other comprehensive income
subsequent changes in fair value of its non-trading equity securities.

1. What amount should be reported as gain on sale of non-trading equity in 2019?

2. The receipt of 2,400 share dividend would cause the investment balance to increase by:

3. What entry is necessary to correct the recording of the cash dividend received from Tamban,
Inc.?

4. What amount of unrealized gain or loss should be reported in the 2019 statement of
comprehensive income as component of other comprehensive income?

5. What amount should be reported as Investment in Equity Securities in the statement of

financial position on December 31, 2019?