AUDITING PROBLEMS CHRISTIAN L.

BETIA

AUDIT OF INVESTMENTS

PROBLEM 1
SMARTS CORP. invested its excess cash in equity securities during 2015. The business model for these investments is to profit
from trading on price changes.

(a) As of December 31, 2015, the equity investment portfolio consisted of the following:

Investment Quantity Cost Fair Value

MSU, Inc. 1,000 shares P 45,000 P 63,000
GFI Co. 2,000 shares 120,000 126,000
NDDU Corp. 2,000 shares 216,000 180,000
Totals P381,000 P369,000

1. In the December 31, 2015, statement of financial position, what should be reported as carrying amount of the
investments?
A. P369,000 C. P381,000
B. P345,000 D. P405,000
2. In the 2015 income statement, what amount should be reported as unrealized gain or loss?
A. Unrealized gain of P12,000
B. Unrealized loss of P12,000
C. Unrealized loss of P36,000
D. Unrealized gain of P24,000
(b) During the year 2016, SMARTS Corp. sold 2,000 shares of GFI Co. for P114,600 and purchased 2,000 more shares of
MSU, Inc. and 1,000 shares of RMMC Company. On December 31, 2016, Magnolia’s equity securities portfolio
consisted of the following:

Investment Quantity Cost Fair Value

MSU, Inc. 1,000 shares P 45,000P 60,000
MSU, Inc. 2,000 shares 99,000 120,000
RMMC Company 1,000 shares 48,000 36,000
NDDU Corp. 2,000 shares 216,000 66,000
Totals P408,000 P282,000
3. What is the gain or loss on the sale of GFI Co. investment?
A. P5,400 gain C. P11,400 gain
B. P5,400 loss D. P11,400 loss
4. What is the carrying amount of the investments on December 31, 2016?
A. P408,000 C. P282,000
B. P444,000 D. P246,000
5. What amount of unrealized gain or loss should be reported in the income statement for the year ended December
31, 2016?
A. P126,000 unrealized gain
B. P126,000 unrealized loss
C. P108,000 unrealized gain
D. P108,000 unrealized loss
(c) During the year 2017, SMARTS sold 3,000 shares of MSU, Inc. for P119,700 and 500 shares of RMMC Company at a
loss of P8,100. On December 31, 2017, SMARTS’s equity investment portfolio consisted of the following:

Investment Quantity Cost Fair Value

RMMC Company 500 shares P 24,000P 18,000
NDDU Corp. 2,000 shares 216,000 246,000
Totals P240,000 P264,000
6. What should be reported as loss on sale of trading securities in 2017?
A. P60,300 C. P24,300
 B. P32,400 D. P68,400
7. What amount of unrealized gain or loss should be reported in the income statement for the year ended December
31, 2017?
A. P180,000 unrealized gain
B. P180,000 unrealized loss
C. P24,000 unrealized gain
D. P24,000 unrealized loss
8. In the December 31, 2017, statement of financial position, what should be reported as carrying amount of trading
securities?
A. P240,000 C. P264,000
B. P234,000 D. P270,000

PROBLEM 2
During the course of your audit f the financial statements of MILK CORPORATION for the year ended December 31, 2015, you
found a new account, “Investment in Equity Securities.” Your audit revealed that during 2015, MILK began a program of
investments, and all investment-related transactions were entered in this account. Your analysis of this account for 2015
follows:
Milk Corporation
Analysis of Investment in Equity Securities
For the Year Ended December 31, 2015
Debit Credit
(a)
Alaska Company Ordinary Shares
Feb. 14 Purchased 36,000 shares
@ P55 per share P1,980,000
July 26 Received 3,600 ordinary shares of
Alaska Company as a share dividend.
(Memorandum entry in general ledger.)
Sept. 28Sold the 3,600 ordinary shares of
Alaska Company received July 26 @
P70 per share. P252,000
(b)
Debit Credit
Nido, Inc. Ordinary Shares
April 30 Purchased 180,000 shares
@ P40 per share P7,200,000
Oct. 28 Received dividend of P1.20 per share. P216,000

Additional information:
a. The fair value for each security as of the 2014 date of each transaction follow:
Security Feb. 14 April 30 July 26 Sept. 28 Dec. 31
Alaska Company P 55 P 62 P 70 P 74
Nido, Inc. P 40 32
MilkCorp. 25 28 30 33 35
b. All of the investments of Milk Corporation are nominal in respect to percentage of ownership (5% or less).
c. Each investment is considered by Milk Corporation to be non-trading. Milk 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 securities in 2015?
A. P72,000 C. P54,000
B. P18,000 D. P 0
2. The receipt of 3,600 share dividend would cause the investment balance to increase by
A. P223,200 C. P198,000
B. P252,000 D. P 0
3. What entry is necessary to correct the recording of the cash dividend received from Nido, Inc.?
A. Cash 216,000
 Dividend income 216,000
B. Cash 216,000
Investment in equity securities 216,000
C. Investment in equity securities 216,000
Dividend income 216,000
D. Dividend income 216,000
Investment in equity securities 216,000
4. What amount of unrealized gain or loss should be reported in the 2015 statement of comprehensive income as
component of other comprehensive income?
A. P1,440,000 gain C. P576,000 gain
B. P1,440,000 loss D. 424,000 gain
5. What amount should be reported as Investment in Equity Securities in the statement of financial position on
December 31, 2015?
A. P9,000,000 C. P7,560,000
B. P8,424,000 D. P9,864,000

PROBLEM 3: The following two subsidiary accounts reflect the Trading Securities ofn A Corp. for the year 2015.

Noel Company
Date Transactions Shares Ref. Debit Credit
Feb. 22 Purchase 2,000 CD P190,000
28 Raised to market value; offset to
retained earnings -- GJ 10,000

Date Transactions Shares Ref. Debit Credit

Mar. 15 Sale at P150 1,000 CR P150,000
June 30 Stock dividend at par 1,000 GJ 100,000
July 15 Sale at P110 1,000 CR 110,000

Ilan Company

Date Transactions Shares Ref. Debit Credit

Sep. 5 Purchase 20,000 CD P1,000,000
28 Cash dividend to stock of record
September 15, declared August 15 CR P50,000
Oct. 1 Sale at P65 20,000 CR P1,300,000
5 Purchase 50,000 CD 2,500,000
Nov. 30 Cash collected for sale made on
Nov. 10, after a November 1
declaration of P5 cash dividend
per share to stockholders of record
as of December 1 20,000 CR 1,320,000
Dec. 15 Cash dividend received CR 150,000

The above trading securities had the following fair values at December 31, 2015:
Noel Company P 50 per share
Ilan Company 30 per share

1. What is the gain on sale of Noel Company shares on March 15, 2015?
a. 50,000 b. 55,000 c. 60,000 d. 0
2. What is the gain on sale of Noel Company shares on July 15, 2015?
a. 52,500 b. 62,500 c. 60,000 d. 0
3. What is the gain on sale of Ilan Corporation shares on October 1, 2015?
a. 300,000 b. 400,000 c. 0 d. 350,000
4. What is the gain on sale of Ilan Corporation shares on November 10, 2015?
a. 300,000 b. 100,000 c. 220,000 d. 0
 5. At what amount should A Corp. report its trading securities on its balance sheet at Dec. 31, 2015?
a. 947,500 b. 1,597,500 c. 950,000 d. 1,547,500
6. What is the unrealized holding gain/loss to be recognized in the 2015 income statement?
a. 47,500 b. 597,500 c. 550,000 d. 547,500

PROBLEM 4
You are auditing the CSI INC’s investments accounts. In its initial year of operations. The company has provided you
the following information with regard to its stock investment acquisition for the year.

Number of Recorded
Shares acquired acquisition cost
ABC Corp. 2,000 P240,000
DEF Inc. 1,500 225,000
GHI Co. 3,000 285,000
JKL Corp. 4,000 200,000
MNO Co. 10,000 850,000

Additional Information:
a. ABC Corp. stocks were acquired on March 1, 2015 at a total cost of P200,000 plus brokerage fees and a commissions
to P40,000. Dividends, which were declared on January 25, 2015 to stockholders as of March 20, 2015 were
received on April 1, 2015 at P20,000. ABC Corp. stocks were acquired by the company with the intention of
designating the same as a financial asset at fair value through profit or loss. the stocks were selling at P105 per
share as of December 31, 2015.

b. DEF Corp. were acquired on May 1, 2015 at P150 per share. The company paid brokerage and commissions
amounting to P30,000. The company had neither significant influence over DEF Corp. nor does it intend to sell the
stocks for short-term profit, thus designated the same as fair value through other comprehensive income. The
company received a 20% stock dividend on October 11, 2015. The stocks were selling at P160 per share on
December 31, 2015.

c. GHI Co. stocks, which acquired for trading purposes on June 1, 2015 at P285,000, were split 5 for
3 on August 15, 2015. On September 30, 2015, the company paid special assessment on the investment at P25 per
share. On December 30, 2015, when the shares had a market value of P75 per share, GHI declared a P5 dividend
payable on January 25, 2016.

d. JKL Corp. stocks were acquired on August 1, 2015 classified as financial asset at fair value through other
comprehensive income. JKL Corp. issued 1 share for every 4 shares held in lieu of a P15 per share cash dividends it
has previously declared. The stocks were selling at that time at P55 per share. JKL shares were selling at P60 per
share on December 31, 2015.

e. MNO Corp. stocks were acquired at the beginning of 2015 when MNO Corp. offered its P50 par value stocks in an
IPO in January 2015. All of MNO Corp.’s 50,000 authorized shares were issued on the same date and remained
outstanding as of December 31, 2015. The company reported total comprehensive income of P250,000, which is net
of a foreign exchange loss reported in its OCI/OCL amounting to P50,000. MNO also paid P3 cash dividends on
 December 31, 2015. The stocks were selling at P90 per share on December 31, 2015. No entry has been made by
the company to reflect the transactions and information on December 31, 2015.

REQUIREMENTS:
1. How much should the investment in ABC Corp. stocks and DEF Inc., be initially recognized?
a. 240,000; 225,000 b. 180,000; 255,000 c. 200,000; 225,000 d. 200,C 000; 225,000
2. How much is the correct dividend income to be recognized from investment in stocks of DEF Inc. and GHI Co.,
respectively?
a. 46,500; 15,000 b. 0; 25,000 c. 46,500; 25,000 d. 0; 15,000
3. How much is the correct dividend income to be recognized from investment in JKL Corp.?
a. 0 b. 55,000 c. 60,000 d. 220,000
4. How much investment income should be reported from investment in MNO Co. stocks?
a. 100,000 b. 50,000 c. 120,000 d. 60,000
5. How much should be reported as investments in stock classified as trading securities and the corresponding
unrealized holding gain or (loss) to be reported in its income statement?
a. 590,000; 0 b. 585,000; (5,000) c. 590,000; 5,000 d. 585,000; 0
6. How much should be reported as investments in stocks classified as available-for-sale security and the
corresponding unrealized holding gain or loss to be reported in its balance sheet?
a. 510,000; 0 b. 588,000; 78,000 c. 510,000; 78,000 d. 588,000; 0
7. How should investment in MNO Co. stocks be presented by this company’s balance sheet?

PROBLEM 5
Maria Corporation has the following non-trading equity securities on December 31, 2015
Security # of shares Cost Fair value (12/31/2015)
ABC ordinary shares 9,000 441,000 P 46 per share
DEF ordinary shares 30,000 1,080,000 35 per share
GHI preference shares 2,400 360,000 154 per share

Audit notes:
a. The above securities were all bought in 2015. On the initial recognition, Maria made an irrevocable election to
present gain/losses on the said securities to other comprehensive income.
b. On April 1, 2016, the company sold all the ABC ordinary shares for P65 per share
c. On May 1, 2016, the company purchased 4,200 ordinary shares of JKL Corp. at 75 per share. The company incurred
brokers fee amounting to P10,400
d. The following additional information in 2016 deemed relevant.
Dividends declared Reported Net income FV of shares
12/31/2016
ABC ordinary shares P2.00 per share P900,000 P62 per share
DEF ordinary shares P1.50 per share 1,300,000 38 per share
GHI preference shares P1.00 per share 750,000 145 per share
JKL ordinary shares P0.75 per share 450,000 77 per share
®all dividends were declared 12/31/2016

Based on the results of your audit, answer the following:

1. What is the realized gain on sale of ABC shares in 2016, under PAS 39?
a. 144,000 b. 171,000 c. 190,000 d. 0
2. What is the unrealized holding gain/loss to be reported in the shareholder’s equity portion of the 2016 statement of
financial position?
a. 76,800 b. 56,400 c. 46,000 d. 66,400
3. Assuming that the company elected to report gains/losses in the profit/losses instead, what is the unrealized
holding gain/loss to be reported in the 2016 statement of comprehensive income?
a. 76,800 b. 56,400 c. 46,000 d. 66,400
 4. Assuming that the 4,200 JKL shares acquired in 2016 represent 20% interest on JKL’s outstanding ordinary shares,
what is the correct carrying value of the investment in JKL shares?
a. 412,250 b. 382,250 c. 371,850 d. 401,850

PROBLEM 6
Your audit of Dumbo Inc. revealed the following transactions on its “ Financial Assets at Fair Market Value through Profit and
Loss” account:
Date Particulars Debit Credit
1/15/15 Purchased 40,000 shares of ABC at P21.50 per share
And 20,000 shares of XYZ at P13.00 per share. Amount
Includes transaction cost amounting to P1.50/share 1,120,000
6/30 Purchased 1,000 of DEF Inc.’s 12%, 4 year P1,000 face
Value bonds dated 1/1/12 and pays annual interest
Every Dec. 31. Prevailing interest on the same date at
14%. Amount includes accrued interest and transaction
Cost amounting to P10 per bond. 1,044,258
7/1 Received 3,000 shares of XYZ as stock dividends, prevailing
Market price at P12 per share 36,000
8/5 Sold 15,000 of ABC shares at 15 per share and 5,000 of
XYZ share at P13 per share 290,000
12/1 Sold half of the DEF bonds at P98 plus accrued interest 515,000
12/30 Received P80,000 in lieu of a 5,000 stock dividends from
Its ABC shares 80,000
BALANCE 1,315,258

Additional information
On December 31, 2015, the market values of the ABC and XYZ were at P18 and P15 per share, respectively.
Moreover, the DEF bonds had a prevailing interest on the same date at 11%.
Based on your audit findings, answer the following:
1. How much is the total realized gain or (loss) on disposal of bonds on Dec. 1?
a. 2,129 b. 2,871 c. (32,129) d. (2,871)
2. How much is the total realized gain or (loss) on sale of shares on Aug. 5?
a. (67,500) b. 67,500 c. (60,000) d. 60,000
3. How much should be the unrealized holding gain to be recorded in the income statement for the year 2015?
a. 27,379 b. 57,376 c. 64,876 d. 140,709
4. How much interest income should be recorded in the income statement?
a. 60,000 b. 55,000 c. 58,179 d. 67,629
5. How much dividend income should be recorded in the income statement?
a. 0 b. 36,000 c. 80,000 d. 116,000
6. How much investment in trading securities should be reported in the statement of financial position?
a. 1,038,064 b. 1,113,064 c. 1,167,129 d. 1,224,505