M7 Auditing Investment in Securities

PROBLEM 1

Investment in Equity Securities

COVID CORP. has a policy of investing idle cash in equity securities. It has made periodic
investments in its principal supplier, SINOBAK Company. COVID currently owns 12% of
SINOBAK’s outstanding ordinary shares.

DU DUKE, COVID’s assistant controller, has gathered the following information about the
company’s investments in equity securities.

1. COVID has FA @ FV TPL equity investments in PICER Corp. and SPUTNEK

Company. During 2022, COVID purchased 100,000 shares of PICER Corp. for
P4,200,000; these shares have a fair value of P4,800,000 at December 31, 2022. The
investment in SPUTNEK consists of 50,000 shares acquired in March 2022 at P60 per
share and currently has a value of P2,160,000.

2. COVID’s 12% ownership on SINOBAK Company has a fair value of P66,675,000 on

December 31, 2022. The securities were purchased prior to 2022 for P67,500,000 and
was valued at P64,500,000 on December 31, 2021. COVID has not changed its holdings
in the current year.

REQUIRED:

1. What amount of unrealized loss should be reported as component of other comprehensive

income on COVID’s December 31, 2021 statement of comprehensive income?
A. P1,065,000
B. P 0
C. P825,000
D. 3,000,000
 2. What is the cumulative unrealized gain/loss that should be shown on the statement of
changes in equity for the year ended December 31, 2022?
A. P2,175,000 unrealized gain
B. P1,065,000 unrealized loss
C. P825,000 unrealized loss
D. P1,935,000 unrealized gain

3. What amount of unrealized gain/loss should be reported on COVID’s income statement

for the year ended December 31, 2022?
A. P600,000 unrealized gain
B. P240,000 unrealized loss
C. P825,000 unrealized loss
D. P1,065,000 unrealized loss

SOLUTION PROB 1

1. Fair value, December 31, 2021 P 64,500,000

Acquisition cost 67,500,000
Unrealized loss P 3,000,000
Answer: D

2.
Fair value, December 31, 2022 P 66,675,000
Fair value, December 31, 2021 64,500,000
Unrealized gain in 2022   2,175,000
Answer: C
Unrealized loss in 2021 (3,000,000)
Cumulative unrealized loss, December 31,
3. 2022 P Unrealized
(825,000)
Cost Fair Value Gain (loss)
PICER Corp. P 4,200,000 P 4,800,000 P 600,000
SPUTNEK
Company Answer: B 3,000,000 2,160,000 (840,000)
P 7,200,000   P 6,960,000   P (240,000)
PROBLEM 2

Investment in Bonds

Shown below is an amortization schedule related to CORONA COMPANY’s 5-year, P500,000

bond with a 7% interest rate and a 5% yield, purchased on December 31, 2019, for P543,300.

Interest Interest Premium Carrying

Amortizati
Date Received Income on Amount
12/31/201 543,30
9 P 0
12/31/202 535,46
0 P 35,000 P 27,165 P 7,835 5
12/31/202 527,23
1 35,000 26,773 8,227 8
12/31/202 518,60
2 35,000 26,362 8,638 0
12/31/201 509,53
3 35,000 25,930 9,070 0
12/31/201 500,00
4 35,000 25,470 9,530 0

The following shows a comparison of the amortized cost and fair value of the bonds at year-end:

Amortized
Cost Fair Value
December 31, 2020 P 535,465 P 532,500
December 31, 2021 527,238 537,500
December 31, 2022 518,600 528,250
December 31, 2013 509,530 515,000
December 31, 2014 500,000 500,000

REQUIRED:

a. Prepare the journal entry to record the purchase of these bonds on December 31, 2019,
assuming the bonds are held as financial assets measured at amortized cost.

b. Prepare the journal entry(ies) related to these bonds for 2020.

c. Prepare the journal entry(ies) related to these bonds for 2022.

 d. What should be reported as the carrying amount of these bonds in the statement of
financial position on December 31, 2013?

SOLUTION PROB 2

(a) December 31, 2019

Investments in bonds 543,300

Cash 543,300

(b) December 31, 2020

Cash 35,000
Investment in bonds 7,835
Interest Income 27,165

(c) December 31, 2022

Cash 35,000
Investment in bonds 8,638
Interest income 26,362

(d) Investment in bonds, at amortized cost P509,530

PROBLEM 3

Purchase and Sale of Various Equity Securities

LOUGHI, INC. purchased the following securities during January 2021:

No. of
Security Category Shares Total Cost
A1 Corp. stock FA @ FV TPL 25,000 P 450,000
B2 Co. stock FA @ FV TOCI 5,000 1,100,000
C3, Inc. stock FA @ FV TOCI 125,000 2,125,000
D4 Corp.
bonds Held-to-maturity -- 1,200,000
E5 Co. bonds FA @ FV TPL -- 550,000

The following transactions related to LOUGHI, Inc.’s investments occurred during 2021:

a) Received interest from D4 Corp. and E5 Company bonds totaling P181,500.

b) Dividends received on the equity securities held amounted to P88,000.

c) Sold 10,000 shares of the A1 Corp. stock at P17 per share and 12,500 shares of the C3,
Inc. stock at P19 per share.

1. What is the gain (loss) on the sale of A1 Corp. stock?

2. What is the gain (loss) on the sale of C3,Inc. stock?

SOLUTION 4-5

1.
1. Sales price (P17 x 10,000 shares) P 170,000
Less: Cost (P450,000 x 10,000 / 25,000) 180,000
Loss on sale of A1 Corp. stock P (10,000)

2.

Sales price (P19 x 12,500 shares) P 237,500 2.

Less: Cost (P2,125,000 x 12,500 / 125,000) 212,500
Gain on sale of C3, Inc. stock P 25,000