Case 1

Requirement: Create a working paper to document your audit. Make sure that
the following questions are answered by your audit working paper:

a) At the end of the first year of ownership, what would appear on the (1) income

Oct 1 Purchased 150,000 shares of Rheinland for P 17 per share.

Oct 30 The fair value of Rheinland’s stock for P 27 per share and the company
reported September income of P 330,000.
Nov 15 The fair value of Rheinland’s stock was P 32 per share, and the company
declared and paid a dividend of P 1.25 per share.
Nov 31 The fair value of Rheinland’s stock was P 28 per share, and the company
reported October income of P 270,000.
statement and (2) statement of financial position of MBL?
b) Repeat part 1, assuming that the cost method was used. Under what circumstances
would this level of share ownership be accounted for under the cost method?

Refer to this case.

MBL Company bought 40,000 of the available 100,000 voting ordinary shares of Huge
Corporation. This acquisition provided MBL with significant influence. MBL paid P
1,450,000 cash for the investment. At the time of acquisition, Huge had assets of P
3,000,000, and liabilities of P 1,700,000. Asset values reflected fair market value, except
for capital assets that had a net book value of P 400,000 and a fair value of P 625,000.
These assets had a remaining useful life of five years. After 12 months of ownership,
Huge reported net income of P 526,000 and paid cash dividends of P 75,000.

Case 2

Bench Company acquired 30% of the stock Rain Minerals Company. Bench acquired this
investment for purposes of being able to exert significant influence over the strategic
plans and operations of Rain. Following are the events pertaining to this investment:

Requirement: Create a working paper to document your audit. Make sure that
the following questions are answered by your audit working paper:

a) What method should be used to account for this investment?

b) Prepare journal entries to account for the activity pertaining to the investment in
Rain Minerals.
c) If the investment in Rain Minerals was insufficient to allow Bench to show
significant influence, how much would the accounting approach differ?