Applied Auditing

QUIZ NO.____

INVESTMENTS-Dividend Income
Fruit Basket Company has several investments in equity instruments, determine the amount to be reported as dividend income for
2010 in each class of investment.
1. Fruit Basket owns a 10% interest in Lemon Company which declared a P2,000,000 cash dividend on November 15, 2010 to
stockholders of record on December 15, 2010 payable on January 15, 2011.

2. Received from Kiwi Company P330,000 in lieu of a 20% stock dividend. Fruit Basket owns 15,000 of the total 100,000
outstanding shares of Kiwi Company which it has acquired for P1,800,000.

3. Apple Company declared stock dividends of 50,000 shares on July 15, 2010. The market price of Apple Company’s shares
was P50 per share at that time.

4. Received 2,000 common shares of Banana Company in lieu of cash dividend. The market price of Banana Company’s shares
was P150.

5. Received 2, 000 common shares of cherry Company in lieu of cash dividend. The market price of Cherry Company’s share
was P150. Fruit Basket holds 10,000 shares of Cherry Company. The cash dividend would have been P30 per share.

6. Received P800,000 from Orange Company which was considered as a liquidating dividend.

7. Fruit Basket received from Watermelon Company a dividend in kind of one share of Peach Company ‘common stock for
every 5 Watermelon Company common shares held. Fruit Basket holds 50,000 Watermelon shares. Peach Company shares
were currently selling at P20 per share.

8. Fruit Basket owns 3,000 of Pomelo Company’s P50 par, 12% cumulative, non-participating preferred stocks of which 10,000
were issued and outstanding. No dividends had been declared or paid since 2009 Pomelo declared dividends in arrears.

9. Fruit Basket owns 1,000 of Pear Company’s P20 par, 8% cumulative, fully participating preference shares of which 2,500
were issued and outstanding, as well as, 5,000 of Pear Company’s P5 par value ordinary shares of which 40,000 were
issued and outstanding. No dividends were declared in 2009. Cash dividends were declared on December 30, 2010 totaling
to P350,000.

10. A cash dividend of P450,000 from Mango Company in which Fruit Basket Company owns a 25% interest which gave Fruit
significance influence.

STOCK RIGHTS
On March 1, 2010, Rainy Company purchased 60,000 shares of Windy Company common stock at P80 per share and classified them
as available for sale securities. On December 31, 2010, Windy shares were quoted at P84. On February 1, 2011, Rainy Company
received stocks rights to purchase one Windy Company common share at P90 plus 4 stock rights. That stock rights had an expiration
date of May 1, 2011. Applying the following independent cases, determine the amount to be reported as investment in stock rights
a. Assume that on February 1, 2011, Windy’s common stock had a market value, ex-right P95 per share and the stock right
had a market value of P5.
b. Assume that on February 1, 2011, Windys common stock had a market value, rights on of P95 per share and the stock right
had a market value of P5.
c. Assume that on February 1, 2011, Windy’s common stock had a market value, ex-right of P90 and a market value rights-on
of P100.
d. Assume that on February 1, 2011, Windy’s common stock had a market of P8.
e. Assume that on February 1, 2011, Windy’s common stock had a market value ex-right of P100 per share.
f. Assume that on February 1, 2011, Windy’s common stock had a market value rights-on of P100 per share.

INVESTMENT IN ASSOCIATE
A. On January 1, 2010, Mylene Company acquired 30,000 shares of the outstanding common stock of Cheesy Company for
P1,200,000. At the time of purchase, Cheesy had 100,000 shares outstanding. The book value of the net assets acquired
was P3,000,000 which approximates its fair values, except for the following:
Inventory Land Building Equipment
Cost P50,000 200,000 300,000 200,000
Fair values P90,000 300,000 480,000 140,000
During 2010, Chessy reported net income of P1,800,000. Cheesy uses FIFO in reporting inventory. Cheesy depreciates its
building under straight-line method. As of January 1, 2010, the building and equipment have remaining useful lives of 10
and 5 years respectively. Dividends of P300,000 were also declared by Cheesy Company.

Required: Compute for the following:

1. Investment income in 2010.
2. Investment in associate- Cheesy Company balance at December 31, 2010

B. On January 1, 2008, Heidi Company purchased a 20% interest in Raven Company and paid P40,000. The Raven Company’s
assets equal its fair value. In 2008 Raven Company reported net income P400,000. In 2009 Raven Company reported net
income of P340,000 respectively. Raven declared dividends in which Heidi Company received P175,000. Due to the
economic crisis in 2010 and 2011, Raven Company reported net losses of P120,000 and P135,000.
In 2012, Raven Company made a recovery in its operations and reported a net income of P210,000.

Required: Compute for the following:

1. Investment in associate- Raven company at December 31, 2009 is
2. Investment loss reported in Heidi Company’s 2011 income statement is
3. Investment income reported in Heidi Company’s 2012 income statement is

C. On January 1, 2011, Fake Company acquired 2,500 shares of ordinary shares of Real Company at a cost of P400,000. This
represents 25% of the voting shares of Real Company. The book value of Real Company’s net assets at the date of
acquisition was P900,000. The fair value of Real Company’s assets and liabilities were approximately equal to the current
carrying value. During 2011, Real Company reported net income of P200,000 and paid cash dividends of P80,000.

On January 1, 2012, Real Company issued an additional 5,000 ordinary shares in a public offering at a price of P110 per
share. Fake Company did not acquire any these shares and determined that after the offering it no longer has a significant
influence over Real Company and reclassifies the investment as available for sale securities.
Required: Prepare all the necessary journal entries related to the above-mentioned transactions.
Multiple Choice.
1. To establish the existence and ownership of a long-term investment in the common stock of a publicly traded company, an
auditor ordinarily performs a security count or
a. Relies on the client’s internal controls if the auditor has reasonable assurance that the control procedures are being
applied as prescribed.
b. Confirms the number of shares owned that are held by an independent custodian.
c. Determines the market price per share at the balance sheet date from published quotations.
d. Confirms the number of shares owned with the issuing company.

2. In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet.
What other information is usually included on this worksheet?
a. An acknowledgment by a client representative that the securities were returned intact.
b. An analysis of realized gains and losses from the sale of securities during the year.
c. An evaluation of the client's internal control concerning physical access to the securities.
d. A description of the client's procedures that prevent the negotiation of securities by just one person.

3. Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments?
a. Tracing interest declarations to an independent record book.
b. Recomputing interest earned.
c. Confirming interest rate with the issuer of the bonds.
d. Vouching the receipt and deposit of interest checks.

4. Which of the following is the most effective audit procedure for verification of dividends earned on the investments in equity
securities?
a. Tracing deposit of dividend checks to the cash receipts book.
b. Reconciling amounts received with published dividend records.
c. Comparing the amounts received with preceding year dividends received.
d. Recomputing selected extensions and footings of dividend schedules and comparing totals to the general ledger.

5. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely
would
a. Inspect the stock certificates evidencing the investment.
b. Examine the audited financial statements of the investee company.
c. Review the broker’s advice or canceled check for the investment’s acquisition.
d. Obtain market quotations from financial newspapers or periodicals.

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