MODULE – 6 AUDIT OF INVESTMENTS

How to Audit Investments

The following must be considered in the audit of investment:
 Primary investment assertions
 Investment walkthroughs
 Directional risk for investments
 Primary risks for investments
 Common investment control deficiencies
 Risk of material misstatement for investments
 Substantive procedures for investments
 Common investment work papers

Primary relevant investment assertions include:

 Existence
 Accuracy
 Valuation
 Cut-off

Perform procedures to confirm that the investment balances exist, that they are accurate
and properly valued, and that only investment activity within the period is recorded.
While investment balances in the financial statements are important, disclosures are also
vital, especially when the entity owns complex instruments.

Investment Walkthroughs
Second, perform your risk assessment work in light of the relevant assertions.
As you perform walkthroughs of investments, you normally look for ways that investments might
be overstated (though investments can be understated as well). You want to know if:
 The controls were appropriately designed, and
 The controls were implemented (in use)

We ask questions, we also inspect documents (e.g., investment statements) and make
observations (e.g., who reconciles the investment statements to the general ledger?).

If control weaknesses exist, we create audit procedures to address them. For example, if during
the walkthrough we note that there are improperly classified investments, then will plan audit
procedures to address that risk.

Directional Risk for Investments

Third, consider the directional risk of investments.
The directional risk for investments is that they are overstated. So, in performing your audit
procedures, perform procedures to ensure that balances are properly stated.

Primary Risks for Investments

Fourth, think about the risks related to investments.
Primary risks include:
1. Investments are stolen
2. Investments are intentionally overstated to cover up theft
3. Investments accounts are intentionally omitted from the general ledger
4. Investments are misstated due to errors in the investment reconciliations
5. Investments are improperly valued due to their complexity and management’s lack
of accounting knowledge
6. Investments are misstated due to improper cutoff
7. Investment disclosures are not accurate or complete

Common Investment Control Deficiencies

Fifth, think about control deficiencies noted during your walkthroughs and other risk assessment
work.

It is common to have the following investment control deficiencies:

 One person buys and sells investments, records those transactions, and reconciles the
investment activity
 The person overseeing investment accounting does not possess sufficient knowledge or
skill to properly perform the duty
 Investment reconciliations are not performed timely or improperly
 The company does not employ sufficient assistance in valuing complex assets such as
hedges or alternative investments

Risk of Material Misstatement for Investments

Sixth, now its time to assess your risks.
Assess control risk at high for each assertion. (You may, however, assess control risk at less
than high, provided your walkthrough reveals that controls are appropriately designed and that
they were implemented. If control risk is assessed at below high, you must test controls for
effectiveness to support the lower risk assessment.)

When control risk is assessed at high, inherent risk becomes the driver of the risk of material
misstatement (control risk X inherent risk = risk of material misstatement). For example, if
control risk is high and inherent risk is moderate, then my RMM is moderate.

Important Assertions
The assertions that auditors give concern the most are existence, accuracy, valuation,
and cut-off. So RMM for these assertions is usually moderate to high.

Response to higher risk assessments is to perform certain substantive procedures:

namely, confirming investments, testing investment reconciliations, testing values, and
vetting investment disclosures.

Substantive Procedures for Investments

And finally, it’s time to determine your substantive procedures in light of your identified risks.
My customary audit tests include:
1. Confirming investment balances agreeing them to the general ledger
2. Inspecting period-end activity for proper cut-off
3. Using an investment specialist to value complex instruments (if any)
4. Vetting investment disclosures with a current disclosure checklist

If controls are tested and you determine they are effective, then some of the substantive
procedures may not be necessary.

Common Investment Work Papers

My investments work papers normally include the following:
 An understanding of investment-related internal controls
 Risk assessment of investments at the assertion level
 Documentation of any control deficiencies
 Investment audit program
 Investment reconciliations
 Investment confirmations
 Valuations performed by specialists
 Documentation of the specialist’s experience, competence, and objectivity
 Disclosure checklist

Summary
 The primary relevant investment assertions include existence, accuracy, valuation, and
cut-off
 Perform a walkthrough of investments by making inquiries, inspecting documents, and
making observations
 The directional risk for investments is an overstatement
 Primary risks for investments include:
 Investments are stolen
 Investments are intentionally overstated to cover up theft
 Investments accounts are intentionally omitted from the general ledger
 Investments are misstated due to errors in the investment reconciliations
 Investments are improperly valued due to their complexity and management’s
lack of accounting knowledge
 Investments are misstated due to improper cutoff
 Investments disclosures are not accurate or complete

 The substantive procedures for investments should be responsive to the identified risks;
common procedures include:

 Confirming investments
 Inspecting period-end activity for proper cut-off
 Using an investment specialist to value complex instruments
 Vetting investment disclosures with a current disclosure checklist
IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and
some contracts to buy or sell non-financial items.

Initial recognition
Financial assets and financial liabilities are recognized only when the entity becomes a
party to the contractual provisions of the instruments.

Classification of Financial Assets

Financial assets are classified as:
a. Financial assets at amortized cost
b. Financial assets at FVOCI
c. Financial assets at FVPL

Basis of classification
Financial assets, except those that are designated, are classified on the basis of both:
a. The entity’s business model for managing the financial assets; and
b. The contractual cash flow characteristics of the financial asset.

Classification at Amortized cost

A financial asset is measured at amortized cost if both of the following conditions are met:
a. The asset is held with business model whose objective is to hold financial assets in
order to collect contractual cash flows; and
b. The contractual terms of the financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest.

Classification at fair value through other comprehensive income (FVOCI)

A financial asset is measured at FVOCI if both of the following conditions are met:
a. The financial asset is held with a business model whose objective is achieve by
both collecting contractual cash flows and selling financial assets; and
b. The contractual terms of the financial asset give rise on specified dates to cash
flows that are solely payment of principal and interest.

Classification at Fair Value through Profit or Loss (FVPL)

A financial asset that does not meet the conditions for measurement at amortized
cost or FVOCI is measured at fair value through profit or loss. This normally the
case for trading securities.

Held for trading security is a financial asset that is:

a. Acquired principally for the purpose of selling it in the near term.
b. Part of portfolio of financial instruments that are manage together and for which there is
evidence of a recent actual pattern of short-term-profit taking; or
c. A derivative (except for a derivative that is a financial guarantee contract or a
designated and effective hedging instrument).

Initial measurement of financial assets

Financial assets are initially measured at fair value plus transaction cost,
except FVPL (transaction cost are expense immediately).

Subsequent measurement
After initial recognition, financial asset are measured at:
a. Amortized cost;
b. Fair value through other comprehensive income; or
c. Fair value through profit or loss.

Gains and losses from fair value changes:

 FVPL – recognized in profit or loss
FVOCI – recognized in other comprehensive income, until the asset is derecognized or
reclassified.

Illustrative Problem: Acquisition, disposal and measurement of trading and available-for-sale

securities – debt and equity

The following transactions of the Shawn Company were completed during the year 2020:

Jan. 2 Purchased 20,000 shares of Canadian Auto Co. for P40 per
share plus brokerage costs of 4,500. These shares were
classified as held for trading.

Feb. 1 Purchased 20,000 shares of Lake Shore Company ordinary

shares at 125 per share plus brokerage fees of 19,000.
Shawn classifies these shares as available for sale.

Apr. 1 Purchased 2,000,000 of BSP Treasury 7% bonds, paying

102.5 plus accrued interest of 35,000. In addition, the
company paid brokerage fees of 18,000. Shawn classified
these bonds as held for trading.

Jul. 1 Received semiannual interest on the BSP Treasury Bonds.

Aug. 1 Sold 500,000 of BSP Treasury 7% bonds at 103 plus

accrued interest.

Oct. 1 Sold 3,000 shares of Lake Shore at its fair value of 132 per
share.

The market values of the shares and bonds on December 31, 2020, are as follows:

Canadian Auto Co. P45 per share

Lake Shore Company P130 per share
BSP Treasury 7% bonds 102

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Gain or loss on sale of P500,000 BSP Treasury Bonds on August 1, 2020

2. Disregarding income taxes, reclassification adjustment for other comprehensive income on
the sale of 3,000 Lake Shore shares on October 1, 2020
3. Gain or loss on sale of 3,000 Lake Shore shares on October 1, 2020 recognized in retained
earnings.
4. Gain or loss arising from change in the fair value of securities to be recognized in 2020 profit
or loss
Solution:

Question No. 1

Sales proceeds (P500,000 x 1.03) P515,000

Less CA of BSP Treasury bonds sold (P500,000 x 1.025)* 512,500
Gain on sale of P500,000 BSP Treasury Bonds P 2,500

Question No. 2

Fair value (20,000 shares x P132) P2,640,000

Less CA [(20,000 x P125) + P19,000] 2,519,000
Total gain from change in fair value (OCI) P 121,000

Reclassification adjustment (P121,000 x 3/20) (P 18,150)

Question No. 3

Sales proceeds (3,000 shares x P132) P396,000

Less : CA of investment sold*
(P2,640,000 x 3/20) P396,000
Reclassification adjustment
(see no. 2) ( 18,150) 377,850
Gain on sale of 3,000 Lake Shore P 18,150
shares recognized in RE

Alternative computation:

Sales proceeds (3,000 shares x P132) P396,000

Cost of shares sold (P2,519,000 x 3/20) 377,850
Gain on sale of 3,000 Lake Shore shares (RE) P 18,150

Question No. 4

Canadian Auto Co. (20,000 x P45) P 900,000

BSP Treasury 7% bonds (P1,500,000 x 1.02) 1,530,000
Fair value of trading securities, 12/31/2020 2,430,000
Trading securities, 12/31/2020 before mark-to-market
(see computation below) 2,337,500
Unrealized gain to be recognized in profit or loss P 92,500

Cost of Canadian Auto Co. shares (20,000 x P40) P 800,000

Cost of BSP Treasury 7% bonds (P2,000,000 x 1.025) 2,050,000
Cost of P500,000 BSP Treasury bonds sold (see no. ( 512,500)
1)
Trading securities, 12/31/2020 before mark-to-market P2,337,500

MODULE # 6 Post-test
 APPLIED AUDITING
AUDIT OF INVESTMENT

PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. You were engaged by Steven Company to audit its financial statements for the year 2021.
During the course of your audit, you noted that the following trading securities were properly
reported as current assets at December 31, 2020:

Cost Fair value

Anaheim Corporation, 5,000 shares,
convertible preference shares P 450,000 P 487,500
Lakers, Inc., 30,000 ordinary shares 675,000 742,500
Mississauga Co., 10,000 ordinary shares 618,750 450,000
P1,743,750 P1,680,000

The following sale and conversion transactions transpired during 2021:

Mar. 1 Sold 12,500 shares of Lakers for P33.75 per share.

April 1 Sold 2,500 shares of Mississauga for P45 per share.

Sept. 21 Converted 2,500 shares of Anaheim’s preference

shares into 7,500 ordinary shares of Anaheim, when
the market price was P80.25 per share for the
preference shares and P40.50 per share for the
ordinary shares.

The following 2021 dividend information pertains to shares owned by Steven:

Jan. 2 Mississauga issued a 10% share dividend when the

market price of Mississauga’s ordinary share was
P49.50 per share.

March 31 Anaheim paid dividends of P2.50 per share on its

and Sept. preference shares, to shareholders of record on March
30 15 and September 15, respectively. Anaheim did not
pay dividends on its ordinary shares during 2021.

July 1 Lakers paid a P2.25 per share dividend on its ordinary

shares.

Market prices per share of the securities were as follows:

12/31/2021 12/31/2020
Anaheim Co., preference 92.25 97.50
Anaheim Co., ordinary 42.75 38.25
Lakers, Inc., ordinary 22.50 24.75
Mississauga Co., ordinary 40.50 45.00

All of the foregoing shares are listed in the BSP Stock Exchange. Declines in market value from
cost would not be considered permanent.
 Based on the above and the result of your audit, you are to provide the answers to the following:

1. How much is the gain on sale of 12,500 Lakers shares?

a. 112,500 c. 140,625
b. 281,250 d. 0

2. How much is the gain or loss on sale of 2,500 Mississauga shares?

a. 28,125 gain c. 28,125 loss
b. 10,227 gain d. 0

3. How much is the gain or loss on conversion of 2,500 Anaheim preference shares into
15,000 ordinary shares?
a. 43,125 loss c. 60,000 gain
b. 78,750 gain d. 0

4. How much is the total dividend income for the year 2021?
a. 64,375 c. 51,875
b. 101,375 d. 364,375

5. How much should be reported as unrealized loss on trading securities in the company’s
income statement for the year 2021?
a. 47,625 c. 75,750
b. 39,102 d. 0

2. Shawn Marketing Company made investments in trading securities. An analysis of these

investments on December 31, 2020 showed the following:

Security Cost Fair value

Asturias Textile shares 6,000 shares P307,500 P270,000
Mavis, Inc. shares 2,250 shares 76,500 90,000
Loeb Co. 12% Bonds P300,000 269,500 280,600
Total P653,500 P640,600

On April 1, 2021, the company purchased as a temporary investment, 200,000 face value, 9%
BSP treasury notes for 198,500, which includes accrued interest. The notes mature on July 1,
2022 and pay interest semiannually on January 1 and July 1. The notes were sold on
December 1, 2021 for 206,500, which includes accrued interest.

On July 1, 2021, the shares of Mavis were sold for 70,000. On December 31, 2021, Asturias
Textile shares were quoted at P44 per share; Loeb bonds were quoted at P950 per 1,000 bond.

Based on the above and the result of your audit, answer the following:

1. The gain on sale of BSP Treasury Notes on December 1, 2021 is

a. 500 c. 5,000
b. 8,000 d. 12,500

2. The realized loss on sale of Mavis shares on July 1, 2021 is

a. 0 c. 20,000
b. 18,650 d. 6,500

3. The interest income for the year 2021 is

a. 36,000 c. 37,500
b. 48,000 d. 24,000
 4. The carrying amount of the trading securities on December 31, 2021 is
a. 533,500 c. 520,025
b. 577,000 d. 549,000

5. The net unrealized loss that will be recognized in the 2021 profit or loss is
a. 2,800 c. 15,100
b. 1,600 d. 0

3. During 2021, Shawn Company purchased 9,000 ordinary shares of Hurontario Company for
P16 per share, 6,000 ordinary shares of Eglinton Company for P33 per share and P120,000 of
treasury notes at 101. These investments are intended to be held as ready sources of cash and
are classified as held for trading.

Also in 2021, Shawn purchased 10,500 ordinary shares of Dundas Company for P29 per share.
The securities are classified as available for sale.

During 2021, Shawn received the following interest and dividend payment on its investments:

Hurontario Company P1 per share dividend

Eglinton Company P3 per share dividend
Dundas Company P2 per share dividend
Treasury notes 6% annual interest earned for 6 months

Fair values of the securities at December 31, 2021, were as follows:

Hurontario Company P20 per share

Eglinton Company P22 per share
Dundas Company P26 per share
Treasury notes 102

On March 23, 2022, the 6,000 ordinary shares of Eglinton were sold for P17 per share. On
June 30, 2022, the treasury notes were sold 100.5 plus accrued interest.

Fair values of remaining securities at December 31, 2022, are as follows:

Hurontario Company P20 per share

Dundas Company P33 per share

Based on the above and the result of your audit, determine the following:

1. Total dividend income in 2021

a. 48,000 c. 27,000
b. 21,000 d. 0

2. Carrying amount of Trading Securities as of December 31, 2021

a. 434,400 c. 463,200
b. 342,000 d. 717,900

3. Unrealized loss to be recognized in 2021 profit or loss

a. 49,800 c. 27,600
b. 28,800 d. 0

4. Total realized loss on sale of securities in 2022

a. 96,600 c. 29,400
b. 5,400 d. 31,800
 5. Net unrealized gain in accumulated other comprehensive income in equity as of December
31, 2022
a. 42,000 c. 63,000
b. 73,500 d. 0

4. Investment in trading, available-for-sale, and held to maturity securities

Your audit of the Theresa Corporation disclosed that the company owned the following
securities on December 31, 2021:

Trading securities:

Security Shares Cost Fair value

Kristina, Inc. 4,800 P 72,000 P 92,000
Kelly, Inc. 8,000 216,000 144,000
10% , P100,000 face value ,
Kimberly bonds (interest payable
semiannually on Jan. 1 and Jul.
1) 79,200 81,720
Total P367,200 P317,720

Available-for-sale securities:

Security Shares Cost Fair value

Ivan Products 16,000 P 688,000 P 720,000
Cleo, Inc. 120,000 3,120,000 2,920,000
Cooper, Inc. 40,000 480,000 640,000
Total P4,288,000 P4,280,000

Held to maturity:

Carrying
Cost amount
12%, 1,000,000 face value, Emer bonds
(interest payable annually every Dec. 31)
P950,000 P963,000

During 2022, the following transactions occurred:

Jan. 1 Receive interest on the Kimberly bonds.

Mar. 1 Sold 4,000 shares of Kelly Inc. for P76,000.

May 15 Sold 1,600 shares of Cooper, Inc. for P15 per share.

July 1 Received interest on the Kimberly bonds.

Dec. 31 Received interest on the Emer bonds.

31 Transferred the Emer bonds to the available-for-sale

portfolio. The bonds were selling at 101 on this date. The
bonds were purchased on January 2, 2021. The discount
was amortized using the effective interest method.

The quoted prices of the shares and bonds on December 31, 2022, are as follows:
 Kristina, Inc. P22 per share
Kelly, Inc. P15 per share
10% Kimberly bonds P75,600
Ivan Products P42 per share
Cleo, Inc. P28 per share
Cooper, Inc. P18 per share

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Gain or loss on sale of 4,000 Kelly, Inc. shares on March 1, 2022

a. 4,000 loss c. 32,000 loss
b. 4,000 gain d. 32,000 gain

2. Realized gain or loss on sale of 1,600 Cooper, Inc. shares on May 15, 2022
a. 4,800 loss c. 1,600 loss
b. 4,800 gain d. 1,600 gain

3. Total interest income for the year 2022

a. 130,000 c. 144,820
b. 125,560 d. 143,000

4. The amount to be recognized in other comprehensive regarding transfer of Emer bonds to

available-for-sale securities
a. 47,000 c. 61,820
b. 32,180 d. 0

5. Carrying amount of Trading Securities and Available-for-sale securities as of December 31,

2022 should be
Trading securities Available-for-sale securities
a. 241,200 5,733,200
b. 301,200 4,723,200
c. 241,200 5,762,000
d. 301,200 5,720,800

5. On July 1, 2021, Jeffrey Company acquired 25% of the outstanding ordinary shares of Omar
Corporation at a total cost of 7,000,000. The underlying equity of the shares acquired by Jeffrey
was only 6,000,000. Jeffrey is willing to pay more than the book value for the following reasons:

a) Omar owned depreciable plant assets (10-year remaining economic life) with a current fair
value of 600,000 more than their carrying amount.

b) Omar owned land with current fair value of 3,000,000 more than its carrying amount.

c) There are no other identifiable tangible or intangible assets with fair value in excess of book
value. Accordingly, the remaining excess, if any, is to be allocated to goodwill.

Omar earned net income of 5,400,000 evenly over the year ended December 31, 2021. On
December 31, Omar declared and paid a cash dividend of 1,050,000 to ordinary shareholders.
Market value of Jeffrey’ shares at December 31, 2021 is 7,500,000. Both companies close their
accounting records on December 31.

Based on the above and the result of your audit, determine the following:
 1. Total amount of goodwill of Omar Corporation based on the price paid by Jeffrey
a. 4,000,000 c. 400,000
b. 1,000,000 d. 100,000

2. Net investment income from Investment in Omar Corporation

a. 675,000 c. 667,500
b. 1,335,000 d. 662,500

3. Carrying amount of Investment in Omar Corporation as of December 31, 2021

a. 7,412,500 c. 7,667,500
b. 7,405,000 d. 7,662,500

6. On April 1, 2021, Kristina Company acquired 20% interest in the voting shares of Trisha
Company for 1, 800,000 the net assets of Trisha on this date were P6,000,000. Kristina
received 100,000 dividends from Trisha Company, which the former credited to Dividend
Income.

Trisha reported profit after income tax of 800,000 during the year, 160, 000 of which was earned
during the first quarter of 2021. Total market value of the shares of Trisha held by Kristina was
2,300,000 at December 31, 2021.

Kristina Company recorded the acquisition of the securities at April 1 by a charge to Investment.
Dividends received during the year credited to Dividend Income and an Unrealized Gain for
P500, 000 was reported on its draft of statement of comprehensive income for the year 2021.

Kristina had no intention of selling the shares of Trisha, as Trisha is one of Kristina’s valued
suppliers. As a result of this acquisition, Kristina has the ability to exercise significant influence
over the operating and financial policies of Trisha.

Trisha’s assets and liabilities at April 1, 2021 had market values approximating carrying
amounts, except land which had fair value of 750,000 more than its carrying amount, equipment
with fair value at April 1, of 200,000 more than their carrying amounts and inventories which
showed carrying values less than fair values by total of 30,000 at April 1. Equipment had a
remaining life of 5 year at April 1, 2021.

1. How much total income from investment shall Kristina recognize for the year 2021 as a result
of this investment?
a. 116, 000 c. 100, 000
b. 148, 000 d. 248, 000

2. How much Dividend Income shall Kristina report for the year 2021 as a result of its
investment in Trisha?
a. 100, 000 c. 500, 000
b. 116, 000 d. 0

3. At what amount should this investment be shown on the December 31, 2021 statement of
financial position?
a. 1, 848, 000 c. 1, 816, 000
b. 1, 948, 000 d. 2, 300, 000

7. On June 1, 2021, Edna Corporation purchased as a long term investment 4,000 of the 1,000
face value, 8% bonds of Mayet Corporation. The bonds were purchased to yield 10% interest.
Interest is payable semi-annually on December 1 and June 1. The bonds mature on June 1,
2027. Edna uses the effective interest method of amortization. On November 1, 2022, Edna
sold the bonds for a total consideration of 3,925,000. Edna intended to hold these bonds until
they matured, so year-to-year market fluctuations were ignored in accounting for bonds.
 Based on the above and the result of your audit, answer the following: (Round off present value
factors to four decimal places)

1. The purchase price of the bonds on June 1, 2021 is

a. 3,645,328 c. 3,696,736
b. 3,691,132 d. 3,624,596

2. The interest income for the year 2021 is

a. 215,850 c. 212,829
b. 215,521 d. 211,612

3. The carrying amount of the investment in bonds as of December 31, 2021 is

a. 3,725,919 c. 3,719,986
b. 3,649,541 d. 3,671,491

4. The interest income for the year 2022 is

a. 306,608 c. 311,218
b. 310,715 d. 304,748

5. The gain on sale of investment in bonds on November 1, 2022 is

a. 21,196 c. 27,632
b. 80,235 d. 104,045

8. On January 2, 2020, Kristine Company purchased Trisha Company, 9% bonds with a face value
of 4,000,000 for 3,760,000. Kristine Company intends to collect contractual cash flows from the
bonds, and as such the instruments are designated as Held for Collection. The effective interest
rate on this investment is 10%. The bonds are dated January 1, 2020 and mature on December
31, 2029. The bonds pay interest semi-annually on June 30 and December 31. Kristine’s
accounting year is the calendar year.

On November 30, 2022, 1,800,000 of the bonds were sold at 98 plus accrued interest. This
portion sold is considered to be more than an insignificant portion of the investment. As a result
of the change in business model, Kristine reclassified the Trisha Company bonds as at fair value
through profit or loss.

The market value of the bonds was 98 on December 31, 2020, 96 on December 31, 2021 and
98 ½ at December 31, 2022.

1. What is Kristine’s interest revenue for the year ended December 31, 2020?
a. 376,400 c. 498, 920
b. 349,800 d. 374, 600

2. At what amount should this investment be presented on December 31, 2020 statement
of financial position?
a. 3, 785, 220 c. 3,791, 200
b. 3, 776, 400 d. 3, 744, 600

3. What amount of financial asset shall be presented as part of current assets on

December 31, 2021 as a result of the above investment?
a. 3, 785, 220 c. 3, 791, 200
b. 0 d. 3, 744, 600

4. What amount of gain or loss shall be recognized upon sale of the securities at November
30, 2022?
a. 48, 279 c. 47, 900
 b. 47, 829 d. 34, 600

5. At what amount should the investment be shown on December 31, 2022 statement of
financial position?
a. 2, 167,000 c. 2,000,000
b. 4, 000,000 d. 2,200,000

6. How much interest revenue shall be presented on the Statement of Comprehensive

Income for the year 2022?
a. 16,500 c. 366, 879 e. 364,732
b. 365, 218 d. 158, 808

9. On January 2, 2020, Kristine Company purchased Trisha Company, 9% bonds with a face value
of 4,000,000 for 3,760,000. The bonds are designated as “Financial Asset at Fair Value
Through Profit and Loss”. The effective interest rate on this investment is 10%. The bonds are
dated January 1, 2020 and mature on December 31, 2029. The bonds pay interest
semiannually on June 30 and December 31. Kristine’s accounting year is the calendar year.

On November 30, 2022, 2,000,000 of the bonds were sold for 1,960,000 inclusive of accrued
interest.

The fair value of the bonds is 98 on December 31, 2020, 96 on December 31, 2021, 98 ½ at
December 31, 2022.

1. What amount of interest revenue shall be presented in profit and loss for the year 2020?
a. 376,000 c. 360,000
b. 338,400 d. 400,000

2. What amount of unrealized gain or loss shall be taken to profit or loss for the year 2020?
a. Unrealized Gain 160,000 c. Unrealized Gain 1,800,000
b. Unrealized Gain 240,0000 d. Unrealized Gain 80,000

3. How much gain or loss would be recognized upon the sale of the securities on November 30,
2022?
a. Gain of 40,000 c. Loss of 40,000
b. Gain of 35,000 d. Loss of 35,000

4. At what amount should the investment be shown on December 31, 2022 statement of
financial position?
a. 4,000,000 c. 1,920,000
b. 3,940,000 d. 1,970,000

5. What amount of unrealized gain/loss shall be presented in profit or loss for the year ended
December 31, 2022?
a. Gain of 60,000 c. Loss of 60,000
b. Gain of 50,000 d. Loss of 50,000

10. BOND INVESTMENT AT FVOCI

An entity purchased 5,000,000 of 8%, 5-year bonds on January 1, 2020 with interest payable on
June 30 and December 31. The bonds were purchased for 5,100,000 plus transaction cost of
108,000 at an effective interest rate of 7%.

The business model for this investment is to collect contractual cash flows and sell the bonds in
the open market. On December 31, 2020, the bonds were quoted at 106.
1. What amount of interest income should be reported for 2020?
a. 400,000
b. 200,000
c. 364,560
d. 363,940

2. What is the adjusted carrying amount of the investment on December 31, 2020?
a. 5,300,000
b. 5,171,940
c. 5,174,560
d. 5,000,000

3. What amount should be recognized in OCI in the statement of comprehensive income for
2020?
a. 300,000
b. 125,440
c. 128,060
d. 92,000

4. If the entity elected the fair value option, what total amount of income should be recognized
for 2020?
a. 400,000
b. 492,000
c. 600,000
d. 200,000