Substantive Tests of Imvestments 4

CHAPTER As previously mentioned in Chapter 8, because o the relatively few transactions

involving investments, most auditors would focus on directly testing the
transactions affecting the Investments account. The decision to forego testing of
prescribed controls for compliance may be based on cost-benefit considerations
rather than on the absence of effective controls.
SUBSTANTIVE TESTS
12 OF INVESTMENTS The form of investments can vary considerably. The investments may be in debt
T-bills, commercial paper, bonds) or equity (ordinary shares, preference shares)
securities; the securities may be marketable or long term, as investment in shares
of subsidiary or affiliated companies. Also, the investment may be in pension
funds, cash surrender value of the life insurance, real estate, or loan or advance
rather than a security. However, the primary distinction between long-term
Learning Objectives After studying this
chapter,
investment and investment classified as current assets is management's intention
be able to:
you should and ability to hold the investment for longer than one year. Thus, the following
discussion of the substantive audit objectives and procedures will apply in genetal
to most investments.

Describe the auditors' objectives

for the substantive Audit Objectives and Procedures
tests of
investments in debt and
securities, marketable equity Figure 12.1 summarizes the financial statement assertions, specific audit
and long- objectives and the common audit procedures traditionally used to audit
term. Investments.

Describe the nature of the audit Figure 12.1 Assertions, Objectives and Procedures for Investments
procedures to accomplish the
auditors' objectives for the audit of Assertions Audit Objectives Audit Procedures
investments in debt and
securities. equity .Existence or Occurrence A. Todetermine that investments in 1. Obtain or prepare a isting of
securities (shares, bonds, notes) securities and investments
Understand and prepare audit
physically exist and in loans and
advances exist
owned by the company and
related revenue accounts
Working papers to document audit and reconcile to the general
procedures for investments in debt ledger.
and equity securities. 2. Inspect securities on hand.
3 Obtain confirmation of
securities heldby others
. Completeness B. To determine that investments 4 In addition to audit
are allincluded in thestatement procedures 2 and 3, vouch
of financial position. selected purchases and
sales transactions of
securnties during theyear
 412 Chapter 12 Substantive Tests ofIvestments 413
mentioned in audit procedure number I will be shown in the securities count
Assertions Audit Objectives Audit Procedures
sheet. If securities are held in more than one location, an arrangement should

IIl. Rights and To determine that the company 5. In addition to audit be made to have a simultaneous count at all locations. This will avoid the
C.
Obligations owns or has ownership rights to procedures 2 and 3, verify possibility of client personnel attempting to cover up theft or unauthorized use
all investments included in the the clients' cutoff of by transferring the securities from one location to another
statement of financial position. securities transactions.
6. Perform analytical The information obtained during the physical examination of securities should
procedures. be compared to the information on the listing of securities provided by
the
7. Compute independently
client.
revenuefrom securities.
V. Valuation D. To determine that investments 8. Determine market value of
Figure 12.2 shows the Pro-forma Working Papers for Securities Count
Sheet.
are valued properly in securities at statement of
accordance with generally financial position date. Figure 12.2 Securities Count Sheet
accepted accounting principles. 9. Evaiuate the method of
accounting for securities.
V. Presentation E. Investments 10. Evaluate financial statement X Company
are properly
and Disclosure described and classified in the presentation and related Securities Count Sheet
statement of financial position revenue or loss accounts. 1.2.2017
and related disclosures are
adequate. Date Issued in Par Value Number
Certificate
Number IsSued Description thename of Per Share of Shares
Discussion of Audit Procedures
1. Obtain or
prepare analysis of the securities, ofher investments and related
revenue account and reconcile to the
general ledger.
that the above listed securities were inspected on my presence by
The auditor should obtain or certify
prepare in advance if possible, an analysis of the On
and same were returned to me intact.
investment account showing the
sales of investments during the
beginning and ending balances, purchases and name of auditor
year and interest and dividend earned. The
auditors should see to it that the totals on the
schedules agree with the totals Custodian
shown in the general ledger. Ilustrative Audit
Case 12.1 shows the analysis of
securities. Also, the auditor should
prepare a separate list of securities as of
the end of the year that includes the Reviewed by
following information: name of issuer and Prepared by:
description of security; serial numbers; name of owner and any endorsement, Initial Date Initial Date
number of shares or principal amount; cost and
cost, market price per unit; total market
carrying amount if other than
price, location of securities; if they are
pledged, with whom and for what purpose.
3. Confirm securities held by others.
2. Inspect securities on hand.
hands of sharebrokers for safekeeping or
Client-owned securities may be in the
The auditor should account for the banks if they w e r e used as collateral for bank loans. The auditor should send a
securities owned The
inspecting the securities on hand in the presence of the by to the holders of the securities.
the company
by confirmation request signed by the client
obtain a signed receipt in ink for their return to company's official and include instructions to mail the reply directly to the auditor.
the custodian. The information request should
 414 hqver Substantive Tests of Investments 415
4Fouch seiected punhases and sales of securifies and other investns
ts ln those instances where investment in ordinary shares allows
during the yeur. significant
influence by the investor, the equity method should be used to account for the
investment. When the cquity method is used, no valuation to market is
The auditos should verity a sample of transactions by reference to the necessary. The investment account is increased to retlect a proportionate share
bkers advives and cash records. Entries to record the purehases and salles of investee income and decreased to reflect investee losses and dividends
transactins shulkd e checked as to authorization. propriety and accuracv. received from the innvestee.

eriy the olient's cutoff ofsecurities transactions.

When auditing an investment accounted for by the equity method, the auditors
The auditors should review transactions must verity that the investment was properly recorded initially. The auditors
pertaimng to securities a few weeks
efore and atter the statement of finaneial position date to must also obtain evidence regarding additions to or deductions from the
determine whether account by referring to the "audited financial statements of the investee." If
they are reconded in the corect accounting period. Sometimes
sales occurring
at the statement of tinancial these statements are not available, the auditors should perform a sufficient
pSition date are not recorded because the deliverv
of the certificates the brker are nade atter the investigation of the investee's financial statements to determine the fairness of
by statement of
Asition date. Hence, an ermor in cutoft of transactions will occur. financial the amounts recorded by the investor. In certain cases, this might involve
performing audit procedures at the investee's placce.
7

Perform analyvical procedure. Compute revenue

from investments
imdependenty. 10. Evaluate financial statement presentation and disclosure of securities.
Financial Reporting Standards 32 and 39 require the proper categorization of
To the reasonableness of the amounts of dividend
test
and nterest income the investment portfolio in the financial statements. They also require the
rorded. they may be elated to their sources diselosure of the method of accounting for the securities, aggregate market
namely,
Dividends that should have been received and recorded can the securities
also be verified values of the various portfolio, amount of realized and unrealized gains and
eferring to the investment advisory services by the by losses, proceeds from sales of securities, lien on the securities and other related
and other intemativnal Philippine Stock Exchange
can also be veritied
publications. Interest income earned on notes, bonds matters.
independently by the auditors and compared with recorded
amounts in the books of the client. lustrative Audit Case 12.1: Analysis of Investment in Equity Securities
to prepare the
8&. Determine market value
of securities
As auditor for the Laurel Company. you are
following
and evaluate accounting method. Working papers for the securities and for security transactions for the year
Generally. the audit procedures in the
verification of valuation" are ended December 31, 2017, including columns for the following:
detemineod by the method of valuation
that is appropriate under PFRS.
largely
(1) Securities inventory at December 31. 2016, divided into security
Cost is substantiated name, number of shares., cost, and average cost per share.
by
rconds and market price vouching
the acquisition
is substantiated price in the accounting (2) Security purchases in 2017, divided into date, shares, and amount.
market quotation of by comparison to publication Security sales in 2017, divided into date, shares, amount, and average
security prices. When securities are not listed ot
at the Stock
(3)
Exchange or not actively traded. it may be cost of shares sold, and profit or loss on sales.
quotations from brokers. necessary to obtain market (4) Securities inventory at December 31. 2017, divided into name of
security, shares, cost, and market value.
If the investment is
closely held with no active market, the auditors (S) Dividends received in 2017.
an
appraisal value from a securities appraiser.
may obtain of December 31, 2017.
(6) Adjusting journal entry required (if any) as
 416 Chaprer 12
securities available-for-sale purchased
by the Laurel Compan:
any
Marketable a
December 31. 2016:
Security A, 1,500 shares, at a cost of.. ***
P 120,000
Security B, 1,200 shares, at a cost o r . . 84,000
Security C, 1,000 shares, at a cost
of.
************
130,000
Security D, 800 shares, at a cost of...sasn 85,000
Securityy E, 1,000 shares, at a cost of . . . . 70,000
P 489.000
Security transactions for 2017 are as shown in the two tables following:

Purchases Shares Cost R

April 15 500A P 50,000
April 25 ****** *****" 200F 15,000 8
July 15 300G
*************************** 40,000
July 25 ********** 200D 20,000
August 15 200D
***********'*******

25,000
September 15 1,000G 90,000
Sales Shares Selling Price
March 10 ********* 200C P 30,000
April 10 *****************
1,200B 110,000
June 15 300C
August 20 50,000
September 15
**************** **** 1,000E 30,000
.....

1,000A 125,000
Other data follows:
are as

() Cash dividends received, 2017: A,

P1,000.
P12,000; C, P6,000; D, P5,000; and F,
(2) Share dividend received on June
15, 2015; E, 100 percent.
(3) Market price of
securities at December 31, 2017:
A
P100,000
D 70,000
E 135,000
40,000
G 12,000
133.000
P490.000
 Substantive Tests of Imvestments 419
418 Chupter 12
ustrative Audit Case 12.2: Audit of Trading Securities AIdentify the following amounts on Amarillo's financial statements.
for advice on the
Hector Santos, an investor in Amarillo Co., asked you Carrying value of Azul investment
of Amarillo's financial reporting for two of ts investments. You obtaine ropriety
Decemher Carrying value of Western investment
tolowing information related to the investments from Amarillo's er
2016 financ ial statements.
31, Income on Income Statement
Azul investment
20% ownership interest in Azul Co., represented by 200,000 outstand:. Western investment
ordinary shares purchased on January 2, 2016. for P1,200,000 nding
Other comprehensiveincome
20% ownership interest in Western Co., represented by 20.000 outstandine Azul investment
ordinary shares purchased on January 2., 2016, for P600,000. Western investment
On January 2, 2016, the carrying values of the acquired shares of both
investments equaled their purchase price Solution: Illustrative Case 12.2
Azul reported earnings of P800,000 for the year ended
December 31. Requirement
2016, and declared and paid dividends of P200,000 during 2014
Western reporting earnings of Investment in Azul Co. 1.200,000
P700,000 for the year ended
December 31, 1.200.000
2014, and declared and paid dividends of P120,000 during 2016. Cash....noo
On December 31, 2016, Azul's and Western's
ordinary shares were 40,000
trading over-the-counter at P36 and P40 per share,
respectively. Cash
Investment in Azul Co.
The investrnent in Azul is accounted for 40.000
using the equity method 200,000 x 20%% =40,000).
The investment in Western is accounted
for as available-for-sale securities
Investment in Azul Co. .i...eur..--i*e-**** 160,000
You recalculated the amounts
reported in
financial statements, and determined that
Amarillo's December 31, 2016 income from Azul
they were correct.
800,000x 20%% = 160,000 60.000
informatinn available the financial statcments was
in
Stressing that the
Santos limited, you advised
that, assurning properly applied financial reporting standards, Amarillo .
may have appropriatecly used two
different methods to account for ts Carrying value of Azul investrment PL320.000o
investments in Azul and
ywnership interests
Western even though the
investrnents represent equal Carrying value of Western investment P800.000
Income on Income Statement
REOUIRE P160,000
Azul investment P 24,000
1Prepare the journal entry for Amarillo's Western investment
2016. investment in Azul Co. on January 2
2
Prepare the yournal emry for the dividends Other comprehensive income P
received from Azul 2016 Azul investment
Prepare the journal eniry required for in
Western investment P200,000
ending December 31, 2016
on Amarillo's reported income for the year
 420 Cher Substantve Tests of Imvestments 421
Explanation of solution Noncurrent investment in 8%, 10-year bonds (at face value
cost: P87.711) 100.000
arying alue of Azul 75,000
Noncurrent marketable equity securities (at market: cost: P62.000)
Statement of financial position Amarillo reported its investment in Azul at a cam Plant assets 100.000
amount of PI.320,000
arrying Less: Accumulated depreciation 25,000)
Calculations:
=
Pi60.000 (P800,000 x 20%) Total assets P322000
Equity in eamings
Dividend rec'd = P40.000 (P200.000 x 20%)
Carrying amount P1.200,000 160,000 P40,000 P1.320.000 The long-term
investment in
bonds (held-to-maturity) was purchased on January
The difference between cost and face value was recognized on the 201
Carryng alue of Western 2017.
as an unrealized gain on the acquisition date. The interest on
the
income statement
Statement of financial position its investment in Western at marketable equity
Amarillo reported a fai bonds is payable annually on January 1. The noncurrent
This
value of P800.000
securities (@FVIOC) include a 30% interest in the Alomar Company
Calculations
20,000 shares x P40 per share = P800,000 investment (with a P45,000 market value on December 31, 2017) was purchased

Income Statement Amounts
Income from Azul
Income from Western
Other Comprehensive Income
Azul Investment
Western Investment
Iliustrative Audit Case 12.3:
Investments
on January 2,
2017, for P40,000 and represents a significant influence. Alomar
2015. MB reported 2017
had net income of P50,000 and dividends of P20.000 in
P800,000 x 20% = P160,000 net income of P57,000. The books for MB Corporation have not been closed for
P24,000 dividend income 2017. Assume that all items are material.
Dividend income P24,000
Calculation: REQUIRED:
P120,000 x 20% P24,000
Provide correcting and adjusting and adjusting entries for MB Corporation
in
a.
on the bond
light of the information given. Any discount or premium
investment is to be carried in á separate account from the face value.
PO
Unrealized gain P200,000 b. What is MB°s corect net income for 2017? Show your computations.
Calculation:
P800,000 -P600,000 P200,000 c. Recast the asset side of the December 31, 2017, statement of financial position
for MB Corporation according to generally accepted accounting principles.
Valuation of Current and Non-Current
Solution: llustrative Audit Case 12.3

The Requirement (a)

following asset side of the statement of financial
MB Corporation on December 31, 2017. position was provided by the Adjusting journal entries for MB Corporation are as follows

AJE (1)
MB Corporation Loss on Valuation of Current Marketable Equity Securities (CMES) 6,000
Allowance to reduce Current Marketable Equity Securities
December 31, 2017 6.000
to Fair Value or Market Adjustment- Trading Securities
To adjust CMES to fair value valuation
Assets
Cash
AJE 2)
Temporary marketable equity securities P20,000 Unrealized Gain on Bond lInvestment (P100,000- P87.711) 12.289
Inventory trading (market: Pl6,000) ,000 Discount on Bond Investment 12,289
To properly record discount bond investment.
Current assets 30,000 on

72.000
 ubstantive Tests of Irvestments425
422 Chaprer 12
AJE AJE (6)Dividend Revenue (P20,000 x 30%)
8,000 6,000
interest Receivable (8% x P100.000) 771 Investment in
Equity Securites 6,000
Discount on Bond Investment To corect entry recording receipt of dividends.
InterestRevenue (P87,711x 10%)
To accrue interest on investment in bonds.
8,771
Requirement (b)
investment must be detemined The effective rate must be gre;
The effective rate of the bond
than 8% because the bonds were acquired at a discount; try 1070. greater Net income as reported P57,000
Unrealized loss on curent marketable equity securities 000)
P100.000x pví 1ol 1o% P38,554
(38554) Elimination of unrealized gain on bond investment (12,289)
(P100,000 x 8%) pví 1ol e P49,157 Interest revenue 8,771
(6.14457) P87,711 Elimination of unrealized gain (13,000)
This caiculatbon indicates that 10% is the effective rate on the investment. Therefore, the ab Income from Alomar investment 15,000
oumal entry has to be made
above
Dividend revenue 16.000)
AJE(4) Correct net income P43.482
Gain on Valuation Noncumrent Marketable Equity Securities (NCMES) 13,000
Investment in Equity Securnties - Alomar
40,000 Requirement (c)
Noncurrent Marketable Equity Securities 45,000 MB Corporation
Unrealized Gain on Noncurent Marketable Equity Securities December 31, 2017
@FVTOCI) (Equity) 8,000
To reclassity investment in Alomar and corect entry to record
gain on valuation of non-curent marketable equity securities.
Assets
P 20,000
Cash
The noncurent marketable equity securities are caried at market value, which exceeds Current marketable equity securities P 22,000
cost. The
company uses fair value" basis of valuation in consonance with PAS 39. They include, however, the Less: Allowance to reduce current marketable
investment in Alomar Company which should be reclassified and accounted for by the (6000) 16,000
method.equity equity securities to fair value
Interest receivable
8,000
Cost Market
Noncurent marketable equity securities P 62,000 P 75,000 30.000
Investment in Alomar Inventory
40.000) 45,000) P 74,000
Balance of noncurent marketable Total Current assets
equity secunites 88,482
@FVTOCI) P 22.000 P 30.000 Noncurrent investment in bonds (held-to-maturity)
'Because the secuities Noncurrent marketable equity securities (cost P22,000) 30,000
are included in the statement of financial
position at P75,000, the
assumption is made that an unrealíized gain of P13,000 to the asset account was recorded. Investment in Alomar
49,000

Total Unrealized Gain on NCMES per client 100,000

Less: increase in value of Investment in Alomar P13,000 Plant assets
Balance for remaining NCMES 5.000 Less: Accumulated depreciation (25,000) 75.000
P 8.000 Total assets
2308.482
The equity method should be applied to the Alomar
investment as follows:
AJE (5)
P87,711+ 771 P88,482
*

P40,000+ P15,000 P6,000

=
P49,000
Investment in Equity Securities (P50,000 x
Equity in Investee Income
30%) 15,000
(@FVTOCI) balance of P8,000 will be reflected in the Equity
To take up share in investee income. 15,000 The Unrealized Gain on NCMES
section of the statement of financial position.
 424 hpier i2 Substantve Tests of investmenis 425
llustrative Audit Case 12.4: Fair Value to Equity Method Illustrative Audit Case 12.5
Solution:
Nco Corporation has owned shares of Astro Corporation since 2014. 7.600
At
Casn **********************..
**************** **************

Devember 31, 2017. the balances related to this investment were 1,200
Securities ((@ FVTOC).. ****

Dividend Revenue.. 6.400

Secunties (FVTOC) P185.000
To record dividend revenue from Pablo in 2017
Securities Fair Value Adj (AFS) 34,000 Dr.
Unrealized Holdng Gain or Loss - Equity (OC) 34,000 Cr. and to recognize cumulative excess
of dividends
received over share of investee earnings in periods
subsequent to change from equity method.
On Januarn 1. 2018. Nico purchased additional shanes of Astro Corporation
or
P44s.000 and now has significant intluence 0v er Astro If the equity method had
Audit Case 12.6: Journal Entries for Fair Value and Equity
een used in 2014-2017. income have
would been P33,000 greater
than dividends Illustrative
rveved Prepare Nico's jounal entries to record the purchase of the investment Methods
and the change to the equity method.
Presented below are two independent situations
Solution: lllustrative Audit Case 12.4
Situation
Investment in Astro Corporation Shares. 478,000
10% of the 200,000 ordinary shares of Monday
*
*

Cash Charming Cosmetics acquired

On June 30
445.000 Fashion at a of P13 per share on March 18. 2017.
total cost
Retained Earnings.. cash dividend. On December 31.
33.000 Monday declared and paid a P75.000
for the year. At December 31. the
Investment in Astro Corporation Shares.. Monday reported net income of P122.000
185.000 Fashion P15 per share. The securities are
***
market price of Monday was
method. The
Securities ( FVTOCD. . 185.000 classified as FA @ FVTOCI but the accountant used the equity
P264,700.
balance of the Investment in SAS account is
Unrealized Holding Gain or Loss-Equity (OC).. 34.000
Securities Fair V'alue Adjustment Situation 2
(FVTOC).. ************************************* .000 by
Monsters,. Ine. significant intluence over Nemo Corporationof Py9
obtained
llustrative Audit Case 12.5: Equity ordinary shares at a total cost
to Fair Value Method buy ing 30% of outstanding
Nemo's 30,000
2017. On June 15. Nemo declared
and paid a cash
per share on January 1. income of P85,000
Backyard Corporation owns shares of Pablo. Ine. Prior to 2017. the investment dividend of P36.000. On December 3 1.
Nemo reported net
and
was accounted for using the equity method. In for the year. The accountant used the fair value method of accounting
ts investment in Pablo. and
early 2017. Backyard sold part ot FVTroCi. The market value per share on

began using the fair value method. In 2017. Pablo considered the shares as FA @
eamed net income
of P80,000 and paid dividends of P9s.000. Prepare Backyard's
entries related to Pablo's net income
December 31, 2017 is P10.
and div idends, assuming
8% of Pablo's shares Backy ard now owns
REQUIRED: situations.
entries in 2017 for both
Prepare all necessary adjusting journal
 426 Chapter 12 Substantive Tests of Investments
Solution: Ilustrative Audit Case 12.6 REQUIRED:

Siuation 1: Adjusting Journal Entries

Prepare the necessary adjusting journal entries.
Ilustrative Audit Case 12.7
12,200 Solution:
) Equity in Investee lncome...
**** **************

Dividend Revenue..******* ... . ..

The adjusting journal entries are:
7.500
Investment in S A S . .
4,700 500
I. Trading Securities.
************ ****************

(2) Securities Fair Value Adjustment Gain on Sale of Trading Securities. 500
(@FVT0C)........... . *************************** 40,000
Unrealized Holding Gain or Loss-Equity (OC).. Unrealized Holding Gain or Loss - Income. 500
40,000 2. ..

Securities Fair Value Adjustment

(PIS-PI3) X 20,000 shares = P40,000 500
(Trading Securities) (P40- P35) x 10..

Situation 2: Adjusting Journal Entries

() Dividend Revenue...
10,800
Investment in Nemo Corporation Shares.
To correct entry
10,800
recording the receipt of
dividend.

(2) Investment in Nemo Corporation

(30% X P85,000)
Shares. ********
**| 25,500

Equity in Investee Income... ********* ************

To record share in income of Nemo

*.
25,500
Corporation.
(3) Unrealized Holding Gain or Loss
Equity (OCI)..
-

3,000
Securities Fair Value Adjustment -
FA @FVTOCI.
*********************""*******
To reverse the 3,000
entry recording the change
in market value of Nemo
Corporation.
Ilustrative Audit Case 12.7:
Equity Investment Trading -

Oregano Co. had purchased 200

shares of Welsh Co. for P40 each
classified the investment as a this year and
P45 each and credited trading security. Oregano Co. sold 100 shares for
Trading Securities account for the
entries were made
relative to this investment proceeds. No
other
per share of the Welsh
Co. had during the year. At year end the price
dropped to P35.
 425 Ca Substantnve Tests of Investments 429
Rovin Questions and Problems
26.
(AICPA Adapted)
Select the best answer for each of the following situations and give reasons
12-1 Under what conditions would CPAs accept a contirmation ofthe securiti for your choice
rities
inthe possession of a custodian in lieu ot inspecting the securities
urities a. In order to guard
themselves? against the misappropriation of company-owned
marketable securities. which of the
12 all
following is the best course o
How can the auditors determine
that dividends applicable
to
securities ow ned by the client have been received and recorded?
marketable action that can be taken by a company with a large portoiio or
marketable securities?
that and bonded employee be responsible
12-3 Under what circumstances may securities owned by the client not be
on
()Require one trustworthy
for access to the safekeeping area were securities are kept.
hand at the statement of financial position?
(2) Require that employees who enter and leave the safekeeping area
Assume that it is not possible for you to be present on the statement of sign and record in a log the exact reason for their access.
financia position to inspect the securities owned by the client. What (3) Require that employees involved in the safekeeping function
variation in audit procedures is appropriate if the inspection 1s not maintain a subsidiary control ledger for securities on a current
made
until two weeks after the statement of financ1al position? basis
(4) Require that the safekeeping function for securities be assigned to
12-5 You are in of the audit of the financial statements of
charge Pink a bank that will act as a custodial agent.
Corporation for the year ended December 31. The corporation has had the
amounts of funds to
policy of investing its surplus cash in marketable securities. Its share and b. Red Company had large invest
on a
temporary
bond certificates are kept in a basis. The of directors decided to purchase marketable
board
safe-deposit box in a local bank. Only the
securities and assigned the future purchase and sale decisions
to a
president or the treasurer of the corporation has access to the box
responsible tinancial executive. The best person(s) to make periodic
You were unable to obtain access to the
safe-deposit box December 31
on reviews of the investment activity would be:
because neither the president nor the treasurer (1) An investment committee of the board of directors
was available.
ATangements were made for your staft assistant to accompany the (2) The chief operating officer
treasurer to the bank on
January 11 to examine the securities. Your (3) The corporate controller.
assistant has never examined securities that were
being kept in a safe- (4) The treasurer.
deposit b0x and requires instructions. To inspect all the securities on hand
should not require more than one hour. 12-7 Audit of Marketable Securities

Voltron Company,
REQUIRED: The Marketable Securities account of your client.
2017.
a. List the instructions that you would
give to your assistant regarding the appears as follows for the year
examination of the share and bond certificates kept in the Marketable Securities (Trading)
box. Include in your instructions the details of the
safe-deposit 650.00
securities to be 2.350.00 September i1
January l Balance
exanined and the reasons for 4,762.50
these details.
examining June 3 4,762.50 November 30
b. Upon returning from the bank. your assistant
treasurer had entered the box on
reported that the discovered the
January 4. The treasurer stated that of pertinent documents, you
the purpose of the January 4 visit to the
From your examination
remove an old
safe-deposit box had been to following:
photograph of the corporation's original building.
The balance was composed ot:
photograph was reportedly loaned to the local chamber of commerce 1) The opening share.
for display purposes. List the additional 25 shares of Lie Company preference
purchased at P42 a
audit procedures that are purchased at P65 a share.
required because of the treasurer' s action. 20 shares of Lipay Company ordinary

(AICPA Adapted)
 Substantive Tests of Investments 431
430 Chapier 12
received 5 shares of Lpay Company ordina Red Company ordinary:
2) On March 15, the client
Market value of Lipay Company ordinary shorti. 1,000 shares, purchased in June, 1999, P20 per share P 20,000
a s share dividend.
dividend was P73 per share.
tly
after declaration of this 2.000 shares, purchased in August, 2002, P16 per share 32,000
1,500 shares, purchased in May, 2015, P22 per share 33,000
3) On June 3, the company purchased shares of
5 Lambing Company 5
value of PI,000 each, interest dates March I and Septem
bonds. par
accrued interest.
er White Company ordinary:
1; due March 1, 2014, for P4,762.50 including 2,000 shares, purchased in January 2015, P33 per share 66,000
4) On November 30, the Lambing bonds were sold for P4,750 nls
accrued interest.
Blue Company ordinary:
100 shares, purchased in August 2001, P73 per share
S) On September 11. the company sold 10 shares of Lipay Co. at P65 per ,300
er (par P100)
share.
6) The market value per share as of December 31 are as follows: Lie Green Company 15 percent bonds:
20 bonds, P1,000 each, purchased in July 2004, at
Company, P45; Lipay Co., PS5.
20,000
par (interest dates February 1 and August 1)
REQUIRED: P178,300
Prepare an analysis of the Marketable Securities account in good form
including an indication of the verification work you would have performed Your examination discloses the following:
on the job, and
any adjusting entries you feel are necessary to correct the
amounts as stated.
1) In January, 2017, 1,000 ordinary shares of the
Red Company
purchased in May, 5, were sold for P21,364, net of brokerage.
White Company were
12-8. Audit of Investments and Related Accounts 2) In March, 2017, 500 ordinary shares of
at P24 share plus brokerage, for P12,125.
purchased per
From the following information: share dividend
3) In June, 2017, the Blue Company paid a 100 percent
a)
Prepare work sheet analyzing the Investment
a in Trading Securities
account for the period January 1, 2017, to December 31, 2017,
ordinary on ordinary.
its president, for P125 per
showing transactions, adjustments and final balance as of December 4) In July, 2017, the Color Company sold to
the president
31, 2017. share, 100 ordinary shares of Blue Company, for which
and letter in which he agreed to pay the
gave his check for P8,750 a
b) Prepare the necessary audit adjustments to correct the following balance upon demand of the treasurer of the company.
Investment account as
of December 3 1, 2017, appearing in the records 5) On August 1, 2017, the Green Company
redeemed its five percent
of the Color Company:
bonds at 110 plus accrued interest.
Date Explanation Debit Credi 6) The total market value of the securities at year-end amounted to
2017
Jan. Balance P150,000.
188,300 (AICPA adapted)
Sold Red ordinary
Mar. 31 21,364 12-9. Audit of Investments and Related
Accounts
Bought White ordinary 12,125 of the Kalayaan Corporation
June 30 Dividend on Blue ordinary During your audit of the financial
statements
10,000 determine that a portion of
July 31 Sold Blue ordinary for the year ended December 31, 2017, you
750 securities (available-
marketable
Aug. Sold Green bonds company's funds have been invested in
22,500 for-sale).
The audit work papers of the
preceding year show that the account balance on the accrual basis. A transcript of
as
of January 1, 2017, consisted of the following: The company's books are maintained
account follows:
the investment in trading securities
432 Chapter 1 Substantive Tests of Imvestments 433
The Kalayaan Corporation c. In August, Major Electronics Co. reorganized. The original
Investment in Trading Securities of share
was
issueto
December 31, 2017
was
eliminated. New ordinary share was Issued
bondholders and other creditors.
d. During December, Acme Laboratories declared a 5% share dividend.
Account Per Books In lieu of fractional shares, cash was distributed based on the current
2017 Transactions Folio Debit Credit
of P40 per share. (The credit in the journal entry was to
Jan. 3 Purchased 100 shares. National DC P 4.500 market price
Purchased 100 shares, Major ElectroniCs
Motors CD 500
Miscellaneous Income).
Mar 31 Cash dividend, National Motors CR e. he Ace Investment Co. letter accompanying its annual dividend
P 50
Apr. 5 Sold 100 shares, National Motors CR check gave the following composition of the dividend
6 Purchased 100 shares, Ace Investment CD
4,800
300 P.80 Derived from income from investments
6 Purchased 100 shares, General Utility CD 2 400
Return of shareholder's capital
May Received I00 rights issues, General Utility J 100 90 Total dividend
July 2 Purchased 10 shares, General Utility CD 130
15 Purchased 50 shares, Acme Laboratories CD i,900 f. On December 15, General Utility declared a cash dividend of Pl per
I8 Purchased 20 shares, The Kalayaan Corp. CD 3,000 share. payable on January 15, 2018 to shareholders on record of
Aug. 15 Sold 10 shares. The Kalayaan Corporation CR to
1,550 December 29, 2017. (The credit in the journal entry was
Dec. 8 Received2 shares, Acme Laboratories 80
8 Cash dividend. Acme Laboratories
Miscellaneous Income).
CR 20
15 Cash dividend, Ace Investment g. Total market value of the securities as of December 31, 2017
CR 00
31 Cash dividend. General Utility amounted to P5,500.
120
Total . The securities in a safe deposit box. You examined the
are kept
15.030 6,510 securities on January 8, 2018. after determining from the bank's
Balance per books All
8.520 records that the last entry to the box was on December 8.

P15,030 PI5,030 securities were examined and properly accounted for.

The following information and data were

developed from your audit REQUIRED to arrive at the corrected
procedures: Prepare a worksheet showing the adjustments
balance the Investments account at Decembe: 31, 2017 and other
of
audit of the account. Your
a. The 100 General adjustment or reclassification arising from your
Utility rights were recorded at the May I quoted work sheet should include the names of the other accounts affected by the
price on the stock exchange. (The credit in the journal entry was to The books have not been closed.
adjustments or reclassifications.
Miscellaneous Income.) The share was quoted at P19 per share ex-
rights on 1. For each 5 rights held, one share of General
May the first quarter of 2016 the Canada Corporation entered
into the
could be purchased P13 Utility 12-10. During
per share. The company exercised rights to following transactions:
buy 10 shares on July 2 when the market price was Pl6 for P20 per
per share. The Jan. Acquired 150 ordinary shares of Tan Corporation
rights expired on August 15. for P30 per
share, 200 ordinary shares of Argante Corporation
b. The shares of Francisco Corporation for
Kalayaan Corporation purchased 20 of its own shares from share, and 100 ordinary
estate of a deceased
shareholder. The share has a par value the P25 per share. These are the only shares the company owns
and was
originally issued for PI15 per share.
of P100 and all are classified as securities available
for sale.
officer They were sold to an
of the company for P155 per share.
Feb. 1 Purchased 12% Josefina Company bonds
with a face value of
Interest on the bonds is
P20,000 at par, plus accrued interest.
and August 31 each year, and the bonds
payable February 28
 Substantive Tests of Investments 435
434 Chapter 12
are due August 31, 2014 Also purchased 10% Jayo REOUIRED

Company bonds with

a face value of P12,000 at na e . Preparc journal entries to record the preceding transactions
e

accrued interest. Interest on the bonds is payable Marchplus Canada Corporation for the first quarter of 2016
31
and September 30, and the bonds are due September 30, 201 Prepare a bank reconciliation for Canada for March 31. 2016
2 books on
These are the only bonds the company owns and all
are 3 Prepare any journal entries necessary to adjust Canadas
classified as securities available for sale. March 31, 2016.
Feb. Established a petty cash fund for incidental expenditures
at 10,000 shares of
PS00. 12-11. On January , 2016 Patrick Company paid P600,000 for
10% interest n
Lede Company's voting ordinary shares, which w a s a

Feb. 28 Received the semiannual interest on the Josefina

Companv Lede. Patrick does not have the ability to exercise significant intiuence
bonds. of Lede. Patrick received
over the operating and financial policies
2, 2016 Lede
Feb. 28 A count of cash on hand indicated that P125.50 remained in dividends of PI.00 per share from Lede on October
income of P400,000 for the year ended
December 31. 2016
the petty cash fund. A soting of petty cash reported net
vouchers
disclosed that Pl10.00 was spent for postage, Pl70.65 and the ending market price of its shares was P63.
was
spent for office supplies, P45.00 was spent for transportation,
30,000 additional shares of
and P43.50 was spent for miscellaneous items. The fund On July 2, 2017 Patrick paid P1,950,000 for
was shares, which represents a 07%
replenished. Lede Company's voting ordinary
investment in Lede. The fair values of all of Lede's assets, net of
Mar. 31 Received first quarter dividends of P1,500 and the P6,500,000. As a result of
semiannual of
liabilities, w e r e equal to their book values exercise
nterest on the Jayce Company bonds. On this significant influence
date, the this transaction, Patrick has the ability to
aggregate fair value of Canada's securities available for sale is over the operating and financial policies of Lede
Patrick received
P42.600. 2. 2017 and P1.35 per
dividends of P1.00 per share from Lede on April
Mar. 31 A count of cash on hand indicated that P230.50 Lede reported net income of P500,000 for the
remained in share o n October 1, 2017.
2017, and P200,000 for the 6 months ended
the petty cash fund. A sorting of petty cash vouchers year ended December 31,
disclosed that P140.00 was spent for December 31, 2017
postage, P75.30 was
spent for office supplies, and P54.20 was spent for
miscellaneous items. The fund was
replenished. REQUIRED: well
r e v e n u e for 2016, as
1. For the Patrick Company show the dividend
increase in value of available
The bank statement and the as the December 31, 2016 unrealized
for the month of March 2016 accounting records of the Canada Corporation for-sale securities and carrying value of
the investment account.
indicated that the cash collected from the issues comparative financial
dividends and the Jayce Company bond interest 2. Assuming hat Patrick Company
31 but did not
was
deposited on March
appear on the March bank statement. There were no other statements for 2016 and 2017, show the investment income for 2016

deposits transit. The bank statement showed a balance on March 31

in and 2017, as well as the December 31,
2016 and 2017 carrying value
P13,459.75, which included collection of a of of the Investment account.
interest by the bank for the Canada P1,500 note and P100 of
bank service charge and a Corporation. Also listed was a P20 of Castro & Horario, CPAs, is
in charge of the Belle
P75.60 NSF check returned 12-12. May Flores, December 31, 2018.
cash balance per the by the bank. The Manufacturing Company audit
for the year ended
which included checks accounting records on March 31 was Pl1,689.95, Belle manufactures earth-moving
totaling P2,365.40 that had not yet cleared the The firm also audited Belle last year.
bank. the shares of Laribee Industries, a
equipment and owns 25% of voting
the preceding year,
December 31, 2017, the end of
leasing company. At the investment at cost, which
Belle held 10% of the shares and reported
shares at that date. During 2018, Belle
equaled the market value of the
 436 Chapter 12 Substantive Tests of Imestments 437

acquired additional 15% of the voting shares, 12/31/2017

an
balano
balances and Bel's identifiable assets and liabilities were equal to their book values.
are as follows:
2018 transactions related to this investment Analen does not have the ability to exercise significant influence over the
operating and financial policies of Bel. Analen received dividends ot
12/31/2017: Balance in "Investment in Laribee," 1,000 shares att aa cost
PO.90 per share from Bel on October 1. 2017. Bel reported net income ot
of PS0 per share.
P400.000 for the year ended December 31. 2017.
01/02/2018: Purchased 1,500 shares of Laribee at a cost of P50
share. per On July 1, 2018. Analen paid P2.300.000 for 30.000 additional shares of
04/01/2018 Laribee declared a first-quarter dividend of P50.000
Bel Company's voting ordinary shares, which represents a 30% mvestment
07/01/2018
10/01/2018:
Laribee declared a second-quarter dividend of
Laribee declared athird-quarterdividend of P60,000
P50,000 in Bel. The fair values of all of Bel's identifiable assets net of lhabilities
were equal to their book values of P6.500,000. As a result of this
intluence over
transaction, Analen has the ability to exercise significant
At December 31, the investment account appeared as follows in of
Belle' the operating and financial policies of Bel. Analen received dividends
general ledger. P1.10 per share from Bel on April 1. 2018. and P1.35 per share on October
1. 2018. Bel reported net income of P500.000 for the year ended
Investmentin
12/31/2017
Laribee Ordinary
Balance
December 31. 2016, and P200.000 for the 6 months ended Decenber
31.
50,000 2018. Analen does not amortize goodwill but evaluates at each year-end
01/02/2018 Purchase 75,000 had been observed
its possible impairment. No impairment on goodwill
Belle recorded its share of Laribee dividends though.
as "Dividend Revenue."
REQUIRED:
Laribee's income statement for 2017 reflected the 1. Prepare a schedule showing the income or loss before income taxes for
following revenue and
expense components: the year ended December 31. 2017. that Analen should report from its
investment in Bel in its income statement issued in March 2018
Leasing revenues P20 million statements
Cost of equipment for
sales-type leases
2. During March 2019. Analen issues comparative financial
P12 million for 2017 and 2018. Prepare schedules showing the income or loss
Operating expenses P 5 million the ended December 31. 2017 and 2018.
Loss from before income taxes for years
casualty (net of tax) PImillion that Analen should report from its investment in Bel. Show supporting
Income taxes
PImillion computations in good form. (AICPA adapted)
REQUIRED:
a. What specific audit 12-14. Imvestment in Debi Securities at a Premium: Entries and Reporting
objectives should Flores identify in examining the
Laribee account? What audit 9
On July1, 2016. Elmar Company purehased for cash eight PI,000,
b. What level of satisfaction doesprocedures should she apply? at 100 plus accrued interest. The
Flores require with respect to Laribee's percent bonds of Celebrity Corporation
income statement components?
bond interest is paid semiannually each May I and November 1,
and the
Prepare an audit
workpaper, in good form, for the Laribee investments. bond maturity date is November 1, 2017. Elmar Company's annual
Be sure to include classifies this
d. Does the Laribee
any necessary audit
adjustments. reporting period ends on December 31. Elmar Company
investment raise any security. At December 31, 2016, the Celebrity
auditors should pursue? "warning signs" that the investment as a trading
Corporation bonds were quoted at 97.
12-13. On January 1, 2017, Analen,
Inc., REQUIRED:
paid P700,000 for of the bonds
Company
that date
s voting ordinary shares, which was 10%10,000 shares of Bel
interest in Bel.
a
I. Give the entry for Elmar Company to record the purchase
the net assets of Bel totaled At on July 1, 2016.
P6,000,000. The fair values of all of 2. Give the entry for interest collected during 2016.
 Substantve Tests of Imvestments 4
438 Chapter i2

Give any adjusting entry(s) required on

December 31, 2016. REQUIRED
Show what items and amounts should be reported on the 2016
income
1. Give all of the appropriate entries for Jeng Company during 2015 and
statement and statement of financial position. 2016
Give the entry required on January 2, 2017.
Goodvill: Entries and 3. Show what items and amounts based on requirements and will I 2 be
12-15 Long-ierm Investment. Equiny Method. Reportin.
rting reported on the 2015, 2016, and 2017 income statements and on
the
for Three Years
2015 and 2016 statements of financial position.
On January 1, 2015. Jeng Company purchased 30 percent of the 3.000
outstanding ordinary shares. par P10. ofZash Corporation at P17 per shar
as a long-term investment (the only long-term equity
12-16. Analytical Procedures Applied to imvestments
investment held of
The following data relate to Za: orporation: In its 2017 report. Del Corporation, a manufacturer
annual
has several items in the financial statements that
photocopying equipment,
acquisition date. January 1. 2015: refer to investments in equity-basis companies (which are labeled afiliated
a At
companies by Del):
Value at
(Amounts in millions) 2017 2016
Book Market
Assets not subject to depreciation.. . . .
P250,000 P260.000 From the income statement:
Assets subject to depreciation, net Equity in income of unconsolidated
P 74 P 127
(10-yearremaining life; straight-line) affiliated companies and other income.
200.000 220,000 From the statement of financial position
Liabilities. ************************
P450,000 Investment in aftiliates, at equity. ***************| 1,456 1.332
****** P50,000 50,000 From the statement of cash flows:
Ordinary shares (par P10).. ******************
300,000
Retained earnings. Adjustments to reconcile income to
********************'**********
100.000 cash flows:*
P450,000 Undistributed equity in income of
affiliates. (27) (84)
Difference is due to irventory, and this inventor is sold
during 2015.
..*********************

income to oblain cash

These are amounts added back (subtracted from) net
b. Selected data available at December
31, 2015 and 2016: flow from operations.

2015 2016 Assume that there are no adjustments required for differences between
Cash dividends declared and
paid by Zash book value and fair value at the date of acquisition, or any goodwill,
Corporation during the year. . .
*** P 8,000 P 5,000 associated with the equity-basis companies.
Income reported by Zash:
Income(loss). *****

22,000 (10,000) REQUIRED:

Quoted
'************

market price per share, Zash 1. On the income statement, equity income is combined with "other
Corporation shares (December 31). **" 20 18 income. From the information presented, what is the maximum
amount that Del could have received in dividends from its equity-basis
On January 2, 2017, Jeng Company sold 500 of the Zash shares at PI8 dividends from its
per share companies in 2017? Now suppose Del received no
equity-basis companies in 2017. In this case, how much of the P74
million is other income?
2. Did Del increase or decrease its investments in equity-basis companies

during 2017 beyond the amount of Del's equity in earnings retained by

the investee? If' so, by how much?
 Substantve Tests of Irvestments 441
440 haver 12
Del earn on its investmo.
3What rate of returm on average assets did During 2018, Brad Co. shares are sold for P9,400. The fair value the
of
Assume that other income in 20
in
equity-basis companies in 2017? 2017 is shares on December 31, 2018, are: Eric Corp. shares P19,100, Orlando
Co. shares - P20,500.
zero.
4 Suppose there is only one equity-basis company in Del's investmen

and it is a 50 percent owned joint venture.

What would you estima
nate REQUIRED:
the total shareholders' equity of that company to be at December 31 (a) Prepare the adjusting journal entry needed on December 31. 2017
2017 (b) Prepare the journal entry to record the sale of the Brad Co. shares
during 2018.
12-17. Entries for FA @FVTOCIand Trading Securities (c) Prepare the adjusting journal entry needed on December 31, 2018.
The informationon the following page is available for BYDG
Company at
December 31, 2017, regarding its investments. 12-19. Securities @ FVTOCI Entries and Reporting
Francis Corporation purchases equity securities costing P73,000 and
Securities Cost the fair value
Fair Value classifies them as securitiesFVTOCI. At December 31,
3,000 shares of Austin Corporation of the portfolio is P65,000.
Ordinary Shares P40,000 P48,000
1.000 shares of Tyrone REQUIRED:
Incorporated Preference Shares properly. Indicate the
25.000 22.000 Prepare the adjusting entry to report the securities
P65,000 statement presentation of the accounts in your entry
P70,000
REQUIRED 12.20 Violet Company's investment portfolio contains the following
securities on

(a) the adjusting entry (if any) for 2017,

Prepare December 31, 2016:
assuming the securities
are classified as
trading.
(b) Prepare the adjusting
entry (if any) for 2017, assuming the securities Market
are classified as Value Classified as
FA@ FVTOCI. Security Shares Cost
(c) Discuss how the amounts
reported in the financial statements are Oslo Co. ordinary 150,000 P 6.000.000 P 5,700.000 Trading
affected by the entries in (a) and (6).
Grand, Inc. preference 60,000 2,400,000 2,580,000 Trading
12-18. Trading Securities Entries Sunday Co. ordinary
On December 21, 2017, 600,000 68.400,000 67,800,000 Investment
Troy Company (30% ownership)
information regarding its trading provided you with the following in Associate
securities
Jack Co. ordinary 750,000 4,050,000 3.000,000 Available-for
Sale
December 31, 2017
Unrealized
Investments (Trading) Cost Fair Value
Eric Corp. shares
P20,000
Gain (Loss)
Brad Co. shares P19,000 P(1,000)
Orlando Co. shares 10,000 9,000 (1,000)
Total of portfolio 20,000 20,600 600
Previous securities fair value P50,000 P48,600 (1,400)
balance adjustment
Securities fair value adjustment Cr.
- -0-
PU,400)
 Substantive Test of Investments 44
442 harier 13
Dece
Volet Company's
investments had the following
market values at
December 31, 4 ASume that the investment categories remain the same and that all
2017 declines in 2016 and 2017 are temporary except tor the
20
P 6,120,000 decline in Jack Co.'s ord inary shares. The valuation entry required
Co. ordinary at December 31, 2017 on Trading Securities will involve
Grand. Inc. ordinary 2,580,000 a. No adjustment.
Sunday Co. ordinary 66,900,000
3,400,000 b. A credit to Unrealized holding gain (Equity) of P420,000.
Jack Co. ordinary
C. A credit to Unrealized holding gain (Profit and Loss) of

P420,000.
d. A debit to Unrealized holding loss (Profit and Loss) of
Questions
P420,000.
The valuation entry required on Trading Securities at December 31. 201c
.
assuming that the securities were acquired 2014 and none of
in
. Assume that the investment categories remain the same and that all
the indicated declines in market value are considered other than
temporary, will involve
declines in 2016 and 2017 are temporary except for the 2014
a. P120.000 debit to Unrealized holding loss (Profit and loss). decline in Jack Co.'s ordinary shares. The valuation entry on
b. PI20,000 debit to Unrealized holding Loss (Equity). available-for-sale securities required at December 31. 2015 wil
involve
C. P120,000 credit to Unrealized holding gain (Profit and loss).
a. A credit of P400,000 to Unrealized holding gain (Equity).
d. No adjustment.
b. A credit of P400,000 to Unrealized holding gain (Profit and
2 The valuation entry required Available-for-sale Securities at
on Loss).
December 31, 2016. assuming that the securities were
C. A debit of P400,000 to Unrealized holding gain (Equity)
acquired in 2013 and none of the indicated declines in d. No adjustment.
market value are considered other than temporary, will
olve 12.21. On July 1, 2016, Garden Co. purchased 1,000 shares of Dollie Co.
ordinary shares at a cost of P15 per share and classified it as an available-
a Pl.050.000 debit to Unrealized holding loss on available-for-
sale (Equity). for-sale security.
b. Pl,050,000 debit Unrealized
a to holding loss on available-for-
sale (Profit & Loss). On October 1, 2016, Garden Co. purchased an at-the-money put on Dollie
for P3.500 with an exercise price of P25 and an expiration date of April,
c. a P1,050.000 credit to Unrealized holding gain on available- 2015. This put option purchase locks in a profit of P6,500 (P25,000
-

for-sale (Equity).
PI5,000- P3,500). The P3,500 premium paid for an at-the-money option
d. No adjustment needed.
market value of the underlying) is
(i.e., where the exercise price is current
The valuation entry on Investments in the price paid for the right to have the entire remaining option period in
Associates required at
December 31. 2016, assuming that the indicated decline in which to exercise the option.
value is ten1porary, will involve Other pertinent facts are:
4. No adjustment.
A P600,000 debit to Unrealized is to
A P600,000 debit to
loss holding (Equity). (1) Garden Co. specifies that only the intrinsic value of the option
Unrealized holding loss (Profit and Loss). effectiveness. Thus, the time value decreases of
be used to measure
A P600,000 credit to and
Unrealized holding gain (Equity). the put option will be charged against the income of the period
not offset against the change in the value of the underlying, hedged
item.
 444 hate Substantive Test of lnvestments 444A

Garden Co. has documented the hedge s strategy (designated The fair market value of Butter's depreciable assets, with an averagt
put
option as a fair value hedge), objectives, hedging relationships aand remaining useful life of 8 years. exceeded their book value Dy
To summarize:
method of measuring effeetiveness. P320,000
Hedged ltemn Available-for-sale security The remainder of the excess of the cost of the investment over the
Hedging Instrument : Put option book value of net assets purchased was attributable to goodwill.
Price of the security
Underly ing
Notional Amount 1,000 shares of the security
Questions
1. What amount ofthe investment cost is attributable to goodwill
()Data on Fair Value ofthe Hedged Item and the Hedging Instrument
a. P240,000
follow:
b. P 96,000
10/1/16 12/31/16 3/31/17 4/17/17
Hedged Item: c. P336,000
Dolie share price P 25 P 28 P 300 P
Number of shares
310 d. P144,000
1.000 1.000 1.000 000
Total value of sharesS P25.000 P28,0 P30,000 P31.000 2. What amount of investment revenue should be reported in Raffles
income statement for the year ended December 31, 2016?
10/1/16
12/31/16 3/31/17 4/17/17 a. P120,000
Hedging lInstrument b. P108,000
Put option (100 shares)
Intrinsic value P P 00 P 0 P
c. P180,000
Time value
Total
3500 1.000 250 d. P192,000
P3500 P 1.000 P 2,500
Intninsic value What is the value of the investment in Butter ordinary
carrying
shares
Gain (loss) on put from last shares on December 31. 2016? Assume that the 40,000
measurement date net accets of Butter rather than a
P P represent a 10% interest in the
P 0 P 0 30% interest.
a. P1,280,000
Required: . P1,356,000
() What are the entries to record the
in value? foregoing transactions and changes P1,296,000
(lgnoring tax effects and transaction costs.) d. P1,368,000
(2) Assuming that Garden Co. decided to sell the securities, what 4. What amount of investment revenue should be reported in Raffles
should be made to record the entry statement for the year ended December 3 1, 2016?
transaction'? income

a. P120,000
12.22. On January 4. 2016, Raffles
Corp. paid P1,296,000 for 40,000 ordinary b. P 64,000
shares of Butter
Company.
the net assets of Butter and
The investment
represents a 30% interest in C. P 60,000
gave Raffles the ability to exercise d. P180,000
influence of Butter's operating and significant
financial policy decisions. Raffles
received dividends of P3 the investment in Butter ordinary
per share on December 5 What is the carrying value of
reported net income of P6 ,000 for the year ended 4, 2016, and Butter shares atDecember 31, 2016?
The market value of Butter's December 31, 2016. P1,296,000
P32 per share. The book ordinary share at December 31, 2016, was a.

value of Butter's net assets was b. P1,356,000

P3,200,000 and
P1,280,000
C.

d. P1,236,000