Audit Problems.

Tips in Analyzing

1. Read first the question given then the problem.

2. Use a pencil to analyze, underline DATES and other information important and encircle significant data
(amount, transactions, Subject of the Problem, Proper Nouns(Corporation, Entities, Names), Positive (All) and
Negative wordings (not, except, unless) and relating to the question.

3. Recompute amounts (Totals) and solutions (Percentages, dates, years) to the data. It is possible
that the examineer intentionally change the amounts or unintentionally due to typographical errors.

Trading Securities
Presented below are unrelated situations

Problem 1
Please Study Co. purchased the following trading securities
Fair Value
Security Cost Dec. 31, 2019
A P195,000 225,000
B 300,000 162,000
C 660,000 678,000

Before any adjustments related to these trading securities, Please Study Co. had a net income of P900,000
1. What is Please Study Co. net income before making any necessary trading security adjustments?
A. 900,000 C. 762,000
B. 810,000 D. 948,000

2. What is Please Study Co. net income after making any necessary trading security adjustments?
A. 900,000 C. 762,000
B. 810,000 D. 948,000

3. What is Please Study Co. net income if the fair value of security B were 285,000?
A. 867,000 C. 885,000
B. 900,000 D. 933,000

Problem 2
Pugosa Shiny Co. portfolio of trading securities includes the following on December 31, 2019
Cost Fair Value
15,000 ordinary shares of Tomas Co. P195,000 225,000
30,000 ordinary shares of Gandara Co. 300,000 162,000
1,023,000 987,000
All of the above securities have been purchased in 2019. In 2020, Pugosa Shiny Co. completed the following
securities transactions:
March 1 Sold 15,000 shares of Tomas Co. ordinary shares at P31, less brokerage commission of P4,500
 April 1 Bought 1,800 ordinary shares of Goblin, Inc. at P45 plus commission, taxes, and other transaction
costs of P1,650.
The Pugosa Shiny portfolio of trading securities appeared as follows on December 31, 2020.
Cost Fair Value
30,000 ordinary shares of Gandara Co. P546,000 580,000*
1,800 ordinary shares of Goblin, Inc. 82,650 75,000**
628,650 655,000
*Net of 6,500 est. transaction costs
**Net of 1,500 est. transaction costs

4. What is the amount of unrealized gain on these securities should be reported in the 2020 income statement?
A. 12,000 C. 26,350
B. 10,350 D. 28,000

5. What is the gain or loss on the sale of Tomas Co. ordinary shares on March 1, 2020?
A. 48,000 C. 43,500
B. 9,000 D. 4,500

6. What amount should be reported as trading securities in Pugosa’s statement of financial position on
December 31, 2020?
A. 655,000 C. 628,650
B. 663,000 D. 636,650
SOLUTION
PLEASE STUDY CO.
1. 900,000 (Before any Adjustments) Answer: A
2. Net income before trading security adjustment 900,000
Unrealized loss (1,155,000-1,065,000) (90,000)
810,000
Fair Value
Security Cost Dec. 31, 2019
A P195,000 225,000
B 300,000 162,000
C 660,000 678,000
Totals 1,155,000 1,065,000
Answer: B
2. Net income before trading security adjustment 900,000
Unrealized loss (1,188,000-1,155,000) 33,000
933,000
Fair Value
Security Cost Dec. 31, 2019
A P195,000 225,000
B 300,000 285,000
C 660,000 678,000
Totals 1,155,000 1,188,000
Answer: D
PUGOSA SHINY CO.
4. Unrealized gain (663,000-651,000) 12,000
Carrying Value Fair Value
Dec. 31, 2020 Dec. 31, 2019
Gandara Co. P570,000 586,500
Goblin, Inc. 81,000 76,500
Totals 651,000 663,000
Answer: A
5. Net proceeds (31 x 15,000) = 465,000-4,500) 460,500
Carrying value (417,000)
Gain on sale of Tomas Co. Ordinary shares 43,500
Answer: C
6. Trading securities at fair value (see No. 1) 663,000
Answer: B
Problem 3
Trading Securities
MAGNOLIA CORP. Invested its excess cash in equity securities during 2019.
(A) As of December 31, 2019, the equity investment portfolio consisted of the following:
Investment Quantity Cost Fair Value
LJ, Inc. 1,000 shares P45,000 63,000
Polland Co. 2,000 shares 120,000 126,000
Alabang Corp. 2,000 shares 216,000 180,000
Totals P381,000 P369,000

1. In December 31, 2019, statement of financial position, what should be reported as carrying amount of the
investments?
A. 369,000 C. 381,000
B. 345,000 D. 405,000

2. In the 2014 income statement, what amount should be reported as unrealized gain or loss?
A. Unrealized gain of P12,000 C. Unrealized loss of P36,000
B. Unrealized loss of P12,000 D. Unrealized gain of P24,000

(A) During the year 2020, Magnolia Corp. sold 2,000 shares of Polland Co. for P114,600 and purchases 2,000
more shares of LJ, Inc. and 1,000 shares of Dwarfy Company. On December 31, 2020, Magnolia’s Equity
securities consisted the following:
Investment Quantity Cost Fair Value
LJ, Inc. 1,000 shares P45,000 60,000
LJ, Inc 2,000 shares 99,000 120,000
Dwarfy Co. 1,000 shares 48,000 36,000
Alabang Corp. 2,000 shares 216,000 66,000
Totals P408,000 P282,000

3. What is the gain or loss on the sale of Polland Co. Investment?

A. 5,400 gain C. 11,400 gain
B. 5,400 loss D. 11,400 loss

4. What amount of unrealized gain or loss should be reported in the income statement for the year ended
December 31, 2020
A. 408,000 C. 282,000
B. 444,000 D. 246,000

5. In the 2020 income statement, what amount should be reported as unrealized gain or loss?
A. Unrealized gain of P126,000 C. Unrealized loss of P108,000
B. Unrealized loss of P126,000 D. Unrealized gain of P108,000
(A) During the year 2021, Magnolia Corp. sold 3,000 shares of LJ, Inc. for P119,700 and 500 shares of Dwarfy
Company at a loss of P8,100. On December 31, 2021, Magnolia’s Equity securities consisted the following:
Investment Quantity Cost Fair Value
Dwarfy Co. 500 shares 24,000 18,000
Alabang Corp. 2,000 shares 216,000 246,000
Totals P240,000 P264,000

6. What should be the reported loss on the sale of trading securities in 2021?
A. 60,300 C. 24,300
B. 32,400 D. 68,400

7. In the 2021 income statement, what amount should be reported as unrealized gain or loss?
A. Unrealized gain of P180,000 C. Unrealized loss of P24,000
B. Unrealized loss of P180,000 D. Unrealized gain of P24,000

8. In December 31, 2021, statement of financial position, what should be reported as carrying amount of
trading securities?
A. 240,000 C. 264,000
B. 234,000 D. 270,000
SOLUTION
MAGNOLIA CO.
1. Trading securities, at fair value 369,000 Answer: A
2. Fair Value, December 31, 2019 369,000
Acquisition Cost (381,000)
Unrealized loss (12,000)

3. Sales Price of Polland Securities 114,600

Carrying amount, December 31, 2019 (126,000)
Unrealized loss (11,400)

4. Trading securities, at fair value 282,000 Answer: C

5.Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares P63,000 60,000
LJ, Inc 2,000 shares 99,000 120,000
Dwarfy Co. 1,000 shares 48,000 36,000
Alabang Corp. 2,000 shares 180,000 66,000
Totals P390,000 P282,000
Unrealized loss (390,000-282,000) 108,000
Answer: D
 6. Sales Price of LJ, Inc Securities 114,600
Carrying amount, December 31, 2020
1,000 shares 60,000
2,000 shares 120,000 (180,000)
Loss on sale of LJ, Inc. Securities 60,300
Loss on sale of Dwarfy Company Securities 8,100
Total realized loss in 2020 68,400
Answer: D
7. Investment Quantity Cost Fair Value
Dwarfy Co. 500 shares 18,000 18,000
Alabang Corp. 2,000 shares 66,000 246,000
Totals P84,000 P264,000
Unrealized loss (264,000-84,000) 180,000
Answer: A
8. Trading securities, at fair value 264,000 Answer: C