AUDIT OF INVESTMENTS

PROBLEM NO. 1

The following Investment in Trading Securities account appears in the books of CAP,
INC.

Date Explanation Debit Credit

2017
Jan. 1 Balance P5, 349,000
31 Sold Robusta ordinary P640, 920
Mar. 31 Bought Wilma ordinary 365,000
June 30 Dividend on Bulk ordinary 300,000
July 31 Sold Bulk ordinary 262,500
Aug. 1 Sold Gudo bonds 675,000

The audit work papers of the preceding year show that the account balance as of
January 1, 2017, consisted of the following:

Robusta Company ordinary:

30,000 shares, purchased in June 2014, P20 per share------------------------P600, 000
60,000 shares, purchased in August 2015, P16 per share---------------------- 960,000
45,000 shares, purchased in May 2016, P22 per share ------------------------- 990,000

Wilma Company ordinary:

60,000 shares, purchased in January 2016, P33 per share-------------------1, 980,000

Bulik Company ordinary:

3,000 shares, purchased in August 2015, P73, per share (par P100)---------219,000

Gudo company 15@ bonds:

600 bonds, P1, 000 each, purchased in July 2016, at par
Interest dates February 1 and August 1)-------------------------------------------600,000
P5, 349,000

Your examination discloses the following:

1) On January 31, 2017, 30,000 ordinary shares of the Robusta company purchased
in May 2016 were sold for P640,920.

2) On March 31, 2017, 15,000 ordinary shares of Wilma Company were purchased at
P24.25 per share plus brokerage fee, for P365, 000.

3) In June 2017, the Bulik Company paid a 100% ordinary share dividend on ordinary
shares.
4) In July 2017, CAP, INC. sold to its president, for P125 per share, 3,000 ordinary
shares of Bulik Company, for which the president gave his check for P262,500 and
a letter in which he agreed to pay the balance upon demand of the treasurer of the
company.

5) On August 1, 2017, CAP, INC. , sold its Gudo Company 5% bonds at 110 plus
accrued interest.

6) The total market value of the securities at year-end amounted to P4, 500,000.

Questions:

1. What is the gain on sale of Bulik Company shares on July 31, 2017?
a. P109, 500
b. P153, 000
c. P156, 000
d. P265, 500

2. What is the gain on sale of Gudo Company bonds on August 1, 2017?

a. P0
b. P45, 000
c. P60, 000
d. P75, 000

3. The adjusting entry for the sale of Robusta Company ordinary shares on January
31, 2017, should include a
a. Debit to Loss on sale of trading securities for 19,080
b. Credit to Gain on sale of trading securities for P19, 080
c. Debit to Cash for P640, 920
d. Credit to Investment in trading securities for P660, 000.

4. The December 31, 2017, carrying amount (before market adjustment) of CAP,
INC.’s investment in trading securities is
a. P4, 233,750
b. P4, 343,250
c. P4, 344,500
d. P4, 500,000

5. What amount of unrealized gain should be reported in the income statement for
the year ended December 31, 2017?
a. P155, 500
b. P156, 750
c. P158, 000
d. P266, 250
PROBLEM NO. 2
MAGNOLIA CORP. Invested is excess cash in equity securities during 2016. The
business model for these investments is to profit from trading on price changes.

a) As of December 31, 2016, the equity investments portfolio consisted of the

following:
Investment Quantity Cost Fair Value
LJ, Inc. 1,000 shares P90, 000 P126, 000
Polland Co. 2,000 shares 240,000 252,000
Alabang Corp. 2,000 shares 432,000 360,000
Totals P762, 000 P738, 000

1. In the December 31, 2016, statement of financial position, what should be

reported as the carrying amount of the investment?
a. P738, 000
b. P690, 000
c. P762, 000
d. P810, 000

2. In the 2016 income statement, what amount should be reported as unrealized

gain or loss?
a. Unrealized gain of P24, 000
b. Unrealized loss of P24, 000
c. Unrealized loss of P72, 000
d. Unrealized gain of P48, 000

b) During the year 2017, Magnolia Corp. sold 2,000 shares of Poland Co. for P229,
200 and purchased 2,000 more shares of LJ, Inc. and 1,000 shared of Dwarfy
Company. On December 31, 2017, Magnolia’s equity securities portfolio consisted
of the following.

Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares P90, 000 P120, 000
LJ, Inc. 2,000 shares 198,000 240,000
Dwarfy company 1,000 shares 96,000 72,000
Alabang Corp. 2,000 shares 432,000 132,000
Totals P816, 000 P564, 000

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

a. P10, 800 gain
b. P10, 800 loss
c. P22, 800 gain
d. P22, 800 loss
 4. What is the carrying amount of the investment on December 31, 2017?
a. P816, 000
b. P888, 000
c. P564, 000
d. P492, 000

5. What amount of unrealized gain or loss should be reported in the income

statement for the year ended December 31, 2017?
a. P252, 000 unrealized gain
b. P252, 000 unrealized loss
c. P216, 000 unrealized gain
d. P216, 000 unrealized loss

c) During the year 2018, Magnolia sold 3,000 shares of LJ, Inc. for P239,400 and 500
shares of Dwarfy company at a loss of P16,200. On December 31, 2018. Magnolia’s
equity investment portfolio consisted of the following.

Investment Quantity Cost Fair Value

Dwarfy Company 500 shares P48, 000 P36, 000
Alabang Corp. 2,000 shares 432,000 492,000
Totals P480, 000 P528, 000

6. What should be reported los on sale of trading securities in 2018?

a. P120, 600
b. P64, 800
c. P48, 600
d. P136, 800

7. What amount of unrealized gain or loss should be reported in the income

statements for the year ended December 31, 2018?
a. P360, 000 unrealized gain
b. P360, 000 unrealized loss
c. P48, 000 unrealized gain
d. P48, 000 unrealized loss

8. In the December 31, 2018, statement of financial position, what should be

reported as carrying an amount of trading securities?
a. P480, 000
b. P468, 000
 c. P528, 000
d. P540, 000

PROBLEM NO. 3

Supporting records of MAYON CORPORATION’s trading securities portfolio show the

following debt and equity securities.

Security Cost Fair Value

400 ordinary shares Concave Co. P254, 500 P243, 000
P800, 000 Tipo Co. 7% bonds 796,500 774,000
P1, 200,000 turkey Co. 7 ½ % bonds 1,207,500 1,218,900
Totals P2, 258,500 P2, 235,900

Interest dates on the bonds are January 1 and July 1. Mayon Corporation uses the
income approach to record the purchase of bonds with accrued interest. During 2017
and 2018, Mayon completed the following transactions related to trading securities:

2017
Jan. 1 Received semiannual interest on bonds. Assume that the appropriate
adjusting entry was made on December 31

April 1 Sold P600, 000 of 7 ½% Turkey bonds at 102 plus accrued interest.

May 21 Received dividend of P1.25 per share on the Concave ordinary share
capital. The dividend had not been recorded on the declaration date.

July 1 Received semiannual interest on bonds and then the 7% Tipo bonds at 97
½.

Aug. 15 Purchased 200 shares of Newman, Inc. ordinary share capital at P580 per
share plus brokerage fees of P500.

Nov. 1 Purchased P500, 000 of 8% Toll Co. bonds at 101 plus accrued interest.
Brokerage fees were P1, 250. Interest dates are January 1 and July 1.

Dec. 31 Market prices of securities were:

Concave ordinary shares P550

7 ½ % Turkey bonds 110 ¾
8 % Toll bonds 110
Newman ordinary shares P583.75
2018
Jan. 2 Recorded the receipt of semiannual interest on bonds.

Feb. 1 Sold the remaining 7-½% Turkey bonds at 101 plus accrued interest.

QUESTIONS:

1. What is the total interest and dividend income for 2017?

a. P125, 166
b. P164, 416
c. P91, 417
d. P98, 804

2. What amount should be reported as gain on sale of trading securities in 2017?

a. P2, 550
b. P6, 000
c. P8, 550
d. P3, 450

3. What amount of unrealized gain or loss should be reported in the income

statement for the year ended December 31, 2017?
a. P21, 200 unrealized gain
b. P21, 200 unrealized loss
c. P6, 150 unrealized gain
d. P6, 150 unrealized loss

4. What is the carrying amount of the remaining trading securities on December 31,
2017?
1. P1, 481,000
2. P1, 450,450
3. P1, 473,450
4. P1, 452,250

5. What is the loss on the sale of the remaining Turkey bonds on February 1, 2018?
a. P4, 500
b. P10, 500
c. P13, 500
d. P750

PROBLEM NO. 4

SANTOL CORP. invested its excess cash in non-trading equity securities during 2017.
ON initial recognition, the entity made an irrevocable election to present its securities
at fair value through other comprehensive income FVOCI. As of December 31, 2017,
the company’s securities portfolio consisted of the following:
 Investee Company Shares Cost Market Value
Kelly, Inc. 30,000 P450, 000 P425, 000
Eloy Corp. 60,000 1,500,000 1,610,000
Yogi Enterprises 60,000 2,160,000 2,300,000
Totals P4, 110,000 P4, 335,000

During the year 2018, Santol sold 60,000 shares of Eloy Corp. for P1, 700,000 and
purchased 60,000 additional shares of Kelly, Inc. and 30,000 shares of Kongga
Company.

On December 31, 2018, Santol’s portfolio of non-trading equity securities comprised

the following:

Investee Company Shares Cost Market Value

Kelly, Inc. 30,000 P450, 000 P500, 000
Kelly, Inc. 60,000 1,300,000 1,450,000
Kongga Company 30,000 520,000 480,000
Yogi enterprises 60,000 2,160,000 700,000
Totals P4, 430,000 P3, 130,000

During the year 2019, Santol sold all the Kelly, Inc. shares for P2, 300,000 and 15,000
shares of Kongga Company at a loss of P90,000. On December 31, 2019, Santol’s
portfolio of non-trading equity securities consisted of the following:

Investee Company Shares Cost Market Value

Yogi Enterprises 60,000 P2, 160,000 P4, 200,000
Kongga Company 15,000 260,000 180,000
Totals P2,420,000 P4,380,000

QUESTIONS;

1. What total amount should be credited to retained earnings as a result of the sale
of Eloy Corp.. securities in 2018?
a. P200, 000
b. P110, 000
c. P90, 000
d. P20, 000
2. What unrealized loss on the remaining financial assets should be reported in the
2018 statements of comprehensive income as component income?
a. P1, 600,000
b. P1, 640,000
c. P1, 415,000
d. P1, 300,00
3. What cumulative amount of unrealized loss should be reported as a component of
other comprehensive income in the statement of changes in equity on December
31, 2018?
a. P1, 415,000
b. P1, 300,000
c. P335, 000
d. P225, 000

4. What unrealized gain on the remaining financial assets should be reported in the
2019 statements of comprehensive income as a component of other
comprehensive income?
a. P1, 960,000
b. P60, 000
c. P3, 440,000
d. P3, 500,000

5. What cumulative amount of unrealized gain should be reported as a component

of other comprehensive income in the statement of changes in equity on
December 31, 2019?
a. P1, 505,000
b. P1, 960,000
c. P1, 480,000
d. P3, 440,000

PROBLEM NO.5

1. Which of the following is not one of the auditor's primary objectives in an audit of
trading securities?
a. To determine whether securities are authentic
b. To determine whether securities are the property of the client
c. To determine whether securities actually exist
d. To determine whether securities are properly classified on the balance sheet
date.

2. Which of the following is the least effective audit procedure regarding the
existence assertion for the securities held by the auditee?
a. Examination of paid checkes issued in payment of securities purchased
b. Vouching all changes during the year to supporting documents.
c. Simultaneous count of liquid assets.
d. Confirmation from the custodian

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

4. In confirming with an outside agent, such as financial institution, that the agent
is holding investment securities in the client’s name, an auditor most likely
gathers evidence in support of management’s financial statement assertions of
existence and
a. Valuation
b. Rights and obligations
c. Completeness
d. Presentation and disclosure

5. In establishing the existence and ownership of an investment held by a

corporation in the form of publicly traded stock, an auditor should inspect the
securities and
a. Obtain written representations from management confirming that the
securities are properly classified as trading securities
b. Inspect the audited financial statements of the investee company
c. Confirm the number of shares held by an independent custodian
d. Determine that the investment is carried at fair value

6. An auditor is most likely to verify the interest earned on bond investment by

a. Verifying the receipt and deposit of interest checks
b. Confirming the bond interest rate with the issuer of the bonds
c. Recomputing the interest earned on the basis of face amount, interest rate, and
period held.
d. Testing controls relevant to cash receipts.

7. Which of the following provides the best form of evidence pertaining to the annual
valuation of an investment in which he independent auditor’s client owns a 30%
voting interest/
a. Market quotations of the investee company’s stock
b. Current fair value of the investee company’s assets.
c. Historical cost of the investee company’s assets
d. Audited financial statements of the investee company

8. The auditor can best verify a client’s bond sinking fund transactions and year-end-
balance by
a. Confirmation with individual holders of retired bonds.
b. Confirmation with the bond trustee
c. Recomputation of interest expense, interest payable, and amortization of bond
discount or premium
d. Examination and count of the bonds retired during the year

9. An auditor who physical examines securities should insist that a client

representative be present in order to
 a. Detect fraudulent activities
b. Lend authority to the auditor’s directives
c. Coordinate the return of securities to the proper locations.
d. Acknowledge the receipt of securities returned

10. In testing long-term investments, an auditor ordinarily would use analytical

procedure to ascertain the reasonableness of the
a. Classification between current and noncurrent portfolio
b. Valuation of marketable equity securities
c. Existence of unrealized gains or loses in the portfolio
d. Completeness of recorded investment income