MOUNTAIN VIEW COLLEGE

SCHOOL OF BUSINESS AND ACCOUNTANCY

AUDITING & ASSURANCE: CONCPTES AND APPLICATION

WORKSHEET#08: AUDIT OF INVESTMENTS

INSTRUCTIONS: Answers and all necessary solutions to the requirements must be written in a clean
sheet of paper (all in good form). Submission format must be in pdf file (one file
only).

PROBLEM #1
GEOMETRY CORP. presented the following breakdown of its investment in equity securities as of December 31,
2020:
Cost Market value
ABC CORP. Ordinary Shares (10,000 shares) (10%) P100,000 P120,000
DEF CORP. Preference Shares (5,000 shares) (30%) 80,000 75,000
GHI CORP. Ordinary Shares (8,000 shares) (15%) 150,000 200,000

Audit Notes:
Only the investment in GHI's ordinary shares is designated at fair value through other comprehensive income.

During 2021, the following transactions occurred in relation to the entity's investment account.
01/10/2021 GEOMETRY acquired 3,000 shares out of the 25,000 ordinary shares outstanding of
JKL INC. for a total amount of P84,000, which includes a P1 dividend per share. Upon
investigation. GEOMETRY acquired the shares of JKL INC. between the date of
declaration and date of record. Additional cost of P9,000 for broker's commission were
paid. These shares are to be initially recognized as trading securities.
03/01/2021 Sold 4,000 shares of ABC CORP. for P60,000. Commissions and taxes for P2,500 were
paid for the sales.
04/01/2021 GHI CORP. declared a 10% stock dividends distributable on 04/15/2021.
05/26/2021 JKL INC. declared a share split of 2 for 1 share.
07/25/2021 GHI CORP. declared a P2.10 per share cash dividend, the date of settlement is on
08/01/2021
08/01/2021 GEOMETRY received P10,000 cash in lieu of the 10% stock dividends declared
previously by ABC CORP. The stock dividend declaration were made just days after the
sale of shares on 03/01/2021.
09/11/2021 JKL INC. declared a cash dividend of P2.10 per share but since it is currently having
problems with cash management, the investee instead declared 10% stock dividends.
JKL's shares are traded in the market P20 per share.
10/18/2021 GHI CORP. declared a stock dividend of 2 preferred share for every 10 ordinary
investee share held by its investor. The preference shares received is classified as
trading securities. The market price of the investee company's ordinary and preferred
share on that date is P20 and P25, respectively.
11/15/2021 GEOMETRY sold 1,000 shares of DEF CORP. for P12,000.
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 12/31/2021 The investee companies reported the following net income (loss) for the current year:
ABC CORP. P300,000
DEF CORP. (50,000)
GHI CORP. 150,000
JKL INC. 100,000
12/31/2021 The following market values per share are available:
ABC CORP. - Ordinary shares P15
DEF CORP. - Preference shares 18
GHI CORP.- Ordinary shares 22
GHI CORP. - Preference shares 24
JKL INC. - Ordinary shares 25

Required: Based on the results of your audit, determine the following:

1. What is the initial measurement of investment in JKL INC.?
2. What is the total dividend income to be presented in the 2021 statement of profit or loss?
3. What is the net amount to be presented in the statement of comprehensive income for 2021 in relation to
the above investments?
4. What is the total carrying amount of investment in equity securities at fair value through profit or loss?
5. What is the total carrying amount of investment in equity securities at fair value through other
comprehensive income or loss?

PROBLEM #2
On January 2, 2021, ALGEBRA CORP. acquired a 30% interest in TRIGO INC.'s 500,000 outstanding shares at a
cost of P5,400,000. On that date, the equity of ALBERT is as follows:
Share capital (P20 par value) P10,000,000
Share premium 3,000,000
Retained earnings 2,000,000
Total Shareholder's Equity P15,000,000

The book value of TRIGO's net assets differs from its fair value due to the following:
• TRIGO owned depreciable assets with a 10-year remaining useful life with current fair value of
P1,500,000 more than its carrying value.
• TRIGO's computer software, an intangible asset, has a fair value which is lower than its carrying amount
by P500,000.
• TRIG's inventories on this date is undervalued by P1,000,000. All of these inventories were sold before
year-end.
• Any excess is attributable to goodwill since there are no other identifiable assets with fair value different
from its book value.

TRIGO reported a net income of P1,500,000 for the year ended, December 31, 2021. On December 31, 2021,
TRIGO declared and paid cash dividends amounting to P800,000 to its stockholders. Moreover, TRIG reported an
unrealized gain on its investment at fair value through OCl amounting to P200,000. The market value of the
shares held by ALGEBRA at year-end is at P60 per share. Cost to sell on the same date is at P5 per share.

Required:
1. How much is the total amount of goodwill of TRIGO based on the 30% acquisition?
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 2. What is the investment income to be reported by ALGEBRA on its current year statement of profit or
loss?
3. What is the carrying amount of the investment as of December 31, 2021?
4. Assuming on March 1, 2022, ALGEBRA sold 50% of its investment from TRIGO CORP. at the
prevailing market value of P52 per share, how much is the total gain or loss on cessation? How much
from this cessation gain or loss is realized and unrealized?
5. Assuming on March 1, 2022, TRIGO issued additional 300,000 shares at the prevailing market value of
P52 per share to other stockholders without the participation of ALGEBRA, how much shall be reported
in profit or loss as a result of dilution in investment?
6. Assuming that the equity of TRIGO as of acquisition date is as follows:
Ordinary share capital (P20 par value) P10,000,000
Preference share capital (P50 par value) 2,000,000
Share premium 1,000,000
Retained earnings 2,000,000
Total Shareholder's Equity P15,000,000
What is the carrying amount of the investment in associate as of December 31, 2021 assuming that the
preference shares are cumulative and non-cumulative?

PROBLEM #3
On January 1, 2021, STATISTICS CORP. purchased 30% of the outstanding common stock of CALCULUS
COMPANY for P1,000,000 at that time, the book value and fair value of the associate's net asset is P2,000,000.

On December 31, 2021, the investor has the following accounts with the associate in addition on its investment
before recognition of any share in the profit or loss of the investee:
Investment in preference shares P300,000
Loans receivable - long term & secured 160,000
Loans receivable - long term & unsecured 100,000
The above balances did not move until 2024.
In relation to the profit or loss of the investee, the following are available:
Year Profit (Loss)
2021 P1,000,000
2022 (4,000,000)
2023 (2,000,000)
2024 1,200,000

Required: Determine the balance of the following at each year-end:

1. Investment in associates
2. Loans receivable - long term & unsecured
3. Investment in preference shares

PROBLEM #4
On January 1, 2021, BOTANY CORP. acquired 15% interest in ZOOLOGY CORP. by paying P1,400,000 for
7,500 ordinary shares. On this date, the net assets of ZOOLOGY CORP. totaled P8,000,000. The fair values of
ZOOLOGY's identifiable assets and liabilities approximate their book values. BOTANY had no ability to exercise
significant influence over the operating and financial policies of ZOOLOGY. BOTANY received dividends of
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P3.50 per share from ZOOLOGY on August 1, 2021. ZOOLOGY reported net income of P1,250,000 for the year
ended December 31, 2021. The stocks which were selling on December 31, 2021 at P190 were classified as
financial asset at fair market value through other comprehensive income or losses.

BOTANY paid P1,000,000 on July 1, 2022 for 5,000 additional shares of ZOOLOGY CORP's ordinary shares
from another stockholder. The fair value of ZOOLOGY's identifiable assets and liabilities approximate their book
values. As a result of this acquisition, BOTANY has the ability to exercise significant influence over the operating
and financial policies of ZOOLOGY. BOTANY received a dividend of P4.50 per share from ZOOLOGY on
April 5, 2022 and P5.50 per share on October 1, 2022. ZOOLOGY reported net income of P1,500,000 for the year
ended December 31, 2022, P800,000 of which were earned for the six months ended December 31, 2022.

Required: Assuming the step-acquisition was accounted for under Cost Approach with Catch-up Adjustment,
Cost Approach without Catch-up Adjustment and Fair Value Approach:
1. What is the retroactive adjustment to the retained earnings, beginning 2022?
2. What is the investment income for the year ended December 31, 2022?
3. What is the balance of the investment account as of December 31, 2022?

PROBLEM #5
On January 1, 2021, PHYSICS CORP. acquired 30% of the ordinary shares of an for P10,000,000. On this date,
all the identifiable assets and liabilities of the associate were recorded at fair value. An analysis of the acquisition
showed that goodwill of P800,000 was acquired.

The net income and dividend of the associate for 2021 and 2022 were as follows:
2021 2022
Net income P 5,000,000 P 8,000,000
Dividend paid 1,800,000 4,000,000

On January 3, 2021, PHYSICS CORP. sold an equipment costing P600,000 to the associate for P800,000. The
equipment has a remaining life of 5 years.

In December 2021, the associate sold inventory to PHYSICS for P700,000. The cost of the inventory was
P600,000. This inventory remained unsold by PHYSICS on December 31, 2021. However, it was sold by
PHYSICS in 2022.

In December 2016, PHYSICS sold inventory to the associate for P1,100,000. The cost of the inventory was
P800,000. This inventory remained unsold by the associate on December 31, 2022.

Required: Based on the above date, determine the following: (ignore income tax on the intercompany sale)
1. Net share in the net income (or loss) of the associate in 2021 & 2022.
2. Carrying amount of the investment in associate on December 31, 2021 and December 31, 2022.

PROBLEM #6
On January 1, 2021, CALCULUS CORP. invested in a 5-year 10% bond with a face value of P6,000,000 at 95, in
which interest is to be paid every December 31. The company paid broker's fee and non-refundable taxes
amounting to P533,376 as a result, the yield rate on the bond was 9%. The bonds are selling at 120 at the end of
2021. At the end of 2022, the prevailing market rate of interest is at 8%.
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Required: Under the different assumptions enumerated below, determine the following:
1. How much should be the initial measurement of the investment in bonds?
2. How much should be reported in the 2021 and 2022 income statement in relation to the investment in
bonds?
3. What is the carrying amount of the investment in bonds on December 31, 2021 and December 31, 2022?
4. Assuming that the investment in bonds was sold on June 30, 2023 at P105, what is the realized gain or
loss on sale to be recognized in profit or loss?
5. Assuming that 50% of the investment in bands was sold on June 30, 2022 at P110, what is the realized
gain or loss on sale to be recognized in profit or loss?
CASE 1: Assuming that the company has a business model whose objective is to hold the asset in order to collect
contractual cash flows
CASE 2: Assuming that the company has a business model whose objective is to hold the asset in order to collect
contractual cash flows and sell, and which the enterprise elected to recognize the change in fair value
through OCI.
CASE 3: Debt investments held for trading

PROBLEM #7
On January 1, 2019, GENETICS CORP. invested in a 4-year 10% bond with a face value of P6,000,000 in which
interest is to be paid every December 31. The bonds has an effective interest rate of 9% and was acquired for
P6,194,383 GENETICS has a portfolio of commercial loans that it holds to sell in the short-term. On December
31, 2019, the investment has a fair value of P6,229,862 which is based on the prevailing market rate of 8.5%.

Required:
1. Assume that during 2019, there was a change in the business model and cash flow characteristics but they
decided to make a reclassification on January 1, 2020 to investment at fair value to other comprehensive
income. On December 31, 2020, the debt investment has a fair value of P6,213,992 which is based on the
prevailing rate of 8%. What amount should the debt investment be reported on December 31, 2020?
2. In relation to the original information, assume that the investment were reclassified at amortized cost, at
what amount should the investment in debt security be valued on December 31, 2020?
3. Assume that on the acquisition date, the security was designated as investment at amortized cost, but the
investment at amortized cost valuation was reclassified on January 1, 2020 as investment at fair value to
profit or loss, at what amount of gain or loss should the company recognized on the date of transfer?

PROBLEM #8
CHEMISTRY COMPANY and its subsidiaries own the following properties as of December 31, 2021:
Land held for long-term capital appreciation .................................................................. P300,000
Vacant building but held to be leased out under operating lease ....................................... 250,000
Office building awaiting disposal ....................................................................................... 100,000
Constructed building to be used as office building ............................................................ 400,000
Equipment leased out under operating lease ...................................................................... 200,000
Building occupied by its employee paying a market rent .................................................. 300,000
Building occupied by its employee paying a market rent .................................................. 150,000
Building that is in the process of construction for sale....................................................... 300,000
Building constructed in behalf of RAICHU CORP. .......................................................... 250,000
Factory is in the process of being constructed on behalf of the government ..................... 500,000
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 Land held for undetermined future use............................................................................... 300,000
Equipment leased out under operating lease ........................................................................ 50,000
Building under construction to be rented out under operating lease .................................. 350,000
10-storey building (first 6 floors are rented out under operating lease
other floors used as office space)* ............................................................................ 1,000,000
Building leased out under operating lease ** ..................................................................... 500,000
Building that is leased to another entity under a finance lease........................................... 300,000
Land rented out to PICHU CORP. (a subsidiary) ............................................................. 400,000
Equipment rented out to SNORLAX CORP. (a subsidiary) ............................................. 300,000
Land held for sale in the ordinary course of business ........................................................ 700,000
Building rented out to FEEBAS INC. (an associate) ......................................................... 400,000

*The portions of the building could be rented out separately.

**The company provides significant ancillary services to its tenants.

Intracompany leases made to related parties (subsidiaries and associates) were all classified as operating leases.

Required:
1. What is the total investment property that should be reported in the consolidated statement of financial
position of CHEMISTRY CORP. and its subsidiaries?
2. What is the total investment property that should be reported in the separate statement of financial
position of the CHEMISTRY CORP.?

PROBLEM #9
BIOLOGY INC. has the following investment properties' transactions during 2021:
• On January 1, 2021, BIOLOGY INC. acquired a building at P300,000, excluding VAT of P36,000. Legal
fees and other professional fees in relation to the purchase transaction amounted to P50,000. The acquired
building is to be rented out under an operating lease scheme and the day-to-day servicing cost of the asset
for 1 year amounted to P14,000.
• On March 1, 2021, the company started to construct a 15-storey building to be partly rented out to third
parties (10 floors) and partly for administrative purposes (5 floors). Both portions can be sold separately.
The total cost incurred is as follows:
Materials, labor and overhead P300,000
Operating Losses and start-up costs 15,000
Abnormal Losses of materials during construction 12,000
Interest expense directly related to construction 15,000
Normal amounts of losses 30,000
• On July 1, 2021, BIOLOGY purchased a land for capital appreciation on instalment basis of P500,000. It
was agreed that BIOLOGY will provide a 30% down payment and a non-interest bearing note for the
remaining balance, the maturity of which is after 5 years. The prevailing market rate of interest for similar
instrument is 10%. BIOLOGY incurred transaction costs of P15,000.
• A land was acquired through finance lease on October 1, 2021 and to be rented out under various
operating leases. The fair value of the land is P650,000 and the present value of minimum lease payments
is P600,000

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 • On December 1, 2021, BIOLOGY entered into an exchange transaction with PHYSICS CORP. The
exchange involved the lands of the companies. The following information was available in relation to the
exchange transaction:
Fair Value Carrying Amount
BIOLOGY 400,000 350,000
PHYSICS 450,000 500,000
BIOLOGY paid additional cash to compensate difference in fair value of the lands. The exchange has
commercial substance.

Required: How much is the total cost of investment properties at initial recognition?

PROBLEM #10
QUANTECH CORP. acquired on January 1, 2021 a real property and classified the same as an investment
property. The acquisition cost was P20,000,000 and has an estimated life of 10 years. The company paid for a
finder's fee and commissions at P1,000,000.

The investment property was appraised at P25,000,000 on December 31, 2021 and P22,000 on December 31,
2022.

Required:
CASE 1: Assuming the company uses fair value method:
1. How much should the investment property be presented in the 2021 statement of financial position?
2. How much gain or loss related to the investment should be recognized in the 2021 income statement?
3. How much should the investment property be presented in the 2022 statement of financial position?
4. How much gain or loss related to the investment should be recognized in the 2022 income statement?
5. Assuming the real property was reclassified as owner-occupied property on June 30, 2023, when the fair
value of the investment was at P20,000,000, how much should the property initially recognized upon
transfer?
6. Based on the previous item, how much gain or loss from reclassification should be recognized in the
income statement?
7. Assuming the real property was sold on June 30, 2023 at P20,000,000, how much is the realized gain or
loss on the disposal?
CASE 2: Assuming the company uses cost method:
1. How much should the investment property be presented in the 2021 statement of financial position?
2. How much should the investment property be presented in the 2022 statement of financial position?
3. Assuming the real property was reclassified as owner-occupied property on June 30, 2023, when the fair
value of the investment was at P20,000,000, how much should the property initially recognized upon
transfer and how much gain or loss from reclassification should be recognized in the income statement?
4. Assuming the real property was sold on June 30, 2023 at P20,000,000, how much is the realized gain or
loss on the disposal?

PROBLEM #11
You were able to gather the following in connection with your audit of SCIENCE CORP. On December 31, 2020,
SCIENCE properly reported the investments:

Fair value through other comprehensive income:

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 Unrealized
Cost Market Loss
ABC CORP., 20,000 shares of ordinary shares (a 1% interest) P 1,000,000 P 880,000 P 120,000
DEF CORP., 40,000 shares of ordinary shares (a 2% interest) 1,280,000 1,200,000 80,000
Total P 2,280,000 P 2,080,000 P 200,000

Investment in Associate
GHI CORP., 50,000 shares (25% interest)* P 18,000,000

Additional information:
• On April 1, 2021, SCIENCE acquired 10,000 shares of MATH CORP.. stocks at P200 per share to be
appropriately classified as Fair value through other comprehensive income. Brokerage and commissions
of P 50,000 were paid by SCIENCE
• On April 25, 2021, SCIENCE. sold 4,000 shares of MATH at P230 per share.
• On August 30, 2021, DEF CORP. issued to all shareholders stock rights on the basis of one right per
share. Market prices at date or issue were P28.80 per share of stock and P3.20 per right. SCIENCE sold
all rights on December 1, 2021 for net proceeds of P 130,000.
• The investment in associate was acquired on January 1, 2020 for P 16,000,000. The book value of the
acquired shares was P14,000,000. The excess is attributable to a patent which has a useful life of 10 years.
On December 31, 2021, SCIENCE sold one-half of its investments in GHI CORP. for P450 per share and
reclassified the remaining balance of its investment to Fair value through other comprehensive income
reported net income. GHI reported net income of P 20,000,000 for the year ended December 31, 2021.
• Market prices per share follow:
12/31/2016
ABC CORP. - ordinary shares 46
MATH CORP. - shares 192
DEF CORP. - ordinary shares 28
GHI CORP. - ordinary shares 450
• Cash dividends follow:
Amount Date of Date of Date of
per share declaration record payment
Boy-ot P8 3/30/2022 4/30/2022 5/15/2022
Cleo 40 10/1/2022 10/31/2022 11/30/2022

Required: Based on the above date, answer the following:

1. What is realized gain or loss on sale of MATH shares?
2. What is realized gain or loss on sale of GHI shares?
3. What is the total dividend income in the statement of comprehensive income in 2021?
4. What is the adjusted carrying value of the investment in Fair value through other comprehensive income
to be reported in the statement of financial position on December 31, 2021?
5. What is the total unrealized loss to be presented in the statement of financial position on December 31,
2021?

PROBLEM #12
On December 31, 2020, LITERATURE CORP.'s statement of financial position showed the following balances to
its securities accounts:
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Financial Asset at Fair Value Through Profit or Loss:
Cost Market
10,000 shares of ABC CORP P3,000,000 P3,050,000
8,000 shares of DEF CORP 2,200,000 2,113,000
10% GHI CORP. bonds purchased at face value
(interests payable semi-annually on January and July) 1,000,000 747,000

Financial Asset at Fair Value Through Other Comprehensive Income or Loss:

Cost Market
10,000 shares of JKL CORP. P2,360,000 P2.520.000
20,000 shares of MNO CORP. 1,960,000 2,200,000

During 2021, the following transactions took place:

1/1 Received semi-annual interest from GHI
3/1 Purchased additional 3,000 shares of ABC CORP. for P918,000 as investment at fair value
through profit or loss.
4/15 Sold 4,000 shares of DEF CORP. for P138 per share.
5/4 Sold 4,000 shares of JKL shares for P124 per share.
7/1 Received semi-annual interest from GHI.
9/1 Purchase 400 of PQR CORP.'s 5-year, 12%, P1,000 bonds at 93 plus accrued interest. The
bonds are dated January 1, 2021. The bonds were designated as investment at fair value
through profit or loss.

The market values of the stocks and bonds on December 31, 2021 are as follows:
ABC CORP.’s stocks P153.20
DEF CORP.’s stocks 137.00
GHI CORP.’s Bonds 82.22 (Quoted Price)
JKL CORP.’s stocks 110.50
MNO CORP.’s stocks 44.00
PQR CORP.’s bonds 98.00 (Quoted Price)

Required:
1. How much is the realized gain or loss on the sale of DEF shares?
2. How much is the realized gain or loss on the sale of JKL shares?
3. How much is the unrealized holding gain to be reported in the 2021 income statement?
4. How much is the unrealized holding gain to be reported in the 2021 statement of financial position?

PROBLEM #13
ENGLISH CORP. insured the life of its president for P1,500,000, the entity being the beneficiary of an ordinary
life insurance policy. The annual life insurance premium is P60,000 payable every first day of the year. The entity
follows the calendar year as the fiscal period.

The policy is date January 1, 2021, and carries the following cash surrender values:
End of Policy Year Cash Surrender Value
2021 P -
2022 -
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 2023 30,000
2024 45,000
2025 63,000

In addition, the company received dividends in 2024 and 2025 of P10,000 and P12,000, respectively. The
president died on October 31, 2025 and the policy was collected on December 1, 2025.

Moreover, ENGLISH CORP., provided the following information in relation to a bond sinking fund that was
placed in trust as required by the underwriter:
Bond sinking fund, January 1, 2021 P6,000,000
Additional investment in 2021 1,200,000
Dividends on investments 400,000
Interest revenue 200,000
Administration costs 500,000
Carrying amount of bonds payable 10,000,000

Required:
1. How much is the life insurance expense to be reported on the income statement of 2023, 2024 and 2025?
2. What is the gain on life insurance policy settlement in 2025?
3. What is the carrying amount of the bond sinking fund on December 31, 2021?

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