AUDIT OF INVESTMENTS

DON CARLO CAVINA SCHOOL

1st Semester SY 20-21
APPLIED AUDITING

PROBLEM NO. 1:
Presented below are unrelated situations:
A. Liton Company buys and sells securities expecting to earn on short-term differences in
price. During 2018, Liton Company purchased the following trading securities:
Security Cost Fair Value, December
31, 2018
A P 195,000 P 225,000
B 300,000 162,000
C 660,000 678,000
Before any adjustments related to these trading securities, Liton Company had net
income of P 900,000.
1. What is Liton’s net income after making any necessary trading security adjustments?
A. P 900,000
B. P 810,000
C. P 762,000
D. P 948,000
2. What would Liton’s net income be if the fair value of Security B were P 285,000?
A. P 867,000
B. P 900,000
C. P 885,000
D. P 933,000
B. Candaba Co.’s portfolio of trading securities includes the following on December 31,
2017:
Cost Fair Value
15,000 ordinary shares of Tomas Co. P 477,000 P 417,000
30,000 ordinary shares of Gandara Co. 546,000 570,000
P 1,023,000 P 987,000
All of the above securities have been purchased in 2017. In 2018, Candaba Co.
completed the following securities transactions:
March 1 Sold 15,000 shares of Tomas Co. ordinary shares for P 460,500.
April 1 Bought 1,800 ordinary shares of Westin, Inc. at P45 plus commission,
taxes, and other transaction costs of P1,650.
The Candaba Co. portfolio of trading securities appeared as follows on December 2018:
Cost Fair Value
30,000 ordinary shares of Gandara Co. P 546,000 P 580,000 *
1,800 ordinary shares of Westin, Inc 82,650 75,000 **
P 628,650 P 655,000
* Net of P6,500 estimated transaction costs that would be incurred on the sale of the
securities.
**Net of P1,500 estimated transaction costs that would be incurred on the sale of the
securities.
1. What amount of unrealized gain on these securities should be reported in the 2018
income statement?
A. P 12,000
B. P 10,350
C. P 26,350
D. P 28,000
2. What is the gain or loss on the sale of Tomas Co. ordinary shares on March 1, 2018?
A. P 48,000
B. P 9,000
C. P 43,500
D. P 4,500
3. What amount should be reported as trading securities on Candaba’s statement of
financial position on December 31, 2018?
A. P 655,000
B. P 663,000
C. P 628,650
D. P 636,650

PROBLEM NO. 2:

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Magnolia Corp. invested its excess cash in equity securities during 2018. The business model for
these investments is to profit from trading on price changes.
a. As of December 31, 2018, the equity investment portfolio consisted of the following:
Investment Quantity Cost Fair Value
Lj, Inc. 1,000 shares P 45,000 P 63,000
Polland Co. 2,000 shares 120,000 126,000
Alabang Corp. 2,000 shares 216,000 180,000
Totals P 381,000 P 369,000
1. In the December 31, 2018, statement of financial position, what should be reported
as carrying amount of the investments?
A. P 369,000
B. P 345,000
C. P 381,000
D. P 405,000
2. In the 2018 income statement, what amount should be reported as unrealized gain
or loss?
A. Unrealized gain of P 12,000
B. Unrealized loss of P 12,000
C. Unrealized loss of P 36,000
D. Unrealized gain of P 24,000
b. During the year 2019, Magnolia Corp sold 2,000 shares of Polland Co. for P 114,600 and
purchased 2,000 more shares of LJ Inc and 1,000 shares of Dwarfy Company. On
December 31, 2019, Magnolia's equity securities portfolio consisted of the following:
Investment Quantity Cost Fair Value
Lj, Inc. 1,000 shares P 45,000 P 60,000
Lj, Inc 2,000 shares 99,000 120,000
Dwarfy Company 1,000 shares 48,000 36,000
Alabang Corp. 2,000 shares 216,000 66,000
Totals P 408,000 P 282,000
3. What is the gain or loss on the sale of Polland Co. investment?
A. P 5,400 gain
B. P 5,400 loss
C. P 11,400 gain
D. P 11,400 loss
4. What is the carrying amount of the investments on December 31, 2019?
A. P 408,000
B. P 444,000
C. P 282,000
D. P 246,000
5. What amount of unrealized gain or loss should be reported in the income statement
for the year ended December 31, 2019?
A. P 126,000 unrealized gain
B. P 126,000 unrealized loss
C. P 108,000 unrealized gain
D. P 108,000 unrealized loss
c. During the year 2020, Magnolia sold 3,000 shares of LJ Inc for P 119,700 and 500
shares of Dwarfy Company at a loss of P 8,100. On December 31, 2010, Magnolia's
equity investment portfolio consisted of the following:
Investment Quantity Cost Fair Value
Dwarfy Company 500 shares P 24,000 P 18,000
Alabang Corp. 2,000 shares 216,000 246,000
Totals P 240,000 P 264,000
6. What should be reported as loss on sale of trading securities in 2020?
A. P 60,300
B. P 32,400
C. P 24,300
D. P 68,400
7. What amount of unrealized gain or loss should be reported in the income statement
for the year ended December 31, 2020?
A. P 180,000 unrealized gain
B. P 180,000 unrealized loss
C. P 24,000 unrealized gain
D. P 24,000 unrealized loss

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8. In the December 31, 2020, statement of financial position, what should be reported
as carrying amount of trading securities?
A. P 240,000
B. P 234,000
C. P 264,000
D. P 270,000

PROBLEM NO. 3:
During the course of your audit of the financial statements of Fishing Corporation for the year
ended December 31, 2018, you found a new account, “Investment in Equity Securities.” Your
audit revealed that during 2018, Fishing began a program of investment, and all investment-
related transactions were entered inn this account. Your analysis of this account for 2018
follows:
Fishing Corporation
Analysis of Investment in Equity Securities
For the Year Ended December 31, 2018
Debit Credit
Salmon Company Ordinary Shares
Feb 14 Purchased 36,000 shares @ P55 per share P 1,980,000
July 26 Received 3,600 ordinary shares of Salmon
Company as a stock dividend.
(Memorandum entry in general ledger.)
Sept 28 Sold the 3,600 ordinary shares of Salmon P 252,000
Company received July 26 @ P70 per share

Tamban, Inc. Ordinary Shares

Apr 30 Purchased 180,000 shares 2 P40 per share P 7,200,000
Oct 28 Received dividend of P1.20 per share P 216,000
Additional information:
a. The fair value for each security as of the 2018 date of each transaction follow:
Security Feb 14 Apr 30 Jul 26 Sept 28 Dec 31
Salmon Company P 55 P 62 P 70 P 74
Tamban, Inc P 40 32
Fishing Corp 25 28 30 33 35
b. All of the investments of Fishing Corporation are nominal in respect to percentage of
ownership (5% or less).
c. Each investment is considered by Fishing Corporation to be non-trading. Fishing
Corporation has made an irrevocable election to present in other comprehensive income
subsequent changes in fair value of its non-trading equity securities.
1. What amount should be reported as gain on sale of non-trading equity securities in the
income statement of Fishing Corporation for the year ended December 31, 2018?
A. P 72,000
B. P 18,000
C. P 54,000
D. P 0
2. The receipt of 3,600 stock dividend would cause the investment balance to increase by
A. P 223,200
B. P 252,000
C. P 198,000
D. P 0
3. What entry is necessary to correct the recording of the cash dividend received from
Tamban Inc.?
A. Cash P 216,000
Dividend Income P 216,000
B. Cash P 216,000
Investment in Equity securities P 216,000
C. Investment in Equity securities P 216,000
Dividend income P 216,000
D. Dividend income P 216,000
Investment in Equity securities P 216,000
4. What amount of unrealized gain or loss should be reported in the 2018 statement of
comprehensive income as component of other comprehensive income?
A. P 1,440,000 gain

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B. P 1,440,000 loss
C. P 576,000 gain
D. P 576,000 loss
5. What amount should be reported as Investment in Equity Securities in the statement of
financial position on December 31, 2018?
A. P 9,000,000
B. P 8,424,000
C. P 7,560,000
D. P 9,864,000

PROBLEM NO. 4:
Supporting records of Mayon Corporation’s trading securities portfolio show the following debt
and equity securities:
Security Cost Fair Value
200 ordinary shares Concave Co. P 127,250 P 121,500
P400,000 Tipo Co. 7% bonds 398,250 387,000
P600,000 Turkey Co. 7 ½ % bonds 603,750 609,450
TOTALS P 1,129,250 P 1,117,950
Interest dates on the bonds are January 1 and July 1. Mayon Corporation uses the income
approach to record the purchase of bonds with the accrued interest. During 2018 and 2019,
Mayon completed the following transactions related to trading securities.
2018
Jan 1 Received semiannual interest on bonds. Assume that the appropriate adjusting
entry was made on December 31, 2017.
Apr 1 Sold P 300,000 of 7 1/2% Turkey bonds for P 305,000.
May 21 Received dividend of P 1.25 per share on the Concave ordinary share capital.
The dividend had not been recorded on the declaration date.
Jul 1 Received semiannual interest on bonds and then sold the 7% Tipo Bonds
P388,750.
Aug 15 Purchased 100 shares of Newman, Inc. ordinary share capital at P580 per share
plus brokerage fees of P 250.
Nov 1 Purchased P 250,000 of 8% Toll Co. bonds at 101 plus accrued interest.
Brokerage were P 625. Interest dates are January 1 and July 1.
Dec 31 Market price of securities were:
Concave ordinary shares P550
7 ½ % Turkey bonds 101 ¾
8% Toll bonds 101
Newman ordinary shares P583.75
2019
Jan 2 Recorded the receipt of semiannual interest on bonds
Feb 1 Sold the remaining 7 1/2% Turkey bonds at P 301,500 plus accrued interest.

1. What is the total interest and dividend income for 2018?

A. P 62,583
B. P 82,208
C. P 45,708
D. P 49,402
2. What amount should be reported as gain on sale of trading securities in 2018?
A. P 2,025
B. P 6,376
C. P 4,275
D. P 3,125
3. What amount of unrealized gain or loss should be reported in the income statement for
the year ended December 31, 2018?
A. P 10,600 unrealized gain
B. P 10,600 unrealized loss
C. P 3,075 unrealized gain
D. P 3,075 unrealized loss
4. What is the carrying amount of the remaining trading securities on December 31,2018?
A. P 740,500
B. P 725,225
C. P 736,725
D. P 726,125
5. What is the loss on the sale of the remaining Turkey bonds on February 1, 2019?

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A. P 3,750
B. P 5,250
C. P 6,750
D. 375

PROBLEM NO. 5:
Your audit of Guava Corporation’s investments in debt securities in debt and equity securities
reveals the following information:
a. On January 1, 2018, X Company issued P 1,000,000 in debt securities. The stated
interest is 9%, with interest payable semiannually, on June 30 and December 31. On
February 1, Guava purchased these debt securities from an investor who acquired them
when they were originally issued. Guava paid the investor an amount equal to the face
value of these securities plus accrued interest. The securities were designated as held-
for-trading.
b. On June 1, Guava purchased 10,000 shares of equity securities for P50 per share. These
non-trading equity securities are to be measured at fair value through other
comprehensive income. Guava paid P 13,000 broker’s commission on the purchase.
1. On initial recognition, a financial asset or financial liability is measured at
A. Acquisition cost, i.e., the consideration paid or received plus any directly attributable
transaction costs to the acquisition or issuance of the financial asset or financial
liability.
B. The consideration paid or received for the financial asset or financial liability.
C. Fair value. For items that are not measure at fair value through profit or loss,
transaction cots are also included in the initial measurement.
D. Zero
2. The entry to record the acquisition of debt securities on February 1 is
A. Investment in trading securities P 1,007,500
Cash P 1,007,500
B. Investment in trading securities P 992,500
Interest income 15,000
Cash P 1,007,500
C. Investment in trading securities P 1,000,000
Unrealized loss on trading securities 7,500
Cash P 1,007,500
D. Investment in trading securities P 1,000,000
Interest income 7,500
Cash P 1,007,500
3. The entry to record the purchase of equity securities on June 1 is
A. Investment in equity securities P 500,000
Broker’s commission expense 13,000
Cash P 513,000
B. Investment in equity securities P 513,000
Cash P 513,000
C. Investment in trading securities P 513,000
Cash P 513,000
D. Investment in equity securities P 500,000
Broker’s commission expense 13,000
Cash P 513,000

PROBLEM NO. 6:
On January 1, 2018, Rambutan Corp purchased debt securities for cash of P765,540 to be held
as financial assets at amortized cost. The securities have a face value of P600,000, and they
mature in 15 years. The securities carry fixed interest of 10% that is receivable semiannually,
on June 30 and December 31. The prevailing market interest rate on these debt securities is
7% compounded semiannually.

1. The carrying value of the debt securities on December 31, 2018, at amortized cost using
the effective interest rate method is
A. P 771,840
B. P 759,016
C. P 765,540
D. P 600,000

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2. The interest income to be reported for 2018 using the effective interest rate method is
A. P 66,524
B. P 6,524
C. P 60,000
D. P 53,476

PROBLEM NO. 7:

On January 1, 2017, Elagro Company purchased P 2,000,000 face value bonds at a price of P
1,824,800 which will yield an interest rate of 10%. The nominal interest rate on the bonds is
8% payable annually every December 31. The company’s business model it to collect
contractual cash flows that are solely payments of principal and interest.

On December 31, 2018, Elagro company changed the business model in managing the bonds
from collecting contract cash flows that are solely payments of principal and interest to realizing
short term gains. The market value of the bonds on January 1, 2019 is 105.

1. What amount should be reported as interest income for 2018?

A. P 184,728
B. P 160,000
C. P 182,480
D. P 24,728
2. What is the carrying amount of bonds on December 31, 2018?
A. P 2,000,000
B. P 1,872,008
C. P 1,847,280
D. P 1,782,088
3. On reclassification date, what amount of gain on reclassification of financial asset should
be recognized by Elagro Company?
A. P 120,000
B. 187,200
C. P 0
D. P 247,992

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