291 CHAPTER 4 Audit of Investments DIT PR FOR INVESTM. Audit Objectives: To determine that: 1. Investments exist (held by the entity 0 or the entity's fund manager) and are owned by the entity. 2. All recorded income from. investments has accrued to the entity at the end of the reporting period. 3. All investments owned by the entity at the end of the teporting period are included in the statement of financial position. 4. All income accruing from investments at the end of the Teporting period has been recorded.2. cApMTEKROTENER: AUDITING PROBLEMS 5. Investments are included in the statement of financial . position at "ap riate amounts. The related investment income is included in the income statement at the appropriate amount. 6. All investments are. free of liens, pled; or other security interests, or if not, are adequately disclosed. 7. Investments and’ related investment income accounts are properly classified, described, and disclosed in. the financial statements in conformity with PFRS. : 1. Prepare or obtain.an analysis of the investment account and: © Trace to applicable general ledger balances. ; Vouch citnaes dues. Te by reference to board minutes and brol s. e. Verify completeness of dividend and interest . and where necessary, by reference to outside published sources, ¢ Check footings and cross-footings, 2. Conduct securities count and: © Inspect securities as to registered owner. * Reconcile and compare details with investment analysis. & For securities held by an outside custodian: a ° Axrange fora visit to the custodian and conduct & 5 OF293 e Confirm from the custodian the details securities held for the account of the entity. - carrer 4. AUDIT OF INVESTMENTS, 4, Review minutes, agreements, and confirmation replies for evidence of liens, pledges, or othe security imerest in the entity's. investments and of commitments to acquire or dispose of investments. 5, Inspect market quotati financl satonens_ of i ements and other oe evidenre to determine the current é scuss with the entity the process used by management in investments. 7. Determine whether the client’s investment activities are” consistent with its business model for managing clench. 4, Determine whether the decline in fi value of hel-fr- collection ets below cost is other than temporary and is properly recognized. 9. Vesify computations of gins and loses fom dpe of investments. ee . , discount on hel — 1, Determine propriety of financial a and adequacy of disclosures. aaa294 en xuenanan ENT: AUDITING PROBLEMS Trading Securities Presented below are unrelated situations. 1. LITON COMPANY buys and sells securities expecting to earn profits on short-term differences in. price. During 2018, Liton securities: ding s Company purchased the following trading ‘sat Wiis A P195,000 P225,000 B 300,000 162,000 Cc 660,000 678,000 Before any adjustments related to these trading securities, Liton Company had net income of P900,000. 1. What is Liton’s net income after making any necessary trading security adjustments? C. A. P900,000 . P762,000 B. P810,000 D. P948,000 2. What'would Liton’s net income be if the fair value of security B were P285,000? A. P867,000 C. P885,000 B, P900,000 D. P933,000 “2, CANDABA CO/s portfolio of trading securities includes the following on December.31, 2017: - Cost Fair Value 15,000 ordinary shares of Tomaso. 477,000 P417,000 30,000 ordinary shares of Gandara Co. 546,000 ~~ Bi923.000 — paeZaequarter 4 AUDIT OF INVESTMENTS 295 Il of the above securities have been purchased in 2 foie, Candaba Co. commit the following mee transactions: 1 Sold 15,000 shares of Tomas Co. ordina; Mar. P460,500. TY shares for April 1 Bought 1,800 ordinary shares of Westin, Ine. at Pas commission, taxes, and other transaction Bes Costs of P1,650, The Candaba Co. portfolio of trading securities a eared follows on December 31, 2018: pp as 30,000 ordinary shares of Gandara Co, Cost FairValue ! P546,000 "580,000: 1,800 ordinary shares of Westin, Inc. 82,650 —75,0002 2628.650 655.000 1 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 bereported in the 2018 income statement? A. P12,000 C. P26,350 B. P10,350 D. P28,000 . What is the gain or loss on the sale of Tomas Co. ordinary shares on March 1, 2018? A. P48,000 C. P43,500 B. P9,000 D. P4500 * What amount should be reported as trading securities in dal 2 bas statement of financial position on. December 31, 0187 A. P655,000 C. 628,650 8. P663,000 D. P636,650 ‘296 CPADAIATIONRENEVER: AUDITING PROBLEMS SOLUTION 4-1 Se ee 1, LITON COMPANY 4. Net income before trading security adjustment 900,000 Unrealized loss (P1,155,000 — P1,065,000) (90, 000) Net income, aS adjusted 810,009 Fair Value A P195,000. 225,000 B 300,000 162,000 c —860,000 P.155,000 Answer: B 2. Net income before trading security adjustment 900,000 Unrealized gain (P1,188,000 — P1,155,000) — 33,000 Net income, as adjusted ~ 933,000 Fair Value Security Cost Dec. 31,2018 A P195,000 225,000 y 300,000 285,000 — 560,000 __678,000 PL155.000 —P.188,000 Answer: D 2. CANDABA CO. 1, Unrealized gain (P663,000 ~P651,000) pio Carrying Value —_—Failr Value Dec, 31, 2018 Gandara Co. P570,000 586,500 Westin, Inc. 81,000 Pési.000 Ps. Answer:HAPTER 4 auoit oF INVESTMENTS 297 2. Proceeds from sale Carrying eek 460,500 Gain on sale of ‘omas Co, ordinay 412,000 Answer: C ny saces 243,500 3, Trading securities at fair Value (see no, 1 Answer: B ) P663,000 PROBLEM 4-2 ees MAGNOLIA CORP. invested its excess cash in equity securiti 2018. The business model for these investments is to proft ot trading on price changes, (a As of December 31, 2018, the equity investment portfolio consisted of the following: Cost 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 ‘ P381,000 P369.000 1. In the December 31, 2018, statement of financial position, what should be reported .as carrying amount of the investments? A. P369,000 C. P381,000 'B. P345,000 D. P405,000 2 In the 2018 income statement, what arnount should be Teported.as unrealized gain or loss? A. Unrealized gain of P12,000 B. Unrealized loss of P12,000 C. Unrealized loss of P36,000298 CCADNITNATENENEVE, AUDITING PROBLEMS D. Unrealized gain of P24,000 (b) During the year 2019, Magnolia Corp. sold 2,000 shares Polland Co. for P114,600 and purchased 2,000 more shares of) Inc. and 1,000 shares of Dwarfy Company. On Decemby er 31, 2019, Magnolia’s equity securities portfolio consisted of the following. 4 Investment Quantity Cost - FairValue Lj, Inc. 1,000shares P 45,000 P 60,000 Ly, 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 fi 408.000 P282.000 3.. What is the gain or loss on the sale of Polland Co, investment? © A. P5,400 gain C. P11,400 gain B.. P5,400 loss D. P11,400 loss 4. What is the carrying amount of the investments on December 31,2019? A. P408,000 . C, .P282,000 B. .-P444,000 “D. P246,000 5. What amount of unrealized gain or loss should be reported in the income statement for the year ended December 31, 2019? A. P126,000 unrealized gain B. P126,000 unrealized loss Cc P108,000 unrealized gain D. P108,000 unrealized loss (6) During the year 2020, Magnolia sold 3,000 shares of U Ine" P119,700 and 500 shares cee chates ot of Dwarfy Company at a loss of P8,100p 4 AUDIT OF INVESTMENTS, cuArTe 299 on December 31, 2020, Ma gnolia’s equity { consisted of the following. ‘Miy Investment portfolio Investment Quantity Dwarfy Company —_ 500 shares Cost Fair Value P 24,000 P 18.009 AlabangCorp. — 2,000 shares ~216,000 ¢ ‘Tole 240.000 264.009 6. What should be reported as loss on sale of trading securities in 2020? A. P60,300 C. P24,300 B. P32,400 D. P68,400 7, What amount of unrealized gain or loss should be Teported in the income statement for the year ended December 31, 2020? A. P180,000 unrealized gain B. P180,000 unrealized loss C. P24,000 unrealized gain D. P24,000 unrealized loss aes ~—8-In the December-34,-2020, statement of financial position, what should be reported as carrying amount of trading securities? A. P240,000 C. P264,000 B, P234,000 D, P270,000 LUTION 4-9 mS on GR a pelea ae | Trading securities, at fair value ase.000 Answer: : 2 aie Value, December 31, 2018 a0 Acquisition cost ’ p.i2,000 Unrealized loss Answer: B300 crapAMUTONREEE AUDITING PROBLEMS 3. Sales price of Polland securities a8 P114,600 Carrying amount, December 31, Loss on sale of Polland securities P1140 Answer: D 4, Trading securities, at fair value 282,000 Answer: C 5. Investment Quantity Camying Value Fair Value U, Inc. 1,000 shares P 63,000 P 60,000 U, Inc. 2,000 shares pat ae Dwarfy Company 1,000 shares , q Alabang Corp. 2,000 shares _180,000 —56,000 Totals 390,000 —-P282,000 Unrealized loss (P390,000 — P282,000) 108,000 Answer: D 6. Sales price of LJ, Inc. securities P119,700 Carrying amount, December 31, 2019: 1,000 shares P 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 Carrying Value Fair Value pill Company ; a0 shares 18,000 P 18,000 19 Corp. 100 shar Totals y res. 66,000 _246,000 . 84,000 264,000 Unrealized gain (264,000 ~ P84,000) 180,000 ‘Answer: A 8, Trading securities, at fair value 264,000 Answer: C4, AUDIT OF INVESTMI HAPTER ENTS 301 prosien 4-3 Non-tradii reir Value Changes in Other Comprehensive Income aes wring the course of your audit of the fi FISHING CORPORATION for the year ended Deceit sae of found a new account, “Investment in Equity Securities.” a 8, you revealed that during 2018, Fishing began a program of invests and all investment-related transactions were entered in this a¢ ome your analysis of this account for 2018 follows; en Fishing Corporation Analysis of Investment in Equity Securities For the Year Ended December 31,2018 Debit Credit (a) Salmon Company Ordinary Shares . Feb. 14 Purchased 36,000 shares @ P55 per share P1,980,000 July 26 Received 3,600 ordinary shares of Salmon Company asa stock dividend. (Memorandum entry in general ledger.) Sept.28 Sold the 3,600 ordinary shares of Salmon Company received July 26 @ P70 per share. 252,000 o Debit Credit 4pril30 Purchased 180,000 shares z 100,000 @ P40 per share P72 P216,000 Oct. 28 Received dividend of P1.20 per share.302 ‘CRA EXAMINATION REVIEWER: AUDITING PROBLEM Additional information: a. The fair value for each security as of the 2018 date of each transaction follow: Feb.14 April30 luly26 Sept.28 Security Salmon Company PS: P62 P7 P74, Tamban, Inc. P40 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: 4. 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. P72,000. C. P54,000 B. P18,000 D. PO 2. The receipt of 3,600 stock dividend would cause the investment balance to increase by A. P223,200 C. P198,000 B. P252,000 D. PO 3. What entry is necessary to correct the recording of the cash dividend received from Tamban, Inc.? A. Cash 216,000 Dividend income : 216,000 B. Cash 216,000 Investment in equity securities 216,000 C. Investment in equity securities 216,000 Dividend.ingome : 716,000x 4 AUDIT OF INVESTMENTS 303 5 cHAFT Fava inoue ; 216,000 D. Oe atone in equity securities 216,060 mount of unrealized gain or loss should be Teported in the 4 es atement of comprehensive income 45 component of other a mpretiensive income? col P1,440,000 gain C. P576,000 gain A prada 000 loss D. P576,000 loss B. P1440, 5, What amount should be reported as ] nvestment in Equity Securities in the statement of financial Post ition on December 31, 2018? 000 C. P7,560,000 i paateoog D. P9,864,000 SOLOTION 4-3 Sales price of Salmon ordinary shares (P70x 3,600) 252,000 Acquisition cost.(P1,980,000 x 3,600/39,600) 180,000 Gain on sale of Salmon ordinary shares 272,000 Answer: D 7 The receipt Of stock dividend does Not affect the total cost of the investment, Answer: * Investment in equity securities * 216,000 Dividend income a (P1.20 x 180,000 shares) ; Answer: ¢ i 216,000 | ae304 CPAEKAMINATION REVIEWER: AUDITING PROBLEMS, 4, Investment Quantity © Gost Falt Value Salmon Company 36,000 shares P1,800,000° P2,664, 0001 Tamban, Inc. 180,000 shares 7,200,000 Totals 9,000,000 P8.424, oon 1 p74 x 36,000 shares ? P32 x 180,000 shares Unrealized loss (P9,000,000 — P8,424,000) 576,000 Answer: D 5. Investment in equity securities, at fair value 8,424,000 Answer: B s PROBLEM 4-4 Investment in Bonds Shown below is an amortization schedule related to ANGLER COMPANY’s 5-year, P500,000 bond with a 7% interest rate and a5% yield, purchased on December 31, 2018, for P543,300. Interest Interest Premium Carrying Date Received Income Amortization - Amount 12/31/18 - P543,300 12/31/19 P35,000 P27,165 P7,835, 535,465 12/31/20 - 35,000 26,773 8,227. 527,238 12/31/21 . 35,000 26,362 8,638 518,600 12/31/22 35,000 25,930 9,070 509,530 12/31/23 35,000 - 25,470 9,530 500,000 The following shows a comparison of the amortized cost and faif value of the bonds at year-end: Amortized Cost —_Fair Value December 31, 2019 P535,465 532,500 December 31, 2020 527,328 537,500IT OF INVESTMENTS x 4 AUD! Hartel per 31, 2021 518,600 December 31,2022 509,530 December 31, 2023 500,000 required: a assets measured at amortized cost. re the journal entry to record the prepecember 31, 2018, assuming the bi 305 528,250 515,000 500,000 Purchase of these bonds onds are held as financial prepare the journal entry(ies) related to these bonds for 2019, 7 prepare the journal entry(ies) related to these bonds for 2021. ‘ What should be reported as the carrying amount of these bonds in the statement of financial position on December 31, 20227 suLuTION 4-4 —_— December 31, 2018 ® Investment in bonds Cash (b) December 31, 2019 Cash ‘ Investment in bonds - Interest income (© December 31, 2021 Cash "Investment in bonds Interest income {Investment in bonds, at amortized cost 543,300. 543,300 35,000 7/835 27,165 35,000 \ ‘ 8,638 ‘ 26,362 1509530306 covcawmnonsevive: AUDITING PROBLEMg PROBLEM 4-5 Investment in Bonds at Fvoq, (Fair Value through Other Comprehensive Income) COLOONG CO. holds debt securities within a business model whose objective is achieved both by collecting contractual cash flows and selling the debt securities. The contractual cash flows are Solely payments of principal and interest on specified dates. The following. amortization schedule relates to its 5-year, P1,000,000, 7% bonds purchased on December 31, 2016, for P1,086,565. The bonds were purchased to yield 5% interest. Interest Interest Premium Amortized 12.31.16 P1,086,565 12.31.17 P70,000 P54,328 P 15,672 1,070,893 12.31.18 70,000 53,545 16,455, 1,054,438 12.31.19 70,000 52,722 17,278 1,037,160 12.31.20 70,000 51,858 > 18,142 1,019,018 12.31.21 70,000 50,982* 19,018 1,000,000. *Adjustment due to rounding as . The following schedule presents the amortized cost and fair value of the bonds at year-end. FairValue - Amortized Cost December 31,2017 P1,065,000 P1,070,893 December 31, 2018 1,075,000 1,054,438 December 31, 2019 1,056,500 1,037,160 December 31, 2020 1,030,000 ~ 1,019,018 December 31,2021 1,000,000 1,000,000 ' 1, What amount should be reported as investment in bonds in the tat i ; : amen a financial position of Coloong Co. on December 31,HAPTER 4 AUDIT OF INVESTMENTS 307 A. P1,086,565 © Phops B. P1,054,438 . PLossogp , What amount of unrealizeq Bain should a of other comprehensive income in the agi #5 component comprehensive income? Statement of A. P26,455 © 10,009 B. P20,562 D. P16,455 What amount of unrealized loss should be sho 3. of other comprehensive income in the 2010 state nPonent comprehensive income? ‘Ment of A. P14,393 : C. P19,349 B. P18,500 D. P1222 What amount of unrealized loss should be shown aS component of other comprehensive income in the 2020 Statement of comprehensive income? A. P8350 C. P9,792 B. P26,500 D. P10,982 . What amount of unrealized Bain should by statement of changes in equity? A P26,455 C. P25,233 B. P16,883 D. P10,990 SLUTION 4-5 ee a ee e Shown in the 2020 © Investment in bonds — Fvod 1,075,000 Answer: C , ere x * farvaue, Dee, 33, 2018 1,075,000 mya value, Dec, 31, 2018: nee ai walue, Dec. 31,2017. - P1065, lium amortizati 018 (16,455) 1,048,545 alized een in 2 P2645 A dhNEWER ri 308 (CPAEXAMINATION REY! AUDITING PROBLEMS Alternative computation: Dec. 31, 2018 P1,075,000 r amortization schedule Dec, 31, 2018 P 20,562 —5.893 Fair value; Carrying amount pel ‘Cumulative unrealized gain, Unrealized loss in 2017 (P1,065,0 Unrealized gain in 2018 00 — P1,070,893) Fair value, Dec. 31, 2019 P 1,056,500 3. Carrying value, Dec. 31, 2019: Fair value, Dec. 31, 2018 9 P1,075,000 Premium amortization in 201: (17,278) 1,057,722 Unrealized loss Piz Answer: D 4. Fair value, Dec. 31, 2020 P1,030,000 Carrying value, Dec. 31, 2020: Fair value, Dec. 31, 2019 P1,056,500 Premium amortization in 2020 (18,142) 1,038,358 Unrealized loss P8350 Answer: A 5. : Unrealized Gain (Loss) 2017 (P1,065,000 fair value - P1,070,893 carrying value) P (5,893) 2018 26,455 2019 1, 26 te Cumulative unrealized gain 10.990 Answer: D Alternative computation: Fair value, Dec. 31, 2020 1,030,000 Carrying amount per amortization schedule 1,019,018 Cumulative unrealized gain, Dec. 31, 2020 10.982oS | Sey 4 CHAPTER 4. quit oF INVESTMENTS 309 pROBLEM 4-6 Impairment Loss on (Fair Value Through other Compares icone me) in November 1, 2018, Bunzoo Company urchas ” face value of P1,000,000. This financial pee sto be measured Fair Value Through Other Comprehensive Income (Fvocn. re att contractual term is 10 years with an annual coupon of 6%. ie December 31, 2018, the debt Security's fair value has decreased 6 950,000 due to increases in market interest rates. There has hot been a significant increase in the credit isk of this debt investment. Hence, Bunzoo decided to recognize a 12-month Expected Credit Loss (ECL) of P30,000, ed a debt Security On December 31, 2019, the debt Security's fair value has decreased further to P925,000 as a result of increases in market interest rates, There has not been a significant increase in the credit risk of the debt security since initial recognition; hence, Bunzoo decided to Tecognize a12-month ECL amounting to P40,000. OnJanuary 1, 2020, Bunzoo sold the debt Security for its fair value of 925,000. 1. The cumulative gain (loss) in OCI at December 31, 2018 is 4. P20,000 C. P50,000 B. (P20,000) D. (P30,000) 2 The cumulative loss in OCI at December 31, 2019 ts 4. P20,000 C. P35,000 8. P45,000 D. P10,000: * What amount should be reported as loss on sale of the debt qoutity on January 1, 2020? 2 P35,000 C. P10,000 * P45,000 D. P20,000310 ernoummaTmirenenm: AUDITING PROBLEMS SOLUTION 4-6 —_— 1. Decrease in fair value of debt security (P1,000,000-P950,000) (50,000) Impairment loss (12-month ECL) —30,000 Cumulative loss-OCT, Dec. 31, 2018 P(20,000) Answer: B The following entries shall be made on December 31, 2018; 1. Other comprehensive income (OCI) 50,000 Financial asset -FVOCI 50,000 2. Impairment loss 30,000 OCT (Loss allowance) 30,000 3. Cash 60,000 Interest income 60,000 For the interest received. (P1,000,000x6%) | 2. Cumulative loss (OCI), Dec. 31, 2018 ° (20,000) Decrease in fair value (P950,000-P925,000) (25,000) Increase in loss allowance (P40,000-P30,000) 10,000 Cumulative loss-OCI, December 31, 2019 (35,000) Answer: C The following entries shall be made on December 31, 2019: 1, Other comprehensive income (OCI) 25,000 Financial asset -FVOCL 25,00 2. Impairment loss, 10,000 OCT (Loss allowance) 10,000 3. Cash : 60,000 i Interest income : 60,00 For the interest received: (P1,000,000x6%)| quarter 4 AUDIT OF INVESTMENTS 311 3, Loss on sale Answer: A 35.000 Inder PFRS 9, the cumulative ur recyeled to Profit or Loss on wh bt ec eee OCT sta be PROBLEM 4-7 _ Trading Securities Supporting records of MAYON CORPORATION’s tradi ‘ portfolio show the following debt ang equity securities ® Securities Cost 200 ordinary shares Concave Co, P 127,250 | pat value, P400,000 Tipo Co. 7% bonds 398,250 387,000, P600,000 Turkey Co. 749% bonds — 603.759 Totals + Mayon ‘ome approach to record the purchase of bonds with accrued—interest, —During 2018 and 2019, Mayon —— Completed the following transactions related to trading securities: 2018 ; hu 1 Received semiannual interest on bonds, Assume. that the appropriate adjusting entry was made on December 31, 2017, 41 so1g P300,000 of 7 “y 21 Received dividend of P1.25 per share on the Concave ordinary share capital. The dividend had not been "ecorded on the declaration date. %% Turkey bonds for P305,000, |312 cPApUMMUNONREMENR: AUDITING PROBLEMS july 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 P250, Nov. 1 Purchased P250,000 of 8% Toll Co. bonds at 101 plus accrued interest. Brokerage fees were P625. Interest dates are January 1 and july 1. Dec, 31 Market prices of securities were: Concave ordinary shares PS5O 7%% Turkey bonds 101% 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 74% Turkey bonds for P301,500, plus accrued interest. (a) 1. Whatis the total interest and dividend income for 2018? A. P62,583 C. P45,708 B. P82,208 D. P49,402 2. What amount should be reported as gain on sale of trading securities in 2018? A. P2,025 C. P4,275 B. P6,376 D. P3,12S 3: What amount of unrealized gain or loss should be reported it the income statement for the year ended December 2018? A. P10,600 unrealized gain B. P10,600 unrealized loss C. P3,075 unrealized gainHAPTER 4. AUDN OF INVESTMENTS 313 p. P3,075 unrealized loss 4, What is the carrying amount of the remait securities on December 31, 2018? ining trading ‘A. P740,500 C. P736,725 B, P725,225 D. P726,125 . What is the loss on the sale of the remainin; Turk 5. on February 1, 2019? iB ey bonds A. P3,750 C. P6,750 B. P5,250 D. P37 (b)Prepare journal entries for the preceding transactions and to accrue interest on December 31, 2018. Ignore amortization of premium or discount on bonds. SOLOTION 4-7 —_————_— (a) 1. Interest income: Tipo Co. bonds, Jan.’1 — July 1 i (P400,000 x 7% x 6/12) 14,000 Turkey Co. bonds: Jan. 1 — April 1 (P600,000 x 7%% x 3/12) 11,250 April 1 — Dec. 31 (P300,000 x 7¥%2% x 9/12) 16,875 Toll Co, bonds (P250,000 x 8% x 2/12) 1 3,333 Dividend income . —250 Total 45,208 Answer; C 2 Gal I ‘urke Sales price 305,000 Carying amount (P609,450 x 14) 304,725 P 275CPABUMINATONRENENER AUDITING PROBLEMS 314 Gal le of ; P388,750 Sales price ¢ ac amount 387,000 1750 Total P2025 Answer: A 3 Carrying Fair Increase ‘Security Amount Value (Decrease) Concave Co. ordinary P121,500 P110,000 (11,500) Turkey bonds 304,725 305,250 525 Newman, Inc. ordinary 58,000 58,375 .375 Toll Co. bonds 252,500 252,500 = Totals P736,725 P726.125 —P(10,600) Unrealized loss on trading securities 10,600 Answer: B 4, Trading securities, at fair value P726,125 Answer: D 5. Sales price P301,500 Carrying amount 305,250 Loss on sale of Turkey Bonds P.3.750 _ Answer: A (b) 2018 . ; Jan, 2 Cash . 36,500 Interest receivable 36,500 Tipo Co. bonds (P400,000 x 7% x 6/12) 14,000 Turkey Co. bonds (P600,000 x 7% x 6/12) 22.500 Total P3650 ‘Apr. 1 Cash (P305,000 + P5,625) 310,625 Trading securities 304,78 Interest income (P300,000 x 71% x 3/12) 5/605 Gain-on sale of trading securities msiapreR 4 AUDIT OF INVESTMENTS cH May 21 Aug. 15 315 Sales price (P300,000 x 102° Less: Brokerage fees *) 306,000 Net sales price 1.000 Carrying amount (P509,450x 4) 305,000 Gain on sale of trading securities R275 Cash 250 Dividend income (P1.25 x 200 shares)” 250 Cash 2 Interest income 5250 25,250 . Tipo Co. bonds (P400,000 x 7% x 6/12) 7 Turkey Co. bonds (P300,000 x 7¥4% x 6/12) ie Teel 225.250 Cash ; 388,750 Trading securities 387,000 Gain on sale of trading securities 1,750 Sales price (P400,000 x 977%) P3090, Less: Brokerage fees a ot Net sales price 388,750 Carrying amount ‘ 387.009 Gain on sate of trading sécurities B.LZ50 Trading securities (P580 x 100 shares) 58,000 Brokerage fees . 250 Cash 58,250 Trading securities (P250,000 x 101%) 252,500 fees 625 Interest income (P250,000 x 8% 4/12) 6,667 Cash 259,792 + Interest receivable © 21,250 Interest income 21,250 Turkey Co. bonds (P300,000 x 71% x 6/12) P11,250 10,000 Toll Co, bonds (P250,000 x 8% x 6/12) h316 (CPA EXAMINATION REVIEWER: AUDITING PROBLEMS 31. Unrealized loss on trading securities 10,600 Trading securities 10,600 2019 Jan, 2 Cash 21,250 Interest receivable 21,250 Feb. 1 Cash (P301,500 + P1,875) . 303,375 Loss on sale of trading securities 3,750 Trading securities _ 305,250 Interest income (P300,000 x 7V2% x 1/12) 1,875 Sales price (P300,000 x 101%) P303,000 Less: Brokerage fees 1500 Net sales price 301,500 Carrying amount . 305,250 Loss on sale of trading securities 3.750 PROBLEM 4-8 Sed i Investment in Equity Securities BUKIDNON CORP. has a policy of investing idle cash in equity securities, It has made periodic investments in its principal supplier, Nocon. Company. Bukidnon currently owns 12% of Nocon's outstanding ordinary shares. Cherry Kosme, Bukidnon’s assistant controller, has gathered the following information about the company’s investments in equity securities. 1. Bukidnon has trading equity investments in Delta Corp. and Polygon Company. During 2019, Bukidnon purchased 100,000 shares of Delta Corp. for P4,200,000; these shares have 4 fat value of P4,800,000 at December 31, 2019. The investment Mn Polygon consists of 50,000. shares acquired in March 2019 at Pe) per share and currently has a value of P2,160,000.uarTER 4, AUDIT OF INVESTMENTS 317 ukidnon’s 12% ownership in Noco: : 2 66,675,000 on December 31, 2015. pany has flr value of Bukidnon made an irrevocable election to piss oe comprehensive income subsequent changes in fair a in other investment in equity securities. -The. Securities were ane rior to 2018 for P67,500,000 and was valued at P64, soon Pecember 31, 2018. Bukidnon has not changed its holdings the current year. questions: 4, What amount of unrealized loss should be reported as ‘component of other comprehensive income on Bukidnon's December 31, 2018, statement of comprehensive income? A. P1,065,000 C. P825,000 B, PO D. P3,000,000 2. What is the cumulative unrealized gain/loss that should be shown on the statement of changes in equity for the year ended December 31, 2019? - ‘A. P2,175,000 unrealized gain B, 1,065,000 unrealized loss C. P825,000 unrealized loss - D. P1,935,000 unrealized gain 3, What amount of unrealized gain/loss should be reported on panne income statement for the year ended December 31, 019? A. P600,000 unrealized gain B. P240,000 unrealized loss : 625,000 unrealized loss } P1,065,000 unrealized lossCADMSUTIMRNER AUDITING PROBLEMS 318 SOLETION 4-8 er arin 1, Fair value of Nooon securities, Dec. 31, 2018 P 64,500,000 Acquisition cost 67,500,009 Unrealized loss © 3.000.009 Answer: D 2. Fair value of Nocon securities, Dec. 31, 2019 P66,675,000 Fair value of Nocon securities, Dec. 31, 2018 Unrealized gain In 2019 2,175,000 Unrealized loss in 2018 ‘Cumulative unrealized loss, Dec. 31, 2019 (825,000) or . . Feir value of Nocon securities, Dec. 31, 2019 66,675,000 Acquisition cost ; Cumulative unrealized loss, Dec. 31, 2019 P.(825,000) Answer: © ‘ 3. oe Unrealized i FalrValue Gain (loss) pial corp. P4,200,000. 4,800,000 P 600,000 “orygen Company — _3,000,000 _2,160,000 £840,000) . 2,200,000 6,960,000 - (240,900) Answer: B FRORLER 4.9 Pees Purchase of Debt and Equity Securities Your audit of GUAVA CORPORATION's investments in debt and equity securities reveals the following information:| quarter 4 AUDIT OF INVESTMENTS 319 On January 1, 2018, X Com, 9 securities. ‘The stated interest is Sen 000 000 in debt semfannually, on June 30 and December 31, “TTS Payable Guava purchased these debt securities from, gon UY 1, acquired them when they were originally issued, Gi oe investor an amount equal to the face value of the cowed the accrued interest. The securities were desigiated as Nags trading: }) On June 1, Guava purchased 10,000 shares of ¢ ult for P50 per share. These non-trading equity secunties are te measured at fair value through other comprehensive income, Guava paid P13,000 broker’s commission on the purchase, : {, On initlal recognition, a financial asset or financial Haba is measured at A. Acquisition cost, ie,, the consideration pald 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 Ilability. C. Fair value. For items that are not measured at fair value through profit or loss, transaction costs are’also included in _ the initial measurement. D. Zero. 2 The entry to record, the acquisition of debt securities on February 1is 1,007,500 A i Investment in trading securities 1,007,500 & Investment in trading securities 992,500 Interest income ae 0 ach 1,007,501 4,000,000 7 {hestment in trading securities 500 ‘on loss on trading securities 7 4,007,500 as] iOUTRO AUDITING PHOBL A y4s 320 D. Investment in trading securities 1,000,000 "Interest income 7,500 Cash 1,007,509 to record the purchase of equity securities on June 1 is A lndesauatt in equity securities 500,000 te Broker’s commission expense 13,000 Cash 513,000 B. Investment in equity securities 513,000 Cash 513,000 C. Investment in trading securities 513,000 Cash © 513,000 D. Investment in trading securities 500,000 Broker's commission expense 13,000 Cash 513,000 SOLUTION 4-9 . —_—— 1. Fair value. For items that are not measured at fair value ‘through Profit or loss, transaction costs are also included in the inital Measurement, ! i Answer: C 2. Investment in trading securities 1,000,000. Interest income (or Interest receivable) (P1,000,000 x 9% x 1/12) 7,500 Cash 41,007,500 _ Answer: D 3. Investment in‘equity securities 000 i 513,000 5:30 Answer: Bx 4 AUDIT OF INVESTMENTS £ Harr! 321 propLem 4-10 i —— Investment in Debt Securities: Computation of Interest Income and Amortized Cost January 1, 2018, RAMBUTAN CORP. purchased debt securities for held as financial i ash of 765,540 to be assets at amortized cos! securities have a face value of P600,000, and they ible, ae ears. 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. P771,840 C. P765,540 B. P759,016 D. P600,000 2. The interest income to be reported for 2018 using the effective interest rate method is A, P66,524 C. P60,000 B, P6524 D. P53,476 SULUTION 4-10 Carrying value, Jan, 1, 2018 765,540 Amortization of premium, Jan. 1 - June 30: Nominal interest (P600,000 x 10% x 2) 30,000 tective interest (P765,540 x 7%x%) (26,794) _(3,206) ying value, June 30, 2018 762,334 ‘tization of premium, July 1 - Dec. 31: Bena! interest 30,000 ori interest (P762,334 x 7% x ¥2) 26,682) __(3,318) "9 value at amortized cost, Dec. 31, 2018 Answer: B aoN 322 CPA EXAMINATION REVIEWER: AUDITING PROBL EN 2, Interest income for 2018 (P26,794 + P26,682) 253.476 Answer: D PROBLEM 4-11 Sale and Valuation of Non-trading Equity Securities CHICO COMPANY purchased the following non-trading equity securities during 2018: | Fair Value Security Cost xX P450,000 P500,000 Y 500,000 800,000 | At initial recognition, Chico classified these securities as at fair value through other comprehensive income. On July 28, 2019, Chico sold all the shares of Security Y for a total of P835,000. As of December 31, 2019, the shares of Security 'X had a fair value-of P200,000. No other activity occurred during 2019 in relation to the Non-trading equity securities portfolio. Questions: 1. What total amount should be credited to tetained earnings a5 + Fesult of the sale of Security Y in 2019? A. P35,000 C. P300,000 B. P335,000 D. P265,000 2, What is the cumulative unrealized gain (loss) to be reported the statement of changes in equity for 20197 A. -P300,000 C. (P300,000) B. P150,000 D. (P250,000)— —_ Ta cuarTER 4 AUDIT OFINVESTMENTS 323 souoTiol 4-11 A a ee 4, Cash proceeds Less: Carrying value of Secunty ¥, Dec. 31, 018 7835,000 Realized gain on sale P 35,000 Unrealized gain (P800,000 ~ P500,000) 00, Total amount to be credited to retained earings me Answer: B . Gains or losses on disposals of investments in uit i are measured at fair value through other compress at (FVOCI) shall be recognized in tetained earings. Also, any * cumulative unrealized gain or loss that was Previously recognized in other comprehensive income shall be transferred to retained earnings. 2. Cumulative unrealized gain, Dec. 31, 2018 P 350,000 Unrealized gain related to Security Y (300,000) Unrealized loss for 2019 - Secuiity X (P500,000 - P200,000) £300,000) Cumulative unrealized loss, Dec, 31, 2019 (250,000) Answer: D Security x: . 000 Lk Value, Dec. 31, 2019 / ve Unrealized loss, Dec. 31, 2019 250,000)324 C*AAMINTON ERVIN: AUDITING PROBLEMS PROBLEM 4-12 —_———~ Financial Assets at Amortized Cog: SINEGUELAS COMPANY purchased P160 million of 8% bonds, dated January 1, on January 1, 2018, to be held as financial assets at amortized cost. On the acquisition date, the market yield of bonds with similar risk and maturity was 10%. The company paid P1372 million for the price of the bonds. Interest is received semiannually on June 30 and December 31. Due to changes in market conditions, the fair value of the bonds at December 31, 2018, was P140 million, 1, At what amount will Sineguelas Company report its investment in the December 31, 2018, statement of financial position? A. P132.2 million C. P132.41 million B. P140 million D. P160 million 2. The unrealized holding gain or loss to be classified as component of other comprehensive income at December 31, 2018, is A. P8.39 million holding gain C._P7.59 million holding gain B. P8,39 million holding loss D. PO 3. The amount of interest income to be reported in Sineguelas + Company's incorne statement for the year ended December 31, 2018, is A. P64 million C. P6.61 million B. P12.8 million D. ?13.21 million SOLUTION 4-12 1. Initial cost =~ pasa Add: Discount amortization, Jan. 1— June 30: Effective interest (P132 x 5%) P6.60 Nominal interest (P160 x 4%) aq 08CHAPTER 4 aupit oF INVESTMENTS 325, Carrying value, June 30 Add: Discount amortization, July 1- 31: 132.29 Effective interest (P132.20 x 5%)" Nominal interest (P160 x 49%) a 021 Carrying value / Amortized cost, Dec, 31 a. Pia4i Answer: C 2, No unrealized holding gain/loss assets measured at amortized cost, Answer: D shall be recognized on financiat 3. Interest income (P6.60 + P6.61) 13.21 Answer: D PROBLEM 4-13 ° Accouis+ing for Non-trading Equity Securities STRAWBERRY COMPANY has the following non-trading equity securities on December 31, 2018: Security Shares Cost —‘FairValue DanicaCo, ordinary shares 4,500 P220,500 + P207,000 RoseCorp. ordinary shares 15,000 540,000 525,000 Assunta, Inc. preference shares 1,200 180,000 _184.800 Totals 240,500 p916800 Al of the above securities were bought in 2018. On init "cognition, Strawberry made an irrevocable election to ahi n> securities at fair value through other comprehensive income. 218, the company had the following transactions relating to is ‘vestments: 3) . r April 4 Sold the 4,500 ordinary shares of Danica Co. for P65 pel share,326 CAEAMIATIONREVIENER AUDITING PROBLEMg May 1 Bought 2,100 ordinary shares of Rita. Corp. at P75 E broker's fee of P5,200. . Plus Strawberry’s portfolio of non-trading equity securities appeared ag follows on December 31, 2019: Security. . Shares Cost EalrValue Rose Corp. ordinary shares 15,000 540,000 525,000 Rita Corp. ordinary shares 2,100 157,500* = 151 200 Assunta, Inc. preference shares 1,200 Totals > P877.500 * The P5,20C broker's fee was recorded’as expense, 1. The amount of gain or loss on the sale of Danica Co. ordinary shares to be reported in the 2019 income statement of Strawberry should be A. P72,000 gain C. P85,500 loss B. P85,500 gain D. PO 2. The 2,100 ordinary shares of Rita Corp. purchased on May i, 2019, should be initially measured at A. P151,200 C. P162,700 B. P156,400 D. P157,500 3. Strawberry’s December 31, 2019, statement of financial position should report investments in non-trading equity securities at A. P850,200 C. P881,400 B. P877,500 . D. P916,800 SOLUTION 4-13 a ei ee” 1 Sales price (P65 x 4,500 shares) ra Less; Carrying value, Dec. 31, 2018 pss Realized gain on sale of Danica Co. ordinary sharescuapteR 4 AUDIT OF INVESTMENTS 327 lized Toe erie on the sale of Danica shares shall be credited to Answer: D : Purchase price (P75 x 2,100 shares) ‘Add: Broker's fee P157,500 Total cost 5.200 Answer: C P162,700 3, The Investments in non-trading equity seourities : at fair value of 850,200 on December 31, 2019, should be reported Answer: A pReBLeM 4-14 ; ’ Reclassification from Amortized Cost to FVPL On January, 1, 2017, ELAGRO COMPANY purchased P2,000,000 face value bonds at a price of P1,824,800 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 is 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 tains, The market value of the bonds on January 1, 2019, is 105. Questions: 1. What amount should be reported as interest income for 2018? A Pies728 c. 182,480 B. P160,000 D. P24,728328 CAOMMUTANEENONE, AUDITING PROBL Lys 2. What is the carrying amount of the bonds on December 31, 2018? A. P2,000,000 C. P1,847,280 B. P1,872,008 D. P1,782,088 3. On reclassification date, what amount of gain on reclassification of financial asset should be recognized by Elagro Company? A. P120,000 Cc PO B. P187,200 D. P247,992 SOLUTION 4-14 1, Acquisition price P1,824,800 Add: Discount amortization for 2017: Effective interest (P1,824,800 x 10%) . P182,480 ‘Nominal interest (P2,000,000 x 8%) _160,000 22,480 Carrying amount, Dec. 31, 2017 21,847,280 | Interest income for 2018 (P1,847,280 x 10%) P184,728 Answer: A 2. Carrying amount, Jan. 1, 2018 1,847,280 Add: Discount amortization for 2018: Effective interest (P1,847,280 x 10%) P184,728 Nominal interest (P2,000,000 x 8%)° _160,000 Carrying amount, Dec. 31, 2018 Answer: B 3, Market value of bonds, Jan, 1, 2019 F000 106%) 2,120,008 ying amount, Jan. 1, 2019 Gain on reclassification : passe Answer: DcHAPTER 4 AUDIT OF InvestMENTs 329 PROBLEM 4-15 CHERRY, INC. received dividends from shares during the year ended December i rman : ordinary » 6918, as follows; @ A cash dividend of P720,000 is re (Cherry, Inc. owns a 2% interest ingy from It Corporation, ) Acash dividend of P3,600,000 is Teceived fi “ (Cherry, Inc. owns a 30% interest inv) rom WV Corporation (¢) A stock dividend of 18,000 shares from yy Co a received on December 15, 2018, on which dal tha cues market value of YY's shares was P20 per'share, Cherry, Inc. owns less than 1% of YY’s ordinary shares. What amount of dividend income should be reported by Cherry, Inc. inits 2018 income statement? A. P1,080,000 C. P4320,000 B. P4,680,000 D. *P720,000 SOLUTION 4-15 ee EE! Dividend income: . C’sh dividend received from JJ Corporation Fz0.000 Answer: D 1. Because Cherry, Inc. owns @ 30% interest in WV Coronation E Is presumed that it has the ability » oe Influence in the financial * operating Pe tery Corporation. Cherry, Inc. Investn tng ft the equity method iin accordance with PAS 28: Accoun330 CAADANIHATIONREVIENER: AUDITING PROBLEMS vestments in Associates. Under this method, distributions o tariece (dividends) reduce the carrying amount of the investment. stock dividend received from YY Company should not z peice as income. Stock dividends increase the numbers shares owned by an investor but do not affect the total Cost of the investment, : PROBLEM 4-16 Dividend Income BERRIES COMPANY owns a 5% interest in ST Corporation, which declared a cash dividend of P3,720,000 on November 27, 2018, to shareholders of record on December 20, 2018, payable on January 15, 2019. In addition, on October 15, 2018, Berries Company received a liquidating dividend of P1.00,000 from VG Corporation, Berries Company owns 6% of VG Corporation. What amount of dividend income should be included in Berries Company's income statement for the year ended December 31, 2018? A. P186,000 C. P191,000 B. P3,720,000 D. P181,000 SOLUTION 4-16 ; ats ee EEE rE Cash dividend received from ST Co ration ‘ (P3,720,000 x 5%) me 186,000 Answer; A 1.. Dividends shall be recognized as income when the investor right 0 recelve payment is established, j.e., upon declaration by the is of the equity instrument.HAPTER 4. AUDIT OF INVESTMENTS 331 Liquidating dividends are not In 7 + return of invested capita. nized as income. They represent pRopLEM 4-17 Equity Method DURIAN CORP. purchased 40% of Associate Compan in ordinary shares on January 2, 2048, for P270 mile ra value of Associate Company's net assets (shareholders’ equity) at the purchase date totaled P450 million. Book values and fair values were the same for all financial statement items except for inventory and buildings, for which fair values exceeded book values by P12.5 million and P112.5 million, respectively. All inventory on hand at the purchase date was sold during 2018. The buildings have average remaining useful lives of 15 years. Associate Company reported net income of P110 million for the year ended December 31, 2018, and paid cash dividends of P40 million. The fair value of Durian’s investment in associate was P300 million at December 31, 2018. ; 1. Of the amount paid for the acquisition of Associate Company's ordinary shares, how much is attributable to goodwill? A. P50 million C. P40 million D. P90 million B, P45 million 2. Whatis the investment balance at December 31, 2018? 4. P270 million ' C. P290 million B. P300 million D. P298 million 4 At what amount will Durian Corp. report its investment income inits 2018 income statement? a A. P44 million c. P20 million 8. P36 million D. P16 million332 CPABAMNATONRENIENE: AUDITING PROBLEMS SOLUTION 4-17 — . (Bin tations) 1. Purchase price . P270 Less: Fair value of Associate Company's net assets (P450 + P12.5 + P112.5 = P575 x 40%) 230 ‘Goodwill p4o Answer: C 2. Purchase price P270 Share of net income (P110 x 40%) 44 . Cash dividends received (P40 x 40%) (16) Increase in cost of goods sold (P12.5 x 40%) (6) Additional depreciation : (P112.5 x 40% = P45 + 15 years) (3) Investment balance, Dec. 31, 2018 P290 Answer: C The fair value of the investment in associate at year-end is not reported under the equity accounting method. 3, Share of net income (P110 x 40%) P44 Increase in cost of goods sold (P12.5 x 40%) (5) Additional depreciation (P112.5 x 40% = P45 + 15 years) -B) Investment income * P36 Answer: B PROBLEM 4-18 Tnvestment in Equity Securities On January 4, 2018, TOMATO CORP, paid P1,296,000 for 40,000 ordinary shares of Baron Company. The investment represents 2 30% interest in the net assets of Baron and gave Tomato the abil to exercise significant influence over Baron’s operating and finCHAPTER 4. AUDIT OF INVESTMENTS 333 decisions. Tomato received divid: lends of + 4, 2018, and Baron reported net ince. of Posaago on the year ended December 31, 2018. The market value ae for ordinary shares at December 31, 2018, was P32 per share. ee jaron’s f Baron's net assets was P3,200,000 and: p Ths hook The fair market value of Baron's depreci preciable ass average remaining useful life of 8 years, Biecoried eth on value by P320,000. + The remainder of the excess of the cost of the investment cover the book value of net assets purchased was attributable policy pecembe! value to goodwill. 4, What amount of the investment cost is attributable to goodwill? A. P240,000 C, P336,000 . B, P96,000 D. P144,000 unt of investment income should be reported in 2. What amo Tomato’s income statement for the year ended December 31, 2018? A. P120,000 Cc. P180,000 B. P108,000 D. P192,000 What is the carrying value of the investment in Baron ordinary shares on December 31, 2018? A. P1,280,000 CG P1,296,000 B. P1,436,000 D. P1,368,000 res represent a 10% interest in than a 30% interest. Id be reported in ded December 31, Assume that the 40,000 shai the net assets of Baron rather 4 What amount of investment income shou! Tomato's income statement for the year &™ 20187 : 4. P40,000 c. P60,000 p. P180,000 8. P64,000334 ~ ceaDaMnUTIN RENEW: AUDITING PROBLEMS 5. What is the carrying value of the investment in Baron ordinary shares at December 31, 2018? A. P1,296,000 C. P1,280,000 B. P1,436,000 D. P1,236,000 SOLUTION 4-18 ee 1 . Acquisition cost Fair value of net assets purchased . (P3,200,000 + P320,000 = 3,520,000 x 30%) Goodwill ‘Answer: A Share in net income (P640,000.x 30%) Depreciation adjustment (P320,000 x 30% = P96,000 = 8) ° Investment income Answer: C . Acquisition cost Share in net income Depreciation adjustment Dividends received (P1 x 40,000) Carrying value of investment, Dec. 31, 2018 Answer: B Investment income:, Dividends received (P1 x 40,000) Answer: A .. Investment, at fair value (P32 x 40,000 shares) Answer; C P1,296,000 1,056,000 2.240.000 P192,000 (12,000) P180,000 1,296,000 192,000 (12,000) (40,000)quarrer 4 AUDIT OF INVESTMENTS : . 335 propel 4-19 _——___.JT Equity Method MBER CORP. bought 40% of i Company on January 2, ote a thes Leen book value of Super’s net assets was P77.5 muller, ele a and fair values for all statement of financial position ei ie same except for inventory and plant facilities, The Sean exceeded book value by P500,000 for the inventory ay Pa million for the plant facilities, The estimated useful life of the mt i facilities is 8 years. All inventory acquired was sold during 20th, oa cucu! super net income of P14 million for the year ended 2018, and paid a cash dividend of P3 million. t of financial position as of December 31; 2018, P44.1 million as its investment in Super Super reported December 31, Cucumber’s statemen' shows an amount of Company. report as its income from Jd Cucumber e year ended December 31, 1. What amount shoul investment in Super Company for th 2018? A. P12 million C. P5.6 million B. P7.1 million D. P5.3 million 2. What is the acquisition cost of Cucumber's investment in Super Company? A. P40 million c, P45.6 million B P39.4 million Dp. P77.2 million 3 OF the amount paid’ by Cucumber for th —. ny Super Company, how much is attributable to B00 will? A. P8 million ~ ¢. Pesmillion B. P8.2 million D. P9 million336 CAIUTOARNIN: AUDITING PROBL Ens 4, What should Cucumber report in its statement of cash flows regarding its investment in Super Company? - A. P40 million cash outflow from investing activities ‘ang P1.2 million cash inflow among operating activities, B. P45.6 million cash outflow from investing activities ang P5.3 million cash inflow among operating activities, C. P40 million cash outflow from financing activities ang P1.2 million cash inflow among operating activities, D. P39.4 million cash outflow from investing activities and P3 million cash inflow among operating activities. SOLUTION 4-19 Se (P.in millions) 1. Share of net income (P14 x 40%) P56 Adjustment for inventory sold (P0.5 x 40%) (0.2) Adjustment for depreciation (P2 x 40% = P0.8 +8 years) (0.1) Thvestment income P53 Answer: D 2. Acquisition cost (SQUEEZE) P40,0* Investment income (see no, 1) 5.3 Dividends received (P3 x 40%) (1.2) Carrying value, December 31, 2018 (given) Péal .* Pé4.1 + PL2—P5.3 = pag.g Answer: A 3. Acquisition cost (see no. 2) P40 Fair value of net assets purchased. (P77.5 + PO.5 + P2 = P8O x 40%) 2 Goodwill Pa Answer; & 4. P40’ milion cash outfi (dividends received) cosh me Answer: m investing activities and P1.2 millon low among operating activities:prer 4 AUDIT OF INVESTMENTS ae 337 pROBLEM 4-20 — Investment in Equity Securities une 30, 2018, CABBAGE COMPANY purchased 259 peer ordinary shares of IB Co. at a total cost of Pitnge the book value of IB Co.'s net assets on acquisition date was 7,200,000. For the following reasons, Cabbage was willing to pay more than book value for the IB Co. shares: + IB Co. has depreciable assets with a current fair value of P180,000 more than their book value. These assets have a remaining useful life of 10 years. + IB Co. owns a tract of land with a current fair value of P900,000 more than its carrying amount, . + All other identifiable tangible and intangible assets of IB Co. have current fair values that are equal to their carrying amounts, 1BCo. reported net income of P1,620,000, earned evenly during the curent year ended December 31, 2018. Also in the current year, it dedared and paid cash dividends of P315,000 to its ordinary Sareholders. Market value of IB Co.'s ordinary shares at Decembet 44,2018, is P9 million. Cabbage Company's financial year-end is ‘mber 31. Westions; "Whats the total amount of goodwill of IB Co. based on the price 7 by Cabbage Company? 200,000 c. P120,000 8. PLo8o,c00 D. P30,000CPAEXAMINATION REVIEWER: AUDITING PROBLEMS 338 ount of investment income should Cabbage report in its ; income statement for the year ended December 31, 2018, under ir value method? i. 775750 C. P228,750 B.. P202,500 * D, P71,250 3, What amount of investment income should Cabbage report in its income statement for the year ended December 31, 2018, under the equity method? , A. P202,500 C. P78,750 B. P200,250 D. P123,750 ~ 4. Under the equity method, the carrying value of Cabbage Company's investment in ordinary shares of IB Co. on December 31, 2018, should be A. P2,221,500- C. P2,070,000 B. P2,100,000 . D. P2,250,000 5. What amount. ‘should Cabbage Company report in its December 31, 2018, statement of financial Position as its investment in IB Co. under the fair value method? A. P2,250,000 C. P2,221,500 B. P2,070,000 D, P2,100,000 SOLUTION 4-20 oa 1. Underlying value of 1B Co,’s owners’ equity -(P2,100,000 + 25%) 8,400,000 Carrying value of IB Co,’s Owniers’ equity 1,200,000 Excess underlying value over book value Attributable to depreciable assets P180,000 Attributable to land 900,000 1,080,001 Goodwill Answer: CcuarTeR 4 AUDIT OF 'NVEsTMENTs 339 Alternative computation: Underlying value of 18 Co.'s owners’ eau Fair value of 18 Co.'s net asset" eAulty 8,400,000 (P7,200,000 + 180,000 4. P900,000' Goodwill : 8.280.000 : 120,009 . Investment income ~ fair value method; Dividend received (P315,000 x 25%) P78.750 Answer: A . Investment income — equity method: Share of net income (P1,620, 000 x'25% x 6/12) Depreciation adjustment ? nz 500 (P180,000 x 25% = P45,000 + 10 x 6/12) (2,250) Investment income, as adjusted 200,250 - Answer: B The undervaluation Of land does not affect Cabbage Company's share of net income because it is nondepreciable. Acquisition cost aD Share of net income, @s adjusted (see no, 3) 200,2: Gs dividends received (P315,000 x 25%) (78,750) Canying value, Dec. 31, 2018 ~ equity method P2.221,500 Answer: A Re Stock investment should be cared at its fair value of °2,250,000 (P9 milion x 25%) on December 31,2018. end adjustment is: Imvestment in equity securities 0) : 150,000 Unreatized gain on equity securties aeoh . CPAEAMIATION REVIEWER: AUDITING. PROBLEMS Cost P2,100,000 Fair value (P9 million x 25%) 2,250,000 Fair value adjustment. P.150,000 Answer: & PROBLEM 4-21 Equity Method LETTUCE CO. purchased 40% of MU Corp. on April 1, 2017, for P500,000 when MU's book valué was P1,260,000. On the date of acquisition, the market value of MU’s net assets equaled their book values except for the following: : * MU's equipment has a fair value of P50,000 less than its book value. The equipment has a remaining useful life of 10 years. ¢ MU's building has a fair value of P40,000 more than its book value. ‘The building has a remaining useful life of 20 years. MU's results of operations in 2017 and 2018 are as follows: 2017 net income : P150,000 2018 net loss P30,000 MU paid cash dividends of P20,000 and P10,000 in 2017 and 2018, respectively, 1, What amount of investment income should be reported 0” Lettuce Company's: income statement for the year end December 31, 2017? _ A P44,100 C. P61,200 B. P58,800 D. P45,900quaPteR 4 AUDIT OF INVESTMENTS 341 The investment loss to be reported on 2 income statement is Lettuce Compan; A. P10,800 c evans B. P8100 ~ P13,200 ve D. P12,000 3, What is .the carrying yalue of- 4 December 31, 2017? Of: the stock investment on A. P536,100 ©. 553200 B. P537,900 D. P509,000 What is the carrying value of the stock investment on 4 December 31, 2018? A. P521,300 C. P523,100 B, P536,000 D. P5S00,000 SOLUTION 4-21 : Te 1, Share of net income (P150,000 x 40% x 9/12) 45,000 Depreciation adjustment ~ equipment: (P50,000 x 40% = P20,000 + 10 x 9/12) 1,500 Depreciation adjustment — building: (P40,000 x 40% = P16,000 + 20 x 9/12) » (600) Investment income in 2017 . 45,900 Answer: D P(12,000) 2 Share of net loss (P30,000 x 40%) : h ey) 20,000 + 10) 2,008 Depreciation adjustment — equipment pe Depreciation adjustment — building (16,000 +2) 5779 560) Loss from investment in 2018 Answer: A 500,000 A Acquisition cost i 45,900 Adjusted share of income in 2017 (see No 1) 322) Diidend received in 2017 (P20,000 x 40342 CPADAMINATION REVIEWER: AUDITING PROBLEM Carrying value of investment, Dec. 31, 2017: 537,909 Answer: B 4. Carrying value of investment, Dec. 31, 2017 (see no. 3) P537,900 Loss from investment in 2018 (see no. 2) . (10,800) Dividend received in 2018 (P10,000 x 40%) —(4,000) Carrying value of investment, Dec. 31, 2018 523.100 Answer: C PROBLEM 4-22 _ Discontinuance of the Equity Method KANGKONG COMPANY purchased 250,000 shares of Secret Co, ordinary shares on July 1, 2017, at P66 per share, which reflected book value as of that date. At the time of purchase, Secret Co. had 1,000,000 ordinary shares outstanding. Kangkong had no ownership interest in Secret prior to this purchase. Secret reported net income of P3,360,000 for the six months ended June 30, 2017. Kangkong received a dividend of P420,000 from Secret on August 1, 2017. Secret reported net income of P7,200,000 for the year ended December 31, 2017, and again paid Kangkong dividends of P420,000. On January 1, 2018, Kangkong sold 100,000 ordinary shares of Secret for P68 per share and reclassified the remaining stock as at fair value through other comprehensive income. The quoted market price of such investment on January 1, 2018, was P69 per share. Secret reported net income of P7,440,000 for the year ended December 31, 2018, and paid Kangkong dividends of P240,000. The fair value of Secret ordinary shares at December 31, 2018, was P70 per share, 1. What is the catrying value investment December 31, 20177 of the stock inunr TFR 4. AUDIT OF INVESTMENTS : 343 A. P16,620,000 C. 16,380 380,01 p, P16,500,000 D. p9s72,000" The total amount of gain to be repor ii 2 Tet 2 ‘eported in the 2018 income . 152,000 C. P530,000 B. 378,000 D. P680,000 alized gain should be reported in the 2018 What amount of unre hensive income as component of other ment of compre! stat hensive income? compre! a. PO Cc. P528,000 a. P150,000 D. P378,000 4, The carrying value of the retained investment to be shown in the statement of financial position on December 31, 2018, is ‘A. P9,972,000 C. P10,350,000 B. 10,848,000 D. P10,500,000 1, Acquisition cost (P66 x 250,000) 16,500,000 Share of net income (P7,200,000 - 3,360,000 = : 65 940/000 x 25%) 960,000 ividends received (P420,000 x 2) Investment balance, Dec. 31, 2017 16,620,000 Answer: A 7 000 : ee (P68x 100,000) 6,800, ing value of shares sold (6.648 000) 00) 352.000 ol?18:620,000 x 100,000/250; in on sale of investment inCAEMUTONREMENER: AUDITING PROBLEMS 344 Fair value of retained investment (P69 x 150,000) P10;350,000 Carrying amount of retained investment (P16,620,000 x 150,000/250,000) {9.972,000) Gain from remeasurement 2.378.000 Total gain (P152,000 + 378,000) r 530.009 Answer: C 3. Fair value, Dec. 31, 2018 (P70 x 150,000) 10,500,000 Fair value, Jan. 1, 2018 (P69 x 150,000) 10,350,000 Unrealized gain on equity securities P.150,000 Answer: B 4, Fair value, Dec. 31, 2018 (P70 x 150,000) P40,500,000 | Answer: D PROBLEM 4-23 Investment in Associate Achieved in Stages: Fair Value to Equity Method On January 2, 2017, LOVELY, INC. acquired a 15% interest in CPS | Corp. by paying P8,000,000 for 100,000 ordinary shares. On this | date, the net assets of CPS Corp. totaled P40,000,000. The fair values of CPS Corp.'s identifiable assets and liabilities were equal to their book values. ! »vely did not have the ability to exercise significant | influence over the. operating and financial policies of CPS. Lovely rectived dividends of P1.40 per share from CPS on October 1, 2017. CPS reported net income of P5,000,000 for the year ended December ane bau cnsslded the investment as at fair value through ehensive income, Mai ic shares was P9,000,000 on December 31, oe heii aoe paid P30,000,000 on January L 2018, for 300,000 addition@l ~CPS ordinary shares, which represents a 25% interest in CPS. ™HAPTER A. aupit OF INVESTMENTS 345 value of CPS Corp.'s identifiabl i en to their book values of P92,000,00%. me lilt, hing additional acquisition, Lovely has the ability to otartne sf ed influence over the operating and financial policies of CPS Laat received a dividend of P2.70 per share on October & 20@- reported net income of P6,000,000 for the year ended Decemb oh 2018. The investment's, fair value on — December 31, 2018, 45,000,000. Questions: 4, In the December 31, 2017, statement of financial position, wh: is the carrying amount of the investment in equity sectrldes? * A. P8,610,000 C. P8,000,000 B. P9,000,000 D. P8,750,000 What is the total amount of investment-related income that 2 should be reported inthe 2017 income statement? A. P140,000 C. P750,000 B. P1,140,000 D. P1,610,000 3, What amount of gain on. remeasurement to equity should be reported in the 2018 income statement? A. P1,320,000 Cc. PO B, . P1,080,000 D. P1,000,000 4. What is the goodwill arising from the acquisition of additional 300,000 shares on January 1, 2018? A PO C. P7,000,000 B. 2,200,000 D. 9,000,000 5. What is the carrying amount of the investment in associate on December 31,2018? : A. P45,000,000 C. 38,120,000 B. P40,320,000 D. 39,000,000346 , CPABAMIATONRENENER: AUDITING PROB, 4s SOLUTION 4-23 a 1. Investment in equity securities, at fair value 22.000.009 Answer: B 2. Dividend income (P1.40 x 100,000) Pla Answer: A , 3. Any previous unrealized gain or loss on the existing in accounted for at fair value through other comprehensive income js not reclassified to profit or loss. Fair value, Dec. 31, 2017 . 9,000,000 Carrying amount Unrealized gain - reclassified to retained earnings 1.000.009 Answer: C , 4, Fair value of 15% existing interest P 9,000,000 Cost of 25% additional interest Total cost of investment in associate 39,000,000 Carrying amount of net assets acquired (P92,000,000 x 40%) 36,800,000 Goodwill (not amortized) P.2,200,000 Answer: B 5. Total cost of investment in associate, Jan. 1, 2018 39,000,000 Cash dividend received (P2.70 x 400,000) (1,080,000) Share in net income (Pé,000,000 x 40%) 2,400,000 Carrying amount, Dec. 31, 2018 40,320,000 Answer: B