Auditing & Assurance: Concepts & Applications 2 (ACC124)

Investment in Equity Securities, Debt Securities, Associate

Quiz #2

1. Baby Eagle Tofu Dahyun - Trading Securities (Equity Securities)

At December 31, 2022, Baby Eagle Tofu Dahyun properly reported the following trading equity securities. Please refer to the table
below.

During 2023, the following transactions occurred among others:

Jan. 5 - Acquired 8,000.00 shares of Born to be Center Wonyoung Co. for P880,000.00 incurring additional P10,000.00 for brokerage
and another P10,000.00 for commission. These shares are to be initially recognized as trading securities.

Feb. 14 - Received dividends from Born to be Center Wonyoung Co. declared on January 10, 2023, P16,000.00

Mar. 18 - Received dividends of P2.00 per share from Chewie Tzuyu, Inc.

Nov. 15 - Sold 2,500.00 shares of Chewie Tzuyu, Inc. for P50,000.00. Commissions and taxes for P5,000.00 were paidb for the sale.

Dec. 15 - Recorded a transfer of all the remaining Chewie Tzuyu, Inc.'s shares to FVTOCI when the fair value was P14.00

On December 31, 2023, the following are the available market values per share. Please refer to the table below.

(1) What is the correct cost of investment acquired on January 5?

(2) What is the gain or loss on sale of Chewie Tzuyu, Inc.?
(3) What is the total adjusted carrying value of the investment at the end of the year
 2. Innocent Rapper Hyewon Corp. - Derecognition of Financial Assets - Sale of Investment (Equity Securities)

On January 1, 2023, Innocent Rapper Hyewon Corp. owns 15,000.00 ordinary shares representing 15.00% of the shares outstanding
of Hiichan Corporation. The ordinary shares were acquired on November 12, 2022 at a cost of P1,500,000.00 and have a fair value of
P1,600,000.00 December 31, 2022. On January 2, 2023, Innocent Rapper Hyewon Corp. sold half of its investment for P100.00 per
share incurring a brokerage and commission expense of P20,000.00

(1) Assuming the above securities are designated as fair value through profit or loss, what is the unrealized gain (loss)
on December 31, 2022 to be presented in the statement of financial position?
(2) Assuming that the above securities are designated as fair value through other comprehensive income, what is the
unrealized gain (loss) on December 31, 2022 to be presented in the statement of financial position?
(3) Assuming the above shares are designated as FVTOCI, what is the gain (loss) on sale on January 2, 2023 to be
recognized in the 2023 profit or loss?

No. 3 (page 545) – NIL.

3. Fairy Chaewon Corp. - Reclassification (Debt Securities)

On April 1, 2023, Fairy Chaewon Corp. acquired 4-year bonds with a face value of P2,000,000.00 and stated interest of
10.00% per year payable annually on December 31. The bonds were acquired to yield 12.00%. The bonds are to be
appropriately classified as financial asset at amortized cost.

(1) How much is the purchase price of bonds on April 1, 2023?

(2) How much is the interest income for 2023?
 4. Pepe Minju Co. -

On January 1, 2021, Pepe Minju Company acquired a 5-year bonds with a total face value of P5,000,000.00 and stated
interest of 12.00% per year payable annually on December 31. The bonds were acquired to yield 10.00%. The bonds are
to be appropriately classified as financial asset at fair value through other comprehensive income.

On December 31, 2021, bonds were quoted at 102.

On November 1, 2022, Pepe Minju Company changed its business model. It was determined that the financial asset
should be reclassified to held for trading securities. On December 31, 2022, the bonds are quoted at 103.

(1) How much is the unrealized gain (loss) in 2022 to be recognized in the other comprehensive income?
(2) How much is the reclassification gain (loss) in 2022?
(3) What is the carrying value of the securities on January 1, 2023?

Problem 16-4 book 16-7 solman

Ans:
1. P118,312.00
2. P0.00
3. P5,150,000.00
 5. Kinako Corp. - Subsequent Measurement of FVTOCI (Debt Securities)

On January 1, 2020, Kinako Corp acquired a 5-year bond with face value of P6,000,000.00 and nominal interest rate of
10.00% per year payable every December 31. The bonds were acquired for 105. Commissions paid on the acquisition
amounted to P179,125.00. The bonds are appropriately classified as FVTOCI.

The fair value of the investment for the next years is as follows:
2020 - P6,600,000.00
2021 - P6,480,000.00
2022 - P6,180,000.00
2023 - P6,060,000.00

On July 1, 2022, Kinako Corp. changed its business model. It was determined that the financial asset should be
reclassified to financial asset at amortized cost.

(1) What is the carrying value of the bonds on December 31, 2020?
(2) What is the balance of unrealized gain (loss) in shareholders' equity o December 31, 2020?
(3) What is the 2022 interest income?
(4) What is the unrealized gain (loss) recognized in 2022 other comprehensive income?
(5) How much is the reclassification adjustment in 2023?
(6) What is the carrying value of bonds on January 1, 2023?

1. P6,600,000.00
2. P202,545.00
3. P504,740.00
4. (P204,740.00)
5. P0.00
6. P6,213,992.00
 6. Mother Eunbi Co. - Cost & Equity Method Compared (Associate)

On July 4, 2023, Mother Eunbi Company paid P30,000,000.00 for 1,000,000.00 shares of Saku-Chan Corp. ordinary
shares. The investment represents a 20.00% interest in the net assets of Saku-Chan Corp. and gave Mother Eunbi
Company the ability to exercise significant influence over Saku-Chan Corp.'s operations. Saku-Chan Corp. declared and
paid dividends on December 15, 2023 amounting to P2,500,000.00 and reported net income of P8,000,000.00 for the
year ended December 31, 2023. The market value of Saku-Chan Corp.'s ordinary shares at December 31, 2023 was
P32.00 per share. On the purchase date, the book value of Saku-Chan Corp.'s net assets was P120,000,000.00 and the
fair value of Saku-Chan Corp.'s depreciable assets, with an average remaining useful life of six years, exceeded their
book value by P6,000,000.00. The remainder of the excess of the cost of investment over the book value of net assets
purchased was attributable to goodwill.

(1) How much is the implied goodwill from acquisition?

(2) What is the amount of investment revenue should Mother Eunbi Company report on its income
statement for the year ended December 31, 2023 under fair value method
(3) What is the amount of investment revenue should Mother Eunbi Company report on its income
statement for the year ended December 31, 2023 under equity method?
(4) Under the equity method, what should be the carrying value of Mother Eunbi Company's investment in
ordinary shares of Saku-Chan Corp. on December 31, 2023?
(5) What amount should Mother Eunbi Company report on its December 31, 2023 statement of financial
position as its investment in Saku-Chan Corp. under fair value method?

1. P4,800,000.00
2. P500,000.00
3. P700,000.00
4. P30,200,000.00
5. P32,000,000.00
 7. Duck Yena Co. - Equity Method (Associate)

On January 1, 2022, Duck Yena Co. acquired 20,000.00 ordinary shares out of the 100,000.00 outstanding ordinary
shares of Joyul Inc. for P5,000,000.00. Joyul Inc.'s assets and liabilities approximate their fair values except for
inventories with carrying amount of P600,000.00 and fair value of P650,000 (all sold in 2022), machinery with carrying
amount of P1,000,000.00 and fair value of P1,500,000.00 and land with carrying amount of P1,500,000.00 and fair value
of P1,200,000.00. The remaining useful life of machinery is 10 years. Joyul Inc.'s net assets have a book value of
P12,000,000.00.
On December 31, 2022, Joyul Inc. reported net income of P8,000,000.00 and declared and paid dividends of
P2,000,000.00.
On April 1, 2023, the land of Joyul Inc. was sold at a gain of P200,000.00.
On December 31, 2023, Joyul Inc. reported net income of P10,000,000.00 and declared and paid dividends of
P3,000,000.00.

(1) How much is the implied goodwill from acquisition?

(2) How much is the carrying amount of the investment as of December 31, 2022?
(3) How much is the carrying amount of the investment as of December 31, 2023?