AUDITING PROBLEMS. CPA REVIEW SCHOOL OF THE PHILIPPINES AP-7605 Manila CPA Review AUDIT OF INVESTMENTS PROBLEM NO.1 MAGNOLIA CORP. invested its excess cash In equity securities during 2013. The business model for these investments Is to profit from trading on price changes. (@) As of December 31, 2013, the equity investment portfolio consisted of the following: Investment Quantity Cost Fair Value Ly, Inc, 1,000 shares 90,000 — P.126,000 Polland Co. 2,000 shares 240,000 252,000 Alabang Corp. 2,000 shares 432,000 360,000 Totals P262,000 2738,000 1, In the December 31, 2013, statement of financial position, what should be reported as carrying amount of the investments? ‘A. P738,000 B. P690,000 c. P762,000 D. P810,000 2. In the 2013 income statement, what amount should be reported as unrealized gain or loss? .. Unrealized gain of P24,000 }. Unrealized loss of 24,000 . Unrealized loss of P72,000 ). Unrealized gain of P48,000 gop> (b) During the year 2014, Magnolia Corp. sold 2,000 shares of Polland Co. for 229,200 and a purchased 2,000 more shares of UJ, Inc. and 1,000 shares of Dwarfy Compas. On December 31, 2014, Magnolia’s equity securities portfolio consisted of the following. Investment Quantity Cost Fair Value , Inc. 1,000 shares 90,000 —P120,000. U, Ine. 2,000 shares 198,000 240,000 Dwarfy Company 1,000 shares 96,000 72,000 Alabang Corp. 2,000 shares _432,000 _132,000 Totals P816,000 ‘2564.000 3. What is the gain or loss on the sale of Polland Co. investment? ‘A. P10,800 gain —-B. P10,800 loss —C. ‘P22,800 gain’ ~—D._P22,800 loss 4, What Is the carrying amount of the investments on December 31, 2014? ‘A. P816,000 B. P888,000 C, P564,000 D. 492,000 5, What amount of unrealized gain or loss should be reported in the income statement for the year ended December 31, 20142 ‘A, P252,000 unrealized gain B, 252,000 unrealized loss C. 216,000 unrealized gain D. P216,000 unrealized lossCPAR- MANILA APT605 ~ AUDIT OF INVESTMENTS (©) During the year 2015, Magnolia sold 3,000 shares of LJ, Inc. for P239,400 and 500 shares of Dwarfy Company at a loss of P16,200. On December 31, 2015, Magnolia's equity investment portfolio consisted of the following. Investment Quantity Cost Fair Value Dwarfy Company 500 shares P 48,000 P 36,000 ‘Alabang Corp. 2,000 shares 432,000 _ 492,000 Totals (480,000 P528.000 . What should be reported as loss on sale of trading securities in 20157 A. P120,600 B. P64,800 Cc. P48,600 D. P136,800 . What amount of unrealized gain or loss should be reported in the income statement for the year ended December 31, 2015? 360,000 unrealized gain 512 j 3. P360,000 unrealized loss ) C. 48,000 unrealized gain D. P48,000 unrealized loss i © 8. In the December 31, 2015, statement of financial position, what should be reported as carrying amount of trading securities? ‘A. P480,000 B. P468,000 C--P528,000 D. P540,000 A PROBLEM NO.2 Supporting records of MAYON CORPORATION'S trading securities portfolio show the following debt and equity securities: Security Cost Fair Value 400 ordinary shares Concave Co. P 254,500 P 243,000 800,000 Tipo Co. 7% bonds 796,500 774,000 1,200,000 Turkey Co. 7 ¥2% bonds 1,207,500 -1.218,900 Totals 2.258.500 2,235,900 Interest dates on the bonds are January 1 and July 1. Mayon Corporation uses the income approach to record the purchase of bonds with accrued interest. During 2014 and 2015, Mayon completed the following transactions related to tracing securities: rh | 2014 | Jan. 1 Received semiannual interest on bonds. Assume that the appropriate adjusting entry was made on December 31, 2013. April 1 Sold P600,000 of 7 ¥2% Turkey bonds at 102 plus accrued interest. Brokerage fees were P2,000, May 21 Received dividend of P1.25 per share on the Concave ordinary share capital. The dividend had not beeri recorded on the declaration date. July 1 Received semiannual interest on bonds and then sold the 7% Tipo bonds at 97 ¥2. Brokerage fees were P2,500. ‘Aug. 15 Purchased 200 shares of Newman, Inc. ordinary share capital at P580 per share plus brokerage fees of P500. Nov. 1 Purchased P500,000 of 8% Toll Co. bonds at 101 plus accrued interest. Brokerage fees were P1,250. Interest dates are January 1 and July 1.PAR - MANILA _AP7605 — AUDIT OF INVESTMENTS Dec. 31 Market prices of securities were: Concave ordinary shares P550 7 Ya% Turkey bonds 101% 8% Toll bonds 101 Newman ordinary shares 583.75, 2015 Jan. 2 Recorded the receipt of semiannual interest on bonds. Feb. 1 Sold the remaining 7 ¥2% Turkey bonds at 101 plus accrued interest, Brokerage fees were P3,000. 1 Mig, abo (GOOT x Wo x/ 12") (2) 1. What is the total interest and dividend income for 20147 WSs ‘ A. P125,166 C P91,417 B. P164,416, By 98,804 OT tenease (1.15 Foe 2. What amount should be reported as gain on sale of trading securities in 2014? Av P4,050 C. P8,550 ee 1p jones B, P12,752 D, P9,375 Fcoetaten ‘Tew ‘wet Sp io 1 32¢ @ 550/000 . What amount of unrealized gain or loss should be repofted in the income statement for the year ended December 31, 2014? mg ‘A. P21,200 unrealized gain ie Bc P21,200 unrealized loss aa C. P6,150 unrealized gain me D, P6,150 unrealized loss oy aT.) 4. What is the carrying amount of the remaining trading securities on December 31, 2014? A. P1,481,000 _C, .P1,473,450 B. P1,450,450 Dy P1,452,250 5. What is the loss on the sale of the remaining Turkey bonds on February 1, 20157 P7500 C. P13,500 B. P10,500 D, P750 (©) Prepare journal entries for the preceding transactions and to accrue interest on December 31, 2014. Ignore amortization of premium or discount on bonds. PROBLEM NO. 3 During the course of your audit of the financial statements of FISHING CORPORATION for the year ended December 31, 2014, you found a new account, “Investment in Equity Securities,” Your audit revealed that during 2014, Fishing began 2 program of investments, and all Investment-related transactions were entered In this account. Your analysis of this account for 2014 follows: Fishing Corporation — Analysis of Investment in Equity Securities For the Year Ended December 31, 2014 Debit Credit @) mpany Or Feb. 14 Purchased 24,000 shares @ P55 per share P1,320,000 July 26 Received 2,400 ordinary shares of atgS CPAR- MANILA, A 7605.~ AUDKT OF INVESTMENTS Salmon Company as a share dividend. (Memorandum entry in general ledger.) Sept.28 Sold the 2,400 ordinary shares of Salmon Company received July 26 @ P70 per share. 168,000 (b) : ; Debit Credit ‘Tamban, Inc, Ordinary Shares April30 Purchased 120,000 shares @ P40 per share 4,800,000 Oct. 28 Received dividend of P1.20 per share. 144,000 Additional information: a. The fair value for each security as of the 2014 date of each transaction follow: ‘Security Feb.14 April30 July26 Sepi.28 Dec. 31 Salmon Company PSS P62 P70 P74) Tamban, Inc. P40 2 Fishing Corp. 25 28 30 33 35 b. All of the Investments of Fishing Corporaticn are nominal in respect to percentage of ownership (5% or less), ¢. 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 onsale of non-tragi securities in 2034? A. P36,000 C. P48,000 eR B. P12,000 D. PO VN AT EET o_laoy, nik om ge % 2. The recelpt of 2,400 share dividend would cause the investment balance to Increase by ‘A, P148,800 CC. P132,000 B. 168,000 D, PO 3. What entry is necessary to correct the recording of the cash dividend received from Tamban, Inc.? A. Cash 144,000 Dividend income 144,000 B, Cash 144,000 Investment in equity securities 144,000 C. Investment in equity securities 144,000 Dividend income Fe 144,000 D. Dividend income 144,000 Investment in equity securities 144,000 4. What amount of unrealized gain or loss should be reported In the 2014 statement of comprehensive Income as component of other comprehensive income? ¢y A. P384,000 gain C, P960,000 gain wv wv B. P384,000 loss D. 960,000 loss = Cuore) yj so57 acy 7 T(1tosr SOT WOT 22x potPl LA OF 5. What amount should be reported as Investment in Equity Securities in the statement of A financial position on December 31, 2014? A. P5,616,000 C. P5,040,000 B. P6,000,000 D. 6,576,000 PROBLEM NO. 4 equi ‘On Dune 30, 2014] CABBAGE COMPANY purchased aie f the outstanding ordinary shares of TB Co, at a total cost of P4,200,000, ‘The book value of 18 Co.'s net assets on acquisition date wes P14,400,000. For the following reasons, Cabbage was willing to pay more than book value for the 1B Co. shares: TB Co. has depreciable assets with a current fair value of P360,000 more than their book value. These assets have a remaining useful life of 10 years. 1B Co. owns a tract of land with a current fair value of P1,800,000 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. 1B Co, reported net income of P3,240,000, eamed evenly during the current year ended te _5"December 31, 2014. Also in the current year, it declared and paid cash dividends of P630,000 Inv:jncom 40050t0 Its ordinary shareholders. Market value of 1B Co.'s ordinary shares at December 31, 2014, is as 6loid == P18 million. Cabbage Company's financial year-end Is December 31. +L. What Is. the total. amount, of goodwill of 18 Co. based on the price paid by Cabbage Company? A. P600,000 C. P240,000 ¥ B, P2,160,000 D. P60,000 & 2. What amount of investment income should Cabbage report in its income statement for the year ended December 31, 2014, under the equity method? AL P405,000 Cc. P157,500 B. P400,500 D, P247,500 A “"3. Under the equity method, the camying value of the Cabbage Company's investment in ) ordinary shares of 1B Co. on December 31, 2014, should be A. P4,443,000 C. P4,140,000 Ac. ain meee B, P4,200,000. D. P4,500,000 Vhop M 400,90. Cou as wv 4,449,000 PROBLEM NO. 5 DURIAN CORP. purchased 40% of Associate Company's outstanding ordinary shares on January 2, 2014, for P540 million. The book value of Associate-Company’s net assets (shareholders’ equity) at the purchase date totaled 900 milion. 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 P25 million and P225 million, respectively. All Inventory on hand at the purchase date was sold during 2014. The buildings have average remaining useful lives of 15 years. Associate Company reported riet income of P220 million for the year ended December 31, 2014, and paid cash dividends of P80 million. The fair value of Durlan’s investment in associate was P600 million at December 31, 2014.PAR - MANILA, AP7605 ~ AUDIT OF INVESTMENTS C. 1, Of the amount paid for the acquisition of Associate Company's ordinary shares, how much is attributable to goodwill? A. P100 million B, P90 million P80 million D. P180 million c 2. What is the investment balance at December 31, 2014? A. P540 million B, P600 million €. P580 million D, P596 million . 3. At what amount will Durian Corp. report its investment revenue In its 2014 income 0 statement? A. P88 million B. P72 milion ©. P40 milion D. P32 milion PROBLEM NO. 6 dD 1. Adient has a large and active investment p:i'tfollo that Is kept in a bank safe-deposit box. If the auditor is unable to count the securitcs at the balance sheet date, the aualtor most likely wal | AA. Request the bank to confirm to the auditor the contents of the safe-deposit box at the | balance sheet date. 8. Examine supporting evidence for transactions occurring during the year. C. Count the securities at a subsequent date and confirm with bank whether securities were added or removed since the balance sheet date. D. Request the client to have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date. D 2. When an auditor is unable to inspect and count a client’s investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be asked to A; Verify any differences between -the contents of the box-and the balances in the client's subsidiary ledger. B. Provide a list of securities added and removed from the box between the balance sheet date and the security count date. C. Count the securities in the box so that the auditor will have an independent direct verification. D. Confirm that there has been no access to the box between the balance sheet date and the security count date. 3. Which of the following is net one of the auditor's primary objectives in an audit of trading A : securities? | A. To determine whether securities are authertic. B. To determine whether securities are the property of the client. | C. To determine whether securities actually exist. D. To determine whether securities are properly classified on the balance sheet date. » 4. Apol Boba, CPA, observes the count of securities on December 31. She records the serial numbers of the securities and reconciles them and the number of shares with company records. Which fraud should be detected by this procedure? A. An Investee company declared and paid a stock dividend on December 15. The stock certificate for the additional shares was recelved directly by the treasurer who made no record of the receipt and embezzled the shares. B. The treasurer embezzled and sold securities on April 4. She speculated successfully with the proceeds and replaced the securities on December 29. C. The treasurer borrowed securities on July 15 to use as collateral for a personal loan. He repaid the loan and retumed the securities on December 2. D. The treasurer embezzled interest receipts from bonds by having the payments mailed directly to him.GPAR-MANIA PT — ADT OF INVESTMENTS 10. ll. 12. Which of the following is the least effective audit procedure regarding the existence assertion for the securities held by the auditee? ‘A. Examination of paid checks issued in payment of securities purchased. B. Vouching all changes during the year to supporting documents. C. Simultaneous count of liquid assets. D. Confirmation from the custodian. ‘An auditee is holding equity securities as collateral for a debt. The auditor should ‘A. Determine from data published in the financial press that the auditee has recorded dividend Income from the collateral. B. Ascertain the value of the securities. C. Ascertain that the amount recorded for the collateral in the investment account is equal to its fair value at the balance sheet date. D. Verify that the client has taken title to the securities. Which of the following is the most effective audit procedure for verification of dividends earned on investments in equity securities? A. Tracing deposited dividend checks to the cash receipts book. B. Reconciling the amounts received with published dividend records. C. Comparing the amounts received with preceding year dividends received. D. Recomputing selected extensions and footings of dividend schedules and comparing totals to the general ledger. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions of existence and A. Valuation C. Completeness B,_ Rights and obligations D. Presentation and disclosure In establishing the existence and ownership of an investment held by a corporation in the form of publi traded stock, an auditor should inspect the securities and ‘A. Obtain written representations from management confirming that the securities are properly classified as trading securities. Inspect the audited financial statements of the investee company. Confirm the number of shares held by an Independent custodian. Determine that the investment is carried at fair value. poe ‘An auditor is most likely to verify the interest earned on bond investment by A. Verifying the receipt and deposit of interest checks. B. Confirming the bond interest rate with the issuer of the bonds. CC. Recomputing the interest earned on the basis of face amount, interest rate, and period held, D. Testing controls relevant to cash receipts. Which of the following provides the best form of evidence pertaining to ‘the annual valuation of an investment in which the independent auditor's client owns a 30% voting interest? A, Market quotations of the investee company’s stock. B. Current fair value of the investee company’s assets. C. Historical cost of the investee company’s assets. ~ D. Audited financial statements of the investee company. In verifying the amount of goodwill recorded by a client, the most convincing evidence an ‘auditor can obtain Is by comparing the recorded value of assets acquired with the ‘Assessed value as evidenced by tax bills. Seller’s book value as evidenced by financial statements. Insured value as evidenced by insurance policies. ‘Appraised value as evidenced by independent appraisals. poePSEAR-MANILA 497605 — AUDIT OF INVESTMENTS. 13, The auditor can best verify a client’s bond sinking fund transactions and year-end balance by ‘A. Confirmation with individual holders of retired bonds. B. Confirmation with the bond trustee. ¢. Recomputation of interest expense, interest payable, and amortization of bond discount or premium. D. Examination and count of the bonds retired during the year. 14, An auditor who physically examines securities should insist that a client representative be present in order to A. Detect fraudulent activities. 8. Lend authority to the auditor's directives, C. Coordinate the return of securities to the proper locations. . Acknowledge the receipt of securities returned, 15. In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the A. Classification between current and noncurrent portfolios. B. Valuation of marketable equity securities, C. Existence of unrealized gains or losses in the portfolio. D. Completeness of recortied investment income. i END —