AudProb – 005

AUDIT OF INVESTMENTS

Problem 1: The following Investments in Trading Securities account appears in the books of CAP, INC.:
Date Explanation Debit Credit
2017
Jan. 1 Balance P 5,349,000
31 Sold Robusta Ordinary Shares P 640,920
Mar. 31 Bought Wilma Ordinary Shares 365,000
June 30 Dividend on Bulik Ordinary Shares 300,000
July 31 Sold Bulik Ordinary Shares 262,500
Aug. 1 Sold Gudo bonds 675,000

The audit working papers of the preceding year show that the account balance as of January 1, 2017,
consisted of the following:
Robusta Company ordinary:
30,000 shares, purchased in June 2014, P20 per share P 600,000
60,000 shares, purchased in August 2015, P16 per share 960,000
45,000 shares purchased in May 2016, P22 per share 990,000

Wilma Company ordinary:

60,000 shares, purchased in January 2016, P33 per share 1,980,000

Bulik Company ordinary:

3,000 shares, purchased in August 2015, P73, per share (par P100) 219,000

Gudo Company 15% bonds:

600 bonds, P1,000 each, purchased in July 2016, at par (Interest dates
February 1 and August 1) 600,000
P 5,349,000

Your examination discloses the following:

 On January 31, 2017, 30,000 ordinary shares of the Robusta Company purchased in May 2016 were
sold for P 640,920.
 On March 31, 2017, 15,000 ordinary shares of Wilma Company were purchased at P24.25 per share
plus brokerage fee, for P 365,000.
 In June 2017, Bulik Company paid a 100% ordinary share dividend on ordinary shares.
 In July 2017, CAP, INC. sold to its president, for P125 per share, 3,000 ordinary shares of Bulik
Company, for which the president gave his check for P 262,500 and a letter in which he agreed to pay
the balance upon demand of the treasurer of the company.
 On August 1, 2017, CAP, INC., sold its Gudo Company 5% bonds at 110 plus accrued interest.
 The total market value of the securities at year-end amounted to P 4,500,000.

Questions:
1. What is the gain on sale of Bulik Company shares on July 31, 2017?
a. P 109,500 b. P 153,000 c. P 156,000 d. P 262,500

2. What is the gain on sale of Gudo Company bonds on August 1, 2017?

a. P 0 b. P 45,000 c. P 60,000 d. P 75,000

3. The adjusting entry for the sale of Robusta Company ordinary shares on January 31, 2017, should
include a
a. Debit to Loss on sale of trading securities for P 19,080
b. Credit to Gain on sale of trading securities for P 19,080
 c. Debit to Cash for P 640,920
d. Credit to Investment in trading securities for P 660,000

4. The December 31, 2017, carrying amount (before market adjustments) of CAP, INC.’s investment in
trading securities is
a. P 4,233,750 b. P 4,343,250 c. P 4,344,500 d. P 4,500,000

5. What amount of unrealized gain should be reported in the income statement for the year ended
December 31, 2017?
a. P 155,500 b. P 156,750 c. P 158,000 d. P 266,250

Problem 2: Magnolia Corp. invested its excess cash in equity securities during 2016. The business model
for these investments is to profit from trading securities on price changes.

(a) As of December 31, 2016, the equity investment portfolio consisted of the following:
Investment Quantity Cost Fair Value
LJ, Inc. 1,000 shares P 90,000 P 126,000
Polland Co. 2,000 shares 240,000 252,000
Alabang Corp. 2,000 shares 432,000 360,000
Totals P 762,000 P 738,000
1. In the December 31, 2016, statement of financial position, what should be reported as carrying
amount of the investments?
a. P 738,000 b. P 690,000 c. P 762,000 d. P 810,000

2. In the 2016 income statement, what amount should be reported as unrealized gain or loss?
a. Unrealized gain of P 24,000
b. Unrealized loss of P 24,000
c. Unrealized loss of P 72,000
d. Unrealized gain of P 48,000

(b) During the year 2017, Magnolia Corp. sold 2,000 shares of Polland Co. for P 229,200 and purchased
2,000 more shares of LJ, Inc. and 1,000 shares of Dwarfy Company. On December 31, 2017, Magnolia’s
equity securities portfolio consisted of the following:
Investment Quantity Cost Fair Value
LJ, Inc. 1,000 shares P 90,000 P 120,000
LJ, Inc. 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 P 816,000 P 564,000

3. What is the gain or loss on the sale of Polland Co. investment?

a. P 10,800 gain b. P 10,800 loss c. P 22,800 gain d. P 22,800 loss

4. What is the carrying amount of the investments on December 31, 2017?

a. P 816,000 b. P 888,000 c. P 564,000 d. P 492,000

5. What amount of unrealized gain or loss should be reported in the income statement for the year
ended December 31, 2017?
a. P 252,000 unrealized gain c. P 216,000 unrealized gain
b. P 252,000 unrealized loss d. P 216,000 unrealized loss
(c) During the year 2018, Magnolia sold 3,000 shares of LJ, Inc. for P 239,400 and 500 shares of Dwarfy
Company at a loss of P 16,200. On December 31, 2018, Magnolia’s equity investment portfolio consisted
of the following:
Investment Quantity Cost Fair Value
Dwarfy Company 500 shares 48,000 36,000
Alabang Corp. 2,000 shares 432,000 492,000
Totals P 480,000 P 528,000
6. What should be reported as loss on sale of trading securities in 2018?
a. P 120,600 b. P 64,800 c. P 48,600 d. P 136,800

7. What amount of unrealized gain or loss should be reported in the income statement for the year
ended December 31, 2018?
a. P 360,000 unrealized gain
b. P 360,000 unrealized loss
c. P 48,000 unrealized gain
d. P 48,000 unrealized loss

8. In the December 31, 2018, statement of financial position, what should be reported as carrying
amount of the trading securities?
a. P 480,000 b. P 468,000 c. P 528,000 d. P 540,000

Problem 3: 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
P 800,000 Tipo Co. 7% bonds 796,500 774,000
P 1,200,000 Turkey Co. 7 ½% bonds 1,207,500 1,218,900
Totals P 2,258,500 P 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 2017 and 2018, Mayon completed the
following transactions related to trading securities:

2017
Jan. 1 Received semiannual interest on bonds. Assume that the appropriate adjusting entry was
made on December 31, 2016.
April 1 Sold P 600,000 of 7 ½% Turkey bonds at 102 plus accrued interest.
May 21 Received dividend of P1.25 per share on the Concave ordinary share capital. The dividend had
not been recorded on the declaration date.
July 1 Received semiannual interest on bonds and then sold the 7% Tipo bonds at 97 ½.
Aug. 15 Purchased 200 shares of Newman, Inc. ordinary share capital at P580 per share plus
brokerage fees of P500.
Nov. 1 Purchased P 500,000 of 8% Toll Co. bonds at 101 plus accrued interest. Brokerage fees were P
1,250. Interest dates are January 1 and July 1.
Dec. 31 Market prices of securities were:
Concave ordinary shares P550
7 ½% Turkey bonds 101 ¾
8% Toll bonds 101
Newman ordinary shares P583.75
2018
Jan. 2 Recorded the receipt of semiannual interest on bonds.
Feb. 1 Sold the remaining 7 ½% Turkey bonds at 101 plus accrued interest.
Questions:
1. What is the total interest and dividend income for 2017?
a. P 125,166 c. P 91,417
b. P 164,416 d. P 98,804

2. What amount should be reported as gain on sale of trading securities in 2017?

a. P 2,550 c. P 8,550
b. P 6,000 d. P 3,450

3. What amount of unrealized gain or loss should be reported in the income statement for the year
ended December 31, 2017?
a. P 21,200 unrealized gain
b. P 21,200 unrealized loss
c. P 6,150 unrealized gain
d. P 6,150 unrealized loss

4. What is the carrying amount of the remaining trading securities on December 31, 2017?
a. P 1,481,000 c. P 1,473,450
b. P 1,450,450 d. P 1,452,250

5. What is the loss on the sale of the remaining Turkey bonds on February 1, 2018?
a. P 4,500 c. P 13,500
b. P 10,500 d. P 750

Problem 4: Santol Corp. invested its excess cash in non-trading equity securities during 2017. On initial
recognition, the entity made an irrevocable election to present its securities at fair value through other
comprehensive income (FVOCI). As of December 31, 2017, the company’s securities portfolio consisted
of the following:

Investee Company Shares Cost Market Value

Kelly, Inc. 30,000 P 450,000 P 425,000
Eloy Corp. 60,000 1,500,000 1,610,000
Yogi Enterprises 60,000 2,160,000 2,300,000
Totals P 4,110,000 P 4,335,000
During the year 2018, Santol sold 60,000 shares of Eloy Corp. for P 1,700,000 and purchased 60,000
additional shares of Kelly, Inc. and 30,000 shares of Kongga Company.

On December 31, 2018, Santol’s portfolio of non-trading equity securities comprised the following:

Investee Company Shares Cost Market Value

Kelly, Inc. 30,000 P 450,000 P 425,000
Kelly, Inc. 60,000 1,300,000 1,450,000
Kongga Company 30,000 520,000 480,000
Yogi Enterprises 60,000 2,160,000 700,000
Totals P 4,430,000 P 3,130,000
During the year 2019, Santol sold all the Kelly, Inc. shares for P 2,300,000 and 15,000 shares of Kongga
Company at a loss of P 90,000. On December 31, 2019, Santol’s portfolio of non-trading equity securities
consisted of the following:

Investee Company Shares Cost Market Value

Yogi Enterprises 60,000 2,160,000 4,200,000
Kongga Company 15,000 260,000 180,000
Totals P 2,420,000 P 4,380,000
Questions:
1. What total amount should be credited to retained earnings as a result of the sale of Eloy Corp.
securities in 2018?
a. P 200,000 b. P 110,000 c. P 90,000 d. P 20,000

2. What unrealized loss on the remaining financial assets should be reported in the 2018 statements of
comprehensive income as component of other comprehensive income?
a. P 1,600,000 b. P 1,640,000 c. P 1,415,000 d. P 1,300,000

3. What cumulative amount of unrealized loss should be reported as component of other comprehensive
income in the statement of changes in equity on December 31, 2018?
a. P 1,415,000 b. P 1,300,000 c. P 335,000 d. P 225,000

4. What unrealized gain on the remaining financial assets should be reported in the 2019 statement of
comprehensive income as component of other comprehensive income?
a. P 1,960,000 b. P 60,000 c. P 3,440,000 d. P 3,500,000

5. What cumulative amount of unrealized gain should be reported as component of other

comprehensive income in the statement of changes in equity on December 31, 2019?
a. P 1,505,000 b. P 1,960,000 c. P 1,480,000 d. P 3,440,000