National University
Manila
Integrated Auditing Review
2nd Trimester 2021-2022
BLD
Audit of Investments
Scope: PFRS 9 shall be applied by all entities to all types of financial instruments except:
Ø
Ø
Ø
Ø
Ø
Ø
Ø
Ø
Ø
Ø
Interests in subsidiaries, associates and joint ventures
Rights and obligations under leases
Employers’ rights and obligations under employee benefit plans
Financial instruments issued by the entity that meet the definition of an equity instrument in PAS
32
Insurance contract
Forward contract under business combinations
Loan commitments
Financial instruments, contracts and obligations under share-based payment
Reimbursements classified as provisions
Rights and obligations rising from revenue from contracts with customers
Classification and Measurement
Financial assets summary (PFRS 9)
Category
Type of instrument
FVTPL
Debt or Equity
FVTOCI
Debt or Equity
FAAC
Debt
Initial
FV
FV + TC
FV + TC
Subsequent
FV
FV
AC
Changes in FV
P/L
OCI
Ignore
Types of instrument:
1. Debt
2. Equity
Classification of financial assets (PFRS 9)
An entity shall classify financial assets as subsequently measured at either amortized cost or fair value on the
basis of both:
1. The entity’s business model for managing the financial assets and
2. The contractual cash flow characteristics of the financial asset.
Debt instruments
Category
FAAC
FVTOCI
FVTPL
Business model
Held to collect contractual cash
flows
Held to collect contractual cash
flows and sell financial assets
Do not satisfy the criteria in
either FAAC or FVTOCI
Cash flow characteristics
Solely payments of principal and
interest
Solely payments of principal and
interest
Do not satisfy the criteria in either
FAAC or FVTOCI
DEBT INSTRUMENTS
Financial Assets at Amortized Cost
Requisites for
Classification
Ø The asset is held to collect its contractual cash flows and
Ø The asset’s contractual cash flows represent ‘solely payments of principal and
interest’
Profit or Loss
Implications
Ø Effective interest income
Ø Impairments losses and reversal gains
Ø Gain or loss on derecognition
Auditing by: Bee Jay L. De Leon, CPA
Page 1
Audit of Investments
Statement of
financial position
Ø Measured at amortized cost
Ø Classified as a non current asset unless maturity is within 12 months after the
end of the reporting period
Financial Assets at Fair Value Through Other Comprehensive Income
Requisites for
Classification
Ø The objective of the business model is achieved both by collecting contractual
cash flows and selling financial assets; and
Ø The asset’s contractual cash flows represent SPPI.
Profit or Loss
Implications
Ø Effective interest (income)
Ø Impairments losses and reversal gains
Ø Gain or loss on derecognition including reclassification adjustments (PAS 1)
OCI
Ø Changes in fair value due to subsequent measurement
Statement of
Financial Position
Ø Measured at fair value after amortization for the effective interest
Ø Cumulative gain or loss on fair value in Equity
Ø Since PFRS 5 excludes the scope for financial assets, FVOCI are non current
asset unless maturity is within 12 months after the end of the reporting period
Note that both amortization is applied under the effective interest method before applying the FV
measurement requirement for the FVOCI classification
Financial Assets at Fair Value Through Profit or Loss
Requisites for
Classification
Ø This is a “residual category” if none of the two previously mentioned (AC and
FVOCI) business models apply or if any of the two business model apply but the
contractual cash flows are NOT SPPI for example if interest will include a profit
participation.
Ø If the two requisites for the AC and FVOCI category are met but the entity
elects to measure debt instruments at FVPL to eliminate an “accounting
mismatch” because financial liabilities are measured at FVPL.
Profit or Loss
Implications
Ø
Ø
Ø
Ø
Statement of
Financial Position
Ø Measured at fair value
Ø Under the assumption the Financial asset is held for trading, FVPL shall be
classified as a current asset (PAS 1)
Nominal interest (income)
Direct transaction cost incurred on acquisition
Gain or loss on changes in fair value on subsequent measurement
Gain or loss on derecognition
EQUITY INSTRUMENTS
Financial Assets at Fair Value Through Profit Or Loss
Requisites for
Classification
Ø Both held for Trading or Non Trading
Profit or Loss
Implications
Ø
Ø
Ø
Ø
Statement of
Financial Position
Ø Measured at fair value
Ø Under the assumption the Financial asset is held for trading, FVPL shall be
classified as a current asset (PAS 1)
Dividends
Direct transaction cost incurred on acquisition
Gain or loss on changes in fair value on subsequent measurement
Gain or loss on derecognition
Auditing by: Bee Jay L. De Leon, CPA
Page 2
Audit of Investments
Financial Assets at Fair Value Through Other Comprehensive Income
Requisites for
Classification
Ø An irrevocable election to present in OCI an investment in equity instruments
that is not held for trading
Profit or Loss
Implications
Ø Dividends
OCI
Ø Changes in fair value due to subsequent measurement
Ø Gain or loss on derecognition and may be transferred within Equity (Retained
Earnings)
Statement of
Financial Position
Ø Measured at fair value
Ø Cumulative gain or loss on fair value in Equity
Ø Non trading investments are classified under the non current assets section of
the statement of financial position
Note that PFRS 9 has eliminated the impairment loss category for equity instruments
Reclassification
For financial assets, reclassification is required between FVTPL, FVTOCI and amortized cost, if and only if the
entity's business model objective for its financial assets changes so its previous model assessment would no
longer apply.
If reclassification is appropriate, it must be done prospectively from the reclassification date which is defined as
the first day of the first reporting period following the change in business model. An entity does not restate any
previously recognized gains, losses, or interest.
RECLASSIFICATIONS OF DEBT INSTRUMENTS
Original category
Amortized cost
FVPL
Amortized cost
FVOCI
Auditing by: Bee Jay L. De Leon, CPA
New category
Accounting impact
FVPL
Fair value is measured at
reclassification date.
Difference from carrying
amount should be recognized
in profit or loss.
Amortized Cost
Fair value at the
reclassification date becomes
its new gross carrying amount
FVOCI
Fair value is measured at
reclassification date.
Difference from amortized
cost should be recognized in
OCI. Effective interest rate is
not adjusted as a result of the
reclassification.
Amortized cost
Fair value at the
reclassification date becomes
its new amortized cost
carrying amount. Cumulative
gain or loss in OCI is adjusted
against the fair value of the
financial asset at
reclassification date.
Page 3
Audit of Investments
FVPL
FVOCI
FVOCI
Fair value at reclassification
date becomes its new carrying
amount.
FVPL
Fair value at reclassification
date becomes carrying
amount. Cumulative gain or
loss on OCI is reclassified to
profit or loss at reclassification
date
PFRS 9 does not allow reclassification:
for equity investments measured at FVTOCI, or where the fair value option has been exercised in any
circumstance for a financial assets or financial liability.
PRACTICAL QUESTIONS
Problem 1
You were able to obtain the following ledger details of Trading Securities in connection with your audit of the
Rizal Corporation for the year ended December 31, 2020:
Particulars
Purchase of GOOD Co. – 4,000 shares
Purchase of LUCK Co. – 4,800 shares
Sale of LUCK Co. – 1,600 shares
Receipt of GOOD Stock Dividend – Offsetting
Credit to retained earnings
Sale of GOOD Stocks – 3,200 shares
Sale of GOOD Stocks – 800 shares
Date
1-14
2-20
3-01
DR
P 960,000
1,200,000
5-31
8-15
10-1
88,000
CR
360,000
784,000
184,000
From the Philippine Stock Exchange, the GOOD dividends were analyzed as follows:
Kind
Cash
Stock
Cash
Declared
01-02
05-02
08-01
Record
01-15
05-15
08-30
Payment
01-31
05-31
09-15
Rate
P20/share
10%
P30/share
At December 31, 2020, GOOD and LUCK shares were selling at P210 and P240 per share, respectively.
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of 1,600 LUCK shares on March 1, 2020
2. Gain on sale of 3,200 GOOD shares on August 15, 2020
3. Gain or loss on sale of 800 GOOD shares on October 1, 2020
4. Dividend income for the year 2020
5. Carrying value of Trading Securities as of December 31, 2020
Problem 2
In connection with your audit of the financial statements of the Bonifacio Company for the year 2020, the
following Available for Sale Securities and Dividend Income accounts were presented to you:
Available for Sale Securities
Date
Description
Ref.
01/15/2020 10,000 shares common,
par value P50, SPIKES Co.
VR-18
04/30/2020 5,000 shares SPIKES Co.
received as stock dividend
CJ-7
05/20/2020 Sold 5,000 shares @ P25
CR-21
12/10/2020 Sold 2,000 shares @ P60
CR-S2
Auditing by: Bee Jay L. De Leon, CPA
Debit
Credit
390,000
250,000
125,000
120,000
Page 4
Audit of Investments
Date
04/30/2020
11/30/2020
Description
Stock dividend
SPIKES Company common
Dividend Income
Ref.
SJ-7
CR-22
Debit
Credit
`250,000
50,000
The following information was obtained during your examination:
1.
From independent sources, you determine the following dividend information:
Type of Dividend
Stock
Cash
Cash
2.
Date
Declared
03/15/2020
11/01/2020
12/01/2020
Date of
Record
04/01/2020
11/15/2020
12/15/2020
Date of
Payment
04/30/2020
11/28/2020
01/02/2020
Rate
50%
P5/share
20%
Closing market quotation as at December 31, 2020:
SPIKES Company common
Bid
13-3/4
Asked
16-1/2
Based on the above and the result of your audit, answer the following:
1.
2.
3.
4.
5.
How much is the gain (loss) on the May 20, 2020 sale?
How much is the gain on the December 10, 2020 sale?
How much is the total dividend income for the year 2020?
How much is the adjusted balance of FVTOCI as of December 31, 2020?
How much is the Unrealized Loss on FVTOCI as of December 31, 2020?
Problem 3
On December 31, 2019, Mabini Company’s balance sheet showed the following balances related to its securities
accounts:
Trading securities
Available-for-sale securities (AFS)
Interest receivable-Mayniladlad water bonds
Unrealized gain - AFS
P1,477,500
1,180,000
12,500
100,000
Mabini’s securities portfolio on December 31, 2019, was made up of the following securities:
Security
10,000 shares Yeye Bonel Corp. stock
8,000 shares Totoy Bibo Inc. stock
10% Mayniladlad water bonds (interest payable
semiannually on Jan. 1 and Jul. 1)
10,000 shares Bulaklak Inc. stock
20,000 shares Jumbo Hotdog Unlimited Inc. stock
Classification
Trading
Trading
Cost
P750,000
550,000
Market
P762,500
528,250
Trading
Available for
sale
Available for
sale
250,000
590,000
186,750
630,000
490,000
550,000
During 2020, the following transactions took place:
Jan. 3
Receive interest on the Mayniladlad water bonds.
Mar. 1
Purchased 3,000 additional shares of Yeye Bonel Corp. stock for P229,500, classified as a
trading security.
Apr. 15
Sold 4,000 shares of the Totoy Bibo Inc. stock for P69 per share.
May 4
Sold 4,000 shares of the Bulaklak Inc. stock for P62 per share.
July 1
Received interest on the Mayniladlad water bonds.
Auditing by: Bee Jay L. De Leon, CPA
Page 5
Audit of Investments
Oct. 30
Purchased 15,000 shares of Pasaway Co. stock for P832,500, classified as a trading security.
The market values of the stocks and bonds on December 31, 2020, are as follows:
Yeye Bonel Corp. stock
Totoy Bibo Inc. stock
Pasaway Co. stock
Mayniladlad water bonds
Bulaklak Inc. stock
Jumbo Hotdog Unlimited Inc. stock
P76.60 per share
P68.50 per share
P55.25 per share
P205,550
P61.00 per share
P27.00 per share
Based on the above and the result of your audit, determine the following:
1.
2.
3.
4.
5.
Gain or loss on sale of 4,000 Totoy Bibo Inc. shares on April 15, 2020
Net realized gain or loss on sale of 4,000 Bulaklak Inc. shares on May 4, 2020
Carrying value of Trading Securities as of December 31, 2020
Carrying value of FVTOCI as of December 31, 2020
In 2020, what amount of unrealized gain or loss should be shown as component of (i)income and
(ii)stockholders’ equity?
Problem 4
Your audit of the Del Pilar Corporation disclosed that the company owned the following securities on December
31, 2019:
Trading securities:
Security
Sputnik, Inc.
Explorer, Inc.
10% , P100,000 face value , Vanguard
bonds (interest payable semiannually
on Jan. 1 and Jul. 1)
Total
Available-for-sale securities:
Security
Score Products
Tiros, Inc.
Midas, Inc.
Total
Shares
4,800
8,000
Shares
16,000
120,000
40,000
Held to maturity:
12%, 1,000,000 face value, Discoverer
bonds (interest payable annually every Dec. 31)
Cost
P 72,000
216,000
Market
P 92,000
144,000
79,200
P367,200
81,720
P317,720
Cost
P 688,000
3,120,000
480,000
P4,288,000
Market
P 720,000
2,920,000
640,000
P4,280,000
Cost
Book value
P950,000
P963,000
During 2020, the following transactions occurred:
Jan. 1
Receive interest on the Vanguard bonds.
Mar. 1
Sold 4,000 shares of Explorer Inc. stock for P76,000.
May 15
Sold 1,600 shares of Midas, Inc. for P15 per share.
July 1
Received interest on the Vanguard bonds.
Dec. 31
Received interest on the Discoverer bonds.
31
Transferred the Discoverer bonds to the FVTOCI portfolio. The bonds were selling at
101 on this date. The bonds were purchased on January 2, 2019. The discount was amortized
using the effective interest method.
Auditing by: Bee Jay L. De Leon, CPA
Page 6
Audit of Investments
The market values of the stocks and bonds on December 31, 2020, are as follows:
Sputnik, Inc.
Explorer, Inc.
10% Vanguard bonds
Score Products
Tiros, Inc.
Midas, Inc.
P22 per share
P15 per share
P75,600
P42 per share
P28 per share
P18 per share
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of 4,000 Explorer, Inc. shares on March 1, 2020
2. Realized gain or loss on sale of 1,600 Midas, Inc. shares on May 15, 2020
3. Total interest income for the year 2020?
4. The amount that should be reported as unrealized gain in the statement of changes in equity regarding
transfer of Discoverer bonds to AFS?
5. Carrying value of Trading Securities and Available-for-sale securities as of December 31, 2020 should be
Trading securities Available-for-sale securities.
Problem 5
The following two subsidiary accounts reflect the trading securities of Luna Company for the year 2020:
Date
Jan. 16
31
Mar. 30
June 10
July 29
Date
Sep. 05
28
Oct. 01
05
Nov.30
Dec.15
LOYAL COMPANY
Transactions
Shares
Ref.
Purchase
20,000
CD
Raised to market value, offset
credit to retained earnings
GJ
Sale at P150
10,000
CR
Stock dividend at par
10,000
GJ
Sale at P110
10,000
CR
Totals
FAITHFUL CORP.
Transactions
Shares
Ref.
Purchase
20,000
CD
Cash dividends to stockholders
of record Sept. 15, declared
Aug. 15
CR
Purchase
50,000
CD
Sale at P65
20,000
CR
Cash collected for sale made on
Nov. 10, after a Nov. 1
declaration of P5 cash dividend
per share to stockholders on
record as of December 1
20,000
CR
Cash dividend received
CR
Totals
Debit
P1,900,000
100,000
1,000,000
.
P3,000,000
Debit
P1,000,000
Credit
P1,500,000
1,100,000
P 2,600,000
Credit
P 50,000
2,500,000
.
P3,500,000
1,000,000
3,300,000
150,000
P4,500,000
On January 2, 2020, Luna Company purchased 39,000 shares of Trustworthy Co.’s 200,000 shares of outstanding
common stock for P1,170,000. On that date, the carrying amount of the acquired shares on Trustworthy Co.’s
books was P810,000. Luna attributed the excess of cost over carrying amount to goodwill.
During 2020, Luna’s president gained a seat on Trustworthy’s board of directors. Trustworthy reported earnings
of P800,000 for the year ended December 31, 2020, and declared and paid cash dividends of P200,000 during
2020. On December 31, 2020, Trustworthy’s common stock was trading at P30 per share.
1.
2.
3.
4.
5.
6.
The gain on sale of 10,000 shares of Loyal Company on March 30 is
The gain on sale of 10,000 shares of Loyal Company on July 29 is
The correct acquisition cost of 20,000 shares of Faithful Corp. acquired on September 5 is
The gain on sale of 20,000 shares of Faithful Corp. October 5 is
The gain on sale of 20,000 shares of Faithful Corp. on November 10 is
The balance of the Company’s investment in Loyal Company before mark-to-market on December 31,
2020
Auditing by: Bee Jay L. De Leon, CPA
Page 7
Audit of Investments
7.
The adjusted balance of the Company’s investment in Faithful Corp. before mark-to-market on December
31, 2020 is
8.
The income from investment in common stock of Trustworthy Company to be reported on the income
statement for the year ended December 31, 2020 is
9.
The adjusted balance of investment in Trustworthy Company at December 31, 2020 is
Problem 6
On June 1, 2019, Aguinaldo Corporation purchased as a long term investment 4,000 of the P1,000 face value,
8% bonds of Laurel Corporation. Aguinaldo Corporation has the positive intention and ability to hold these
bonds to maturity. The bonds were purchased to yield 10% interest. Interest is payable semi-annually on
December 1 and June 1. The bonds mature on June 1, 2024. On November 1, 2020, Aguinaldo Corporation sold
the bonds for a total consideration of P3,925,000.
Based on the above and the result of your audit, determine the following: (Round off present value factors to
four decimal places)
1. The purchase price of the bonds on June 1, 2019 is
2. The interest income for the year 2019 is
3. The carrying value of the investment in bonds as of December 31, 2019 is
4. The interest income for the year 2020 is
5. The gain on sale of investment in bonds on November 1, 2020 is
Investments Property
Definition
Investment property is land or building held to earn rentals or for capital appreciation or both, rather than:
a) Used in the production or supply of goods or services or for administrative purposes; or
b) Sale in the ordinary course of business.
Examples of investment property:
• Land held for long term capital appreciation
• Land held for undetermined future use
• Building leased out under operating lease
• Vacant building held to be leased out under an operating lease
• Property that is being constructed or developed for use as an investment property
• Existing investment property that is being redeveloped for continuing use as investment property
Examples of NOT investment property:
• Property held for use in the production or supply of goods or services or for administrative purposes.
• Property held for sale in the ordinary course of business or in the process of construction of
development for such sale.
• Property being constructed or developed on behalf of third parties.
• Owner-occupied property, including property held for future use as owner-occupied, property held for
future development and subsequent use as owner-occupied property, property occupied by employees
and owner-occupied property awaiting disposal. And
• Property leased to another entity under a finance lease.
Other Classification Issues
Property held under an operating lease
A property interest that is held by a lessee under an operating lease may be classified and accounted for as
investment property provided that:
•
•
•
•
The rest of the definition of investment property is met
The operating lease is accounted for as if it were a finance lease in accordance with PAS 17 Leases
The lessee uses the fair value model set out in this Standard for the asset recognized.
An entity may make the foregoing classification on a property-by-property basis.
Partial own use - If the owner uses part of the property for its own use, and part to earn rentals or for capital
appreciation
Auditing by: Bee Jay L. De Leon, CPA
Page 8
Audit of Investments
Ø If the portions can be sold or leased out separately, they are accounted for separately. Therefore the
part that is rented out is investment property.
Ø If the portions cannot be sold or leased out separately, the property is investment property only if the
owner-occupied portion is insignificant.
Ancillary services - If the enterprise provides ancillary services to the occupants of a property held by the
enterprise, the appropriateness of classification as investment property is determined by the significance of the
services provided.
Ø If those services are a relatively insignificant component of the arrangement as a whole (for instance,
the building owner supplies security and maintenance services to the lessees), then the enterprise may
treat the property as investment property.
Ø Where the services provided are more significant (such as in the case of an owner-managed hotel), the
property should be classified as owner-occupied.
Intracompany rentals - Property rented to a parent, subsidiary, or fellow subsidiary
Ø Not investment property in consolidated financial statements that include both the lessor and the
lessee, because the property is owner-occupied from the perspective of the group.
Ø However, such property could qualify as investment property in the separate financial statements of
the lessor, if the definition of investment property is otherwise met.
Recognition
Investment property should be recognized as an asset when it is probable that the future economic benefit that
are associated with the property will flow to the enterprise, and the cost of the property can be reliably
measured.
Initial measurement
• Investment property is initially measured at cost, including transaction costs (i.e. professional fees for legal
services and property transfer taxes).
• Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the
investment property achieves the planned level of occupancy.
Subsequent Measurement
PAS 40 permits enterprises to choose between (1) fair value model and (2) cost model.
Fair value model
a. Investment property is remeasured at fair value, which is the amount for which the property could be
exchanged between knowledgeable, willing parties in an arm's length transaction. Gains or losses
arising from changes in the fair value of investment property must be included in net profit or loss for
the period in which it arises.
b. Fair value should reflect the actual market state and circumstances as of the end of the reporting period.
The best evidence of fair value is normally given by current prices on an active market for similar
property in the same location and condition and subject to similar lease and other contracts. In the
absence of such information, the entity may consider current prices for properties of a different nature
or subject to different conditions, recent prices on less active markets with adjustments to reflect
changes in economic conditions, and discounted cash flow projections based on reliable estimates of
future cash flows.
c. There is a rebuttable presumption that the enterprise will be able to determine the fair value of an
investment property reliably on a continuing basis. However, if, in exceptional circumstances, an entity
follows the fair value model but at acquisition concludes that a property's fair value is not expected to
be reliably measurable on a continuing basis, the property is accounted for in accordance with the
benchmark treatment under PAS 16, Property, Plant and Equipment (cost less accumulated depreciation
less accumulated impairment losses).
d. Where a property has previously been measured at fair value, it should continue to be measured at fair
value until disposal, even if comparable market transactions become less frequent or market prices
become less readily available.
Auditing by: Bee Jay L. De Leon, CPA
Page 9
Audit of Investments
Cost Model
a. After initial recognition, investment property is accounted for in accordance with the cost model as set
out in PAS 16, Property, Plant and Equipment – cost less accumulated depreciation and less
accumulated impairment losses.
Transfers to or from Investment Property Classification
Transfers to, or from, investment property should only be made when there is a change in use, evidenced by:
Commencement of owner-occupation (transfer from investment property to owner-occupied property)
Commencement of development with a view to sale (transfer from investment property to inventories)
End of owner-occupation (transfer from owner-occupied property to investment property);
Commencement of an operating lease to another party (transfer from inventories to investment
property)
Ø End of construction or development (transfer from property in the course of construction/development
to investment property.
Ø When an entity decides to sell an investment property without development, the property is not
reclassified as investment property but is dealt with as investment property until it is disposed of.
Ø
Ø
Ø
Ø
Accounting for Transfers
From
Transferred Category
Investment property carried at
fair value
Owner-occupied property or
inventories
Owner-occupied property
Investment property carried at
fair value
Inventories
Investment property at fair value
Investment property under
construction or development
Completed investment property
that will be carried at fair value
Investment property under the
cost model
Owner-occupied property or
inventories
Treatment
Fair value at the change of use is
the 'cost' of the property under its
new classification
Difference in carrying amount and
fair value as revaluation under
PAS 16
Difference in carrying amount and
fair value is recognized in profit or
loss.
Difference between the fair value
at the date of transfer and the
previous carrying amount should
be recognized in net profit or loss
No change the carrying amount of
the property transferred
Disposals
Ø An investment property should be derecognized on disposal or when the investment property is
permanently withdrawn from use and no future economic benefits are expected from its disposal.
Ø The gain or loss on disposal is the difference between the net disposal proceeds and the carrying
amount of the asset and recognized in profit or loss.
Ø Compensation from third parties is recognized when it becomes receivable.
Disclosures under the Fair Value Model and Cost Model
a. Whether the fair value or the cost model is used
b. If the fair value model is used, whether property interests held under operating leases are classified and
accounted for as investment property;
c. If classification is difficult, the criteria to distinguish investment property from owner-occupied property
and from property held for sale.
d. The methods and significant assumptions applied in determining the fair value of investment property.
e. The extent to which the fair value of investment property is based on a valuation by a qualified
independent valuer; if there has been no such valuation, that fact must be disclosed.
f. The amounts recognized in profit or loss for:
Ø Rental income from investment property;
Ø Direct operating expenses (including repairs and maintenance) arising from investment property
that generated rental income during the period; and
Ø Direct operating expenses (including repairs and maintenance) arising from investment property
that did not generate rental income during the period.
Auditing by: Bee Jay L. De Leon, CPA
Page 10
Audit of Investments
g. Restrictions on the realizability of investment property or the remittance of income and proceeds of
disposal.
h. Contractual obligations to purchase, construct, or develop investment property or for repairs,
maintenance or enhancements.
PRACTICAL QUESTIONS
Problems:
1. Solano Company is considering the appropriate classification of the following items:
Land held for long-term capital appreciation
Land held for undecided future use
Building leased out under an operating lease
Building leased out under a finance lease
Vacant building held to be leased out under an operating lease
Property held for use in the production or supply of goods or services
Property held for administrative purposes
Property held for sale in the ordinary course of business
Property held in the process of construction or development for sale
Property being constructed of developed on behalf of third parties
Property held for future use as owner-occupied property
Property held for future development and subsequent use as
owner-occupied property
Property occupied by employees
Owner-occupied property awaiting disposal
Property that is being constructed or developed for use as
an investment property
Existing investment property that is being developed for
continuing use as investment property
Building held for administrative purposes and leased out under
operating lease (60% is for administrative purposes)
Building leased out under an operating lease (the entity
supplies security and maintenance services to the lessees)
P15,000,000
30,000,000
75,000,000
45,000,000
8,000,000
6,000,000
9,000,000
2,000,000
3,000,000
12,000,000
4,000,000
4,400,000
3,600,000
750,000
12,000,000
24,000,000
15,000,000
30,000,000
How much is the total amount that would normally be reported as investment property?
a. P200 million
c. P170 million
b. P188 million
d. P158 million
2. Quirino, Inc. and its subsidiaries have provided you their PFRS specialist, with a list of the properties they
own:
•
•
•
•
•
•
Land held by Quirino, Inc. for undetermined future use, P5,000,000.
A vacant building owned by Quirino, Inc. and to be leased out under an operating lease,
P20,000,000.
Property held by a subsidiary of Quirino, Inc., a real estate firm in the ordinary course of its
businrss, P30,000,000.
Property held by Quirino, Inc. for use in production, P1,000,000.
A hotel owned by Sugo, Inc., a subsidiary of Quirino, Inc., and for which Sugo, Inc. provides
security services for its quests belongings, P50,000,000.
A building owned by Quirino, Inc. being leased out to Status, Inc., a subsidiary of Quirino, Inc.,
P20,000,000
How much will be reported as investment properties in Quirino, Inc. and its subsidiaries consolidated
financial statements?
a. P75,000,000
c. P95,000,000
b. P25,000,000
d. P45,000,000
3. The Takoyaki Company’s accounting policy with respect to investment properties is to measure them at
fair value at the end of each reporting period. One of its investment properties was measured at
P800,000 on 31 December 2020.
Auditing by: Bee Jay L. De Leon, CPA
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Audit of Investments
The property had been acquired on 1 January 2020 for a total of P760,000, made up of P690,000 paid to
the vendor, P30,000 paid to the local authority as a property transfer tax and P40,000 paid to
professional advisers.
In accordance with PAS40 Investment property, the amount of the gain to be recognized in profit or loss
in the year ended 31, December 2020 in respect of the investment property is
a. P40,000
c. P80,000
b. P70,000
d. P110,000
4. The Seafoods Company acquired a building on 1 January 2020 for P900,000. At that date the building
had a useful life of 30 years. At 31, December 2020 the fair value of the building was P960,000. The
building was classified as an investment property and accounted for under the cost model.
According to PAS40 Investment property, what amounts should be carried in the statement of financial
position (SFP) and recognized in profit or loss (P/L)?
Carrying amount in SFP
Recognized in P/L
a.
P870,000
Nil
b.
P900,000
Nil
c.
P960,000
Gain of P60,000
d.
P870,000
Expense of P30,000
5. The Air Company purchased an investment property on 1 January 2017 for a cost of P220,000. The
property had a useful life of 40 years and at 31 December 2019 had a fair value of P300,000. On 1
January 2020 the property was sold for net proceeds of P290,000. Air uses the cost model to account for
investment properties.
What is the gain or loss to be recognized in profit or loss for the year ended 31 December 2020
regarding the disposal of the property?
a. P86,500 gain
c. P10,000 loss
b. P81,000 gain
d. P92,000 gain
6. Watch, Inc. owns a building purchased on January 1, 2016 for P50 million. The building was used as the
company’s head office. The building has an estimated useful life of 25 years. In 2020, the company
transferred its head office and decided to lease out the old building. Tenants began occupying the old
building by the end of 2020. On December 31, 2020, the company reclassified the building as investment
property to be carried under the cost model. The fair value on the date of reclassification was P42
million.
How much should be recognized in the 2020 profit or loss as a result of the transfer from owneroccupied to investment property?
a. P8,000,000
c. P500,000
b. P2,000,000
d. Nil
Use the following information for the next two questions.
Cute Corporation owns the following properties at 1 January 2020:
Property A
An office building used by Cute for administrative purposes with a depreciated historical cost of P2
million. At 1 January 2020 it had a remaining life of 20 years. After a e-organization on 1 July 2020, the
property was leased to a third party and reclassified as an investment property applying Cute’s policy of
the fair value model. An independent valuer assessed the property to have a fair value of P2.3 million at
1 July 2020, which has risen to P2.34 million at 31 December 2020.
Property B
Another office building sub-leased to a subsidiary of Cute. At 1 January 2020, it had a fair value of P1.5
million which had risen to P1.65 million on 31 December 2020. At 1 January 2020, it had a remaining life
of 15 years.
Determine the amounts that should be recognized by the entity in its separate financial statements in
respect of these properties for the year ended December 31, 2020 for the following:
7. Net amount in profit or loss
a. P540,000
b. P490,000
c. P190,000
d. P140,000
8. Net amount in other comprehensive income
Auditing by: Bee Jay L. De Leon, CPA
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Audit of Investments
a. P500,000
b. P350,000
c. P300,000
d. Nil
““If you want to be successful, you have to be willing to disappear for a while” – Anonymous
Auditing by: Bee Jay L. De Leon, CPA
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