IV – AUDIT OF INVESTMENTS
PROBLEM NO. 1
The following transactions of the Angat Company were completed during
the year 2006:
Jan. 2
Purchased 20,000 shares of Bulacan Auto Co. for P40 per
share plus brokerage costs of P4,500. These shares were
classified as trading securities.
Feb. 1
Purchased 20,000 shares of Malolos Company common stock
at P125 per share plus brokerage fees of P19,000. Angat
classifies this stock as and available-for-sale security.
Apr. 1
Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5
plus accrued interest of P35,000. In addition, the company
paid brokerage fees of P18,000. Angat classified these bonds
as a trading security.
Jul. 1
Received semiannual interest on the RP Treasury Bonds.
Aug. 1
Sold P500,000 of RP Treasury 7% bonds at 103 plus accrued
interest.
Oct. 1
Sold 3,000 shares of Malolos at P132 per share.
The market values of the stocks and bonds on December 31, 2006, are as
follows:
Bulacan Auto Co.
Malolos Company
RP Treasury 7% bonds
P45 per share
P130 per share
102
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of P500,000 RP Treasury Bonds on August 1, 2006
a. P15,000 gain
c. P2,000 loss
b. P 2,500 gain
d. P7,500 loss
2. Gain or loss on sale of 3,000 Malolos shares on October 1, 2006
a. P18,150 loss
c. P 2,000 gain
b. P18,150 gain
d. P21,000 gain
103
3. What amount of unrealized gain should be shown as component of
income in 2006?
a. P92,500
c. P74,500
b. P97,000
d. P80,000
4. What amount of unrealized gain should be shown as component of
equity as of December 31, 2006?
a. P68,850
c. P66,000
b. P85,000
d. P
0
Suggested Solution:
Question No. 1
Sales proceeds (P500,000 x 1.03)
Less cost of RP Treasury bonds sold (P500,000 x 1.025)*
Gain on sale of P500,000 RP Treasury Bonds
P515,000
512,500
P 2,500
* PAS 39 par. 43 states that when a financial asset or financial liability is
recognized initially, an entity shall measure it at its fair value plus, in the
case of a financial asset or financial liability not at fair value through profit
or loss, transaction costs that are directly attributable to the acquisition or
issue of financial asset or financial liability. Therefore, the transaction costs
(e.g. brokerage fees) should be expensed for trading securities.
Question No. 2
Sales proceeds (3,000 shares x P132)
Less cost of shares sold
{[(20,000 x P125) + P19,000] x 3/20}
Gain on sale of 3,000 Malolos shares
P396,000
377,850
P 18,150
Question No. 3
Cost of Bulacan Auto Co. shares (20,000 x P40)
Cost of RP Treasury 7% bonds (P2,000,000 x 1.025)
Cost of P500,000 RP Treasury bonds sold (see no. 1)
Trading securities, 12/31/06 before mark-to-market
Fair value of trading securities, 12/31/06 (see below)
Unrealized gain on TS to be reported on the IS
P 800,000
2,050,000
( 512,500)
2,337,500
2,430,000
P
92,500
Bulacan Auto Co. (20,000 x P45)
RP Treasury 7% bonds (P1,500,000 x 1.02)
Fair value of trading securities, 12/31/06
P 900,000
1,530,200
P2,430,000
104
Question No. 4
Cost of Malolos Company shares
[(20,000 x P125) + P19,000]
Cost of 3,000 shares sold (see no. 2)
AFS, 12/31/06 before mark-to-market
Fair value of AFS, 12/31/06 [(20,000 - 3,000) x P130]
Unrealized gain-AFS, 12/31/06 to be reported under SHE
P2,519,000
(377,850)
2,141,150
2,210,000
P
68,850
Answers: 1) B; 2) B; 3) A; 4) A
PROBLEM NO. 2
You were engaged by Balagtas Company to audit its financial statements
for the year 2006. During the course of your audit, you noted that the
following trading securities were properly reported as current assets at
December 31, 2005:
France Corporation, 5,000 shares,
convertible preferred shares
Ces, Inc., 30,000 shares of common stock
Coo Co., 10,000 shares of common stock
Cost
Market
P 450,000
675,000
618,750
P1,743,750
P 487,500
742,500
450,000
P1,680,000
The following sale and conversion transactions transpired during 2006:
Mar. 1
Sold 12,500 shares of Ces for P33.75 per share.
April 1
Sold 2,500 shares of Coo for P45 per share.
Sept. 21
Converted 2,500 shares of France’s preferred stock into
7,500 shares of France’s common stock, when the
market price was P78.75 per share for the preferred
stock and P47.25 per share for the common stock.
The following 2006 dividend information pertains to stocks owned by
Balagtas:
Jan. 2
Coo issued a 10% stock dividend when the market price
of Coo’s common stock was P49.50 per share.
March 31
and Sept. 30
France paid dividends of P2.50 per share on its preferred
stock, to stockholders of record on March 15 and
September 15, respectively.
France did not pay
dividends on its common stock during 2006.
105
July 1
Ces paid a P2.25 per share dividend on its common
stock.
Market prices per share of the securities were as follows:
France Corp., preferred
France Corp., common
Ces, Inc., common
Coo Co., common
12/31/2006
92.25
42.75
22.50
40.50
12/31/2005
97.50
38.25
24.75
45.00
All of the foregoing stocks are listed in the Philippine Stock Exchange.
Declines in market value from cost would not be considered permanent.
QUESTIONS:
Based on the above and the result of your audit, you are to provide the
answers to the following:
1. How much is the gain on sale of 12,500 Ces shares?
a. P112,500
c. P140,625
b. P281,250
d. P
0
2. How much is the gain or loss on sale of 2,500 Coo shares?
a. P28,125 gain
c. P28,125 loss
b. P10,227 gain
d. P
0
3. How much is the gain or loss on conversion of 2,500 France preferred
stock into 15,000 common stock?
a. P 28,125 loss
c. P46,875 loss
b. P129,375 gain
d. P
0
4. How much is the total dividend income for the year 2006?
a. P 64,375
c. P 51,875
b. P101,375
d. P364,375
5. How much should be reported as unrealized gain on trading securities
in the company’s income statement for the year 2006?
a. P 4,500
c. P59,250
b. P67,773
d. P
0
Suggested Solution:
Question No. 1
Sales proceeds (12,500 shares x P33.75)
Less CV of Ces shares sold (12.5/30 x P742,500)
Gain on sale of 12,500 Ces shares
106
P421,875
309,375
P112,500
Question No. 2
Sales proceeds (2,500 shares x P45)
Less CV of Coo shares sold (P450,000 x 2,500/11,000*)
Gain on sale of 2,500 Coo shares
P112,500
102,273
P 10,227
* total number of shares after 10% stock dividends (10,000 x 1.1)
Question No. 3
Fair value of preferred stock (2,500 shares x P78.75)
Less CV of shares converted (P487,500 x 2.5/5)
Loss on conversion of 2,500 France preferred shares
P196,875
243,750
P 46,875
Question No. 4
From France (5,000 shares x P2.50 x 2)
From Ces [(30,000 - 12,500) x P2.25)
Total dividend income in 2006
P25,000
39,375
P64,375
Question No. 5
Trading securities, 1/1/06
CV of Ces shares sold (see no. 1)
CV of Coo shares sold (see no. 2)
CV of France preferred shares converted (see no. 3)
Cost of 7,500 France common shares received (see no. 3)
Trading securities, 12/31/06 before mark-to-market
Fair value of trading securities, 12/31/06 (see below)
Unrealized gain on trading securities
France Corp., preferred [(5,000 - 2,500) x P92.25]
France Corp. – Common (7,500 x P42.75)
Ces, Inc., common [(30,000 - 12,500) x P22.50]
Coo Co., common {[(10,000 x 1.1) - 2,500] x P40.50}
Fair value of trading securities, 12/31/06
P1,680,000
(309,375)
(102,273)
(243,750)
196,875
1,221,477
1,289,250
P 67,773
P 230,625
320,625
393,750
344,250
P1,289,250
Answers: 1) A; 2) B; 3) C; 4) A; 5) B
PROBLEM NO. 3
You were able to obtain the following ledger details of Trading Securities in
connection with your audit of the Bocaue Corporation for the year ended
December 31, 2006:
107
Particulars
Purchase of GOOD Co. –
4,000 shares
Date
1-14
Ref.
CV
DR
P 960,000
CR
Purchase of LUCK Co. –
4,800 shares
2-20
CV
1,200,000
Sale of LUCK Co. – 1,600 shares
3-01
CR
Receipt of GOOD Stock Dividend
– Offsetting Credit to retained
earnings
5-31
JV
Sale of GOOD Stocks –
3,200 shares
8-15
CR
784,000
Sale of GOOD Stocks –
800 shares
10-1
CR
184,000
360,000
88,000
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, 2006, GOOD and LUCK shares were selling at P210 and
P240 per share, respectively.
QUESTIONS:
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, 2006
a. P360,000 gain
c. P40,000 loss
b. P200,000 loss
d. P40,000 gain
2. Gain on sale of 3,200 GOOD shares on August 15, 2006
a. P 48,000
c. P16,000
b. P144,000
d. P
0
3. Gain or loss on sale of 800 GOOD shares on October 1, 2006
a. P 8,000 gain
c. P 8,000 loss
b. P24,000 loss
d. P24,000 gain
4. Dividend income for the year 2006
a. P132,000
b. P300,000
108
c. P212,000
d. P
0
5. Carrying value of Trading Securities as of December 31, 2006
a. P768,000
c. P880,000
b. P852,000
d. P768,000
Suggested Solution:
Question No. 1
Sales proceeds
Less CV of shares sold (P1,200,000 x 1,600/4,800)
Loss on sale of 1,600 Luck shares on 3/1/06
P360,000
400,000
P 40,000
Question No. 2
Total proceeds
Less dividends sold (3,200 shares x P30)
Sales proceeds
Less CV of investment sold
(P880,000* x 3,200/4,400**)
Gain on sale of 3,200 Good shares on 9/15/06
P784,000
96,000
688,000
640,000
P 48,000
Computation of adjusted cost of Good Co. shares
Total cash paid
Less purchased dividend (4,000 x P20)
Adjusted cost
P960,000
80,000
P880,000
*
**After 10% stock dividend
Question No. 3
Sales proceeds
Less CV of investment sold (P880,000 x 800/4,400)
Gain on sale of 800 Good shares on 10/1/06
P184,000
160,000
P 24,000
Question No. 4
Dividend income - Declared Aug. 1 (4,400 shares x P30)
P132,000
Question No. 5
Good Co. [(4,000 x 1.1) - 3,200 - 800] = 400 x P210
Luck Co. (4,800 - 1,600) = 3,200 x P240
Carrying value of trading securities, 12/31/06
Answers: 1) C; 2) A; 3) D; 4) A, 5) B
109
P 84,000
768,000
P852,000
PROBLEM NO. 4
In connection with your audit of the financial statements of the Guiguinto
Company for the year 2006, the following Available for Sale Securities and
Dividend Income accounts were presented to you:
04/03
12/02
Available for Sale Securities
Description
Ref.
Purchased 20,000 shares
common, par value P50,
BUSTOS Co.
VR-69
10,000 shares BUSTOS Co.
received as stock dividend
CJ-30
Sold 10,000 shares @ P25
CR-44
Sold 4,000 shares @ P60
CR-65
Date
03/30
08/30
Dividend Income
Description
Ref.
Stock dividend
SJ-8
BUSTOS Company common
CR-52
Date
01/08
03/30
Debit
Credit
780,000
500,000
250,000
240,000
Debit
Credit
500,000
100,000
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
02/14/2006
08/01/2006
12/01/2006
Date of
Record
02/28/2006
08/15/2006
12/15/2006
Date of
Payment
03/30/2006
08/30/2006
01/02/2007
Rate
50%
P5/share
20%
Closing market quotation as at December 31, 2006:
Bid
13-3/4
BUSTOS Company common
Asked
16-1/2
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much is the gain or loss on the April 3, 2006 sale?
a. P10,000 loss
c. P140,000 loss
b. P10,000 gain
d. P
0
2. How much is the gain on the December 2, 2006 sale?
a. P136,000
c. P84,000
b. P 96,000
d. P
0
110
3. How much is the total dividend income for the year 2006?
a. P600,000
c. P100,000
b. P800,000
d. P300,000
4. How much is the adjusted balance of Available for Sale Securities as of
December 31, 2006?
a. P290,000
c. P220,000
b. P264,000
d. P416,000
5. How much is the Unrealized Loss on AFS as of December 31, 2006?
a. P196,000
c. P152,000
b. P 70,000
d. P
0
Suggested Solution:
Question No. 1
Sales proceeds (10,000 shares x P25)
Less CV of investment sold (P780,000 x 10/30*)
Loss on sale of AFS on 4/3/06
P250,000
260,000
P 10,000
*After 50% stock dividend
Question No. 2
Total proceeds (4,000 shares x P60)
Less dividends sold (4,000 shares x P50 x 20%)
Net sales proceeds
Less CV of investment sold (P780,000 x 4/30)
Gain on sale of AFS on 12/2/06
P240,000
40,000
200,000
104,000
P 96,000
Question No. 3
Cash dividends declared, 8/1/2006
(20,000 shares x P5)
Cash dividends declared, 12/1/2006
(20,000 shares x P50 x 20%)
Total dividend income
P100,000
200,000
P300,000
Question No. 4
Shares purchased, 1/08
Shares received as stock dividend
Sold, 4/3
Sold, 12/2
Balance, 12/31/06
Multiply by market value/share, 12/31/06
Carrying value of AFS, 12/31/06
111
20,000
10,000
(10,000)
(4,000)
16,000
13.75
P220,000
Note: Application guidance par. 72 of PAS 39 states that the appropriate
market price for an asset held or liability to be issued is usually the
current bid price and, for an asset to be acquired or liability held, the
asking price.
Question No. 5
Acquisition cost
CV of 10,000 shares sold, 4/3 (see no. 1)
CV of 4,000 shares sold, 12/2 (see no. 2)
AFS, 12/31/06 before mark-to-market
Fair value of AFS, 12/31/06
Unrealized loss on AFS, 12/31/06
P780,000
(260,000)
(104,000)
416,000
220,000
P196,000
Answers: 1) A; 2) B; 3) D; 4) C, 5) A
PROBLEM NO. 5
Your audit of the Baliuag Corporation disclosed that the company owned
the following securities on December 31, 2005:
Trading securities:
Security
Sputnik, Inc.
Explorer, Inc.
10% , P100,000 face value ,
Vanguard bonds (interest payable
semiannually on Jan. 1 and Jul. 1)
Total
Shares
4,800
8,000
Cost
P 72,000
216,000
Market
P 92,000
144,000
79,200
P367,200
81,720
P317,720
Available-for-sale securities:
Security
Score Products
Tiros, Inc.
Midas, Inc.
Total
Shares
16,000
120,000
40,000
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
Held to maturity:
12%, 1,000,000 face value, Discoverer bonds
(interest payable annually every Dec. 31)
112
During 2006, 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 available-for-sale
portfolio. The bonds were selling at 101 on this date. The
bonds were purchased on January 2, 2005. The discount was
amortized using the effective interest method.
The market values of the stocks and bonds on December 31, 2006, 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
QUESTIONS:
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, 2006
a. P4,000 loss
c. P32,000 loss
b. P4,000 gain
d. P32,000 gain
2. Realized gain or loss on sale of 1,600 Midas, Inc. shares on May 15,
2006
a. P4,800 loss
c. P1,600 loss
b. P4,800 gain
d. P1,600 gain
3. Total interest income for the year 2006?
a. P130,000
c. P144,820
b. P125,560
d. P143,000
4. The amount that should be reported as unrealized gain in the
statement of changes in equity regarding transfer of Discoverer bonds
to AFS?
a. P47,000
c. P61,820
b. P32,180
d. P
0
113
5. Carrying value of Trading Securities and Available-for-sale securities as
of December 31, 2006 should be
Trading securities
Available-for-sale securities
a.
P241,200
P5,733,200
b.
P301,200
P4,723,200
c.
P241,200
P5,762,000
d.
P301,200
P5,720,800
Suggested Solution:
Question No. 1
Sales proceeds
Less CV of shares sold (P144,000 x 4/8)
Loss on sale of 4,000 Explorer, Inc. shares
P76,000
72,000
P 4,000
Question No. 2
Sales proceeds (1,600 shares x P15)
Unrealized gain on the shares sold(P160,000 x 1.6/40)
Total
Less CV of shares sold (P640,000 x 1.6/40)
Realized gain on sale of 1,600 Midas, Inc. shares
P24,000
6,400
30,400
25,600
P 4,800
Alternative computation:
Sales proceeds (1,600 shares x P15)
Cost of shares sold (P480,000 x 1.6/40)
Realized gain on sale of 1,600 Midas, Inc. shares
Question No. 3
Vanguard bonds (P100,000 x 10%)
Discoverer bonds (P963,000 x 14%*)
Total interest income for 2006
P 10,000
134,820
P144,820
*Computation of effective interest rate:
Carrying value, 12/31/05
Less carrying value, 1/2/05 (Cost)
Discount amortization for 2005
Add nominal interest (P1,000,000 x 12%)
Effective interest
Divide by carrying value, 1/2/05
Effective interest rate
114
P963,000
950,000
13,000
120,000
133,000
950,000
14%
P24,000
19,200
P 4,800
Question No. 4
Carrying value, 12/31/05
Add discount amortization in 2006:
Effective interest (P963,000 x 14%)
Nominal interest (P1,000,000 x 12%)
Carrying value, 12/31/06
Fair value of Discoverer bonds on
12/31/06 (P1,000,000 x 1.01)
Unrealized gain on transfer of securities
to be reported under SHE
P 963,000
P134,820
(120,000)
14, 820
977,820
1,010,000
P 32,180
Question No. 5
Trading securities
Sputnik, Inc. (4,800 x P22)
Explorer, Inc. [(8,000 - 4,000) x P15]
10% , P100,000 face value , Vanguard bonds
Total market value
Available-for-sale securities
Score Products (16,000 x P42)
Tiros, Inc. (120,000 x P28)
Midas, Inc. [(40,000 - 1,600) x P18]
Discoverer bonds (P1,000,000 x 1.01)
Total market value
P105,600
60,000
75,600
P241,200
P 672,000
3,360,000
691,200
1,010,000
P5,733,200
Answers: 1) B; 2) B; 3) C; 4) B, 5) A
PROBLEM NO. 6
In connection with your audit of Hogonoy Company’s financial statements,
you were able to gather the following subsidiary account which reflect the
marketable securities of the company for the year 2006:
Hugo Corp..
Date
9/01
Transactions
Purchase
9/30
Cash dividends to
stockholders of record
9/15, declared 8/15
10/01
Purchase
10/15
Sale at P65
Shares
40,000
Debit
P2,000,000
Credit
P 100,000
100,000
40,000
115
5,000,000
2,000,000
Hugo Corp..
Date
11/30
12/15
Transactions
Cash collected for sale
made on 11/10, after a
11/1 declaration of P5
cash dividend per share
to stockholders on record
as of 12/1
Shares
Debit
40,000
Cash dividend received
Totals
Credit
6,600,000
.
P7,000,000
300,000
P9,000,000
Hogonoy, Inc. acquired 30% of Pugo Corporation’s voting stock on January
1, 2005 for P5,000,000. During 2005, Pugo earned P2,000,000 and paid
dividends of P1,250,000. Hogonoy’s 30% interest in Pugo gives Hogonoy
the ability to exercise significant influence over Pugo’s operating and
financial policies.
During 2006, Pugo earned P2,500,000 and paid
dividends of P750,000 on April 1 and P750,000 on October 1. On July 1,
2006, Hogonoy sold half of its investment in Pugo for P3,300,000 cash.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The gain on sale of 40,000 shares of Hugo Corp. on October 15 is
a. P628,600
c. P 600,000
b. P700,000
d. P2,057,000
2. The gain on sale of 40,000 shares of Hugo Corp. on November 10 is
a. P4,400,000
c. P2,000,000
b. P4,800,000
d. P4,600,000
3. The carrying value of the Company’s investment in Hugo Corp. on
December 31, 2006 is
a. P2,700,000
c. P2,400,000
b. P2,000,000
d. P3,000,000
4. The gain on sale of investment in Pugo Corp. is
a. P1,312,500
c. P687,500
b. P 537,500
d. P612,500
5. The carrying value of the Company’s investment in Pugo Corp. on
December 31, 2006 is
a. P2,612,500
c. P2,687,500
b. P2,762,500
d. P1,987,500
116
Suggested Solution:
Question No. 1
Sales proceeds (40,000 shares x P65)
Less cost of investment sold:
Cash paid
Less purchased dividend
Gain on sale
P2,600,000
P2,000,000
100,000
1,900,000
P 700,000
Question No. 2
Total proceeds
Less dividends sold (40,000 shares x P5)
Sales proceeds
Less cost of investment sold (P5,000,000 x 40/100)
Gain on sale of 40,000 shares of Hugo Corp., 11/10
P6,600,000
200,000
6,400,000
2,000,000
P4,400,000
Question No. 3
Acquisition cost, 10/1 purchase
Less cost of investment sold on 11/10 (see no. 2)
Gain on sale of 3,200 Good shares on 9/15/06
P5,000,000
2,000,000
P3,000,000
Question No. 4
Proceeds on sale of investment
Less carrying amount of investment sold:
Acquisition cost, 1/1/05
P5,000,000
Share in net income for 2005
(P2,000,000 x 30%)
600,000
Dividends received in 2005
(P1,250,000 x 30%)
(375,000)
Carrying value, 12/31/05
5,225,000
Share in net income up to 7/1/06
(P2,500,000 x 6/12 x 30%)
375,000
Dividends received up to 7/1/06
(P750,000 x 30%)
(225,000)
Carrying value, 7/1/06
5,375,000
Multiply by
1/2
Gain on sale
P3,300,000
2,687,500
P 612,500
Question No. 5
Carrying value, 7/1/06
Less carrying amount of investment sold (see no. 4)
Gain on sale of 3,200 Good shares on 9/15/06
117
P5,375,000
2,687,500
P2,687,500
Note: Since the client's equity was reduced to 15%, it was assumed that the
client lost its ability to exercise significant influence. Thus, the investment
will be accounted for using cost method from 7/1/06. Change from equity to
cost method is accounted for currently and prospectively.
Answers: 1) B; 2) A; 3) D; 4) D, 5) C
PROBLEM NO. 7
The Marilao Company has the following transactions in the stocks of the
Sta. Maria Corp.
a)
On January 2, 1999, Marilao purchased 4,000 shares of P100 par
value common stock at P110 per share.
b) The Sta. Maria Corp. was expanding and on March 2, 2000, it issued
stock rights to its stockholders. The holder needs four rights to
purchase one share of common stock at par. The market value of the
stock on that date was P140 per share. There was no quoted price for
the rights. No journal entry was made to record the receipt of the
rights.
c)
On April 2, 2000, Marilao exercised all its stock rights. The Investment
in Stock account was charged for the amount paid.
d) Robinson, Marilao’s accountant, felt that the cash paid for the new
shares was merely an assessment since Marilao’s proportionate share
in Sta. Maria was not changed. Hence, he credited all dividends (5% in
December of each year) to the Investment in Stock account until the
debit was fully offset.
e)
Marilao received a 50% stock dividend from Sta. Maria in December
2004. Because the shares received were expected to be sold, the
company’s president instructed Robinson not to make any entry for
this dividend. The company did sell the dividend shares in January
2005 for P150 per share. The proceeds from the sale were credited to
income.
f)
In December 2005, Sta. Maria’ stocks were split on a two-for-one basis
and the new shares were issued as no par shares. Marilao found that
each new share was worth P10 more than the P110 per share original
acquisition cost.
For this reason, Marilao decided to debit the
Investment in Stock account with the additional shares received at
P110 per share and credited revenue for it.
118
g)
In August 2006, Marilao sold one half (½) of its holdings in Sta. Maria
at P120 per share. The proceeds were credited to the Investment in
Stock account.
Marilao uses the average method in recording the sale of its investment in
stock.
QUESTIONS:
1. The cost of investment to be allocated to stock rights received on March
2, 2000 is
a. P
0
c. P31,429
b. P29,333
d. P25,143
2. The unadjusted balance of Investment in Sta. Maria stock on December
31, 2006 is
a. P940,000
c. P390,000
b. P490,000
d. P430,000
3. The adjusted balance of Investment in Sta. Maria stock on December
31, 2006 is
a. P135,000
c. P180,000
b. P360,000
d. P270,000
4. The gain on the sale of stock dividend received in December 2004 is
a. P100,000
c. P 80,000
b. P105,000
d. P195,000
5. The gain on sale of the shares sold in August 2006 is
a. P240,000
c. P120,000
b. P420,000
d. P870,000
Suggested Solution:
Question No. 1
Cost allocated to stock rights (P10*/P150 x P440,000)
P29,333
Since the MV of rights is not available we must compute for the
theoretical value of the stock rights. Since the market value of the stock
given is on the date of issuance of the stock rights, the market value is
considered “ex-rights”.
Theoretical value of stock rights = MV of stock ex-rights – subs. price
Number of rights to purchase 1 share
= (P 140 - P100)/4
= P10*
119
Question No. 2
Debits to Investment account:
Purchase, 1/2/99 (4,000 shares x P110)
Exercise of rights, 4/2/00 (4,000/4 x P100)
Stock split, 12/2005 (5,000 x P110)
Less credits to Investment account:
Dividends received, 2000-2003
(5,000 x P100 x 5% x 4)
Sale, 8/2006 (5,000 shares x P120)
Balance, 12/31/06 per books
P440,000
100,000
550,000
100,000
600,000
P1,090,000
700,000
P 390,000
Question No. 3
Purchase, 1/2/1999
Receipt of stock rights, 3/2/2000
Balance
Exercise of rights, 4/2/2000 (see below)
Balance
50% stock dividend, 12/2004
Balance
Sale of stock dividend, 1/2005
Balance
Stock split, 12/2005
Balance
Sale, 8/2006
Adjusted balance, 12/31/06
Cash paid (4,000/5 x P100)
Cost of stock rights
Total cost
Shares
4,000
4,000
1,000
5,000
2,500
7,500
(2,500)
5,000
5,000
10,000
(5,000)
5,000
Cost/
share
P110
103
129
108
Total cost
P440,000
(29,333)
410,667
129,333
540,000
72
72
72
540,000
(180,000)
360,000
36
36
36
360,000
(180,000)
P180,000
P 80,000
29,333
P129,333
Question No. 4
Sales proceeds (2,500 shares x P150)
Less cost of investment sold (see no. 3)
Gain on sale of stock dividend received
P375,000
180,000
P195,000
Question No. 5
Sales proceeds (5,000 shares x P120)
Less cost of investment sold (see no. 3)
Gain on sale of investment in 8/2006
120
P600,000
180,000
P420,000
Answers: 1) B; 2) C; 3) C; 4) D, 5) B
PROBLEM NO. 8
Meycauayan Inc. acquired 50,000 shares of AAA stock for P5 per share and
125,000 shares of BBB stock for P10 per share on January 2, 2005. Both
AAA Inc. and BBB Corp. have 500,000 shares of no-par common stock
outstanding. Both securities are being held as long term investments.
Changes in retained earnings for AAA and BBB for 2005 and 2006 are as
follows:
Retained earnings (deficit), 1/1/05
Cash dividends, 2005
Net income, 2005
Retained earnings, December 31, 2005
Cash dividends, 2006
Net income, 2006
Retained earnings, December 31, 2006
Market value of stock: 12/31/05
12/31/06
AAA, Inc.
P1,000,000
(125,000)
200,000
1,075,000
(150,000)
300,000
P1,225,000
BBB Corp.
(P175,000)
325,000
150,000
(50,000)
125,000
P 225,000
P7.00
6.50
P12.00
15.00
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The income from investment in AAA, Inc. in 2006 is
a. P15,000
c. P12,500
b. P 1,000
d. P
0
2. The income from investment in BBB, Inc. in 2005 is
a. P31,250
c. P2,500
b. P81,250
d. P
0
3. The carrying value of Investment in AAA, Inc. as December 31, 2006 is
a. P250,000
c. P325,000
b. P350,000
d. P252,500
4. The carrying value of Investment in BBB, Inc. as December 31, 2006 is
a. P1,250,000
c. P1,875,000
b. P1,268,750
d. P1,350,000
5. How much is the unrealized gain or loss that will be included as
component of equity as of December 31, 2006?
a. P75,000 gain
c. P25,000 gain
b. P25,000 loss
d. P
0
121
Suggested Solution:
Question No. 1
Meycauayan, Inc. owns 10% (50,000/500,000) of AAA, Inc. stock; therefore,
the cost method is used and the dividend is computed as follows:
Dividends paid by AAA, Inc. in 2006
Multiply by % ownership
Income from investment in AAA, Inc. in 2006
P150,000
10%
P 15,000
Question No. 2
Meycauayan, Inc. owns 25% (125,000/500,000) of BBB Corp. stock;
therefore, the equity method is used to record the income earned.
AAA, Inc. net income in 2005
Multiply by % ownership
Income from investment in BBB Corp. in 2005
P325,000
25%
P 81,250
Question No. 3
Investment in AAA, Inc. stock will be classified as available-for-sale securities
since the shares are held as long term investment and there is reliable fair
value. Therefore, the carrying value as of 12/31/06 is P325,000 (50,000
shares x P6.50).
Question No. 4
Acquisition cost (125,000 shares x P10)
Share in net income for 2005 (P325,000 x 25%)
Carrying value, 12/31/05
Dividends received in 2006 (P50,000 x 25%)
Share in net income for 2006 (P125,000 x 25%)
Carrying value, 12/31/06
P1,250,000
81,250
1,331,250
(12,500)
31,250
P1,350,000
Question No. 5
Fair value, 12/31/06 (50,000 shares x P6.50)
Acquisition cost (50,000 shares x P5)
Unrealized gain, 12/31/06
Answers: 1) A; 2) B; 3) C; 4) D, 5) A
122
P 325,000
250,000
P 75,000
PROBLEM NO. 9
On January 2, 2004, Norzagaray Company acquired 20% of the 400,000
shares of outstanding common stock of Imaw Corporation for P30 per
share. The purchase price was equal to Imaw’s underlying book value.
Norzagaray plans to hold this stock to influence the activities of Imaw.
The following data are applicable for 2004 and 2005:
Imaw dividends (paid Oct. 31)
Imaw earnings
Imaw stock market price at year-end
2004
P 40,000
140,000
32
2005
P 48,000
160,000
31
On January 2, 2006, Norzagaray Company sold 20,000 shares of Imaw
stock for P31 per share. During 2006, Imaw reported net income of
P120,000, and on October 31, 2006, Imaw paid dividends of P20,000. At
December 31, 2006, after a significant stock decline, which is expected to
be temporary, Imaw’s stock was selling for P22 per share. After selling the
20,000 shares, Norzagaray does not expect to exercise significant influence
over Imaw, and the shares are classified as available for sale.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Carrying value of Investment in Imaw as of December 31, 2004
a. P12,020,000
c. P2,420,000
b. P 2,500,000
d. P2,388,000
2. Carrying value of Investment in Imaw as of December 31, 2005
a. P2,442,400
c. P12,042,400
b. P2,612,000
d. P 2,372,000
3. Gain or loss on sale of Investment in Imaw on January 2, 2006
a. P2,390,600 loss
c. P33,000 loss
b. P
9,400 gain
d. P27,000 gain
4. The income from investment in BBB, Inc. in 2005 is
a. P 3,000
c. P4,000
b. P24,000
d. P
0
5. Net unrealized loss on available for sale securities as of December 31,
2006
a. P671,800
c. P639,000
b. P511,800
d. P459,000
123
Suggested Solution:
Question No. 1
Acquisition cost (400,000 x 20% x P30)
Dividends received(P40,000 x 20%)
Investment income (P140,000 x 20%)
Carrying value, 12/31/04
P2,400,000
(8,000)
28,000
P2,420,000
Question No. 2
Carrying value, 12/31/04 (see no. 1)
Dividends received (P48,000 x 20%)
Investment income (P160,000 x 20%)
Carrying value, 12/31/05
P2,420,000
(9,600)
32,000
P2,442,400
Question No. 3
Sales proceeds (20,000 x P31)
Less carrying value of investment sold
(P2,442,400 x 20/80)
Gain on sale of investment
P620,000
P
610,600
9,400
Question No. 4
Dividend income (P20,000 x 15%*)
P3,000
* [20% - (20,000/400,000 x 100%)]
Question No. 5
Carrying value, 12/31/05
Less carrying value of investment sold
Carrying value, 12/31/06 - before reclassification
Fair value of AFS, 12/31/06 [(80,000 - 20,000) x P22]
Unrealized loss on AFS
P2,442,400
610,600
1,831,800
1,320,000
P 511,800
Answers: 1) C; 2) A; 3) B; 4) A, 5) B
PROBLEM NO. 10
You were able to gather the following in connection with your audit of
Obando, Inc. On December 31, 2005, Obando reported the following
available for sale securities:
124
ERAP Corp., 10,000 shares
of common stock
(a 1% interest)
GMA Corp., 20,000 shares
of common stock
(a 2% interest)
FVR Corp., 50,000 shares of
common stock
(a 10% interest)
Total
Cost
Market
Unrealized
loss
P 250,000
P 220,000
P 30,000
320,000
300,000
20,000
1,400,000
P1,970,000
1,350,000
P1,870,000
50,000
P100,000
Additional information:


On April 1, 2006, ERAP issued 10% stock dividend when the market
price of its stock was P24 per share.
On September 15, 2006, ERAP paid cash dividend of P0.75 per share.

On August 30, 2006, GMA issued to all shareholders, stock rights on
the basis of one right per share. Market prices at date of issue were
P13.50 per share of stock and P1.50 per right. Obando sold all rights
on December 1, 2006 for net proceeds of P37,600.

On July 1, 2006, Obando paid P3,040,000 for 100,000 additional
shares of FVR Corp.’s common stock which represented a 20%
investment in FVR. The fair value of all of FVR’s identifiable assets net
of liabilities was equal to their carrying amount of P12,700,000. As a
result of this transaction, Obando owns 30% of FVR and can exercise
significant influence over FVR’s operating and financial policies.

Obando’s initial 10% interest of 50,000 shares of FVR’s common stock
was acquired on January 2, 2005 for P1,400,000. At that date, the net
assets of FVR totaled P11,600,000 and the fair values of FVR‘s
identifiable assets net liabilities were equal to their carrying amount.

Market prices per share of the securities which are all listed in the
Philippine Stock Exchange, are as follows:
12/31/2006
P23
14
31
ERAP Corp. – common
GMA Corp. – common
FVR Corp. – common
125
12/31/2005
P22
15
27

FVR reported net income and paid dividends of:
Year ended December 31, 2005
Six months ended June 30, 2006
Six months ended December 31, 2006
(dividend was paid on 10/1/2006)

Net income
P700,000
400,000
740,000
Dividend
per share
None
None
P1.30
There were no other intercompany transactions between Obando and
FVR.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Net unrealized gain or loss on available for sale securities as of
December 31, 2006
a. P95,000 gain
c. P 5,000 loss
b. P37,000 loss
d. P55,000 loss
2. Net adjustment to Retained Earnings as of January 1, 2006 as a result
of the purchase of additional shares of stock of FVR Corp.
a. P 70,000
c. P58,000
b. P210,000
d. P
0
3. Net investment income from FVR Corp. for year ended December 31,
2006
a. P237,500
c. P262,000
b. P225,000
d. P305,000
4. Carrying amount of Investment in FVR Corp. as of December 31, 2006
a. P4,674,500
c. P4,577,000
b. P4,677,000
d. P4,540,500
5. Gain on sale of stock rights on December 1, 2006
a. P
0
c. P7,600
b. P2,050
d. P5,600
Suggested Solution:
Question No. 1
Available-for-sale securities, 1/1/06
Receipt of stock rights from GMA, 8/30
(P300,000 x 1.5/15)
Reclassification of Investment in FVR
AFS, 12/31/06 before mark-to-market
126
P 1,870,000
(30,000)
(1,350,000)
490,000
Fair value of AFS, 12/31/06:
GMA [(10,000 x 1.1) x 23]
ERAP (20,000 x 14)
Decrease in unrealized loss on AFS
Unrealized loss on AFS, 12/31/05
P253,000
280,000
533,000
43,000
(P100,000 - P2,000 - P50,000)
(see note below)
Unrealized loss, 12/31/06 - as adjusted
P
48,000
5,000
Note: Alternatively, the unrealized loss on AFS can be computed by
comparing the total fair value and total cost of AFS as of December 31,
2006. Incidentally, the journal entries to record the receipt of stock rights
and reclassification of the investment in FVR follow:
Stock rights
P 32,000
Available for sale securities (P300,000 x 1.5/15)
Unrealized loss on AFS (P20,000 x 1.5/15)
Investment in associate
Available for sale securities
Unrealized loss on AFS
P30,000
2,000
P1,400,000
P1,350,000
50,000
Questions No. 2 to 4
Reclassification of investment in FVR (see no. 1)
Retroactive adjustment
(cost to equity method):
Share in NI for 2005 (P700,000 x 10%)
Adjusted balance, 1/1/06
Cost of additional 100,000 shares
Net investment income for 2006:
Share in NI for six months ended 6/30
(P400,000 x 10%)
P40,000
Share in NI for six months ended
12/31 [P740,000 x (10%+20%)]
222,000
Dividends received
[(50,000 shares + 100,000 shares) x 1.3]
Carrying value of investment in FVR, 12/31/06
P1,400,000
70,000
1,470,000
3,040,000
(2)
262,000
(3)
(195,000)
P 4,577,000
(4)
Note: The excess of cost over the book value of net assets acquired will
be attributed to Goodwill. Therefore, the excess will not affect the
investment income and the carrying value of the investment since
Goodwill is not amortized.
127
Question No. 5
Sales proceeds
Less cost of stock rights (see no. 1)
Gain on sale of stock rights
P37,600
32,000
P 5,600
Answers: 1) C; 2) A; 3) C; 4) C, 5) D
PROBLEM NO. 11
Paombong Corporation purchased P200,000 8% bonds for P184,557 on
January 1, 2004. Paombong classified the bonds as available for sale. The
bonds were purchased to yield 10% interest.
Interest is payable
semiannually on July 1 and January 1. The bonds mature on January 1,
2009. Paombong uses the effective interest method to amortize premium or
discount. On January 2, 2006, Paombong sold the bonds for P185,000
after receiving interest to meet its liquidity needs.
The market values of the bonds are as follows:
December 31, 2004
December 31, 2005
P190,449
186,363
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Interest income for the year 2004
a. P14,869
b. P16,000
c. P18,517
d. P18,456
2. Unrealized gain on AFS as of December 31, 2004
a. P3,436
c. P5,892
b. P3,375
d. P
0
3. Interest income for the year 2005
a. P18,775
b. P15,272
c. P16,000
d. P18,701
4. Unrealized gain or loss on AFS as of December 31, 2005
a. P8,053 gain
c. P3,351 gain
b. P3,486 loss
d. P1,806 loss
5. Realized gain or loss on sale of AFS on January 2, 2006
a. P6,861 loss
c. P4,849 loss
b. P4,714 loss
d. P9,416 gain
128
Suggested Solution:
Question No. 1
The following amortization schedule will be useful in computing for the
requirements:
Date
01/01/04
07/01/04
12/31/04
07/01/05
12/31/05
07/01/06
12/31/06
07/01/07
12/31/07
07/01/08
12/31/08
Effective
interest
P9,228
9,289
9,354
9,421
9,492
9,567
9,645
9,728
9,814
9,905
Nominal
interest
P8,000
8,000
8,000
8,000
8,000
8,000
8,000
8,000
8,000
8,000
Discount
amortization
P1,228
1,289
1,354
1,421
1,492
1,567
1,645
1,728
1,814
1,905
1/1/04 to 6/30/04 (see amortization schedule)
7/1/04 to 12/31/04 (see amortization schedule)
Total interest income for 2004
Carrying
value
P184,557
185,785
187,074
188,428
189,849
191,341
192,908
194,553
196,281
198,095
200,000
P 9,228
9,289
P18,517
Note: PAS 39 par. 55(b) states that a gain or loss on an available-for-sale
financial asset shall be recognized directly in equity, through the
statement of changes in equity, except for impairment losses and foreign
exchange gains and losses, until the financial asset is derecognized, at
which time the cumulative gain or loss previously recognized in equity
shall be recognized in profit or loss. However, interest calculated
using effective interest method shall be recognized in profit or
loss.
Question No. 2
Fair value the bonds, 12/31/04
Carrying value, 12/31/04 (see amortization schedule)
Unrealized gain on AFS, 12/31/04
P190,449
187,074
P 3,375
Question No. 3
1/1/05 to 6/30/05 (see amortization schedule)
7/1/05 to 12/31/0 (see amortization schedule)
Total interest income for 2005
129
P 9,354
9,421
P18,775
Question No. 4
Fair value the bonds, 12/31/05
Carrying value, 12/31/05 (see amortization schedule)
Unrealized loss on AFS, 12/31/05
P186,363
189,849
(P 3,486)
Incidentally, the adjusting entry on 12/31/05 follows:
Unrealized gain on AFS
Unrealized loss on AFS
Available for sale securities
P 3,375
3,486
P6,861
Question No. 5
Sales proceeds
Unrealized loss on AFS
Net
Carrying value, 12/31/05 (fair value)
Realized loss on sale of AFS
P185,000
( 3,486)
181,514
186,363
(P 4,849)
Note: PAS 39 par. 26 states that on derecognition of a financial asset in
its entirety, the difference between (a) the carrying amount and (b) the
sum of the consideration received and any cumulative gain or loss
recognized directly in equity, shall be recognized in profit or loss.
Incidentally, the journal entry to record the sale is:
Cash
Realized loss on sale of AFS
Available for sale securities
Unrealized loss on AFS
P185,000
4,849
P186,363
3,486
Answers: 1) C; 2) B; 3) A; 4) B, 5) C
PROBLEM NO. 12
On June 1, 2005, Pandi Corporation purchased as a long term investment
4,000 of the P1,000 face value, 8% bonds of Violet Corporation. 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, 2011. Pandi uses
the effective interest method of amortization. On November 1, 2006, Pandi
sold the bonds for a total consideration of P3,925,000. Pandi intended to
hold these bonds until they matured, so year-to-year market fluctuations
were ignored in accounting for bonds.
130
QUESTIONS:
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, 2005 is
a. P3,645,328
c. P3,696,736
b. P3,691,132
d. P3,624,596
2. The interest income for the year 2005 is
a. P215,850
c. P212,829
b. P215,521
d. P211,612
3. The carrying value of the investment in bonds as of December 31, 2005
is
a. P3,725,919
c. P3,719,986
b. P3,649,541
d. P3,671,490
4. The interest income for the year 2006 is
a. P306,607
c. P311,218
b. P310,715
d. P304,748
5. The gain on sale of investment in bonds on November 1, 2006 is
a. P21,196
c. P 27,632
b. P80,235
d. P104,045
Suggested Solution:
Question No. 1
PV of principal (P4,000,000 x 0.5568)
PV of interest [(P4,000,000 x 4%) x 8.8633]
Purchase price
P2,227,200
1,418,128
P3,645,328
Question No. 2
June 1 to Nov. 30 (P3,645,328 x 10% x 6/12)
Dec. 1 to Dec. 31 (P3,667,594a x 10% x 1/12)
Total interest income for 2005
a Computation
P182,266
30,563
P212,829
of carrying value,12/1/05:
Carrying value, 6/1/05
Add discount amortization,
6/1/05 to 11/30/05:
Effective interest (P3,645,468 x 10% x 6/12)
Nominal interest (P4,000,000 x 8% x 6/12)
Carrying value, 12/1/05
131
P3,645,328
P182,266
160,000
22,266
P3,667,594
Question No. 3
Carrying value, 12/1/05 (see no. 2)
Add discount amortization,
12/1/05 to 12/31/05:
Effective interest (P3,667,594 x 10% x 1/12)
Nominal interest (P4,000,000 x 8% x 1/12)
Carrying value, 12/31/05
P3,667,594
P30,563
26,667
3,896
P3,671,490
Question No. 4
Jan. 1 to May 31 (P3,667,594 x 10% x 5/12)
June 1 to Nov. 1 (P3,690,974b x 10% x 5/12)
Total interest income for 2006
b
P152,816
153,791
P306,620
Computation of carrying value,6/1/06:
Carrying value, 12/1/05
Add discount amortization,
12/1/05 to 5/31/06
Effective interest (P3,667,594 x 10% x 6/12)
Nominal interest (P4,000,000 x 8% x 6/12)
Carrying value, 6/1/06
P3,667,594
P183,380
160,000
23,380
P3,690,974
Question No. 5
Total proceeds
Less accrued interest (P4,000,000 x 8% x 5/12)
Sales proceeds
Less carrying value, 11/1/06 (see below)
Gain on sale on investment in bonds
P3,925,000
133,333
3,791,667
3,711,432
P
80,235
Computation of carrying value,11/1/06:
Carrying value, 6/1/06 (see no. 4)
Add discount amortization,
6/1/06 to 11/1/06
Effective interest (P3,690,974 x 10% x 5/12)
Nominal interest (P4,000,000 x 8% x 5/12)
Carrying value, 11/1/06
Answers: 1) A; 2) C; 3) D; 4) A, 5) B
132
P3,690,974
P153,791
133,333
20,468
P3,711,432
PROBLEM NO. 13
On May 1, 2003, Plaridel Corporation acquired P1,600,000 of J & B
Corporation 9% bonds at 97 plus accrued interest. Interest on bonds is
payable semiannually on March 1 and September 1, and bonds mature on
September 1, 2006. Plaridel intends to hold these bonds until they
matured.
Due to an isolated event that is beyond Plaridel’s control, is non-recurring
and could not have been reasonably anticipated by Plaridel, the company
sold bonds of P480,000 for 103 plus accrued interest on May 1, 2004.
On July 1, 2005, bonds of P640,000 were exchanged for 90,000 shares of J
& B Corporation, common, no par value, quoted on the market on this date
at P8 per share. Interest was received on bonds to date of exchange.
On September 1, 2006, remaining bonds were redeemed and accrued
interest was received.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
(Use the straight line amortization method)
1. Total interest income for 2003 is
a. P96,000
b. P86,400
c. P105,600
d. P106,800
2. The carrying value of the investment in bonds as of December 31, 2003
is
a. P1,561,600
c. P1,562,800
b. P1,540,000
d. P1,564,000
3. The gain on sale of the bonds on May 1, 2004 is
a. P
0
c. P 2,880
b. P4,320
d. P24,480
4. The gain on exchange the bonds on July 1, 2005 is
a. P
0
c. P57,920
b. P86,720
d. P73,280
5. Total cash received by the company on September 1, 2006 is
a. P501,600
c. P480,000
b. P523,200
d. P508,800
133
Suggested Solution:
Question No. 1
Nominal interest (P1,600,000 x 9% x 8/12)
Discount amortization for 2003 (P48,000 x 8/40)
Total interest income for 2003
P 96,000
9,600
P105,600
Question No. 2
Carrying value, 5/1/03 (P1,600,000 x 97%)
Add discount amortization for 2003 (see no. 1)
Carrying value, 12/31/03
P1,552,000
9,600
P1,561,600
Question No. 3
Selling price (P480,000 x 1.03)
Less carrying value of bonds sold:
Face value
Less unamortized bond discount, 5/1/04
to 9/1/06 (P48,000 x 480/1,600 x 28/40)
Gain on sale of investment in bonds
P494,400
P480,000
10,080
469,920
P 24,480
PAS 39 par. 52 states that whenever sales or reclassifications of more than an
insignificant amount of held-to-maturity investments do not meet any of the
conditions in par. 9, any remaining held-to-maturity investments shall be
reclassified as available for sale. Since the sale of the bonds on May 1, 2004 is
due to an isolated event that is beyond Plaridel’s control, is non-recurring and
could not have been reasonably anticipated by Plaridel, the investment is not
required to be reclassified as available for sale.
Question No. 4
Fair value of stocks received (P90,000 x P8)
Less carrying value of bonds exchanged:
Face value
Less unamortized bond discount, 7/1/05
to 9/1/06 (P48,000 x 640/1,600 x 14/40)
Gain on exchange of bonds
P720,000
P640,000
6,720
633,280
P 86,720
Question No. 5
Face value of remaining bonds
(P1,600,000 - P480,000 - P640,000)
Interest, 3/1/06 to 9/1/06 (P480,000 x 9% x 6/12)
Total cash received, 9/1/06
Answers: 1) C; 2) A; 3) D; 4) B, 5) A
134
P480,000
21,600
P501,600
PROBLEM NO. 14
Pulilan Company’s accounting records showed the following investments at
January 1, 2006:
Common stock:
Jang Company (1,000 shares)
Geum Company (5,000 shares)
Parking lot (leased to Jewel Company)
Trademark
Total investments
P
500,000
5,000,000
2,500,000
2,000,000
P10,000,000
Additional information:

Pulilan owns 1% of Jang and 30% of Geum. During the year ended
December 31, 2006, Pulilan received cash dividends of P350,000 from
Jang and P750,000 from Geum, whose 2006 net earnings were
P4,000,000 and P10,000,000 respectively.

The Jewel lease which commenced on January 1, 2005 is for 5 years at
an annual rental of P1,250,000. In addition, on January 1, 2005,
Jewel paid a nonrefundable deposit of P400,000 as well as a security
deposit of P250,000, to be refunded upon expiration of lease. Pulilan
received P1,250,000 rent from Jewel in 2006.

The trademark was licensed to Palace Company for royalties of 10% of
sales of the trademark items. Royalties are payable semiannually on
March 1, for sales in July through December of the prior year, and on
September 1, for sales in January through June of same year. On
March 1, 2005 and 2006, Pulilan received royalties of P500,000 and
P750,000, respectively. On September 1, 2005 and 2006, Pulilan
received royalties of P1,000,000 and P1,500,000 respectively. Palace
Company’s sales of the trademarked items totaled P4,000,000 for the
last half of 2006.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Total income from investments in equity securities
a. P3,350,000
c. P4,100,000
b. P1,100,000
d. P3,000,000
2. Rent income for 2006
a. P1,250,000
b. P1,330,000
c. P1,650,000
d. P1,380,000
135
3. Royalty income for 2006
a. P1,500,000
b. P2,000,000
c. P2,500,000
d. P1,900,000
Suggested Solution:
Question No. 1
Dividend income from Jang
Investment income from Geum (P10,000,000 x 30%)
Total income from investments in equity securities
P 350,000
3,000,000
P3,350,000
Question No. 2
Annual rental
Amortization of lease bonus (P400,000/5)
Rent income for 2006
P1,250,000
80,000
P1,330,000
Question No. 3
January to June 2006
July to December 2006 (P4,000,000 x 10%)
Royalty income for 2006
P1,500,000
400,000
P1,900,000
Answers: 1) A; 2) B; 3) D
PROBLEM NO. 15
Select the best answer for each of the following:
1. Which of the following is not a control that is designed to protect
investment securities?
a. Access to securities should be vested in more than one individual.
b. Securities should be properly controlled physically in order to
prevent unauthorized usage.
c. Securities should be registered in the name of the owner.
d. Custody over securities should be limited to individuals who have
recordkeeping responsibility over the securities.
2. Which of the following controls would a company most likely use to
safeguard investment securities when an independent trust agent is not
employed?
a. The chairman of the board verifies the investment securities, which
are kept in a bank safe deposit box, each year on the balance sheet
date.
136
b. The investment committee of the board of directors periodically
reviews the investment decisions delegated to the treasurer.
c. Two company officials have joint control of investment securities,
which are kept in a bank safe deposit box.
d. The internal auditor and the controller independently trace all
purchases and sales of investment securities from the subsidiary
ledgers to the general ledger.
3. Which of the following controls would an entity most likely use to assist
in satisfying the completeness assertion related to long-term
investments?
a. The controller compares the current market prices of recorded
investments with the brokers’ advices on file.
b. Senior management verifies that securities in the bank safe deposit
box are registered in the entity’s name.
c. The internal auditor compares the securities in the bank safe
deposit box with recorded investments.
d. The treasurer vouches the acquisition of securities by comparing
brokers’ advices with canceled checks.
4. Which of the following controls would an entity most likely use in
safeguarding against the loss of investment securities?
a. A designated member of the board of directors controls the
securities in a bank safe deposit box.
b. An independent trust company that has no direct contact with the
employees who have record-keeping responsibilities has possession
of securities.
c. The internal auditor verifies the investment securities in the entity’s
safe each year on the balance sheet date.
d. The independent auditor traces all purchases and sales of
investment securities through the subsidiary ledgers to the general
ledger.
5. When negotiable securities are of considerable volume, planning by the
auditor is necessary to guard against
a. Substitution of securities already counted for other securities which
should be on hand but are not.
b. Substitution of authentic securities with counterfeit securities.
c. Unauthorized negotiation of the securities before they are counted.
d. Unrecorded sales of securities after they are counted.
6. In auditing investments for proper valuation, the auditor should do all
but the following:
137
a. Vouch purchases and sales of securities by tracing to brokers'
advices and canceled checks.
b. Compare cost and market by reference to year end market values
for selected securities.
c. Confirm securities held in safekeeping off the client's premises.
d. Recalculate gain or loss on disposals.
7. An audit procedure that provides evidence about proper valuation of
trading securities arising from a short-term investment of excess cash
is
a. Recalculation of investment carrying value by applying the equity
method.
b. Comparison of carrying value with current market quotations.
c. Confirmation of securities held by broker.
d. Calculation of premium or discount amortization.
8. The auditee has acquired another company by purchase. Which of the
following would be the best audit procedure to test the appropriateness
of the allocation of cost to tangible assets?
a. Evaluate procedures used to estimate and record fair market values
for purchased assets.
b. Determine whether assets have been recorded at their book value at
the date of purchase.
c. Evaluate the reasonableness of recorded values by discussion with
operating personnel.
d. Evaluate the reasonableness of recorded values by use of
replacement cost data.
9. The auditee has just acquired another company by purchasing all its
assets. As a result of the purchase, "goodwill" has been recorded on
the auditee's books. Which of the following comparisons would be the
most appropriate audit test for the amount of recorded goodwill?
a. The purchase price and the fair market value of assets purchased.
b. The purchase price and the book value of assets purchased.
c. The figure for goodwill specified in the contract for purchase.
d. Earnings in excess of 15% of net assets for the past five years.
10. Of the following, which is the most efficient audit procedure for testing
accrued interest earned on bond investments?
a. Vouching the receipt and deposit of interest checks.
b. Tracing interest declarations to an independent record book.
c. Recomputing interest earned.
d. Confirming interest rate with the issuer of the bonds.
Answers: 1) D; 2) C; 3) C; 4) B, 5) A; 6) C; 7) B; 8) A; 9) A; 10) C
138