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 ,0 00. Angat classified these bonds
as a trading security.
Jul. 1 Received semiannual interest on the RP Treasury Bonds.
Aug. 1 Sold P 500 ,0 00 of RP Treasury 7% bonds at 10 3 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. P45 per share Malolos Company P130 per share RP Treasury 7% bonds 10 2
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 3,0 00 Malolos shares on October 1, 2006
a. P18,150 loss
c. P 2,000 gain
b. P18,150 gain
d. P21,000 gain
3. What amount of unrealized gain should be shown as component of income in 2006?
a. P92,500
c. P74,
b. P97,000
d. P80,
4. What amount of unrealized gain should be shown as component of equity as of December
31, 2006?
a. P68,850
c. P66,
b. P85,000
d. P 0
Suggested Solution:
Question No. 1
Sales proceeds (P500,000 x 1) P515, Less cost of RP Treasury bonds sold (P500,000 x 1)* 512
,5 00 Gain on sale of P500,000 RP Treasury Bonds 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. brokerage fees) should be expensed for trading securities.
Question No. 2
Sales proceeds (3,000 shares x P132) P396, Less cost of shares sold {[(20,000 x P125) +
P19,000] x 3/20} 377 ,85 0 Gain on sale of 3,000 Malolos shares P 18 ,
Question No. 3
Cost of Bulacan Auto Co. shares (20,000 x P40) P 800 ,00 0 Cost of RP Treasury 7% bonds
(P2,000,000 x 1) 2,050, Cost of P500,000 RP Treasury bonds sold (see no. 1) ( 512,5 00 )
Trading securities, 12/31/06 before mark-to -market 2,337,50 0 Fair value of trading securities,
12/31/06 (see below) 2,430, Unrealized gain on TS to be reported on the IS P 92 ,
Bulacan Auto Co. (20,000 x P45) P 900, RP Treasury 7% bonds (P1,500,000 x 1) 1,530, Fair
value of trading securities, 12/31/06 P2,430,
July 1 Ces paid a P2 per share dividend on its common stock.
Market prices per share of the securities were as follows:
12/31/2006 12/31/ France Corp., preferred 92 97. France Corp., common 42 38. Ces, Inc.,
common 22 24. Coo Co., common 40 45.
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. P11 2,500 c. P 140 , b. P281 ,2 50 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 2,5 00 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.
P10 1, 375 d. P 364 ,3 75
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, b. P67 ,773 d. P 0
Suggested Solution:
Question No. 1
Sales proceeds (12,500 shares x P33) P421, Less CV of Ces shares sold (12/30 x P742,500) 309 ,
Gain on sale of 12,500 Ces shares P112,
Question No. 2
Sales proceeds (2,500 shares x P45) P112, Less CV of Coo shares sold (P450,000 x
2,500/11,000*) 102 , Gain on sale of 2,500 Coo shares P 10 ,
* total number of shares after 10% stock dividends (10,000 x 1)
Question No. 3
Fair value of preferred stock (2,500 shares x P78) P196, Less CV of shares converted (P487,500
x 2/5) 243 ,7 50 Loss on conversion of 2,500 France preferred shares P 46 ,
Question No. 4
From France (5,000 shares x P2 x 2) P25, From Ces [(30,000 - 12,500) x P2) 39 , Total dividend
income in 2006 P64 ,
Question No. 5
Trading securities, 1/1/06 P1, 680 , CV of Ces shares sold (see no. 1) (309,375) CV of Coo
shares sold (see no. 2) (102,273) CV of France preferred shares converted (see no. 3) (243,750)
Cost of 7,500 France common shares received (see no. 3) 196, Trading securit ies, 12/31/06
before mark-to -market 1,221, Fair value of trading securities, 12/31/06 (see below) 1,289,
Unrealized gain on trading securities P 67,
France Corp., preferred [(5,000 - 2,500) x P92] P 230, France Corp. – Common (7,500 x P42)
320 , Ces, Inc., common [(30,000 - 12,500) x P22] 393 , Coo Co., common {[(10,000 x 1) 2,500] x P40} 344 , Fair value of trading securities, 12/31/06 P1, 289 ,
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:
Suggested Solution:
Less CV of investment sold
Adjusted cost P880,0 00 *



5. Carrying value of Trading Securities as of December 31,
o a. P768,000 c. P880,
o b. P852,000 d. P768,
Question No. - Sales proceeds P360, - Less CV of shares sold (P1,200,000 x 1,600/4,800)
400 ,0 - Loss on sale of 1,600 Luck shares on 3/1/06 P 40 ,0
Question No. - Total proceeds P784, - Less dividends sold (3,200 shares x P30) 96, Sales proceeds 688 , - 640 ,0 (P880,000* x 3,200/4,400**) - Gain on sale of 3,200 Good
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

shares on 9/15/06 P 48 ,0 - Total cash paid P960, Computation of adjusted cost of Good
Co. shares - Less purchased dividend (4,000 x P20) 80,
Question No. **After 10% stock dividend - Sales proceeds P184, - Less CV of investment
sold (P880,000 x 800/4,400) 160 ,0 - Gain on sale of 800 Good shares on 10/1/06 P 24 ,0
Question No.
o Dividend income - Declared Aug. 1 (4,400 shares x P30) P132,
Question No. - Good Co. [(4,000 x 1) - 3,200 - 800] = 400 x P210 P 84, - Luck Co.
(4,800 - 1,600) = 3,200 x P240 768 ,0 - Carrying value of trading securities, 12/31/06
P852,0
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:
Available for Sale Securities Date Description Ref. Debit Credit 01/
03/
04 /0 3
12/
Purchased 20,000 shares common, par value P50, BUSTOS Co. 10 ,000 shares BUSTOS Co.
received as stock dividend Sold 10 ,000 shares @ P Sold 4,000 shares @ P
VRCJCRCR78 0,
500,
25 0,
240,
Dividend Income Date Description Ref. Debit Credit 03/ 08 /
Stock dividend BUSTOS Company common
SJ CR500,
10 0,
The following information was obtained during your examination:
1. From independent sources, you determine the following dividend information:
Type of Dividend
Date Declared
Date of Record
Date of Payment Rate Stock Cash Cash
02/14/
08/01/
12/01/
02/28/
08 /15/
12/15/
03/30/
08 /30 /
01/02/
50%
P5/share 20%
2. Closing market quotation as at December 31, 2006:
Bid Asked BUSTOS Company common 13 -3/4 16 -1/
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. P14 0,000 loss
b. P10 ,000 gain d. P 0
2. How much is the gain on the December 2, 2006 sale? a. P13 6,000 c. P84, b. P 96,000 d.
P0
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 P780, CV of 10,000 shares sold, 4/3 (see no. 1) (260,000) CV of 4,000 shares
sold, 12/2 (see no. 2) (104,000) AFS, 12/31/06 before mark-to -market 416, Fair value of AFS,
12/31/06 220, Unrealized loss on AFS, 12/31/06 P196,0 00
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 Shares Cost Market Sputnik, Inc. 4,800 P 72,000 P 92, 000 Explorer, Inc. 8,000 216
,000 144, 10% , P100,000 face value , Vanguard bonds (interest payable semiannually on Jan. 1
and Jul. 1) 79, 81, Total P367,200 P317, 720
Available-for-sale securities:
Security Shares Cost Market Score Products 16,000 P 688,000 P 720,0 00 Tiros, Inc. 120,000
3,120,000 2,920, Midas, Inc. 40,000 480 ,0 00 640 ,00 0 Total P4,288,0 00 P4,280,00 0
Held to maturity:
Cost Book value 12%, 1,000,000 face value, Discoverer bonds (interest payable annually every
Dec. 31) P950, P963,
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. P22 per share Explorer, Inc. P15 per share 10% Vanguard bonds P75, Score
Products P42 per share Tiros, Inc. P28 per share Midas, Inc. 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 1,6 00 Midas, Inc. shares on May 15, 2006 a. P4,8 00 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. P 144 ,8 20 b. P125,560 d. P143,
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, b. P32,180 d. P
0
Question No. 4
Carrying value, 12/31/05 P 963 ,
Add discount amortization in 2006: Effective interest (P963,000 x 14%) P134, Nominal interest
(P1,000,000 x 12%) (120,000) 14 , 820 Carrying value, 12/31/06 977 , Fair value of Discoverer
bonds on 12/31/06 (P1 ,000,000 x 1) 1, 010, Unrealized gain on transfer of securities to be
reported under SHE P 32 ,
Question No. 5
Trading securities Sputnik, Inc. (4,800 x P22) P105, Explorer, Inc. [(8,000 - 4,000) x P15] 60,
10% , P100,000 face value , Vanguard bonds 75 ,60 0 Total market value P241,
Available-for-sale securities Score Products (16,000 x P42) P 672, Tiros, Inc. (120,000 x P28)
3,360, Midas, Inc. [(40,000 - 1,600) x P18] 691,2 00 Discoverer bonds (P1,000,000 x 1) 1,010,00
0 Total market value 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 Transactions Shares Debit Credit 9/01 Purchase 40,000 P2,000, 9/30 Cash
dividends to stockholders of record 9/ 15, declared 8/ 15 P 100, 10/ 01 Purchase 100,000 5,000,
10/15 Sale at P 40,000 2,000,
Hugo Corp.. Date Transactions Shares Debit Credit 11/ 30 Cash collected for sale made on
11/10, after a 11/1 declaration of P cash dividend per share to stockholders on record as of 12/ 1
40, 6,600, 12/ 15 Cash dividend received. 300, Totals P7,000,000 P9,000,
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,
b. P700,000 d. P2,057,
2. The gain on sale of 40,000 shares of Hugo Corp. on November 10 is a. P4,400,000 c.
P2,000, b. P4,800,000 d. P4,600,
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,
4. The gain on sale of investment in Pugo Corp. is a. P1,312,500 c. P687, b. P 537,500 d.
P612,
5. The carrying value of the Company’s investment in Pugo Corp. on December 31, 2006 is
a. P2,612,500 c. P2, 687, b. P2,762,500 d. P1,987,
Note: Since the client's equity was reduced to 15%, it was as sumed 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 200 4. 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 200 5 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.
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, b. P29,333 d. P25,
2. The unadjusted balance of Investment in Sta. Maria stock on December 31, 2006 is a.
P940,000 c. P390, b. P490,000 d. P430,
3. The adjusted balance of Investment in Sta. Maria stock on December 31, 2006 is a. P13
5,000 c. P180, b. P360,000 d. P270,
4. The gain on the sale of stock dividend received in December 2004 is a. P100,000 c. P 80,
b. P105,000 d. P195,
5. The gain on sale of the shares sold in August 2006 is a. P240,000 c. P120, b. P420,000 d.
P870,
Suggested Solution:
Question No. 1
Cost allocated to stock rights (P10*/P150 x P440,000) P29,
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)/ = P10*
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:
AAA, Inc. BBB Corp. Retained earnings (deficit), 1/1/05 P1,000,000 (P175,000) Cash
dividends, 2005 (125,000) - Net income, 2005 200,000 325 , Retained earnings, December 31,
2005 1,075,000 150, Cash dividends, 2006 (150,000) (50,000) Net income, 2006 300,000 125 ,
Retained earnings, December 31, 2006 P1,225,000 P 225,
Market value of stock: 12/31/05 P7 P12. 12/31/06 6 15.
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, b. P 1,000 d. P 0
2. The income from investment in BBB, Inc. in 2005 is a. P31,250 c. P2, b. P81,250 d. P 0
3. The carrying value of Investment in AAA, Inc. as December 31, 2 006 is a. P250,000 c.
P325, b. P350,000 d. P252,
4. The carrying value of Investment in BBB, Inc. as December 31, 2006 is a. P1,250,000 c.
P1,875, b. P1,268,750 d. P1,350,
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
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 P150, Multiply by % ownership 10% Income from
investment in AAA, Inc. in 2006 P 15 ,0 00
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 P325, Multiply by %
ownership 25% Income from investment in BBB Corp. in 2005 P 81 ,
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, shares x P6).
Question No. 4
Acquisition cost (125,000 shares x P10) P1,250, Share in net income for 2005 (P325,000 x 25%)
81, Carrying value, 12/31/05 1,331,25 0 Dividends received in 2006 (P50,000 x 25%) (12,500)
Share in net income for 2006 (P125,000 x 25%) 31, Carrying value, 12/31/06 P1,350,0 00
Question No. 5
Fair value, 12/31/06 (50,000 shares x P6) P 325,00 0 Acquisition cost (50,000 shares x P5) 250,
Unrealized gain, 12/31/06 P 75 ,
Answers: 1) A ; 2) B ; 3) C ; 4) D , 5) A
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