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APPLIED AUDITING
INVESTMENT

PROF. U.C. VALLADOLID

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. Angel Co.'s portfolio of trading securities includes the following on December 31, 2020:

Cost Fair Value

15,000 ordinary shares of Kris Co. 1,431,000 1,251,000

30,000 ordinary shares of Tris Co. 1,638,000 1,710,000
3,069,000 2,961,000

All of the above securities have been purchased in 2020. In 2021, Angel Co. completed the following securities
transactions:

Mar. 1 Sold 15,000 shares of Kris Co. ordinary shares at P93, less brokerage commission of P13,500.
April 1 Bought 1,800 ordinary shares of Ozz, Inc. at P135 plus commission, taxes, and other transaction costs
of P4,950.

The Angel Co. portfolio of trading securities appeared as follows on December 31, 2021:
Cost Fair Value
30,000 ordinary shares of Tris Co. 1,638,000 1,740,0001
1,800 ordinary shares of Ozz, Inc. 247,950 225,0002
1,885,950 1,965,000

1 Net of P19,500 estimated transaction costs that would be incurred on sale of the securities.
2 Net of P4,500 transaction costs blat would be Incurred on the sale of the securities.

1. What amount of unrealized gain on these securities should be reported in the 2021 income statement?
a. 31,050
b. 79,050
c. 84,000
d. 36,000

2. What is the gain on the sale of Kris Co. ordinary shares on March 1, 2021?
a. 144,000
b. 27,000
c. 130,500
d. 13,500

3. What amount should be reported as trading securities in Angel's statement of financial position on December 31, 2021?
a. 1,965,000
b. 1,989,000
c. 1,885,950
d. 1,909,905
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2. At December 31, 2020, Ivan, Inc. reported as financial assets at fair value though profit or loss the following marketable
equity secutirites:

Seattle Company ordinary share, P10 par, 2,000 shares P28,400

Grunge Co. preference share, P50, 1,200 shares P78,000

An analysis of transactions during 2021 relating to the account “Trading Securities” reveals the following:

A 20% bonus issue was declared by Seattle Co. when each ordinary share has a market value of P12 per share.
Ivans recorded the dividend as a debit to investment with a corresponding credit to dividend income at the total
market value of the shares received.
Subsequent to the receipt of the bonus issue, 400 shares of Seattle were sold at P12 per share, the proceeds of
the sale were credited to the account.
A 10% cash dividend from Grunge Company was received and recorded on January 15, 2021. The said dividend
was declared on December 15, 2020.
1,500 ordinary shares of Cobain, Inc. were purchased during 2021 at P21 per share. Broker’s commission of
P2,800 was recorded as operating expenses.
800 shares of Nirvana Co. were purchased on April 1, 2021, for the purpose of affiliation. Nirvana has 4,000
shares outstanding throughout the year. The company does not intend to sell the said shares in the near future.
The shares were recorded at the purchase price of P50 per share. Broker’s commission of P5,400 was recorded
as operating expenses. Nirvana reported net income of P50,000 during the year 2021.
There were no other investments during the year.
Market value per share as of December 31, 2021 are as follows: Seattle ordinary, P14; Grunge preference, P64;
Cobain ordinary, P21; and Nirvana ordinary P52.
Related unadjusted account balances per books as of December 31, 2021 are as follows: Other Operating Income
P53,200 and Operating Expenses P764,000.
1. Trading Securities at December 31, 2021

a. P133,167 c. P104,800
b. P136,300 d. P135,000

2. Total Dividend Income for the year 2021

a. P7,800 c. P7,680
b. P6,000 d. 0

3. Investment in Associate as of December 31, 2021

a. P52,900 c. P41,000
b. P47,500 d. P52,000

4. What is the income from Associate in year 2021?

a. 2,500 c. 7,500
b. 72,500 d. 77,500

5. What is the Operating Expenses for the year 2021?

a. 769,400 c. 764,000
b. 758,600 d. 730,000

6. Unrealized Gain or Loss on Trading Securities taken to profit or loss?

a. P 5,533 c. 4,333
b. P 3,133 d. 1,200
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3. On January 1, Year 3, Inna Corporation had 30,000 ordinary shares of NPE Company acquired during Year 2 for a total
consideration of P1,800,000 , including P30,000 directly attributable costs. On December 31, Year 2, the NPE shares
were selling at P65 per share. I

In July Year 3, Inna Corporation received a 20% bonus issue. Subsequently, it sold 15,000 shares at 70 per share.
Market value of NPE ordinary at December 31, Year 3 was P72 per share.

The shares were designated at Equity Investments at Fair Value through Other Comprehensive Income.

1. What total amount shall be reported in profit or loss in the statement of comprehensive income for Year 3?
a. P237,500
b. P374,500
c. P612,000
d. P0

2. How much total income shall be reported in profit or loss in the statement of comprehensive income for Year 3 as a
result of this investment?
a. P1,050,000
b. P462,000
c. P1,512,000
d. P0

3. At what amount should the investment be shown on December 31, Year 3 statement of financial position?
a. P1,050,000
b. P462,000
c. P1,512,000
d. P0

4. What is the amount that will be shown in the equity section of the statement of financial position at December 31, Year
3 relating to the investment account?
a. P1,050,000
b. P462,000
c. P1,512,000
d. P252,000

4. Harry Corporation had the following portfolio of equity investment at fair value through other comprehensive income at
December 31, Year 2:

Purchase Price FV 12/31/Year 2

Jackson ordinary shares (5,000) 225,000 P250,000
Monterey preference (3,500) 133,000 140,000
Garcia ordinary shares (1,000) 180,000 178,000

On April 30, Year 3, Harry sold all the Jackson shares at P54 per share. In addition, on July 31, Year 3, 3,000 of Barney
Corporation shares were acquired at P59.

The December 31, Year 3 fair values were: Monterey, P135,000; Garcia, P190,000; and Barney, P200,000.

Harry has the policy of transferring the equity account to retained earnings at the date the equity investment is
derecognized.

1. How much gain or loss shall be recognized on the sale of Harry shares on April 30, Year 3?
a. P20,000
b. P25,000
c. P30,000
d. 0
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2. What should be the cumulative balance of Unrealized Gains and Losses on Equity Investments at December 31, Year
3?
a. P23,000
b. P25,000
c. P33,000
d. P35,000

5. On December 31, 2020, Daihatsu, Inc. reported as equity investments at fair value through other comprehensive income
the following equity securities:

Cost Fair Value

Alaska Corp., 5,000 ordinary shares (a 1% interest) P125, 000 P 110, 000
Bahamas Corp., 10, 000 ordinary shares (a 2% interest)
160, 000 180, 000
Canada Corp., 25, 000 ordinary shares (a 10% interest) 700, 000 750, 000
Total P985, 000 P1, 040, 000

Additional information:

On May 1, 2021, Alaska issued a 10% bonus issue, when, the market price of each share was P24.

On November 1, 2021, Alaska paid a cash dividend of P0.75 per share.

On July 1, 2021, Daihatsu paid P1, 520, 000(at fair value) for P50, 000 additional shares of Canada Corporation’s ordinary
shares which represented a 20% investment in Canada. The fair value of all Canada’s identifiable assets net of liabilities
was equal to their carrying amount of P6, 350, 0000. As a result of this transaction, Daihatsu owns 30% of Canada and can
exercise significant influence over Canada’s operating and financial policies.

Daihatsu’s initial 10% interest of 25, 000 shares of Canada’s was acquired on January 2, 2016 for P700, 000. At
that date, net assets of Canada totaled P5, 800, 000 and the fair value of Canada’s identifiable assets net of
liabilities was equal to their carrying amount.

Market prices per share of the equity securities, all listed on a national securities exchange, were as follows:

December 31, 2021

Alaska Corporation- ordinary P23
Bahamas Corporation- ordinary P19
Canada Corporation – ordinary P29

Canada reported Profit and paid dividends of:

Profit Dividends per

share
Year ended 12/31/2020 P350, 000 None
Six months ended 6/30/2021 200, 000 None
Six months ended 12/31/2021 370, 000 P1.30

There were no other intercompany transactions between Daihatsu and Canada. Daihatsu has the policy of transferring to
Retained Earnings the Unrealized Gains and Losses relating to equity disposed of.

1. What is the balance of the Net Unrealized Gain or Loss on Equity Investments at fair value through Other
Comprehensive Income at December 31, 2020?
a. P126, 500 c. P55, 000
b. P10, 000 d. P0

2. What amount of dividend income shall be presented in the profit or loss section of the statement of
comprehensive income for the year 2021?
a. P4, 125 c. P36, 625
b. P12, 425 d. P48, 625
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3. What amount, if any, should Daihatsu, Inc. report in its profit or loss as Income from Associate- Canada
Corporation for the year ended December 31, 2021?
a. P131, 000 c. P 74, 000
b. P171, 000 d. P111, 000

4. At what amount should the Investment in Associate-Canada Corporation be reported in Daihatsu’s

December 31, 2021 statement of financial position?
a. P2, 313, 500 c. P2, 293, 500
b. P2, 353, 500 d. P2, 256, 500

5. At what amount should the equity Investments at Fair Value be shown on the statement of financial
position at December 31, 2021?
a. P1, 040, 000 c. P316, 500
b. P290, 00 d. P414, 000

6. What should be the balance of the Net Unrealized Gains or Losses on Equity Investments at December 31,
2021?
a. P55, 000 c. P31, 500
b. P5, 000 d. P129, 000

7. What amount of total income or loss (realized or unrealized) shall be presented in profit or loss as a result
of the foregoing transactions?
a. P151, 000 c. P111, 000
b. P135, 125 d. P115, 125

6. At December 31, 2020, Maria Angela Corporation had the following investments that were purchased during 2019, its first
year of operations:
Cost Fair Value
Trading Securities:
Security A 700,000 725,000
Security B 210,000 200,000
Totals 910,000 925,000

Securities Available for Sale:

Security C 500,000 560,000
Security D 850,000 865,000
Totals 1,350,000 1,425,000

Securities to be Held to Maturity: Amort. Cost Fair Value

Security E 970,000 980,000
Security F 412,000 409,000
Totals 1,382,000 1,389,000

No investments were sold during 2020. None of the market changes is considered permanent.

Questions
1. The amount of investment to be reported as current assets is:
a. P 2,465,000 b. P 2,455,000 c. P 2,380,000 d. P 1,485,000 e. P 925 000

2. The amount of investment to be reported as non-current assets is:

a. P 1,389,000 b. P 1,382,000 c. P 1,277,000 d. P 2,807,000

3. The unrealized gain (or loss) component of income before taxes is:
a. P 15,000 b. P 75,000 c. P 97,000 d. P 100,000

4. The unrealized gain (or loss) component of shareholders’ equity is:

a. P 82,000 b. P 75,000 c. P 60,000 d. P 12,000
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7. On January 1, 2020 Piper Ltd bought 20% of the outstanding shares of Jason Construction Company for 300,000,000 cash.
At the date of acquisition of the shares, Jason’s net assets had a fair value of 900,000,000. Their book value was
800,000,000. The difference was attributable to the fair value of Jason’s buildings and its land exceeding book value, each
accounting for one-half of the difference between the fair value and book value of Jason’s net assets. Jason’s net income
for the year ended, December 31, 2020, was 150,000,000. During 2020, Jason declared and paid cash dividends of
30,000,000. The buildings have a remaining life of 10 years.

1. What is the amount to be reported by Piper Ltd in its consolidated financial statements as investment in Piper’s 2020
statement of financial position?
a. 323,000,000
b. 337,000,000
c. 322,000,000
d. 338,000,000

2. What is the amount to be reported by Piper Ltd in its consolidated financial statements as investment revenue in the
income statement?
a. 30,000,000
b. 29,000,000
c. 31,000,000
d. 28,000,000

8. Jeffrey Company bought 20% of Cooper Corporation’s ordinary shares on January 1, 2020 for P11,400,000. Carrying
amount of Cooper’s net assets at purchase date totaled P50,000,000. Fair value and carrying amounts were the same
for all items except for plant and inventory, for which fair values exceed their carrying amounts by P10,000,000 and
P2,000,000 respectively. The plant has a 5-year life. All inventory was sold during 2020. During 2020, Cooper reported
profit of P30,000,000 and paid a P10,000,000 cash dividend.

Based on the above and the result of your audit, answer the following:

1. What amount should Jeffrey report as net income related to this investment in 2020?
a. P5,200,000 c. P5,400,000
b. P6,200,000 d. P4,200,000

2. The carrying amount of Investment in Cooper Corporation as of December 31, 2020

a. P14,600,000 c. P13,600,000
b. P14,800,000 d. P15,600,000

9. Your accounting firm was engaged as the auditor of Trishia Company for the examination of its financial statements for the
year ended December 31, 2020. In the course of your review, you gathered the following information:
a. On May 1, 2019, the Trishia Company acquired P 400, 000 of XYZ Corporation 9% bonds for P 440, 000, inclusive
of accrued interest. Interest on bonds is payable semiannually on June 30 and December 31, and bonds mature
on December 31, 2024 The XYZ bonds belong to a portfolio of Trishia’s investments intended for profit taking
opportunities, and this, are held for trading.
b. On October 1, 2020, bonds the Trishia Company sold bonds of P 100, 000 for P 109, 000 inclusive of accrued
interest.
c. On November 30, 2020, bonds of P 120, 000 were exchanged for 1, 000 shares of XYZ Corporation P 100 per
ordinary share. Interest was received on the date of exchange.

You obtained the following quoted prices of the securities:

December 31, 2019 XYZ bonds 107
November 30, 2020 XYZ ordinary share 140
December 31, 2020 XYZ bonds 108
December 31, 2020, XYZ ordinary shares 143

1. Interest revenue for the years ended December 31, 2019 and December 31, 2020
a. 24, 000 & 32, 850 b. 54, 000 & 51, 300 c. 72, 000 & 51, 300 d. 36, 000 & 51, 300
2. Net unrealized gains and losses during 2019 & 2020
a. 6,000 & 4, 800 b. 0 & 1, 800 c. 6, 000 & 1, 800 d. 4, 800 & 1, 800
3. Gains and losses on disposal of the investments in 2020
a. 14, 100 gain b. 14, 100 Loss c. 11, 600 & (250) d. (11, 600) & 2, 500
4. Carrying value of the investments at December 31, 2019 and December 31, 2020
a. 186, 600 & 140, 000 b. 11, 610 & 140, 000 c. 11, 610 & 107 d. 428, 000 & 194, 400
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10. On June 1, 2019, Edna Corporation purchased as a long term investment 4,000 of the P1,000 face value, 8% bonds of
Mayet 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, 2025. Edna uses the effective interest method of amortization. On November
1, 2020, Edna sold the bonds for a total consideration of P3,925,000. Edna intended to hold these bonds until they matured,
so year-to-year market fluctuations were ignored in accounting for bonds.

QUESTIONS:

Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal
places)

1. The purchase price of the bonds on June 1, 2019 is

a. P3,645,328 c. P3,696,736
b. P3,691,132 d. P3,624,596

2. The interest income for the year 2019 is

a. P215,850 c. P212,829
b. P215,521 d. P211,612

3. The carrying amount of the investment in bonds as of December 31, 2019 is

a. P3,725,919 c. P3,719,986
b. P3,649,541 d. P3,671,491

4. The interest income for the year 2020 is

a. P306,608 c. P311,218
b. P310,715 d. P304,748

5. The gain on sale of investment in bonds on November 1, 2020 is

a. P21,196 c. P 27,632
b. P80,235 d. P104,045