Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

AUDIT OF INVESTMENTS
Accounting 152

PROBLEM 1 – Investment in Equity Securities (OCI)

Your client, Dora Company, had the following investment transactions in 2012:
Mar. 2 Purchased 10,000 ordinary shares of Yolo Company at P80 plus broker’s fee of
0 P4,000.
Jun. 1 Received a 20% share dividend.
Sep. 1 Received share rights permitting the purchase of one share at P70 for every
four shares owned. On this date, the rights had a market price of P5 each,
and the market price of the stocks was P75 per share.
Nov. 1 Exercised 8,000 rights
0
Nov. 3 Sold the remaining rights at P6 each
0
Dec. 3 Sold 4,000 shares from the shares purchased on March 21 at P75, the quoted
1 price on this date, less broker’s fee of P1,500.
Dora Company classified these shares as at fair value through other comprehensive income.
Based on the above and the result of your audit, answer the following questions:
1. The cost to be allocated to the share rights received on September 1 is:
2. The gain on sale of share rights on November 30 is:
3. The gain on sale of 4 000 shares on December 31is:
4. The amount to be recognized as investment in Yolo Company on December 31, 2012 is
5. The unrealized gain to be recognized directly in equity at December 31, 2012 is:
PROBLEM 2 – Investment in Equity and Debt Securities
The following subsidiary ledger reflects the trading securities of Gateway Company for the
year 2012:
TEMPLAR CORPORATION
Date Transactions Debit Credit
Sep. 5 Purchased 20,000 shares. P 1,000,000
28 Cash dividends to stockholders of record on
September 15, declared August 15. P 50,000
Oct. 1 Purchase 50,000 shares. 2,600,000
5 Sold 20,000 shares at P62.50. 1,000,000
Nov. 30 Cash collected for sale of 20,000 shares
made on November 10, after November 1
declaration of P5.00 cash dividend per share
to stockholders on record as of December 1.
3,400,000
Dec. 15 Cash dividend received. 150,000
Totals P P
3,600,000 4,500,000
On January 2, 2012, Gateway Company purchased 39,000 shares of Dark Company’s
200,000 shares of outstanding common stock for P1,170,000. On that date, the carrying
amount of the acquired shares on Dark Company’s books was P810,000. Gateway attributed
the excess of cost over carrying amount to goodwill. During 2012, Gateway’s president
gained a seat on Dark’s board of directors. Dark reported earnings of P800,000 for the year
ended December 31, 2012 and declared and paid cash dividends of P200,000 during 2012.
Market values per share of the securities at December 31, 2012 are as follows:
Templar Corporation P60.00
Dark Company P30.00
Based on the above and the result of your audit, answer the following questions:
1. The gain or loss on sale of 20,000 share of Templar Corporation on October 5 is:
2. The gain or loss on sale of 20,000 shares of Templar Corporation on November 10 is:
3. How much should be reported as unrealized gain on trading securities?
4. The adjusted balance of investment in Dark Company at December 31, 2012 is:
PROBLEM 3 – Investment in Equity and Debt Securities

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You were able to obtain the following ledger details of “Trading Securities” in connection with
your audit of the IBMC Corporation for the year ended December 31, 2012:
Date Particulars Debit Credit
Jan. 10 Purchase of Forward Company, 6,000 shares.
P 1,440,000
Feb. 20 Purchase of Back Company, 7,200 shares.
1,800,000
Mar. 1 Sale of Back Company, 2,400 shares. P 540,000
May 31 Receipt of Forward share dividend with off-
setting credit to retained earnings.
132,000
Aug. 15 Sale of Forward stocks, 4,800 shares. 1,176,000
Sep. 1 Sale of Forward stocks, 1,200 shares. 276,000
From the Philippine Stock Exchange, the Forward Company dividends were analyzed as follows:
Nature Declared Record Payment Rate
Cash 01/02/12 01/15/12 01/31/12 P20 per share
Share 05/02/12 05/15/12 05/31/12 10%
Cash 08/01/12 08/30/12 09/15/12 P30 per share
At December 31, 2012, Forward and Back shares were selling at P210 and P240 per share, re -
spectively. Based on the above and the result of your audit, answer the following the following
questions:
1. The gain or loss on sale of 2,400 Back shares on March 1, 2012:
2. The net gain or loss on sales of Forward shares in 2012:
3. The total dividend income to be recognized in 2012 is:
4. The carrying amount of “Trading Securities” as of December 31, 2012 is overstated by:
5. The unrealized loss on “Trading Securities” to be recognized in 2012 profit or loss is:
PROBLEM 4 – Investment in Equity and Debt Securities
Your audit of the Heidie Corporation disclosed that the company owned the following securities
on December 31, 2009:
Shares Cost Market
TRADING SECURITIES
Lim, Inc. 9,600 P 144,000 P 184,000
Ket, Inc. 16,000 432,000 288,000
Kai bonds (10%, P200,000 face value with
interest payable every Jan. 1 and July 1) 158,400 163,440
Total P P
734,400 635,440

FINANCIAL ASSETS AT FAIR VALUE

THROUGH OCI
Lamar Products 32,000 P 1,376,000 P
1,440,000
Lapasan Inc. 240,000 6,240,000 5,840,000
Divisoria Inc. 80,000 960,000 1,280,000
Total P P
8,576,000 8,560,000

FINANCIAL ASSETS AT AMORTIZED COST Cost Book Value

12%, 2,000,000 face value, Cagayan bonds
with interest payable yearly every Dec. P P
1 1,900,000 1,926,00
During 2010, the following transactions occurred:
Jan. 1 Received the interest due on the Kai bonds.
Mar. 1 Sold 8,000 shares of Ket, Inc. Stock for P152,000.
May 1 Sold 3,200 shares of Divisoria, Inc. for P15 per share.
5
July 1 Received the interest due on the Kai bonds.
Dec. 3 Received the interest due on the Cagayan bonds.
1
3 Transferred the Cagayan bonds to the financial asset at fair value through
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 1 profit or loss portfolio. The bonds were selling at 101 on this date. The bonds
were purchased on January 2, 2009. The discount was amortized using the
effective interest method.
The market values of the shares and bonds on December 31, 2010 are as follows:
Lim Inc. P22 per share
Ket Inc. P15 per share
10% Kai bonds P151,200
Lamar Products P42 per share
Lapasan Inc. P28 per share
Divisoria Inc. P18 per share
Based on the above and the result of your audit, answer the following questions:
1. The gain or loss on the sale of 8,000 Ket, Inc. shares on March 1, 2010?
2. The realized gain or loss on sale of 3,200 Divisoria, Inc. shares on May 15, 2010?
3. The total interest income for the year is:
4. The amount that should be recognized in profit or loss in 2010 regarding the transfer of Ca-
gayan bonds to financial asset at fair value through profit or loss is:
5. The carrying amount of “Trading Securities” and Financial asset at fair value through OCI”
as of December 31, 2010, respectively, should be:
PROBLEM 5 – Investment Property
Baguio Company is considering the appropriate classification of the following items in its
December 31, 2012 statement of financial position:
P
Land held for long term capital appreciation 3,000,000
Land held for undecided future use 1,500,000
Building leased out under an operating lease 300,000
Building leased out under a finance lease 450,000
Vacant building held to be leased out under an operating
lease 3,120,000
Property held for use in the production or supply of goods or
services 2,750,000
Property held by Marawi, Inc., a subsidiary of Baguio
engaging in the real estate business, in the ordinary
course of business 1,350,000
Property held for administrative purposes 2,400,000
Property held for sale in the ordinary course of business 750,000
Property held in the process of construction or development
for sale 2,000,000
Building owned by Marawi, Inc. and for which it provides
security and maintenance services to the lessees. 1,000,000
Property being constructed or developed on behalf of third
parties 250,000
Property held for future use as owner occupied property 1,075,000
Land leased to Marawi, Inc. under a finance lease and is
leased out by Marawi, Inc. to Iligan Corporation under an
operating lease 1,825,000
Property held for future development and subsequent use as
owner occupied property 3,050,000
Property occupied by employees 875,000
Building leased to Marawi, Inc. under an operating lease 1,250,000
Owner occupied property awaiting disposal 5,000,000
Property that is being constructed or developed for use as
an
investment property 765,000
Existing investment property that is being redeveloped for
continuing use as investment property 550,000
Machinery leased out under an operating lease 125,000
Building held for administrative purposes and leased out 2,000,000
under an operating lease (40% is for administrative

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 purposes)
Building leased out under an operating lease (the entity
supplies security and maintenance services to the
lessees) 450,000
Land leased out under an operating lease by Marawi, Inc. 150,000
Based on the above and the result of your audit, answer the following questions:
1. What amount shall be presented by Baguio Company as investment property in its separate
financial statements?
2. What amount shall be presented by Baguio Company as investment property in its separate
financial statements?
3. What amount shall be presented as investment property in the consolidated financial
statements of Baguio Company and Marawi, Inc.?
PROBLEM 6 – Investment in Equity and Debt Securities
The following transactions of the Angat Company were completed during the year 2012:
Jan. 2 Purchased 20,000 shares of Bulacan Auto Company for P40 per share plus
brokerage costs of P4,500. These shares were classified as held for trading.
Feb. 1 Purchased 20,000 shares of Malolos Company ordinary shares at P125 per
share plus brokerage fees of P19,000. Angat classified these shares as at fair
value through other comprehensive income.
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 held for trading.
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 its fair value of P132 per share.
The market values of the shares and bonds on December 31, 2012 are as follows:
Bulacan Auto Company P45 per share
Malolos Company P130 per share
RP Treasury 7% bonds 102
Based on the above and the result of your audit, answer the following questions:
1. The gain (loss) on sale of P500,000 RP Treasury bonds on August 1, 2012 is:
2. Disregarding income taxes, reclassification adjustments for other comprehensive income
on the sale of 3,000 Malolos shares on October 1, 2012 is:
3. The gain (loss) on sale of 3,000 Malolos shares on October 1, 2012 is:
4. The gain (loss) arising from change in the fair value of securities to be recognized in 2012
profit or loss is:
5. The net unrealized gain (loss) in accumulated other comprehensive income in equity as of
December 31, 2010 is:
PROBLEM 7 – Investment in Equity and Debt Securities
During 2011, Pampanga Company purchased 9,000 ordinary shares of Angeles Company for
P16 per share; 6,000 ordinary shares of Apalit Company for P33 per share and P120,000 of
treasury notes at 101. These investments are intended to be held as ready sources of cash and
are classified as held for trading. Also in 2011, Pampanga purchased 10,500 ordinary shares of
Arayat Company for P29 per share. The securities are classified as at fair value through OCI.
During 2011, Pampanga received the following interest and dividend payment on its invest-
ments:
Angeles Company P1 per share dividend
Apalit Company P3 per share dividend
Arayat Company P2 per share dividend
Treasury notes 6% annual interest earned for 6
months
Fair values of the securities at December 31, 2011 were as follows:
Angeles Company P20 per share
Apalit Company P22 per share
Arayat Company P26 per share
Treasury notes 102

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On March 23, 2012, the 6,000 ordinary shares of Apalit were sold for P17 per share. On June 30,
2012, the treasury notes were sold for 100.5 plus accrued interest. Fair values of remaining se -
curities at December 31, 2012 are as follows:
Angeles Company P20 per share
Arayat Company P33 per share
Based on the above and the result of your audit, answer the following questions:
1. The carrying amount of trading securities as of December 31, 2011 is:
2. The total amount of income to be recognized in the 2011 income statement of Pampanga
in relation these securities is:
3. The total realized loss on sale of securities in 2012 is:
4. The net unrealized gain in accumulated other comprehensive income in equity as of De-
cember 31, 2012 is:
PROBLEM 8 – Investment in Equity and Debt Securities
You were engaged by Balagtas Company to audit its financial statements for the year 2012.
During the course of your audit, you noted that the following trading securities were properly
reported as current assets at December 31, 2011:
Cost Fair Value
France Corporation, 5,000 shares,
convertible preference shares P 450,000 P 487,500
Ces, Inc., 30,000 ordinary shares 675,000 742,500
Coo, Company, 10,000 ordinary 618,750 450,000
shares
The following sale and conversion transactions transpired during 2012:
Mar. 1 Sold 12,500 shares of Ces, Inc. for P33.75 per share.
Apr. 1 Sold 2,500 shares of Coo Company for P45 per share.
Sep. 2 Converted 2,500 shares of France’s preference shares into 7,500 ordinary
1 shares of France when the market price was P80.25 per share for the prefer-
ence shares and P40.50 per share for the ordinary shares.
The following dividend information for 2012 pertains to shares owned by Balagtas:
Jan. 2 Coo Company issued a 10% share dividend when the market price of Coo’s
ordinary share was P49.50 per share.
Mar. 3 France paid dividends of P2.50 per share on its preference shares to share -
1 holders of record on March 15.
Sep. 3 France paid dividends of P2.50 per share on its preference shares to share -
0 holders of record on September 15. France did not pay dividends on its ordi-
nary shares during 2012.
Jul. 1 Ces, Inc. paid a P2.25 per share dividend on its ordinary shares.
All of the foregoing shares are listed in the Philippine Stock Exchange. Market prices per share
of the securities were as follows:
12/31/2012 12/31/2011
France Corporation, preference P92.25 P97.50
France Corporation, ordinary 42.75 38.25
Ces, Inc., ordinary 22.50 24.75
Coo Company, ordinary 40.50 45.00
Based on the above and the result of your audit, answer the following questions:
1. How much is the gain (loss) on sale of 12,500 Ces shares?
2. How much is the gain (loss) on sale of 2,500 Coo shares?
3. How much is the gain (loss) on conversion of 2,500 preference shares into 15,000 ordi-
nary shares?
4. How much is the total dividend income for the year 2012?
5. How much should be reported as unrealized gain (loss) on trading securities in the com-
pany’s income statement for the year 2012?
PROBLEM 9 – Investment in Equity Shares and Debt Securities
In connection with your audit of the financial statements of Guiguinto Company for the year
2010, the following “Financial Assets at Fair Value through OCI” and “Dividend Income” ac-
counts were presented to you:
FINANCIAL ASSETS AT FAIR VALUE THROUGH OCI
Date Description Ref. Debit Credit

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 1/8 Purchased 20,000 ordinary
shares, P50 par, Bustos Com- VR-69 P 780,000
pany
3/30 10,000 shares of Bustos Com-
pany received as share divi- CJ-30 500,000
dend
4/3 Sold 10,000 shares at P25 per CR-44 P 250,000
share
12/2 Sold 4,000 shares at P60 per CR-65 240,000
share
DIVIDEND INCOME
Date Description Ref. Debit Credit
3/30 Share dividend SJ-8 P 500,000
8/30 Bustos Company ordinary CR-52 100,000
The following information was obtained during your examination:
A. From independent sources, you determined the following dividend information:
Date of Dec- Date of Pay-
Nature laration Date of ment Rate
Record
Share 2/14/2010 2/28/2010 3/30/2010 50%
Cash 8/1/2010 8/15/2010 8/30/2010 P5 per share
Cash 12/1/2010 12/15/2010 1/2/2010 20%
B. Closing market quotation as at December 31, 2010:
Asked Bid
Bustos Company, common shares 16 ½ 13 ¾
Based on the above and the result of your audit, answer the following questions:
1. How much is the gain (loss) on the April 3, 2010 sale?
2. How much is the gain (loss) on the December 2, 2010 sale?
3. How much is the total dividend income for the year 2010?
4. How much is the adjusted balance of the “Financial Assets at Fair Value through OCI” as of
December 31, 2010?
5. How much should the entity report as the net unrealized gain (loss) at December 31, 2010
in accumulated other comprehensive income in equity relating to the investment in Bus-
tos’ shares?
PROBLEM 10 – Investment in Equity and Debt Securities
The Guagua Corporation had acquired interest in a promising local company, the Florida Silver
Company. During your audit of the company’s accounts for the year 2010, which was a first au-
dit, you obtained the following:
INVESTMENT IN FLORIDA SILVER COMPANY
1/2/2008 30,000 shares P 1,050,000 7/15/2010 50,000 P 2,000,000
shares
7/2/2009 90,000 shares 5,400,000
3/2/2010 30,000 shares 2,100,000

INVESTMENT IN BLANCA COMPANY

8/10/201 P 10,000

DIVIDEND INCOME
2/2/2010 P 120,000
4/1/2010 150,000
8/10/2010 10,000
12/20/201 100,000
0

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The investments are classified as at fair value through other comprehensive income. Prior to
2010, the fair value of the investment in Florida Silver Company cannot be reliably measured.
The transactions pertaining to the foregoing for 2010 were as follows:
Jan. 2 Received cash dividend (declared on December 1) of P1 per share.
Mar. 2 Bought 30,000 shares at P70 per share.
Apr. 1 Received cash dividend (declared on March 1 to shareholders of record as of
March 10) of P1 per share.
July 1 Sold 50,000 shares at P40 per share.
5
Aug. 1 Received an “extra” dividend in shares of one share of Blanca Company for
0 every ten shares of Florida Silver Company. The share dividend had a market
value of P3 per share and its book value on the ledger of Florida Silver Com-
pany was P1 per share.
Dec. 2 Received cash dividend of P1 per share (declared December 1) out of Florida
0 Silver Company’s “Reserve for Depletion.”
Dec. 2 Sold 10,000 Florida Silver Company shares at P70. Cash was received on Jan-
9 uary 5, 2011.
Guagua Company applies the FIFO cost flow assumption in valuing its share investments. Mar-
ket prices per share of the securities as of December 31, 2010 are as follows:
Florida Silver Company P 70.00
Blanca Company 2.50
Based on the above and the result of your audit, answer the following questions:
1. The gain (loss) on sale of 50,000 Florida Silver Company shares on July 15, 2010 is:
2. The gain (loss) on sale of 10,000 Florida Silver Company shares on December 29, 2010 is:
3. The dividend income for the year ended December 31, 2010 is overstated (understated)
by:
4. The carrying amount of the financial assets at fair value through other OCI as of Decem-
ber 31, 2010 is:
5. The net unrealized gain (loss) on financial assets at fair value through OCI at December
31, 2010 in accumulated other comprehensive income in equity to be reported by the en-
tity is:
PROBLEM 11 – Trade Date Accounting versus Settlement Date Accounting
Below are the financial asset transactions of your audit clients for the year 2010:
A. On December 28, 2010, Hagonoy Company commits itself to purchase a financial asset
to be classified as held for trading for P800,000, its fair value on commitment (trade)
date. This security has a fair value of P801,000 and P802,000 on December 31, 2010
(year-end) and January 5, 2011 (settlement date), respectively.
B. On December 28, 2010 (trade date), Pulilan, Inc. enters into a contract to sell an equity
security classified as financial asset at fair value through OCI for its current fair value of
P303,000. The asset was acquired a year ago and its cost was P300,000. On December
31, 2010 (year-end), the fair value of the asset is P303,600. On January 5, 2011 (settle-
ment date), the asset’s fair value is P303,900.
Based on the above and the result of your audit, answer the following questions:
1. If Pulilan applies the settlement date accounting method to account for regular way pur-
chases of its securities, how much should be recognized in 2010 profit or loss as gain on
sale of the securities?
2. If Pulilan applies the settlement date accounting method to account for regular way pur-
chases of its securities, how much should be reported as net unrealized gain in accumu-
lated other comprehensive income in equity as of December 31, 2010?
3. If Pulilan applies the trade date accounting method to account for regular way purchases
of its securities, how much should be recognized in 2010 profit or loss as gain on sale of
the securities?
4. If Pulilan applies the trade date accounting method to account for regular way purchases
of its securities, how much should reported as net unrealized gain in accumulated other
comprehensive income in equity as of December 31, 2010?
5. If Hagonoy applies the settlement date accounting method to account for regular way
purchases of its securities, how much should be recognized as trading securities on De-
cember 31, 2010?

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 6. If Hagonoy applies the settlement date accounting method to account for regular way
purchases of its securities, how much should be recognized as unrealized gain on trading
securities in its 2010 profit or loss?
7. If Hagonoy applies the trade date accounting method to account for regular way pur-
chases of its securities, how much should be recognized as trading securities on Decem-
ber 31, 2010?
8. If Hagonoy applies the trade date accounting method to account for regular way pur-
chases of its securities, how much should be recognized as unrealized gain on trading se-
curities in its 2010 profit or loss?

PROBLEM 12 – Investment in Equity and Debt Securities

The Marilao Company has the following transactions in the non-marketable shares of Sta. Maria
Corporation:
A. On January 2, 2004, Marilao purchased 4,000, P100 par value, ordinary shares of Sta.
Maria Corporation at P110 per share. Marilao debited “Investment in Stock” account.
B. The Sta. Maria Corporation was expanding and on March 2, 2004, it issued share rights
to its shareholders. The holder needs 4 rights to purchase 1 ordinary share at par. The
best estimate of the fair value of the ordinary share on that date was P140 per share.
There was no quoted price for the rights. No journal entry was made to record the re-
ceipt of the rights.
C. On April 2, 2004, Marilao exercised all its share rights. The “Investment in Stock” ac-
count 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% share dividend from Sta. Maria in December 2008. 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 Jan -
uary 2009 for P150 per share. The proceeds from the sale were credited to income.
F. In December 2009, Sta. Maria’s shares were split on a 2 for 1 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 2010, Marilao old ½ of its holdings in Sta. Maria at P120 per share. The pro -
ceeds were credited to the “Investment in Stock” account.
Marilao uses the average method in recording the sale of its investment in stocks. The fair
value of the investment cannot be reliably measured since the shares of Sta. Maria are not ac -
tively traded. Therefore, Marilao used cost to measure its investment in Sta. Maria. Based on
the above and results of your audit, answer the following questions:
1. The cost of investment to be allocated to share rights received on March 2, 2004 is:
2. The unadjusted balance of the “Investment in Stock” account on December 31, 2010 is:
3. The adjusted balance of the “Investment in Stock” account on December 31, 2010 is:
4. The gain on sale of dividend shares received in December 2008 is:
5. The gain on sale of shares in August 2010 is:

PROBLEM 13 – Cash Surrender Value

The following accounts are found under current assets in the December 31, 2011 statement of
financial position of Elysee Company:
Cash surrender value P 90,000
Less: Policy loan from insurance company 50,000 40,000
Dividend receivable from insurance company 2,000
The above accounts are the only ones in the statement of financial position which pertain to
the insurance policy or the loan. Upon investigation, the following data are gathered:
A. The cash surrender value reported in the statement of financial position is for June 30,
2012. The cash surrender value was P80,000 on June 30, 2011.
B. On June 30, 2011, the entity paid the annual premium of P30,000 minus the dividend
declared of P2,000.
C. The loan from the insurance company is a one-year note dated April 1, 2011. The 12%
interest is payable on the date of maturity.
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 D. The dividend declared was recorded by debiting dividend receivable and crediting divi-
dend income.
Based on the above and the result of your audit, answer the following questions:
1. The current assets of Elysee Company as of December 31, 2011 is overstated (under-
stated) by:
2. The current liabilities of Elysee Company as of December 31, 2011 is overstated (under-
stated) by:
3. The cash surrender value should be reported on December 31, 2011 at:

PROBLEM 14 – Sinking Fund

The transactions given below relate to a sinking fund for retirement of long-term bonds of Red
Company:
2011
Jan. 1 In accordance with the terms of the bond indenture, cash in the amount of
P2,000,000 is transferred at the end of the first year from the regular cash ac-
count to the sinking fund. The entity administers the fund.
Jan. 2 The sinking fund cash is used to acquire AB Company 12% bonds of P500,000
face value, maturing in five years, for P450,000.
Jan. 2 The sinking fund cash is used to acquire 10%, P100 par value CD, 5,000 pref -
erence shares, at P80 per share.
Dec. 3 Annual interest is received on the AB bonds. The discount on the bonds is
1 amortized accordingly using the straight line method.
Dec. 3 Sinking fund expenses of P20,000 are paid from the sinking fund cash.
1
Dec. 3 Annual dividends are received on the CD preference shares
1
2012
Apr. 1 The sinking fund cash is used to acquire EF Company, 10% bonds of P400,000
face value, maturing in 4 years for P400,000 plus accrued interest of P10,000.
July 1 Interest is received on the EF bonds, P20,000 including the accrued interest
at the time of purchase.
Dec. 3 All EF bonds are sold for P450,000. No interest is accrued at the time of sale.
1
Dec. 3 Annual interest on the AB bonds and the annual dividends on the CD prefer-
1 ence shares are received.
Dec. 3 Sinking fund expenses of P15,000 are paid from the sinking fund cash.
1
Dec. 3 Retained earnings are appropriated in an amount equal to the sinking fund
1 balance.
Based on the above and the result of your audit, answer the following questions:
1. The balance of the sinking fund on December 31, 2011 is: Answer: P2,100,000.
2. The net amount recognized by Elysee in relation to the sinking fund in 2011 profit or loss
is: Answer: P100,000.
3. The balance of the sinking fund on December 31, 2012 is: Answer: P2,265,000.
4. The net amount recognized by Elysee in relation to the sinking fund in 2012 profit or loss
is: Answer: P165,000.

PROBLEM 15 – Investment in Equity Securities

In connection with your audit of Lopez Company’s financial statements, you were able to
gather the following subsidiary account which reflects the trading securities of the company for
the year 2010:
HUGO CORPORATION
Date Transactions Shares Debit Credit
9/1 Pucrhase 40,000 P 2,000,000
9/30 Cash dividends to shareholders
of record 9/15, declared 8/15 P 100,000
10/1 Purchase 100,00 5,000,000
0
10/15 Sale at P65 40,000 2,000,000
11/30 Cash collected for sale made on

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 11/10, after a 11/1 declaration
of P5 cash dividend per share
to shareholders on record as of
12/1 40,000 6,600,000
12/15 Cash dividend received 300,000
Totals P 7,000,000 P 9,000,000
Lopez, Inc. acquired 30% of Pugo Corporation’s ordinary shares on January 1, 2009 for
P5,000,000. During 2009, Pugo earned P2,000,000 and paid dividends of P1,250,000. Lopez’
30% interest in Pugo gives Lopez the ability to exercise significant influence over Pugo’s oper-
ating and financial policies. During 2010, Pugo earned P2,500,000 and paid dividends of
P750,000 and P750,000 on October 1. On July 1, 2010, Lopez sold half of its investment in Pugo
for P3,300,000 cash. Based on the above and the result of your audit, answer the following
questions:
1. The gain on sale of 40,000 shares of Hugo Corporation on October 15 is:
2. The gain on sale of 40,000 shares of Hugo Corporation on November 10 is:
3. The carrying amount of the company’s investment in Hugo Corporation on December 31,
2010 is:
4. The gain on sale of investment in Pugo Corporation is:
5. The carrying amount of the company’s investment in Pugo Corporation on December 31,
2010 is:

PROBLEM 16 – Investment in Equity and Debt Securities

On December 31, 2009, Jay Ar Company’s statement of financial position showed the following
balances related to its securities accounts:
Trading securities P 738,750
Financial asset at fair value – OCI 590,000
Interest receivable – Jona Water bonds 6,250
Unrealized gain – OCI 50,000
Jay Ar’s securities portfolio on December 31, 2009 was made up of the following securities:
Security Classification Cost Fair Value
5,000 Judith Corporation shares Trading P 375,000 P 381,250
4,000 Zeny, Inc. shares Trading 275,000 264,125
10% Jona Water bonds, interest is Trading 125,000 93,375
payable semi-annually on January
1 and July 1
5,000 Raizel, Inc. shares FA at FV – OCI 295,000 315,000
10,000 Jenny Unlimited, Inc. shares FA at FV – OCI 245,000 275,000
During 2010, the following transactions took place:
Jan. 3 Received interest on the Jona Water bonds.
Mar. 1 Purchased 1,500 additional shares of Judith Corporation for P114,750, classi-
fied as held for trading.
Apr. 1 Sold 2,000 shares of Zeny, Inc. for P69 per share.
5
May 4 Sold 2,000 shares of Raizel, Inc. for P62 per share.
July 1 Received interest on the Jona Water bonds.
Oct. 3 Purchased 7,500 shares of Joyce Company stocks for P416,250 classified as
0 held for trading.
The fair values of the shares and bonds on December 31, 2010 are as follows:
Judith Corporation P76.60 per share
Zeny, Inc. P68.50 per share
Joyce Company P55.25 per share
Jona Water bonds P102,775
Raizel, Inc. P61.00 per share
Jenny Unlimited, Inc. P27.00 per share
Based on the above and the result of your audit, answer the following questions:
1. The gain (loss) on sale of 2,000 Zeny, Inc. shares on April 15, 2010 is: Answer: P5,937
gain.
2. The gain (loss) on sale of 2,000 Raizel, Inc. shares on May 4, 2010 is: Answer: P2,000
loss.

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 3. The carrying amount of trading securities as of December 31, 2010 is: Answer:
P1,152,050.
4. The carrying amount of the financial assets at fair value – OCI as of December 31, 2010
is: Answer: P453,000.
5. What net amount of gains (losses) should be recognized in 2010 profit or loss? Answer:
P18,300 gain.
6. What net amount of gain (loss) should be recognized as component of equity as of De-
cember 31, 2010? Answer: P31,000 gain.

PROBLEM 17 – Investment Property

Alaminos, Inc. completed the construction of buildings at the end of 2008 for a total cost of
P100 million. The buildings are estimated to be economically useful for 25 years. The buildings
were constructed for the purpose of earning rentals under operating leases. The tenants began
occupying the buildings after its completion. The company opted to use the fair value model to
measure the buildings. An independent valuation expert was used by the company to estimate
the fair value of the buildings on an annual basis. According to the expert, the fair values of the
buildings at the end of 2008, 2009, 2010 and 2011 were P105 million, P120 million, P118 mil -
lion and P115 million.
On January 1, 2011, one half of the buildings were sold for P57.5 million. On the other hand, the
remaining properties were reclassified from investment property to property, plant and equip-
ment. This reclassification was brought about by the use of Alaminos of the building in its oper-
ations starting that date.
Based on the above and the result of your audit, answer the following questions:
1. What amount would be recognized by Alaminos in profit or loss in 2008 relating to the
buildings?
2. What amount would be recognized by Alaminos in profit or loss in 2010 relating to the
buildings?
3. What amount net of any expenses would be recognized by Alaminos in profit or loss in
2011 relating to the buildings?
4. The gain (loss) of Alaminos in selling half of its buildings on January 1, 2011 is:
5. What is the carrying amount of the remaining buildings as of December 31, 2011?
6. What is the carrying amount of the building as of December 31, 2010 assuming
Alaminos opted for the cost model?

PROBLEM 18 – Investment Property

Candon, Inc. completed the construction of buildings at the end of 2008 for a total cost of P20
million. The building is estimated to be economically useful for 25 years. The buildings were
built by Candon, Inc. various purposes and classified them depending on such purpose as fol-
lows:
 One half of the buildings were to be sold as part of Candon’s real estate business. Can-
don measures its inventories at the lower of cost or net realizable value.
 One fourth of the buildings were constructed for the purpose of earning rentals under
operating leases. The tenants began occupying the buildings after its completion. Can-
don measures its investment property using the fair value model. An independent valua-
tion expert was used by the company to estimate the fair value of the buildings on an
annual basis and based on such expert, the fair values of the buildings at the end of
2008, 2009 and 2010 were P22 million, P24 million and P25 million.
 The remaining buildings were constructed to be the new headquarters of the company.
Candon occupied the building on the first week of January 2009.
At the beginning of 2010, Candon reclassified the buildings classified as inventories to invest-
ment property due to renting out the buildings to tenants as Candon were not able to sell them
in 2009. On the other hand, half of the buildings used by the company as its headquarters were
leased out to tenants for additional income and cost cutting purposes. The fair values of these
buildings on the date of reclassifications are the same to that at year-end of 2009. Based on
the above and the result of your audit, answer the following questions:
1. What is the total initial measurement of the buildings?
2. What is the total carrying amount of the buildings on December 31, 2009?
3. The net amount to be recognized in the 2009 profit or loss relating to the buildings is:
4. The reclassifications to investment property of the buildings would increase the net income
for 2010 by:
Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 11
PROBLEM 19 – Investment Property
On January 1, 2011, Carolina Company acquired property consisting of ten identical freehold
detached houses each with separate legal title including the land on which it is built for P200
million, 20% of which is attributable to the land. The units have a useful life of 50 years. The
following costs are also incurred on such date:
Non-refundable transfer taxes not included in
the purchase price P 20,000,000
Legal cost directly attributable to the acquisi-
tion 1,000,000
Reimbursement to the previous owner for
prepaying non-refundable property taxes
for the 6-month period ending June 30, 10,000
2011
Advertising campaign 500,000
Opening function to celebrate new rental
business 200,000
On June 30, 2011, Carolina paid local property taxes of P20,000 for the year ending June 30,
2012. Throughout 2011, Carolina incurred repairs and maintenance cost of P120,000. Carolina
uses one of the ten units to accommodate its administration and maintenance staff. The other
nine units are rented out to independent parties under operating leases.
Refundable deposits held by Carolina on December 31, 2011 totaled P270,000. Rent received in
the year ended December 31, 2011 totaled P1,550,000 of which P50,000 relates to January
2012. On December 31, 2011, the fair value of each unit was reliably estimated at P25 million.
Carolina accounts for its assets classified as investment property using the fair value model.
Based on the above and the result of your audit, answer the following questions:
1. What is the initial measurement of the investment property? Answer: P198,900,000.
2. What is the initial measurement of the land to be accounted for as property, plant and
equipment? Answer: P4,420,000.
3. What is the initial measurement of the building to be accounted for as property, plant and
equipment? Answer: P17,680,000.
4. What is the gain (loss) from the increase (decrease) in fair value of investment property in
2011? Answer: P26,100,000.
5. What is the depreciation of the building for 2011? Answer: P353,600.

PROBLEM 20 – Various Investments

Lake Company’s accounting records showed the following investments on January 1, 2011:
Share capital:
Kar Company (1,000 shares) P 100,000
Aub Company (5,000 shares) 1,000,000
Parking lot (leased to Day Company) 3,000,000
Trademark 250,000
Lake owns 30% of Kar and 1% of Aub. The Day leased, which commenced on January 1, 2011,
is for 10 years at annual rental of P480,000. In addition, on January 1, 2011, Day paid a non-re -
fundable deposit of P500,000, as well as a security deposit of P80,000 to be refunded upon ex-
piration of the lease.
The trademark was licensed to Barr Company for royalties of 15% of sales of the trademarked
items. Royalties are payable semiannually on March 1 for sales in July through December of
prior year, and on September 1 for sales in January through June of the same year. During the
year ended December 31, 2011, Lake received cash dividend of P10,000 from Kar, and
P150,000 from Aub, whose 2011 net income figures were P750,000 and P1,500,000 respec -
tively.
Lake also received P480,000 rent from Day in 2011, and the following royalties from Barr:
March 1 September 1
2010 P 300,000 P 500,000
2011 400,000 700,000
Barr reported that sales of the trademarked items totaled P2,000,000 for the last half of 2011.
Based on the above and the result of your audit, answer the following questions:
1. The total income of Lake in 2011 from investment in equity securities is:
2. The total rent income of Lake in 2011 is:
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3. The total royalty income of Lake in 2011 is:

PROBLEM 21 – Building Fund

On January 1, 2010, Mandaue Company is currently planning the purchase of a building in Janu-
ary 1, 2015. It wants to establish a fund, by depositing in a bank, which should equal the cost
of construction of the building by December 31, 2014. Data regarding the fund follows:
Cost of the building P 5,000,000
Compound interest rate on bank deposits 12%
Mr. Ba Lang, the company’s controller, presented the following options to its management for
their consideration:
A. Contribute one lump sum amount on January 1, 2010.
B. Contribute five equal annual amounts with the first deposit to be made on January 1,
2010 and every December 31 thereafter.
C. Contribute five equal annual amounts with the first deposit to be made on December
31, 2010 and every December 31 thereafter.
D. Contribute P2,000,000 on January 1, 2010 with the rest to be deposited to the bank
equally every December 31.
E. Contribute one lump sum amount on January 1, 2010 with the interest compounded
semi-annually.
F. Contribute five equal annual amounts with the first deposit to be made on January 1,
2010 and every December 31 thereafter but with the interest compounded semi-annu-
ally.
Based on the above and the result of your audit, answer the following questions:
1. The balance of the building fund on December 31, 2012 assuming Option A was chosen
would be: Answer: P3,986,064.
2. What is the annual deposit to the fund assuming Option B was chosen? Answer:
P702,720.
3. The balance of the building fund on December 31, 2012 assuming Option C was chosen
would be: Answer: P2,655,835.
4. What is the annual deposit to the fund assuming Option D was chosen? Answer:
P232,231.
5. The balance of the building fund on December 31, 2012 assuming Option E was chosen
would be: Answer: P3,960,574.
6. What is the annual deposit to the fund assuming Option F was chosen? Answer:
P695,478.

PROBLEM 22 – Cash Surrender Value

Jessica Sanchez Limited insured 3 of its officers in 2011. The terms of each of the insurance pol-
icy and events that transpired afterwards are as follows:
A. The first policy is to insure the life of Jessica’s president for P2,000,000. The president’s
wife is named as the beneficiary. The annual premium is P30,000 paid in advance. The
policy is dated January 1, 2011 and carries the following cash surrender value:
December 31, 2011 Nil
December 31, 2012 Nil
December 31, 2013 P 30,000
December 31, 2014 42,000
December 31, 2015 58,000
B. The second policy is to insure the life of Jessica’s vice-president for P2,000,000. Jessica
is named as the beneficiary. The annual premium is P30,000 paid in advance. The policy
is dated April 1, 2011 and carries the following cash surrender values:
April 1, 2012 Nil
April 1, 2013 Nil
April 1, 2014 P 30,000
April 1, 2015 42,000
April 1, 2016 58,000
C. The third policy is to insure the life of Jessica’s controller for P2,000,000. Jessica is
named as the beneficiary. The annual premium is P30,000 paid in advance. The policy is
dated January 1, 2011 and carries the following cash surrender values:
December 31, 2011 Nil
December 31, 2012 Nil
December 31, 2013 P 30,000
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 December 31, 2014 42,000
December 31, 2015 58,000
D. In connection with the insurance policies covering the company’s vice president and
controller, Jessica earned and/or received the following dividends in total:
December 31, 2011 Nil
December 31, 2012 P 12,000
December 31, 2013 15,000
The dividends earned in 2013 were applied to increase the cash surrender values.
E. On June 30, 2014, the company’s vice-president and controller met an accident on their
flight from Singapore bound to Manila after attending a three day conference on good
governance. The two were declared dead on the spot. The face of the policy is collected
on July 31, 2014.
F. On December 31. 2014, the president died and the wife was able to collect the proceeds
of the policy a month after.
Jessica Sanchez follows the calendar year as its accounting period. Based on the above and re -
sult of your audit, answer the following questions:
1. The total life insurance expense of Jessica for 2011 is:
2. The total prepaid life insurance of Jessica as of December 31, 2012 is:
3. The total life insurance expense of Jessica for 2013 is:
4. The total cash surrender value that will be reported by Jessica as of December 31, 2013 is:
5. The total life insurance expense for 2014 is:
6. The total gain (loss) on life insurance settlement of Jessica is:

PROBLEM 23 – Investment in Equity and Debt Securities

On July 1, 2010, San Luis Company acquired 25% of the outstanding ordinary shares of San Si-
mon Corporation at a total cost of P7,000,000. The underlying equity of the shares acquired by
San Luis was only P6,000,000. San Luis is willing to pay more than the book value for the fol -
lowing reasons:
A. San Simon owned depreciable plant assets with a current fair value of P600,000 more
than their carrying amount. The asset has a 10 year remaining economic life.
B. San Simon owned land with current fair value of P3,000,000 more than its carrying
amount.
C. There are no other identifiable tangible or intangible assets with fair value in excess of
book value. Accordingly, the remaining excess, if any, is to be allocated to goodwill.
San Simon earned net income of P5,400,000 evenly over the year-ended December 31, 2010.
On December 31, San Simon declared and paid a cash dividend of P1,050,000 to ordinary
shareholders. Market value of San Luis’ shares at December 31, 2010 is P7,500,000. Both com -
panies close their accounting records on December 31. Based on the above and the result of
your audit, answer the following questions:
1. The total amount of goodwill of San Simon Corporation based on the price paid by San Luis
is:
2. The net investment income from the investment in San Simon Corporation is:
3. The carrying amount of the “Investment in San Simon Corporation” as of December 31,
2010 is:

PROBLEM 24 – Investment in Equity Securities

Santa Ana Company bought 20% of Santa Rita Corporation’s ordinary shares on January 1,
2010 for P11,400,000. Carrying amount of Santa Rita’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 2010. During 2010, Santa
Rita reported profit of P30,000,000 and paid a P10,000,000 cash dividend. In addition, Santa
Rita recognized a revaluation surplus of P1,000,000. Based on the above and the result of your
audit, answer the following questions:
1. What is the carrying amount of the investment in Santa Rita Corporation as of January 1,
2010?
2. What is the carrying amount of the investment in Santa Rita Corporation as of December
31, 2010?
3. What amount should Santa Ana report as net income related to this investment in 2010?

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 14
PROBLEM 25 – Investment in Equity Securities
On January 2, 2008, Norzagaray Company acquired 20% of the 400,000 ordinary shares 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 2008 and 2009:
2008 2009
Imaw dividends paid on October 31 P 40,000 P 48,000
Imaw profit 140,000 160,000
Imaw share market price at year-end 32 per share 31 per share
On January 2, 2010, Norzagaray Company sold 30,000 shares of Imaw at their quoted price of
P33 per share. During 2010, Imaw reported profit of P120,000 and on October 31, 2010, Imaw
paid dividends of P20,000. At December 31, 2010, after a significant stock decline, Imaw’s
stockj was selling for P22 per share. After selling the 20,000 shares, Norzagaray does not ex-
pect to exercise significant influence over Imaw and the shares are classified as at fair value
through OCI. Based on the above and the results of your audit, answer the following questions:
1. The carrying amount of the “Investment in Imaw” as of December 31, 2008 is:
2. The carrying amount of the “Investment in Imaw” as of December 31, 2009 is:
3. The total amount to be recognized in profit or loss on January 2, 2010:
4. The income from the investment in Imaw in 2010 is:
5. The net unrealized loss on available for sale securities as of December 31, 2010 is:

PROBLEM 26 – Investment in Equity Securities

On April 1, 2009, Sasmuan Company purchased 25,000 ordinary shares of Bacolor Company at
P180 per share which reflected book value as of that date. At the time of the purchase, Bacolor
had 100,000 ordinary shares outstanding. The shares are intended as a long-term investment.
The first quarter statement ending March 31, 2009 of Bacolor reported profit of P480,000. For
the year ended December 31, 2009, Bacolor reported profit of P2,400,000. Bacolor paid Sas -
muan dividends of P60,000 on June 1, 2009 and again P60,000 on December 31, 2009. The
shares of Bacolor are selling at P190 per share on December 31, 2009.
On April 1, 2010, Sasmuan sold 10,000 ordinary shares of Bacolor for their fair value of P200
per share. After selling the 10,000 shares, Sasmuan does not expect to exercise significant in-
fluence over Bacolor and the shares are classified as financial assets at fair value through OCI.
For the year ended December 31, 2010, the reported profit of Bacolor was P2,800,000 and divi-
dends of P60,000 was paid to Sasmuan on August 1, 2010. The shares of Bacolor are selling at
P205 per share on December 31, 2010. Based on the above and the result of your audit, an-
swer the following questions:
1. How much is the carrying amount of the “Investment in Bacolor Company” as of December
31, 2009? Answer: P4,860,000.
2. How much is the gain (loss) on sale of the “Investment in Bacolor Company” on April 1,
2010? Answer: P14,000 loss.
3. How much is the net amount that should be recognized in 2010 profit or loss regarding the
investment in Bacolor Company? Answer: P200,000.
4. How much is the net unrealized gain (loss) on financial assets at fair value through OCI as
of December 31, 2010? Answer: P75,000 gain.

PROBLEM 27 – Investment in Equity Securities

On January 3, 2008, San Miguel Company purchased for P1,500,000 cash a 10% interest in San
Ildefonso Corporation. On that date, the net assets of San Ildefonso had a book value of
P11,250,000. The excess of cost over the underlying equity in net assets is attributable to un -
dervalued depreciable assets having a remaining life of 10 years from the date of San Miguel’s
purchase. The investment in San Ildefonso Corporation is not intended for trading. The fair
value of San Miguel’s investment in San Ildefonso securities is as follows:
December 31, 2008 P 1,710,000
December 31, 2009 1,575,000
December 31, 2010 6,600,000
On January 2, 2010, San Miguel purchased an additional 30% of San Ildefonso’s stock for
P4,525,000 cash when the carrying amount of San Ildefonso’s net assets was P12,450,000. The
excess was attributable to depreciable assets having a remaining life of 8 years. During 2008,
2009 and 2010, the following occurred:
San Ildefonso’s Dividends Paid by

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 Profit San Ildefonso to San Miguel
2008 P 1,050,000 P 45,000
2009 1,200,000 60,000
2010 1,650,000 210,000
Based on the above and the result of your audit, answer the following questions:
1. The adjustment to retained earnings as of January 1, 2010 as a result of the acquisition of
the additional 30% interest in San Ildefonso Corporation is:
2. The income from investment in San Ildefonso Corporation to be recognized in 2010 profit
or loss is:
3. The carrying amount of the investment in San Ildefonso Corporation as of December 31,
2010 is:

PROBLEM 28 – Investment in Equity Securities

You were able to gather the following in connection with your audit of Obando, Inc. On Decem-
ber 31, 2009, Obando reported the following financial assets at fair value – OCI:
Description Cost Fair Value Unrealized
Loss
Erap Company, 10,000 ordinary
shares representing a 1% interest P 250,000 P 220,000 P 30,000
GMA Company, 20,000 ordinary
shares representing a 2% interest 320,000 300,000 20,000
FVR Company, 50,000 ordinary
shares representing a 10% interest 1,400,000 1,350,000 50,000
Total P 1,970,000 P 1,870,000 P 100,000
Additional information follows:
A. On April 1, 2010, Erap issued 10% share dividend when the market price of its share
was P24 per share.
B. On September 15, 2010, Erap paid cash dividend of P0.75 per share.
C. On August 30, 2010, GMA issued to all shareholders, share rights on the basis of one
right per share. Market prices at date of issue were P13.50 per share and P1.50 per
right. Obando sold all rights on December 1, 2010 for net proceeds of P37,600.
D. On July 1, 2010, Obando paid P3,000,000 for 100,000 additional shares of FVR’s ordi -
nary shares which represented a 20% investment in FVR. The fair value of all FVR’s iden-
tifiable 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 now exercise significant in -
fluence over FVR’s operating and financial policies. The fair value of the entity’s previ -
ously held equity interest in FVR Company on this date was P1,300,000.
E. Obando’s initial 10% interest in FVR was acquired on January 2, 2009 for P1,400,000. At
that date, the net assets of FVR totaled P11,600,000 and the fair values of FVR’s identi-
fiable assets net of liabilities were equal to their carrying amount.
F. Market prices per share of the securities which are all listed in the PSE are as follows:
12/31/2010 12/31/2009
Erap Company – ordinary P 23 P 22
GMA Company – ordinary 14 15
FVR Company – ordinary 31 27
G. FVR reported profit and paid dividends of:
Dividend per
Profit Share
Year ended December 31, 2009 P 700,000 None
Six months ended June 30, 2010 400,000 None
Six months ended December 31,
2010 (dividend was paid on Octo-
ber 1, 2010) 740,000 P 1.30
H. There were no other intercompany transactions between Obando and FVR.
Based on the above and the result of your audit, answer the following questions:
1. The net unrealized gain (loss) on financial assets at fair value – OCI as of December 31,
2010 is: Answer: P7,000 loss.
2. The amount to be recognized in profit or loss on July 1, 2010 as a result of the purchase
of additional shares of FVR Company is: Answer: P110,000 gain.

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 3. The net investment income from FVR Company for the year ended December 31, 2010
is: Answer: P222,000.
4. The carrying amount of “Investment in FVR Company” as of December 31, 2010 is: An-
swer: P4,537,000.
5. The gain (loss) on sale of share rights on December 1, 2010 is: Answer: P7,600 gain.

PROBLEM 29 – Investment in Equity Securities

The following transactions appear on the “Investment in Paniqui Company” account of Tarlac
Corporation:
Date Particulars Debit Credit
1/2/2009 Purchased 10,000 shares P 2,000,000
12/31/2009 Purchased 15,000 shares 3,000,000
4/30/2011 Sold 12,500 share at P232 P 2,900,000
Your audit revealed the following additional information:
A. On January 2, 2009, Tarlac, Inc. acquired a 10% interest in Paniqui Corporation by paying
P2,000,000 for P10,000 ordinary shares. The shares were classified as financial assets at
fair value through OCI.
B. On December 31, 2009, Tarlac paid P3,000,000 for 15,000 additional ordinary shares of
Paniqui which represents a 15% interest in Paniqui.
C. The acquisitions on January 2 and December 31 were made at prices proportionate to
the value assigned to Paniqui’s net assets which equaled their carrying amounts.
D. Tarlac uses the average method in recording disposals of its investments. From Paniqui’s
financial statements, you were able to obtain the following information:
2009 2010 2011
Profit P 2,000,000 P 3,000,000 P 1,500,000
Dividends paid on July 1 1,000,000 1,500,000 600,000
E. Closing market quotations for the shares of Paniqui:
Bid Asked
December 31, 2009 P 212 per P214 per share
share
December 31, 2010 P216 per share P218 per share
December 31, 2011 P220 per share P221 per share
Based on the above and the result of your audit, answer the following questions:
1. The income from investment in Paniqui that should have been recognized in 2009 is:
2. The carrying amount of the investment in Paniqui as of December 31, 2009 is under-
stated by:
3. The carrying amount of the investment in Paniqui as of December 31, 2010 is:
4. The gain (loss) on sale of investment in Paniqui on April 30, 2011 is:
5. The carrying amount of the investment in Paniqui as of December 31, 2011 is:

PROBLEM 30 – Investment in Debt Securities

On June 1, 2009, 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,
2015. Pandi uses the effective interest method of amortization. On November 1, 2010, Pandi
sold the bonds for a total consideration of P3,925,000. Pandi intended to hold these bonds in
order to collect contractual cash flows consisting solely of payments to principal and interests.
Based on the above and the result of your audit, answer the following questions:
1. The purchase price of the bonds in June 1, 2009 is:
2. The interest income for the year 2009 is:
3. The carrying amount of the investment in bonds as of December 31, 2009 is:
4. The interest income for the year 2010 is:
5. The gain on sale of investment in bonds on November 1, 2010 is:

PROBLEM 31 – Investment in Debt Securities

On January 1, 2010, Gerona Company acquired the entire issue of Tarlac’s P6,000,000 12% se-
rial bonds. The bonds were purchased to yield 10%. Bonds of P2,000,000 mature at annual in -
tervals beginning December 31, 2010. Interest is payable annually on December 31. Gerona in-
tended to hold these bonds in order to collect contractual cash flows consisting solely of pay-

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 17
ments to principal and interests. Based on the above and the result of your audit, answer the
following questions:
1. The purchase price of the bonds on January 1, 2010 is:
2. The interest income to be recognized in 2010 is:
3. The carrying amount of the investment in bonds on December 31, 2010 is:
4. The carrying amount of the investment in bonds on December 31, 2011 is:

PROBLEM 32 – Investment in Debt Securities

On April 1, 2010, Kulot Corporation purchased a 5-year P10,000,000 10% bonds dated January
1, 2010. The bonds were purchased to yield 8%. Interest is payable annually every December
31. Kulot Corporation intended to hold these bonds in order to collect contractual cash flows
consisting solely of payments to principal and interests. The issuer paid the interest as sched-
uled in 2010 and 2011. During 2012, the issuer of the bonds is in financial difficulties and it be-
comes probable that the issuer will be put into administration by a receiver. On December 31,
2012, Kulot estimated that none of the interest will be collected and only P8,000,000 of the
principal will be collected on maturity date. No cash flows are received during 2013. At the end
of 2013, the issuer is released from administration and Kulot receives a letter from the receiver
stating that the issuer will be able to meet its remaining obligations, including interest and re-
payment of principal. Based on the above and the result of your audit, answer the following:
1. How much was the total amount paid to acquire the investments in bonds on April 1,
2010? Answer: P11,014,674.
2. How much is the carrying amount of the investment in bonds on December 31, 2010? An-
swer: P10,662,596.
3. How much should be recognized as impairment loss in 2012? Answer: P3,498,452.
4. How much is the interest income to be recognized in 2013? Answer: P548,672.
5. How much should be recognized as reversal of impairment loss in 2013? Answer:
P2,778,328.

PROBLEM 33 – Investment in Debt Securities

On January 1, 2011, Marimar Ay, Inc. purchased a portfolio of bonds in accordance with its busi-
ness model of managing financial assets by selling the bonds in the short-term. The bonds
were acquired at a cost of P6,000,000. The bonds has a face value of P5,000,000 with interest
of 12% payable annually every December 31 and matures on January 1, 2016. During 2011, no
securities were sold and on December 31, 2011, the fair value of the bonds is P5,500,000. In
December 2012, the Marimar Ay acquired another entity, Donya Angelica Corporation that
manages commercial bonds and has a business model that holds the bonds in order to collect
contractual cash flows. As a consequence, the portfolio of bonds acquired by the entity is no
longer for sale and the portfolio is now managed together with the acquired entity’s commer-
cial bonds to collect contractual cash flows. On December 31, 2012, the fair value of the bonds
is P5,200,000. Based on the above and the result of your audit, answer the following questions:
1. The interest income for 2011:
2. The unrealized gain (loss) on trading securities that will be recognized in 2012 is:
3. The interest income for 2013 is:
4. The carrying amount of the investment in bonds as of December 31, 2014 is:

PROBLEM 34 – Dividend Revenue

Cherry, Inc. received dividends from its investments in equity shares during the year ended De-
cember 31, 2010 as follows:
 A cash dividend of P720,000 is received from AA Corporation. Cherry Inc. owns a 2% in-
terest in AA.
 A property was received from BB Corporation as a dividend. Such property was recorded
in BB’s books at P5,000,000 with an independent expert valuation of P4,350,000.
 A cash dividend from CC Corporation amounting to P1,230,000. Cherry Inc. owns a 25%
interest in CC.
 A cash dividend from DD Corporation amounting to P2,000,000. Cherry, Inc. owns a 10%
interest in DD. 65% of the cash dividend is in the form of liquidating dividends.
 Shares with a fair value of P500,000 and par value of P400,000 were received in lieu of
a P600,000 cash dividend declared by EE Corporation. Cherry, Inc. owns a 5% interest in
EE.

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  P400,000 cash were received from FF Corporation in lieu of the shares to be received
out of a previously declared stock dividend with a fair value of P500,000 and par value
of P350,000. Cherry, Inc. owns a 3% interest in FF.
 A stock dividend was received from GG Corporation. The number of shares received was
3,000 and the fair value of such share was P30 on declaration date. Cherry, Inc. owns an
8% interest in GG.
 A cash dividend of 500,000 was received from HH. The investment in HH was purchased
on January 1, 2010. FF earned a profit P2,000,000 in 2010. Cherry, Inc. owns a 10% in-
terest in HH.
 Shares of JJ Corporation were received from II Company as a dividend. These stocks
have a market value of P750,000 and is carried at P500,000 in II’s books.
Based on the above and the result of your audit, what amount of dividend income will Cherry
Inc. report in its 2010 financial statements?

PROBLEM 35 – Investment in Equity Securities

Glorious Company acquired a 40% interest in an associate, Alta Company, for P5,000,000 on
January 1, 2011. At the acquisition date, there were no differences between fair value and car -
rying amount of identifiable assets and liabilities. Alta Company reported the following net in-
come and dividend for 2011 and 2012:
2011 2012
Net income P 2,100,000 P 3,200,000
Total dividends paid Nil 1,000,000
The following transactions occurred between Glorious Company and Alta Company:
 On January 1, 2011, Alta Company sold an equipment costing P500,000 to Glorious
Company for P800,000. Glorious Company applies a10% straight line depreciation.
 On July 1, 2012, Alta Company sold an equipment for P900,000 to Glorious Company.
The carrying amount of the equipment is P500,000 at the time of sale. The remaining
life of the equipment is 5 years and Glorious Company uses the straight line deprecia-
tion.
 On December 1, 2012, Alta Company sold an inventory to Glorious Company for
P2,800,000. The inventory had a cost of P2,000,000 and one half of which was still on
hand on December 31, 2012.
 On January 1, 2012, Glorious Company sold an equipment to Alta Company for
P3,000,000. The equipment had a cost of P2,500,000. Glorious Company regarded this
equipment as inventory whereas Alta Company intended to use it as a noncurrent asset.
The remaining useful life of the equipment is 10 years.
In addition, Alta had outstanding preference shares with total par value of P3,000,000 on De -
cember 31, 2011 and December 31, 2012. These preference shares were classified into two as
follows:
Preference share capital, 12% cumulative P 2,000,000
Preference share capital, 10% non-cumulative 1,000,000
Based on the above and the result of your audit, answer the following questions:
1. Determine the investor’s share in the profit of the associate for 2011. Answer:
P636,000.
2. Determine the carrying amount of the investment in associate on December 31, 2011.
Answer: P5,636,000.
3. Determine the investor’s share in the profit of the associate for 2012. Answer:
P752,000.
4. Determine the carrying amount of the investment in associate on December 31, 2012.
Answer: P6,220,000.

PROBLEM 36 – Investment in Equity Securities

On January 1, 2011, Interlude Company acquired a 30% interest in an investee at a cost of
P3,200,000. The equity of the investee on the date of acquisition was P6,000,000, consisting of
P4,000,000 share capital and P2,000,000 retained earnings. All the identifiable assets and lia-
bilities of the investee were recorded at fair value expect for equipment with a fair value of
P3,000,000 greater than carrying amount. The remaining useful life of the equipment is 5
years.

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 19
On December 31, 2011, Interlude Company had inventory costing P2,000,000 on hand which
had been purchased from the investee. A profit of P600,000 had been made on the sale. During
the current year, the investee reported net income of P4,000,000 and paid dividend of
P1,500,000. The equity of the investee on December 31, 2011 showed the following:
Share capital P 4,000,000
Retained earnings 3,500,000
Retained earnings appropriated 1,000,000
Revaluation surplus 2,000,000
The revaluation surplus arose from a revaluation of the land made on December 31, 2011. The
retained earning appropriated arose from a transfer of unappropriated retained earnings appro-
priated for contingencies.
1. What is the goodwill arising from the acquisition of the investment in associate?
2. What is the investment income to be reported by Interlude Company for 2011.
3. Determine the carrying amount of the investment in associate on December 31, 2011.

PROBLEM 37 – Investment in Equity Securities

Greg Popovich, an investor in Spurs Company, asked you for advice on the propriety of Spurs’
financial reporting for two of its investments. Assume that Spurs does not elect the fair value
option for reporting its financial assets and liabilities. You obtained the following information re-
lated to the investments from Spurs’ December 31, 2012 financial statements:
A. 20% ownership interest in Duncan Company represented by 200,000 ordinary shares
purchased on January 2, 2012 for P600,000.
B. 20% ownership interest in Parker Company represented by 20,000 ordinary shares pur-
chased on January 2, 2012 for P300,000.
C. On January 2, 2012, the carrying values of the acquired shares of both investments
equaled their purchase price.
D. Duncan reported earnings of P400,000 for the year ended December 31, 2012 and de-
clared and paid dividends of P100,000 during 2012.
E. Parker reported earnings of P350,000 for the year ended December 31, 2012 and de-
clared and paid dividends of P60,000 during 2012.
F. On December 31, 2012, Duncan’s and Parker’s ordinary shares were trading over the
counter at P4 and P20 per share, respectively.
G. The investment in Duncan is accounted for using the equity method whereas the invest-
ment in Parker is accounted for as at fair value through OCI.
You recalculated the amounts reported in Spurs’ December 31, 2012 financial statements and
determined that they were correct. Stressing that the information available in the financial
statements was limited, you advised Popovich that, assuming Spurs properly applied generally
accepted accounting principles, Spurs may have appropriately used two different methods to
account for its investments in Duncan and Parker even though the investments represent equal
ownership interests. Based on the above and the result of your audit, answer the following
questions:
1. The carrying amount of the investment in Duncan as of December 31, 2012 is:
2. The carrying amount of the investment in Parker as of December 31, 2012 is:
3. The income on the income statement from the investment in Duncan is:
4. The income on the income statement from the investment in Parker is:
5. The total other comprehensive income from the investments in Duncan and Parker is:

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2012-2013 Page | 20