ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41 Ÿ May 2021 CPA Licensure Examination Ÿ Quizzer

AUDITING (Auditing Problems) S. Ireneo Ÿ C. Espenilla

AP-600Q: INVESTING CYCLE: AUDIT OF INVESTMENT

PROBLEM 1:

Pinay Corp. had the following portfolio of financial instruments of the December 31, 2018. All securities
were acquired at the beginning of 2018:
Denomination/ Recorded
Security Face Value Acquisition Cost
Alpha shares 100,000 shares P5,250,000
Beta shares 40,000 shares 2,350,000
10%, Delta bonds, 3 years P2,000,000 par 1,951,126

Audit notes:
a. Alpha shares were acquired and were designated as financial asset at fair value through
profit/losses. The shares were acquired at P52.50 per share which included a P2.50 per share
transaction cost. Half of the Alpha shares were sold at P58 per share on July 1, 2019.

b. Beta shares were and were designated as financial asset at fair value through other
comprehensive income/losses. The shares were acquired at P60 per share which included
P1.25 per share transaction cost. 15,000 of these shares were sold on August 1, 2019 at P59
per share.

c. The Delta bonds were acquired on January 1, 2018, when the prevailing market rate of interest
was at 11%. Interest are collectible every December 31. Half of the Delta bonds were sold on
June 30, 2019 at P1.1M.

d. Additional information on the securities are as follows:

Security Fair value Fair value
Dec. 31, 2018 Dec. 31, 2019
Alpha shares P55/share P62/share
Beta shares 57.50/share 64/share
10%, Delta bonds, 3 years 9% yield: 12% yield:
P2,035,182 ?

Requirements: Determine the adjusted balances of the following:

1. What is the realized gain or loss on sale of Alpha shares in 2019?
a. 150,000 c. 275,000
b. 200,000 d. 400,000

2. What is the realized gain or loss sale on Beta shares in 2019 under PFRS 9, Financial
Instruments?
a. 75,000 c. 15,000
b. 22,500 d. none

3. Assuming that the company’s business model has no objective of holding debt securities to collect
contractual cash flows and that securities are held for short-term profit purposes, what is the
realized gain on sale of the Delta bonds in 2019?
a. 63,067 c. 82,409
b. 113,067 d. 32,409

4. Assuming that the company’s business model has an objective of holding debt securities to collect
contractual cash flows, what is the realized gain on sale of the Delta bonds in 2019?
a. 63,067 c. 82,409
b. 113,067 d. 32,409

5. Assuming that the company’s business model has an objective of holding debt securities to collect
contractual cash flows and hold investment available for sale when opportunity arises, what is the
realized gain on sale of the Delta bonds in 2019?
a. 63,067 c. 82,409
b. 113,067 d. 32,409

6. Assuming that the company’s business model has an objective of holding debt securities to collect
contractual cash flows, what is the total carrying value of investments that shall be presented as
financial asset fair market value through profit or loss (trading securities)?
a. 3,100,000 c. 5,064,285
b. 4,082,143 d. 4,700,000

7. Assuming that the company’s business model has no objective of holding debt securities to collect
contractual cash flows and that debt securities are held for short-term profit purposes, what is the

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-600Q
Quizzer: INVESTING CYCLE - AUDIT OF INVESTMENTS

total carrying value of investments that shall be presented as financial asset fair market value
through profit or loss (trading securities)?
a. 3,100,000 c. 5,064,285
b. 4,082,143 d. 4,700,000

8. Assuming that the company’s business model has an objective of holding debt securities to collect
contractual cash flows, what is the unrealized holding gain/loss to be reported in the profit/loss for
2019?
a. 3,100,000 c. 5,064,285
b. 4,082,143 d. 4,700,000

9. Assuming that the company’s business model has no objective of holding debt securities to collect
contractual cash flows and that debt securities are held for short-term profit purposes, what is the
unrealized holding gain/loss to be reported in the profit/loss for 2019?
a. 250,000 c. 122,402
b. 350,000 d. 314,552

10. Assuming that the company’s business model has an objective of holding debt securities to collect
contractual cash flows and hold investment available for sale when opportunity arises, what is the
unrealized holding gain/loss to be reported in the SHE portion of the Statement of Financial
Position?
a. 250,000 c. 122,402
b. 350,000 d. 314,552

PROBLEM 2:
Benshoppe Inc. had the following portfolio of financial assets as of December 31, 2020. All the
financial asset were acquired in 2020:

Financial asset Acquisition Cost

Aye Corp. Stocks, 20,000 shares P590,000
Bee Inc. Stocks, 40,000 shares 1,100,000
See Co. 10%, P2M bonds 1,973,000
Dee Corp. Stocks, 50,000 shares 2,400,000

Audit notes:
a. Aye Corp. shares were acquired with an intention of generating short-term profits from the
share price’s fluctuations. The company paid P29.50 per share, which included the P0.50 per
share broker’s fees and commissions. The shares were acquired on February 20, 2020. A P2
per share cash dividends were received on March 30. These dividends were declared by Aye
Corp. on January 20, 2020 to stockholders as of record date March 1, 2020.

b. The company paid P27.50 per share, including P0.50 per share brokers’ fee on the acquisition
of Bee Inc. on March 1, 2020. These shares were acquired for trading purposes. A P3 per share
dividends were received from the said shares on May 3, 2020. These dividends were declared
on April 1 to stockholders as of record date April 20.

c. See Co. bonds which pay semi-annual interest every June 30 and December 31, were acquired
on October 1, 2020 at P1,973,000, when the prevailing effective interest rate on similar
instrument was at 12%. The bonds shall mature on December 31, 2022. The company has a
business model of holding debt securities for short-term profits.

d. Dee Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and
commissions on June 30, 2020. Dee Corp. had a total of 200,000 shares outstanding on the
same date. The company received P5 dividends per share form Dee on December 20, 2020.

e. The following information were deemed relevant at year-end and no entries had been made
yet by the company to reflect any of the following information:

Aye Corp. Bee Inc. See Co. Dee Corp.

Net income in 2020 P1,200,000 P1,500,000 P2,000,000 P2,240,000
Fair Value P35/sh P25/sh 11% P51/sh

Requirements:

1. What is the unrealized holding gain/loss to be reported in the 2020 statement of comprehensive
income?
a. 1,948 c. 121,948
b. 51,948 d. 122,750

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2. What is the correct carrying value of investments that should be presented as current asset?
a. 3,665,750 c. 3,664,948
b. 3,543,000 d. 3,765,250

3. What is the correct carrying value of investments that should be presented as non-current?
a. 2,280,000 c. 2,430,000
b. 2,150,000 d. 2,550,000

4. How much in total should be recognized in the income statement in relation the investments?
a. 261,948 c. 571,948
b. 541,948 d. 542,750

5. Assuming that the company’s business model regarding debt securities has an objective of
collecting contractual cash flows, what is the correct carrying value of investments that should be
presented as non-current?
a. 4,394,948 c. 4,395,750
b. 4,362,390 d. 4,360,690

6. Assuming that the company’s business model regarding debt securities has an objective of
collecting contractual cash flows, how much in total should be presented in the income statement
in relation to the investments?
a. 461,948 c. 537,690
b. 525,750 d. 507,690

PROBLEM 3:
Sitaw Corp. acquired and holds debt and equity securities as investment. Equity securities are
accounted for as financial asset at fair value through other comprehensive income, while debt
securities are accounted for under the business model where the objective is to collect contractual cash
flows from the investments.

Described below are the company’s investment-related transactions from 2018 to 2019:

2018
a. The company purchased on March 1, 1 million PATATAS , Inc. common shares for P62 million,
which included the brokerage fees and commissions at P2 million.

b. The company purchased on April 15, P100 million of 10% bonds at face value from SIBUY
Corporation.

c. On July 2, the company received cash dividends of P1.5 million on the investment in PATATAS ,
Inc. common shares.

d. On October 15, the company received the semiannual interest of P5 million on the investment
in SIBUY Corporation bonds.

e. Sitaw Corp. sold half of the SIBUY Corporation bonds for P51.25 million on October 16.

f. Sitaw Corp. purchased 250,000 BAWA Co. preferred shares for P20 million which included
brokerage fees and commissions at P1 million on November 11.

g. On December 31, the market values of the investments are P64 per share for PATATAS , Inc.
and P74 per share for BAWA Co. preferred stock. In addition, SIBUY bonds were quoted at
110.

h. Also, on December 31, the company recorded a transfer of all PATATAS shares to financial
asset at fair value through profit or loss caption.

2019
i. The company sold half the PATATAS Inc. shares for P65 per share on February 14.

j. The company sold the BAWA Co. preferred stock for P78 per share on March 15.

REQUIREMENTS:
1. What is the gain (loss) on the sale of the SIBUY Corporation bonds on October 16, 2018?
a. 1.25 million b. 3.75 million c. (1.25 million) d. (3.75 million)

2. What is the total unrealized capital related to the investment to be reported at the balance sheet
date December 31, 2018?

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a. 1.5 million b. 0.5 million c. 1.75 million d. 0.75 million

3. What is the total dividend and interest income from the investments to be reported in the
company’s 2018 income statement?
a. 8.583 million b. 7.583 million c. 7.542 million d. 7.5 million

4. What is the gain (loss) on the sale of the PATATAS , Inc. shares in 2019, under PFRS 9,
Financial Instruments?
a. 1.5 million b. 0.5 million c. (1.5 million) d. None

5. What is the gain (loss) on the sale of the BAWA Co. preferred shares in 2019, under PFRS 9,
Financial Instruments?
a. 1.5 million b. 0.5 million c. (1.5 million) d. None

PROBLEM 4:
Mariah Corp. has the following non-trading equity securities on December 31, 2018:

Fair Value
Security # of Shares Cost (12/31/18)
ABC ordinary shares 9,000 P441,000 P46 per share
DEF ordinary shares 30,000 1,080,000 P35 per share
GHI preference shares 2,400 360,000 P154 per share

Audit notes:
a. The above securities were all bought in 2018. On the initial recognition, Mariah made an
irrevocable election to present gain/loss on the said securities to other comprehensive income.

b. On April 1, 2019, the company sold all of the ABC ordinary share for P65 per share.

c. On May 1, 2019, the company purchased 4,200 ordinary shares of JKL Corp. at P75 per share.
The company incurred brokers’ fees amounting to P10,400.

d. The following additional information in 2019 were deemed relevant:

Reported Fair Value of
Net Income shares
Dividends Declared* (12/31/19)

ABC ordinary shares P2.00 per share P900,000 P62 per share
DEF ordinary shares P1.50 per share 1,300,000 P38 per share
GHI preference shares P1.00 per share 750,000 P145 per share
JKL ordinary shares P0.75 per share 450,000 P77 per share
*all dividends were declared on December 31, 2019.

Requirements:
Based on the results of your audit answer the following:
1. What is the realized gain on sale of ABC ordinary shares in 2019, under PFRS 9?
a. 144,000 b. 171,000 c. 190,000 d. none

2. What is the unrealized holding gain/loss to be reported in the stockholders’ equity portion of the
2019 statement of financial position?
a. 76,800 b. 56,400 c. 46,000 d. 66,400

3. Assuming that the company elected to report gains/losses in the profit or losses instead, what is
the unrealized holding gain/loss to be reported in the 2019 statement of comprehensive income?
a. 76,800 b. 56,400 c. 46,000 d. 66,400

4. Assuming that the 4,200 JKL shares acquired in 2019 represent 20% interest on JKL’s outstanding
ordinary shares, what is the correct carrying value of the investment in JKL shares?
a. 412,250 b. 382,250 c. 371,850 d. 401,850

PROBLEM 5:
Your audit of the Dumbo Inc. revealed the following transactions on its “Financial Asset at Fair Market
Value through profit or loss” account:
Date Particulars Debit Credit
1/15/20 Purchased 40,000 shares of ABC at P21.50 per
share and 20,000 shares of XYZ at P13.00
per share. Amount includes transaction
costs amounting to P1.50 per share. P1,120,000

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6/30 Purchased 1,000 of DEF Inc.’s 12%, 4 year,

P1,000 face value bonds dated January 1,
2018 and pays annual interest every
December 31. Prevailing interest on the
same date at 14%. Amount includes
accrued interest and transaction costs
amounting to P10 per bond. 1,044,258

7/1 Received 3,000 shares of XYZ as stock

dividends, prevailing market price at P12
per share 36,000

8/5 Sold 15,000 of ABC shares at P15 per share and

5,000 of XYZ shares at P13 per share P290,000

12/1 Sold half of the DEF bonds at 98 plus accrued

interest 515,000

12/30 Received P80,000 in lieu of a 5,000 stock

dividends from its ABC shares 80,000
12/31 BALANCE P1,315,258

Additional information:
On December 31, 2020, the market values of the ABC and XYZ shares were at P18 and P15
per share, respectively. Moreover the DEF Inc. bonds had a prevailing interest on the same date at
P11%.

REQUIREMENTS
1. How much is the total realized gain or (loss) on disposal of bonds on December 1?
a. None b. 2,871, c. (32,129) d. (2,871)

2. How much is the total realized gain or (loss) on disposal of stocks on August 5?
a. (67,500) b. 67,500 c. (60,000) d. 60,000

3. How much should be the unrealized holding gain to be recorded in the income statement for the
year 2014?
a. 27,379 b. 57,376 c. 64,876 d. 140,709

4. How much interest income should be recorded in the income statement?

a. 60,000 b. 55,000 c. 58,179 d. 67,629

5. How much dividend income should be recorded in the income statement?

a. 0 b. 36,000 c. 80,000 d. 116,000

6. How much investment in trading securities should be reported in the statement of financial
position?
a. 1,038,064 b. 1,113,064 c. 1,167,129 d. 1,224,505

PROBLEM 6:
The following information appear on the “Available-for-sale Marketable Securities”/”Financial Asset at
FMV trough Other Comprehensive Income/Loss” account of NYU Corp. for the year 2020:

Date Particulars Debit Credit

1/1/20 Beginning balance comprising of 1,000 SMC shares at
market value of P250/share and 2,000 ABI shares
at market value of P350/share. P950,000
4/1 Purchased 5-year, 12%, 500,000 TDI Corp. bonds at
a prevailing interest rate of 9%. Interests are
payable every March 31. 558,345
11/5 Sold 400 shares of SMC at P230 per share and 800
shares of ABI shares at P325 per share. P352,000
12/31 Sold 300,000 face value TDI bonds at 95 plus
accrued interest. 312,000
12/31 BALANCE P844,345

Additional information:
a. The original acquisition cost of SMC and ABI shares were at P260 per share and P330 per
share, respectively.

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b. On December 31, the fair market values of SMC and ABI shares were at P275 per share and
P340 per share, respectively.

Requirements:
1. How much is the realized loss on sale of securities on November 5?
a. 4,000 b. 8,000 c. 12,000 d. 16,000

2. How much is the realized loss on partial sale of the TDI bonds?
a. 45,620 b. 50,007 c. 83,345 d. 91,240

3. How much is the unrealized holding gain or (loss) to be reported in the statement of financial
position?
a. 9,413 b. (9,413) c. 51,413 d. (51,413)

4. What is the balance of the investment in available for sale securities to be reported in the
statement of financial position?
a. 772,413 b. 793,413 c. 763,000 d. 742,000

PROBLEM 7:
On December 31, 2019 Vegas Corp.’s statement of financial position showed the following balances to
its securities accounts:

Financial Asset at Fair Value Through Profit or Loss

Cost Market
10,000 shares of ABC stock P1,500,000 P1,525,000
8,000 shares of DEF stock 1,100,000 1,056,500
10%, GHI bonds purchased at face value
(interests payable semi- annually on
January and July). 500,000* 373,500
*face value

Financial Asset at Fair Value Through Other Comprehensive Income or Loss

Cost Market
10,000 shares of JKL shares 1,180,000 1,260,000
20,000 shares MNO shares 980,000 1,100,000

During 2020 the following transactions took place:

1/1: Received the semi-annual interest from GHI.

3/1: Purchased 3,000 additional shares of ABC stocks for P459,000 classified as investment at fair
value through profit or loss.

4/15: Sold 4,000 shares of DEF stocks for P138 per share.

5/4: Sold 4,000 shares of JKL shares for P124 per share.

7/1: Received semi-annul interest from GHI.

9/1: Purchased 400 of PQR’s 5 year, 12%, P1,000 bonds at 93 plus accrued interest. The bonds are
dated January 1, 2020. The bonds was designated as investment at fair value through profit
or loss.

The market values of the stocks and bonds on December 31, 2020 are as follows:
ABC stocks P153.20
DEF stocks 137.00
GHI bonds 82.22 (Quoted price)
JKL stocks 110.50
MNO stocks P44.00
PQR bonds 98.00 (Quoted price)

Requirements:

1. How much is the realized gain or (loss) on the sale of DEF stocks?
a. 2,000 b. (2,000) c. 23,750 d. (23,750)

2. How much is the realized gain or (loss) on sale of JKL shares?

a. (8,000) b. 8,000 c. (24,000) d. none.

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3. How much is the unrealized holding gain to be reported in the 2020 income statement?
a. 64,950 b. 49,750 c. 10,250 d. 84,950

4. How much is the unrealized holding loss to be reported in the 2020 statement of financial position?
a. 121,000 b. 125,000 c. 129,000 d. 145,000

PROBLEM 8:
During 2019 and 2020 EBC Co. made the following journal entries to account for transactions involving
trading securities:

2019
Nov. 1 Investment in Trading Securities – 10% Banko
Sentral Treasury Bonds P106,583
Cash P106,583
To record the purchase of P100,000 BSP
Treasury bonds at 103.25. Interest payable
semiannually on Jan. 1 and July 1.

Dec. 31 Unrealized Increase/Decrease in Value of Available

for Sale Securities 3,983
Market Adjustment – Trading Securities 3,983
To record decrease in market value of the
current securities based n the following:
Cost Market Adjustment
F Co. Shares P25,250 P23,350 P1,900 cr
D Co. Shares 32,450 33,950 1,500 dr
10% BS Treas. Bonds 106,583 103,000 3,583 cr
Total P164,283 P160,300 P3,983 cr

The beginning balance in Market Adjustment – Trading Securities was a P500 credit. There were no
other entries in 2019.

2020
Jan. 1 Cash 5,000
Interest Revenue 5,000
To record interest for 6 months

July 1 Cash 5,000

Interest Revenue 5,000
To record interest for 6 months.

Dec. 6 Investment in Available for sale Securities-F Co 25,250

Investment in Trading Securities 25,250
To reclassify F Co. Shares form trading
securities to available for sale. Market price was
P24,500 at the date of reclassification.

Dec. 31 Unrealized Increase/Decrease in Value of Available

for Sale Securities 3,183
Market Adjustment – Available for Sale 300
Market Adjustment – Trading Securities 2,883
To record the decrease in market value of
available for sale securities based on the ff:
Cost Market Adjustment
F Co. Shares P25,250 P24,950 P300 cr
D Co. Shares 32,450 32,650 200 dr
10% BS Treas. Bonds 106,583 103,500 3,083 cr
Total P164,283 P161,100 P3,183 cr

There were no other entries in 2020.

Requirements:
1. Assuming that the investments in 2019 are correctly categorized as Trading Securities, how much
unrealized loss should be recognized in the 2019 income statement?
a. 3,983. c. 150.
b. 650. d. 0.

2. How much unrealized gain (loss) should be recognized in the 2020 income statement?

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a. 800. c. 2,883.
b (800) d. 150.

3. What is the correct interest income to be reported in the 2019 and 2020 income statements?
a. 1,667; 10,000. c. 3,333; 6,667.
b. 5,000; 6,667. d. 3,333; 10,000.

4. What is the correct investment in trading securities balance to be reported in the 2020 statement
of financial position?
a. 136,150. c. 161,100.
b. 135,700. d. 160,950.

PROBLEM 9:
The following subsidiary ledgers show the Investment at Fair Value Through Profit or Losses of Hart
Corp. for the year 2020:
BLACK INC.
Date Particulars Debit Credit
June 2 Purchase of 2,000 shares P570,000
30 Adjusted to market value; credit to
retained earnings 30,000
July 5 Sold 1,000 shares at P450 P450,000
Aug. 20 Received 50% share dividends
(debited at par value); credit to
dividend income 150,000
Sept. 15 Stocks were split 2 for 1; credit to
investment income 450,000
Oct. 11 Sold 1,000 shares at P150 150,000

WHITE INC.
Date Particulars Debit Credit
Feb 2 Purchase 20,000 shares P3,000,000
28 Cash dividend to share of record
February 15, declared January 15 90,000
June 1 Sold 20,000 shares at P195 3,900,000
Aug. 5 Purchased 50,000 shares 7,500,000
Nov. 20 Cash received from sale of 20,000
shares after a November 1
declaration of P15 cash dividend per
share to shareholders of record as of
December 1 3,700,000
Dec. 15 Cash dividends received 450,000

Black Inc. shares and White Inc. shares were selling at P150 and P190, respectively, as of December
31, 2020.

Requirements:
1. What is the total gain on sale of Black Inc. shares?
a. 165,000 c. 220,000
b. 205,000 d. 245,000

2. What is the total gain on sale of White Inc. shares?

a. 1,300,000 c. 1,390,000
b. 1,600,000 d. 1,690,000

3. What is the unrealized holding gain or loss to be reported in the Hart’s 2020 Income Statement?
a. 0 c. 1,210,000
b. 1,660,000 d. 1,310,000

4. At what amount should Hart report its investment in its 2020 Statement of Financial Position?
a. 5,812,500 c. 6,150,000
b. 5,850,000 d. 6,000,000

PROBLEM 10:
On January 4, 2020, Isuzu Corp, paid P2,592,000 for 40,000 shares of Suzuki Inc. ordinary shares.
The book value of Suzuki’s assets was P6,400,000 on the date of acquisition.

The investment represents a 30% interest in the net assets Suzuki Inc. and gave Isuzu the ability to
exercise significant influence over Suzuki. Isuzu received dividends of P6 per share on December 4,

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2020, and Suzuki reported net income of P1,280,000 for the year ended December 31, 2020. The
market value of Suzuki’s shares at December 31, 2020 was P64 per share with cost to sell at a
minimal amount.

You also ascertained the following information:

On January 4, 2020, the fair value of Suzuki’s depreciable assets, with an average remaining useful life
of 8 years, exceeded their book value by P640,000. The remainder of the excess of the cost of the
investment over the book value of net assets purchased was attributed to an unidentifiable asset.

Requirements:
1. What amount of investment is attributable to goodwill?
a. 480,000 b. 192,000 c. 672,000 d. 288,000

2. What amount of investment income should be reported in Isuzu’s income statement for the year
ended December 31, 2020?
a. 240,000 b. 216,000 c. 360,000 d. 384.000

3. What is the carrying value of investment in Suzuki’s ordinary share on December 31, 2020?
a. 2,560,000 b. 2,712,000 c. 2,592,000 d. 2,736,000

4. What total/net amount should be reported in Suzuki’s income statement for the year ended
December 31, 2020?
a. 240,000 b. 208,000 c. 60,000 d. 180,000

5. Assuming that the company had no significant influence over Suzuki despite of the proportionate
ownership, what total/net amount should be reported in Suzuki’s income statement for the year
ended December 31, 2020?
a. 240,000 b. 208,000 c. 60,000 d. 180,000

6. In relation to item 5 above, what is the carrying value of the investment at December 31, 2020?
a. 2,592,000 b. 2,712,000 c. 2,560,000 d. 2,472,000

PROBLEM 11:
On January 2, 2020, Pacquio Corp. acquired 50,000 ordinary shares of Morales Inc. at P325 per share.
Morales’ books contained the following selected information as of the last reporting date, December
31, 2019:

Ordinary shares, 100 par value, 200,000 shares issued and outstanding P20,000,000
10% Preference shares, 50 par value, 100,000 shares 5,000,000
issued and outstanding
Share premium on ordinary shares 15,000,000
Accumulated profits as of December 31, 2019 20,000,000
Net income for the year 2019 5,000,000

Dividends were declared and paid on preference shares on December 31, 2019.

Morales’ Building which had a remaining life of 5 years was understated by P4,000,000 on the
acquisition date. Any remaining excess over the book value, is attributed to unidentifiable asset.

On December 31, 2020, Morales reported a total net income of P2.5M.

Requirements:
1. What is the share in the net income of the associate assuming that the preference shares are
cumulative?
a. 625,000 b. 500,000 c. 425,000 d. 300,000

2. What is the balance of the associate investment assuming that the preference shares are
cumulative?
a. 16,875,000 b. 16,750,000 c. 16,675,000 d. 16,550,000

3. What is the share in the net income of the associate assuming that the preference shares are non-
cumulative?
a. 625,000 b. 500,000 c. 425,000 d. 300,000

4. What is the balance of associate investment assuming that the preference shares are non-
cumulative?
a. 16,875,000 b. 16,750,000 c. 16,675,000 d. 16,550,000

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PROBLEM 12:
Black Corporation owns 300,000 of White Inc.’s 1,000,000 shares issued and outstanding purchased
on January 2, 2020 at P20 per share. White’s net assets had a book value on the said date at P16M.
The excess of acquisition cost over book value of net assets acquired was attributed to the total
understatement of White’s Land and Building with a 5 year average useful life at P800,000 and
P1,200,000, respectively. The balance of the excess was attributed to White’s unidentifiable asset.

White Inc. declared P800,000 cash dividends by the end of 2020 and reported a total comprehensive
income amounting to P2,000,000 which is net of an unrealized holding loss from its investment at fair
value through other comprehensive income amounting to P500,000.

Requirements:
1. How much from the acquisition cost on January 2020, is attributed to unidentifiable asset?
a. 600,000 b. 1,200,000 c. 2,000,000 d. 4,000,000

2. How much investment income should be reported in Black Corporation’s profit or loss?
a. 678,000 b. 750,000 c. 600,000 d. 528,000

3. How much total/net amount should be reported in Black Corporation’s 2020 statement of
comprehensive income?
a. 678,000 b. 750,000 c. 600,000 d. 528,000

4. What is the carrying value of the investment in White Inc. as of December 31, 2020?
a. 6,528,000 b. 6,288,000 c. 6,678,000 d. 6,438,000

5. Assuming that White Inc. issued additional 200,000 shares at P30 per shares to other stockholders
early in January of 2021, what shall be the total gain or loss on dilution to be recognized in the
2021 profit or loss, provided further that the dilution is considered as a “true sale”?
a. 25,000. b. 427,000 c. 452,000 d. none.

6. Assuming that White Inc. issued additional 200,000 shares at P30 per shares to other stockholders
early in January of 2021, what shall be the total gain or loss on dilution to be recognized in the
2021 profit or loss, provided further that goodwill is not considered “deemed sold”?
a. 125,000. b. 527,000 c. 552,000 d. none.

7. Assuming that Black Corporation sold 120,000 of its investment in White Corporation at P30 per
share, how much is the total gain on cessation should be recognized in the 2021 profit or loss?
a. 1,627,200 b. 1,084,800 c. 2,562,000 d. 2,712,000

8. Using the information in the previous item, how much from the gain/loss is realized?
a. 1,024,800 b. 1,537,200 c. 2,562,000 d. 2,712,000

PROBLEM 13:
On January 1, 2020, Analen Inc., paid P700,000 for 10,000 shares of Bel Company’s voting ordinary
shares, which was a 10% interest in Bel. At that date the net assets of Bel totaled P6,000,000. The
fair values of all of Bel’s identifiable assets and liabilities were equal to their book values. Analen does
not have the ability to exercise significant influence over the operating and financial policies of Bel.
Analen received dividends of P0.90 per share from Bel on October 1, 2020. Bel reported net income of
P400,000 for the year ended December 31, 2020.

On July 1, 2021, Analen paid P2,400,00 for 30,000 additional shares of Bel Company’s voting ordinary
shares, which represents a 30% investment in Bel. The fair values of all of Bel’s identifiable assets net
of liabilities were equal to their book values of P6,500,000. As a result of this transaction, Analen has
the ability to exercise significant influence over the operating and financial policies of Bel. Analen
received dividends of P1.10 per share from Bel on April 1, 2021, and P1.35 per share on October 1,
2021. Bel reported net income of P500,000 for the year ended December 31, 2021, and P200,000 for
the 6 months ended December 31, 2021. Analen does not amortize goodwill but evaluates at each
year-end its possible impairment. No impairment on goodwill has been observed though.

Case 1: If the step-acquisition of investment in associate was accounted for under “Cost-Based
Approach, with Catch-up Adjustment”:

1. How much investment income should Analen record in its 2021 income statement?
a. 30,000 b. 80,000 c. 91,000 d. 110,000

2. How much should the company present its investment in Bel in its 2021 statement of financial
position?

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a. 3,176,000 b. 3,126,000 c. 3,226,000 d. 3,326,000

Case 2: If the step-acquisition of investment in associate was accounted for under “Cost-Based
Approach, without Catch-up Adjustment”:

3. How much investment income should Analen record in its 2021 income statement?
a. 30,000 b. 80,000 c. 91,000 d. 110,000

4. How much should the company present its investment in Bel in its 2021 statement of financial
position?
a. 3,176,000 b. 3,126,000 c. 3,226,000 d. 3,326,000

Case 3: If the step-acquisition of investment in associate was accounted for under “Fair Market
Value Approach, without Catch-up Adjustment”:

5. How much investment income should Analen record in its 2021 income statement?
a. 30,000 b. 80,000 c. 91,000 d. 110,000

6. How much should the company present its investment in Bel in its 2021 statement of financial
position?
a. 3,176,000 b. 3,126,000 c. 3,226,000 d. 3,326,000

PROBLEM 14:
In line with your audit of Orion Corp.’s investment accounts as of December 31, 2018, you ascertained
the following information:
Investment type CV Per books
Investment in bonds P4,000,000
Investment in stocks 6,200,000
Investment property 3,500,000
Audit notes:
a. The investment in bonds which shall mature on December 31, 2020 were acquired in January
1, 2017 when the prevailing market rate of interest was at 10%. Interest at 12% is collectible
from the bonds every December 31. The acquisition was recorded by the client as a debit to
Investment in bonds at face value with the difference between the face value and the total
consideration given up to interest income. Interest collected in 2017 and 2018 were
appropriately recorded. No other entry relating to the investment was made by the client.
Further investigation revealed that the company business model with regard debt security
investment has an objective of collecting contractual cash flows. The prevailing market rate of
interest was at 11% and 9% at the end of 2017 and 2018, respectively.

b. The investment in stocks is for 40,000 shares of Telecom Corp.’s ordinary shares acquired in
September 30, 2017. The shares were originally acquired at P145 per share. The book value of
the net assets of Telecom Corp. on this date was at P25M and its total outstanding shares was
at 200,000. Telecom’s depreciable assets with average remaining life of 10 years were
understated on this date.

The fair value of Telecom Corp.’s shares were at P155 per share at the end of 2017. The
company recorded the remeasurement (from the acquisition cost to fair value) of the
investment at the end of 2017 and recognized the same as unrealized holding gain in the 2014
profit/loss. The only other entry made by the client related to the investment was the receipt
of P2 per share dividend by the end of 2017 and P4 per share dividend in 2018 as dividend
income.

Further investigation revealed the following relevant information:

Telecom Corp. 2017 2018
Net income for the year P3,800,000 P5,200,000
Foreign exchange loss – OCL - 400,000
Unrealized holding gain – OCI 300,000
Fair value 155 per share 169 per share

c. The investment property was a building-factory converted on June 30, 2018 as a property for
lease since the company decided to discontinue its production segment. The factory was
originally acquired at P5M on January 1, 2015 and was depreciated using straight-line method
over a 10 year useful life. The company elected to use the fair value method in measuring its
investment property. The fair value of the building on June 30, 2018 was at P3.6M. On
December 31, 2018 the fair value of the building is at P3.2M.

Required:
1. What is the correct carrying value of the investment in bonds as of December 31, 2018?

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a. 4,198,948 b. 4,068,501. c. 4,138,843. d. 4,211,093.

2. What is the retroactive adjustment to the retained earnings, beginning as a result of your audit of
the investment in bonds?
a. 198,948. b. 138,843. c. 253,589. d. 226,441.

3. Assuming that the investment in bonds accounted for under the investment category where the
business model has an objective of holding debt securities primarily to generate short-term profits,
what is the unrealized holding gain/loss to be recognized in the 2018 profit or loss?
a. 113,345 b. 138,843. c. 432,101 d. none.

4. What is the correct carrying value of the investment in stocks as of December 31, 2018?
a. 6,760,000. b. 6,670,000. c. 6,770,000 d. 7,180,000.

5. What is the retroactive adjustment to the retained earnings, beginning as a result of your audit of
the investment in stocks?
a. 310,000. b. 400,000 c. 490,000. d. 90,000.

6. Assuming that on December 31, 2018, Orion Corp. sold 10,000 shares of its investment in
Telecom shares at the prevailing fair value, how much is the total gain/loss to be recognized in the
profit or loss in 2018 as a result of the transaction?
a. 90,000. b. 70,000. c. 52,500. d.17,500.

7. How much should be recognized in the statement of comprehensive income upon the
reclassification of the building from PPE to Investment?
a. none. b. 350,000. c. 100,000. d. 400,000.

8. How much should be recognized in the profit or loss for 2018 as a result of the year-end
remeasurement of the investment property?
a. none. b. 350,000. c. 100,000. d. 400,000.

PROBLEM 15:
Jude Corporation acquired a building on January 1, 2018. The acquisition cost was P5,000,000 payable
at the rate of P1M at the beginning of each year starting January 1, 2018. The company paid option
money totaling P400,000, P85,221 of which is attributed to real properties not acquired. The company
also paid property taxes in arrears as of January 1, 2018 at P147,872. The prevailing market rate of
interest for transaction is 12%. The building is estimated to have useful life of 25 Years.

The property was appraised at the end of each year as follows:

2018 2019 2020
Appraised values P4,600,000 P4,100,000 P4,300,000

Requirements:
1. How much should the property be initially recognized?
a. 4,037,349 b. 4,585,200 c. 4,500,000 d. 5,067,427

2. What is the carrying value property of the as of December 31, 2018, assuming that the building is
an owner-occupied property?
a. 4,140,000 b. 4,048,000 c. 4,010,000 d. 4,100,000

3. Using the information in number 2, how much impairment loss should be recognized from the
asset in the 2018 profit or loss?
a. none b. P40,000 c. 140,000 d. 200,000

4. What is the carrying value of the property as of December 31, 2020, assuming that the building is
an investment property under the cost method?
a. 3,960,000 b. 3,975,758 c. 3,921,739 d. 4,000,000

5. Using the information in number 4, how much impairment recovery gain should be recognized
from the asset in the 2020 profit or loss?
a. none b. P40,000 c. 38,261 d. 88,261

6. Assuming that the building is originally categorized as owner occupied upon acquisition but was
transferred to investment property at the end of 2020, how much gain or loss from transfer should
be recognized in the income statement assuming that investment properties are carried at fair
value method?
a. none b. 40,000 c. 140,000 d. 200,000

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7. Assuming that the building is originally categorized as investment property upon acquisition but
was transferred to owner-occupied property at the end of 2020, how much gain or loss from
transfer should be recognized in the income statement assuming that investment properties are
carried at fair value method?
a. none b. 40,000 c. 140,000 d. 200,000

PROBLEM 16:
Your audit of Dado Company’s other long-term investments resulted to the following information:
a. Dado Company insured the life of its president for P4,000,000, the corporation being the
beneficiary of an ordinary life policy. The monthly premium is P8,000 payable every first day
of the month.

b. The policy is dated January 1, 2012, and carries the following cash surrender values:
End of Policy Year Cash Surrender Value
2012 P0
2013 0
2014 25,200
2015 30,000
2016 39,600
2017 50,400

c. The company follows the calendar year as its fiscal period.

d. The company received dividends in 2015, 2016 and 2017 at P8,000, P9,600 and P11,200,
respectively.

e. The president died on October 31, 2017 and the policy is collected on December 1, 2017.
Requirements:
1. What is the life insurance expense to reported in 2014?
a. 96,000 b. 87,600 c. 79,600 d. 83,200

2. What is the life insurance expense to reported in 2015?

a. 96,000 b. 91,200 c. 79,600 d. 83,200

3. What is the life insurance expense to reported in 2016?

a. 96,000 b. 86,400 c. 76,800 d. 83,200

4. What is the life insurance expense to be reported in 2017?

a. 96,000 b. 74,000 c. 85,200 d. 59,800

5. What is the gain on life insurance policy settlement in 2017?

a. 3,951,400 b. 4,000,000 c. 3,935,400 d. 3,940,200

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