AUDIT OF IVESTMENTS

Problem 1

Trading Securities
MAGNOLIA CORP. invested its excess cash in equity securities during 2024. The business model for
these investments is to profit from trading on price changes.

(a) As of December 31, 2018, the equity investment portfolio consisted of the following:

Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares P45,000 P63,000
Polland Co. 2,000 shares 120,000 126,000
Alabang Corp. 2,000 shares 216,000 180,000
Totals P381.000 P369.000

1. In the December 31, 2024, statement of financial position, what should be reported as carrying amount
of the investments?
A. P369,000 C. P381,000
B. P345,000 D. P405,000

2. In the 2024 income statement, what amount should be reported as unrealized gain or loss?
A. Unrealized gain of P12,000
B. Unrealized loss of P12,000
C. Unrealized loss of P36,000
D. Unrealized gain of P24,000

(b) During the year 2025, Magnolia Corp. sold 2,000 shares of Polland Co. for P114,600 and purchased
2,000 more shares of LJ, Inc. and 1,000 shares of Dwarfy Company. On December 31, 2025, Magnolia's
equity securities portfolio consisted of the following.

Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares P45,000 P 60,000
LJ, Inc. 2,000 shares 99,000 120,000
Dwarfy Company 1,000 shares 48,000 36,000
Alabang Corp. 2,000 shares 216,000 66.000
Totals P408,000 P282,000
3. What is the gain or loss on the sale of Polland Co. investment?
A. P5,400 gain C. P11,400 gain
B. P5,400 loss D. P11,400 loss

4. What is the carrying amount of the investments on December 31, 2025?

A. P408,000 C. P282,000
B. P444,000 D. P246,000

5. What amount of unrealized gain or loss should be reported in the income statement for the year ended
December 31, 2019?
A. P126,000 unrealized gain
B. P126,000 unrealized loss
C. P108,000 unrealized gain
D. P108,000 unrealized loss

(c) During the year 2026, Magnolia sold 3,000 shares of LJ, Inc. for P119,700 and 500 shares of Dwarfy
Company at a loss of P8,100.

On December 31, 2026, Magnolia's equity investment portiono consisted of the following.

Investment Quantity Cost Fair Value

Dwarfy Company 500 shares P 24,000 P18,000
Alabang Corp. 2,000 shares 216,000 246,000
 Totals P240.000 P264.000

6. What should be reported as loss on sale of trading securities in 2020?

A. P60,300 C. P24,300
B. P32,400 D. P68,400

7. What amount of unrealized gain or loss should be reported in the income statement for the year ended
December 31, 2020?
A. P180,000 unrealized gain
B. P180,000 unrealized loss
C. P24,000 unrealized gain
D. P24,000 unrealized loss

8. In the December 31, 2020, statement of financial position, what should be reported as carrying amount
of trading securities?
A. P240,000 C. P264,000
B. P234,000 D. P270,000

Problem2
Non-trading Equity Securities:
Fair Value Changes in Other Comprehensive Income (OCI)

During the course of your audit of the financial statements of FISHING CORPORATION for the year
ended December 31, 2018, you found a new account, "Investment in Equity Securities." Your audit
revealed that during 2018, Fishing began a program of investments, and all investment-related
transactions were entered in this account. Your analysis of this account for 2018 follows:

Fishing Corporation
Analysis of Investment in Equity Securities
For the Year Ended December 31, 2018

Debit Credit
(a)
Salmon Company Ordinary Shares
Feb.14 Purchased 36,000 shares
@ P55 per share P1,980,000
July 26 Received 3,600 ordinary shares of
Salmon Company as a stock dividend.
(Memorandum entry in general ledger.)
Sept.28 Sold the 3,600 ordinary shares of
Salmon Company received July 26 @
P70 per share. P252,000

(b)
Debit Credit
Tamban, Inc. Ordinary Shares
April30 Purchased 180,000 shares
@ P40 per share P7,200,000
Oct. 28 Received dividend of P1.20 per share. P216,000

Additional information:

a. The fair value for each security as of the 2018 date of each transaction follow:

Security Feb. 14 April 30 July 26 Sept.28 Dec. 31

Salmon Company P55 P62 P70 P74
Tamban, Inc. 40 32
Fishing Corp. 25 28 30 33 35

b. All of the investments of Fishing Corporation are nominal in respect to percentage of ownership (5% or
less).

C. Each investment is considered by Fishing Corporation to be non trading. Fishing Corporation has made
an irrevocable election to present in other comprehensive income subsequent changes in fair value of its
non-trading equity securities.

1. What amount should be reported as gain on sale of non-trading equity securities in the income
statement of Fishing Corporation for the year ended December 31, 2018?
A. P72,000 C. P54,000
B. P18,000 D. P0

2. The receipt of 3,600 stock dividend would cause the investment balance to increase by
A. P223,200 C. P198,000
B. P252,000 D. P0

3. What entry is necessary to correct the recording of the cash dividend received from Tamban, Inc.?
A. Cash 216,000
Dividend income 216,000
B. Cash 216,000
Investment in equity securities 216,000
C. Investment in equity securities 216,000
Dividend income 216,000

D. Dividend income 216,000

Investment in equity securities 216,000

4. What amount of unrealized gain or loss should be reported in the 2018 statement of comprehensive
income as component of other comprehensive income?
A. P1,440,000 gain C. P576,000 gain
B. P1,440,000 loss D. P576,000 loss
5. What amount should be reported as Investment in Equity Securities in the statement of financial
position on December 31, 2018?
A. P9,000,000 C. P7,560,000
B. P8,424,000 D. P9,864,000

Problem 3
Investment in Bonds

Shown below is an amortization schedule related to ANGLER COMPANY's 5-year, P500,000 bond with a
7% interest rate and a 5% yield, purchased on December 31, 2018, for P543,300.

Interest Interest Premium Carrying

Date Received Income Amortization Amount
12/31/18 P543,300
12/31/19 P35,000 P27,165 P7,835 535,465
12/31/20 35,000 26,773 8,227 527,238
12/31/21 35,000 26,362 8,638 518,600
12/31/22 35,000 25,930 9,070 509,530
12/31/23 35,000 25,470 9,530 500,000

The following shows a comparison of the amortized cost and fair value of the bonds at year-end:

Amortized Cost Fair Value

December 31, 2019 P535,465 P532,500
December 31, 2020 527,328 537,50
December 31, 2021 518,600 528,250
December 31, 2022 509,530 515,000
December 31, 2023 500,000 500,000

Required:
a. Prepare the journal entry to record the purchase of these bonds on December 31, 2018, assuming the
bonds are held as financial assets measured at amortized cost.
b. Prepare the journal entry(ies) related to these bonds for 2019.
C. Prepare the journal entry(ies) related to these bonds for 2021.
d. What should be reported as the carrying amount of these bonds in the statement of financial position on
December 31, 2022?

Reclassification from Amortized Cost to FVPL

On January 1, 2017, ELAGRO COMPANY purchased P2,000,000 face value bonds at a price of
P1,824,800 which will yield an interest rate of 10%. The nominal interest rate on the bonds is 8% payable
annually every December 31. The company's business model is to collect contractual cash flows that are
solely payments of principal and interest.

On December 31, 2018, Elagro Company changed the business model in managing the bonds from
collecting contract cash flows that are solely payments of principal and interest to realizing short term
gains. The market value of the bonds on January 1, 2019, is 105.

Questions:
1. What amount should be reported as interest income for 2018?
A. P184,728 C. P182,480
B. P160,000 D. P24,728

2. What is the carrying amount of the bonds on December 31.

2018?
A. P2,000,000 C. P1,847,280
B. P1,872,008 D. P1,782,088

3. On reclassification date, what amount of gain on reclassification of financial asset should be recognized
by Elagro Company?

A. P120,000 C. P0
B. P187,200 D. P247,992

Problem 4
Equity Method

DURIAN CORP. purchased 40% of Associate Company's outstanding ordinary shares on January 2,
2018, for P270 million. The book value of Associate Company's net assets (shareholders' equity) at the
purchase date totaled P450 million. Book values and fair values were the same for all financial statement
items except for inventory and buildings, for which fair values exceeded book values by P12.5 million and
P112.5 million, respectively. All inventory on hand at the purchase date was sold during 2018. The
buildings have average remaining useful lives of 15 years.

Associate Company reported net income of P110 million for the year ended December 31, 2018, and paid
cash dividends of P40 million. The fair value of Durian's investment in associate was P300 million at
December 31, 2018.

1. Of the amount paid for the acquisition of Associate Company's

ordinary shares, how much is attributable to goodwill?
A. P50 million C. P40 million
B. P45 million D. P90 million

2. What is the investment balance at December 31, 2018?

A. P270 million C. P290 million
B. P300 million D. P298 million

3 At what amount will Durian Corp. report its investment income in its 2018 income statement? A. P44
million C. P20 million
B. P36 million D. P16 million

Investment in Associate Achieved in Stages:

Fair Value to Equity Method

On January 2, 2017, LOVELY, INC. acquired a 15% interest in CPS Corp. by paying P8,000,000 for
100,000 ordinary shares. On this date, the net assets of CPS Corp. totaled P40,000,000. The fair values
of CPS Corp.'s identifiable assets and liabilities were equal to their book values. vely did not have the
ability to exercise significant influence over the operating and financial policies of CPS. Lovely received
dividends of P1.40 per share from CPS on October 1, 2017. CPS reported net income of P5,000,000 for
the year ended December 31, 2017. Lovely classified the investment as at fair value through other
comprehensive income. Market price for the 100,000 shares was P9,000,000 on December 31, 2017,

Lovely paid P30,000,000 on January 1, 2018, for 300,000 additional CPS ordinary shares, which
represents a 25% interest in CPS. The fair value of CPS Corp.'s identifiable assets, net of liabilities, was
equal to their book values of P92,000,000. As a result of this additional acquisition, Lovely has the ability
to exercise significant influence over the operating and financial policies of CPS. Lovely received a
dividend of P2.70 per share on October 5, 2018. CPS reported net income of P6,000,000 for the year
ended December 31, 2018. The investment's fair value on December 31, 2018, is P45,000,000.

Questions: 1. In the December 31, 2017, statement of financial position, what is the carrying amount of
the investment in equity securities?
A. P8,610,000 C. P8,000,000
B. P9,000,000 D. P8,750,000
2. What is the total amount of investment-related income that should be reported in the 2017 income
statement?
A. P140,000 C. P750,000
B. P1,140,000 D. P1,610,000

3. What amount of gain on remeasurement to equity should be

reported in the 2018 income statement?
A. P1,320,000 C. P0
B. P1,080,000 D. P1,000,000

4. What is the goodwill arising from the acquisition of additional

300,000 shares on January 1, 2018?
A. P0 C. P7,000,000
B. P2,200,000 D. P9,000,000

5. What is the carrying amount of the investment in associate on

December 31, 2018?
A. P45,000,000 C. P38,120,000
B. P40,320,000 D. P39,000,000
DRILLS
Breezy Company purchased 35% of an associate on January 1, 2014 for PI 1,200,000 when the carrying
amount of net assets was P32,400,000. On that day, the market value of the net assets equaled their
carrying amount with the following exceptions:
Carrying amount Market
Equipment 7,000,000 5,600,000
Building 1,600,000 2,600,000
The equipment has a remaining useful life of 5 years, and the building has a remaining useful life of
10 years. The associate reported net income of P3,200,000 and cash dividends of P1,000,000 for the
current year. What is the investment income for the current year?
A. 987,000 C. 1,183,000
B. 1,120,000 D. 1,260,000

At the beginning of current the year, an entity purchased 40% of the outstanding ordinary shares of
another entity for P9,500,000 when the net assets of the investee amounted to P15,000,000. At
acquisition date, the carrying amounts of the identifiable assets and liabilities of the investee were equal to
their fair value, except for equipment whose fair value was P3,000,000 greater than carrying amount, land
whose fair value was P2,500,000 greater than cost and inventory whose fair value was P2,000,000
greater than cost. The equipment had a remaining life of 4 years. The land was unsold and the inventory
was sold during the current year. The investee reported net income of P10,000,000, paid P4,000,000 cash
dividend and issued 10% share dividend during the current year.

What amount should be reported as investment income for current year?

a. 4,000,000
b. 2,900,000
c. 1,900,000
d. 1,600,000

42. What is the carrying amount of the investment in associate at year-end?

a. 11,900,000
b. 10,800,000
c. 11,400,000
d. 13,500,000

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