INVESTMENTS – APPLIED AUDITING

EXERCISE 1

Given below is a list of securities and other assets that may qualify as investments.

Equity securities of another company where no control nor significant

influence exist. The company elected to report gains/losses in the
profits/losses 100,000
Equity securities of another company where no control nor significant
influence exist. The company elected to report gains/losses in the other
comprehensive income 150,000
20% equity securities of another company quoted in an active market 500,000
51 equity securities of another company quoted in an active market 1,400,000
Equity securities of the company quoted in an active market reacquired with
an intention of reissuance in latter period for short term profit. 500,000
Debt security of another company quoted in an active market. Business model
of the company has an objective to hold debt securities for short term
profits. 100,000
Debt security of another company quoted in an active market. Business model
of the company has an objective of collecting contractual cash flows from
the bonds which are primarily in the form of interest and principal 500,000
Real property held for resale in the ordinary course of the business 500,000
Real property held for speculation purposes 700,000
Real property held as current factory site 1,000,000
Real property of a manufacturing business being leased out to another party
under operating lease 900,000
Land held for undetermined future used 800,000
Land held to be used as future plant site 400,000
Real property being developed as an investment property 300,000

REQUIREMENTS:

1. How much from the list above is to be categorized as financial asset at fair value
through profit or loss?
A. 0 B. 100,000 C. 200,000 D. 500,000

2. How much from the list above is to be categorized as financial asset at fair value
through OCI.
A. 150,000 B. 180,000 C. 200,000 D. 350,000

3. How much from the list above is to be categorized as investment at amortized cost?
A. 0 B. 500,000 C. 600,000 D. 750,000

4. How much from the list above is to be categorized as investment in associate?

A. 0 B. 500,000 C. 600,000 D. 750,000

5. How much from the list above is to be categorized as investment in subsidiary?

A. 0 B. 1,000,000 C. 1,200,000 D. 1,400,000

6. How much from the list above is to be categorized as investment in property?

A. 2,400,000 B. 2,700,000 C. 2,800,000 D. 3,100,000

EXERCISE 2

Pinky Corp had the following portfolio of financial instruments of the December 31, 2013.
All securities were acquired at the beginning of 2013:

Security Denomination/ Recorded

Face Value Acquisition Cost
Alpha Shares 100,000 shares P5,250,000
Beta Shares 40,000 shares 2,350,000
10% Delta bonds, 3 year 2,000,000 par 1,951,126

Audit Notes:
a. Alpha Shares were acquired and designated as financial assets 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 shard were sold at P58 per share on
July 1, 2014.
Sources : CRC – ACE & RESA
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b. Beta Shares were acquired and designated as financial asset at fair value through
OCI. 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, 2014 at P59 per
share.

c. The Delta Bonds were acquired when the prevailing market interest rate of 11%.
Interest re collectible every December 31. Half of the Delta Bonds were sold on
June 30, 2014 at 1.1M

d. Additional information on the securities are as follows:

Security Fair Value Fair Value
December 31, 2013 December 31, 2014
Alpha Shares P55 per share P62 per share
Beta Shares P57.50 per share P64 per share
10% Delta bonds, 3 year 9% yield 12% yield
2,035,182 ?
REQUIREMENTS:

1. What is the realised gain or loss on sale of Alpha shares in 2014?

A. 150,000 B. 200,000 C. 275,000 D. 400,000

2. What is the realised gain or loss on the Beta shares in 2014 under PAS 39?
A. 75,000 B. 22,500 C. 15,000 D. None

3. Assuming that the company’s business model has no objective of holding debt
securities to collect contractual cash flows, what is the realised gain on sale of
the Delta bonds in 2014?
A. 63,067 B. 113,067 C. 82,409 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 realised gain on sale of
the Delta bonds in 2014?
B. 63,067 B. 113,067 C. 82,409 D. 32,409

5. 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
the investment that shall be presented as financial asset for market value through
profit or loss?
A. 3,100,000 B. 4,082,000 5,064,000 D. 4,700,000

6. Assuming that the company’s business model has no objective of holding debt
securities to collect contractual cash flows, what is the total carrying value of
the investment that shall be presented as financial asset for market value through
profit or loss?
B. 3,100,000 B. 4,082,000 5,064,000 D. 4,700,000

EXERCISE 3

On December 31, 2013, Vegas corporation’s statement of financial position showed the
following balances to its securities account.

Financial asset at fair value through profit or loss.

Cost Market Value

10,000 shares of ABC stock 1,500,000 1,525,000
8,000 shares of DM stock 1,100,000 1,056,000
10%, GHI bonds purchased at face
value interest payable semi annual
on January and July 500,000 373,500

Financial assets at fair value through other comprehensive income

Cost Market Value

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

During 2014 the following transactions took place.

1/1: Receive the semi annual interest from GHI

Sources : CRC – ACE & RESA

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INVESTMENTS – APPLIED AUDITING

3/1: Purchased 3,000 additional shares of ABC stocks for 459,000 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 stocks for P124 per share.

7/1: Received semi annual interest form GHI.

9/1: Purchased 400 of PQR’s 5 year, 12%, 1,000 at 93 plus accrued interest. The
bonds are dated at January 01, 2004. The bonds was designated as investment
at fair value through profit or loss.

The market values of the stocks and bonds on December 31, 2014 are as follows:

ABC stocks P153.20

DEF stocks 137.00
GHI bonds 82.22 quoted price
JKL stocks 110.50
MNO stocks 44.00
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 the sale of JKL stocks under PAS 39?
A. (8,000) B. 8,000 C. (24,000) D. 24,000

3. How much is the realized gain or loss on the sale of JKL stocks under PFRS 9?
A. (8,000) B. 8,000 C. (24,000) D. None

4. How much is the unrealized holding gain to be reported in the 2014 income statement?
A. 64,950 B. 49,750 C. 10,250 D. 84,950

5. How much is the unrealized holding gain to be reported in the 2014 statement of
financial position?
B. 121,000 B. 125,000 C. 129,000 D. 145,000

EXERCISE 4

On January 4, 2014 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 30% interest in the net assets of Suzuki Inc. and gave Isuzu
the ability to exercise significant influence over Suzuki. Isuzu received dividends of P6
per share on December 4, 2014, and Suzuki reported net income of P1,280,000 for the year
ended December 31, 2014. The market value of Suzuki’s share at December 32, 2014 was P64
per share with cost to sell at a minimal amount.

You also ascertained the following information:

On January 04, 2014, 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, 2014?
A. 240,000 B. 216,000 C. 360,000 D. 384,000

3. What is the carrying value of the Suzuki’s ordinary share on December 31, 2014?
A. 2,560,000 B. 2,712,000 C. 2,592,000 D. 2,736,000

Sources : CRC – ACE & RESA

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4. What total/net amount should be reported in Suzuki’s income statement for the year
ended December 31, 2014?
A. 240,000 B. 208,000 C. 60,000 D. 180,000

5. Assuming that the company has 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, 2014?
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, 2014?
A. 2,592,000 B. 2,712,000 C. 2,560,000 D. 2,472,000

EXERCISE 5

Your audit of the Dumbo Inc. revealed the following transactions on its Financial Assets
at Fair Value through profit or loss account:

Date Particulars Debit Credit

01/15/2014 Purchase 40,000 shares of ABC at P21.50 per P1,120,000
share and P20,000 shares of XYZ at P13.00 per
share. Amounts includes transaction costs
amounting to P1.50 per share

6/30/2014 Purchase 1,000 of DEF Inc.’s 12%, 4 year, 1,044,258

P1,000 face value bonds dated January 1, 2012
and pays annual interest every December 31.
Prevailing interest on the same date at 14%.
Amounts includes accrued interest and
transaction costs amounting to P10 per bond

7/01/2014 Received 3,000 shares of XYZ as stock 36,000

dividends, prevailing market price at P12 per
share

08/05/2014 Sold 15,000 shares of ABC at P15 and 5,000 of 290,000

XYZ shares at P13 per share

12/01/2014 Sold half of the DEF bonds at 98 plus accrued 515,000

interest

12/30/2014 Received P80,000 in lieu of a P5,000 stock

dividends from its ABC shares

12/31/2104 BALANCE 1,315,258

Additional information:

On December 30, 2014, 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 rate
on the same date at 11%.

REQUIREMENTS:

1. How much is the total realized gain or (loss) on disposal of bonds on December 1?
A. 2,129 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 reported 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

Sources : CRC – ACE & RESA

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INVESTMENTS – APPLIED AUDITING

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

EXERCISE 6

Jude Corporation acquired a building on January 1, 2012. The acquisition cost was
P5,000,000 payable at the rate of P1M at the beginning of each year starting January 1,
2012. 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, 2012 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:

2012 2013 2014

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 of the property as of December 31, 2013, 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 same information in number 2, how much impairment loss should be recognized
from the asset in the 2013 profit or loss?
A. None B. 40,000 C. 140,000 D. 200,000

4. What is the carrying value of the property as of December 31, 2014, assuming 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 same information in number 4, how much impairment recovery gain should be
recognized from the asset in the 2014 profit or loss?
A. None B. 40,000 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 2014, how much
gain or loss from transfer should be recognize in the income statement assuming
that the investment properties carried at fair value method?
A. None B. 40,000 C. 140,000 D. 200,000

7. Assuming that the building is originally categorized as investment property upon

acquisition but was transferred to owner-occupied property at the end of 2014, how
much gain or loss from transfer should be recognize in the income statement assuming
that the investment properties carried at fair value method?
B. None B. 40,000 C. 140,000 D. 200,000

Sources : CRC – ACE & RESA

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