AUDIT OF INVESTMENTS

Problem 1:
You are auditing the records of ABC Inc. after its first year of operations. The company has provided you the
following information with regard to its stock acquisition for the year:

Number of Shares Acquisition Cost

DEF Co. 2,000 240,000
GHI Co. 1,500 225,000
JKL Co. 3,000 285,000
MNO Co 4,000 200,000
PQR Co. 10,000 850,000

Additional information:
a. DEF Co. stocks were acquired on March 1, 2022 at a total cost of P200,000. Brokerage fees and
commissions amounted to P40,000. Dividends which were declared on January 25, 2022 to stockholders
on record as of March 20, 2022 were received on April 1, 2022 at P20,000. DEF Co. stocks were acquired
by the company with the intention of designating the same as a financial asset at fair value through profit
or loss. The stocks were selling at P105 per share as of December 31, 2022.
b. GHI Co. shares were acquired on May 1, 2022 at P150 per share. The company paid transaction costs of
P30,000. The company did not obtain significant influence from the acquisition. Management designated
the investment as financial instrument at fair value through other comprehensive income. The company
received a 20% stock dividend on October 11, 2022. The stocks were selling at P160 per share on
December 31, 2022.
c. JKL Co. stocks, which were acquired for trading purposes on June 1, 2022 at P285,000 were split 5 for 3
on August 15, 2022. In addition, the company paid special assessment on the investment at P25 per share
owned on September 30. On December 30, 2022, when the shares had a market value of P75 per share,
JKL declared a P5 cash dividend payable on January 25, 2023.
d. MNO Co. stocks were acquired on August 1, 2022 to be classified as financial asset at fair value through
other comprehensive income. MNO Co. issued 1 share for every 4 shares held by the stockholders as stock
dividends in lieu of a P15 per share cash dividends it has previously declared. The stocks were selling P55
per share on date of distribution. MNO Co. shares were selling at P60 per share on December 31, 2022.
e. PQR Co. stocks were acquired at the beginning of 2022 when PQR offered its P50 par value shares in an
initial public offering. All of PQR’s 50,000 authorized shares were issued on date of the offering and
remained outstanding as of December 31, 2022. The company reported total comprehensive income of
P250,000 which is net of a foreign exchange loss due to translation reported in its other comprehensive
income of P50,000. PQR also paid P3 cash dividends on December 31, 2022. The stocks were selling at
P90 per share on December 31, 2022. No entry has been made by the company to reflect the transactions
and information on December 31, 2022.

Required:
1. How much should the investment in DEF Co. stocks be initially recognized?
2. How much should the investment of GHI Co. stocks be initially recognized?
3. How much is the dividend income to be recognized from investment in GHI Co.?
4. How much is the dividend income to be recognized from investment in JKL Co.?
5. How much is the dividend income to be recognized from investment in MNO Co.?
6. How much investment income to be reported from investment in PQR Co. stocks?
7. How much should be reported as investment in stocks classified as financial assets at fair value through
profit or loss on December 31, 2022?
8. How much is the unrealized gain (loss) on financial assets at fair value through profit or loss to be reported
for 2022?
9. How much is the investment in stocks classified as financial assets at fair value through other
comprehensive income as of December 31, 2022?
10. How much is the unrealized gain (loss) to be reported on the statement of financial position for financial
assets at fair value through other comprehensive income as of December 31, 2022?
11. At what amount should investment in associate be reported on the statement of financial position dated
December 31, 2022?

Problem 2:
ABC Corp. presented the following breakdown of its equity investments at fair value as of December 31, 2022:

Through Profit or Loss

No. of shares Cost Fair Value
DEF ordinary shares 15,000 P750,000 P825,000
GHI preference shares 10,000 600,000 650,000
JKL preference shares 20,000 1,400,000 800,000

Through Other Comprehensive Income

No. of shares Cost Fair Value
MNO ordinary shares 50,000 P1,250,000 P1,500,000
PQR ordinary shares 20,000 1,000,000 900,000

Prior year working papers revealed the following relevant information:

 20,000 of the DEF ordinary shares were acquired on June 1, 2020 and designated as a financial asset at fair
value through other comprehensive income. Fair values of the shares on December 31, 2020 and 2021
were P1,050,000 and P1,145,000 respectively.
 10,000 of the GHI shares were acquired on November 1, 2020. Fair values on December 31, 2020 and
2021 were P750,000 and P700,000.
 ABC also acquired 25,000 of STU’s ordinary shares on February 1, 2020. Management designated the
investment as a financial asset at fair value through other comprehensive income. Relevant fair values on
December 31, 2020 and 2021 were P800,000 and P700,000 respectively.
 20,000 of the JKL shares were acquired on June 30, 2020. Fair values on December 31, 2020 and 2021
were P1,300,000 and P1,200,000.
 The MNO shares had a fair value at the end of 2020 and 2021 of P1,125,000 and P1,375,000. These shares
were acquired on September 20, 2020.
 The PQR shares were acquired on January 22, 2020 and had a fair value of P1,560,000 and P1,470,000 on
December 31, 2020 and 2021 respectively.

The following transactions took place during 2022:

Feb. 1 5,000 shares of DEF Co. were sold for P60 per share.

Mar. 31 The STU ordinary shares which were acquired at P35 per share were sold at P30 per share

June 30 The investment in JKL Company was originally designated as a financial asset at fair value
through other comprehensive income. However, due to the continuing decrease in the value
of the investment, management decided to reclassify the investment to a financial asset at fair
value through profit or loss. None of the decrease in 2020 and 2021 was considered to be
permanent. The decrease in the current year, on the other hand, was considered to be other
than temporary.
Oct. 1 10,000 of the investment in PQR ordinary shares were sold at P45 per share.

Required:
1. What is the realized gain on sale of DEF shares on February 1?
2. What is the realized gain (loss) on sale of STU ordinary shares?
3. How much is the impairment loss to be recognized in the income statement in 2022?
4. How much is the realized gain (loss) on sale of PQR ordinary shares?
5. How much is the correct financial asset at fair value through profit or loss to be reported as of December
31, 2022?
6. How much is the correct financial asset at fair value through other comprehensive income to be reported
as of December 31, 2022?
7. How much is the unrealized gain (loss) to be reported in the income statement?
8. How much is the unrealized gain (loss) to be reported in the statement of financial position?

Problem 3:
You are auditing the investments account of ABC Corporation for the year 2023. The following account
balances were extracted from the entity’s year-end trial balance.
Investment in DEF Corporation (150,000 shares) P10,920,000
Investment income – DEF Corporation 1,116,000
Gain on sale of DEF Corporation ?
Investment in GHI Corporation (40,000 shares) 540,000
Dividend Income – GHI Corporation 10,000
Unrealized gain – GHI Corporation 20,000
Upon inquiry of client’s personnel and inspection of relevant documents, you were able to gather the following
information:

Investment in DEF Corporation

The entity acquired 250,000 shares of DEF Corporation ordinary shares on July 1, 2022 at P66 per share which
reflected the book value as of that date. At the time of purchase, DEF Corporation had 1,000,000 ordinary
shares outstanding. The audit client had no ownership in DEF Corporation prior to this purchase. DEF
Corporation reported net income of P3,360,000 for the six months ended June 30, 2022. The client received a
dividend of P420,000 from DEF Corporation on September 1, 2023. DEF corporation reported P7,200,000
net income for the year ended December 31, 2022 and paid the client dividends amounting to P420,000.
On January 1, 2023, the entity sold 100,000 ordinary shares of DEF Corporation for P68 per share and decided
to reclassify the remaining shares as financial instruments at fair value through other comprehensive income.
The quoted price of such investment on January 1, 2023, was at P69 per share. However, the entity continued
to apply the equity method of accounting although significant influence has been lost already. The DEF
Corporation reported net income of P7,440,000 for the year ended December 31, 2023and paid the audit client
dividends of P240,000. The fair value of DEF Corporation’s shares at December 31, 2023 was P70 per share.

Investment in GHI Corporation

The entity purchased 40,000 shares or 40% of GHI Corporation on April 1, 2022 for P500,000 when GHI’s
book value was P1,260,000. On the same date, the fair value of GHI Corporation’s net assets equaled to their
book value except for the following:
 GHI Corporation’s building has a fair value of P40,000 more than its book value. The building has a
remaining useful life of 20 years.
 GHI Corporation’s equipment has a fair value of P50,000 less than its book value. The equipment has a
remaining useful life of 10 years.
GHI Corporation’s result of operations in 2022 and 2023 are as follows:
2022 net income P150,000
2023 net loss 30,000
GHI paid dividends of P20,000 and P10,000 in 2022 and 2023 respectively. The fair value per share were P13
in 2022 and P13.5 in 2023. The entity used the fair value method in accounting for this investment.
Required:
1. How much should be reported as dividend income for the year 2023?
2. How much should be reported as gain on sale of the investment in DEF Corporation?
3. How much is the correct carrying amount the investment in DEF Corporation as of December 31, 2023?
4. How much is the investment loss to be reported in 2023 from the investment in GHI Corporation?
5. How much is the correct carrying amount of the investment in GHI Corporation as of December 31, 2023?

Problem 4:
ABC Inc.’s portfolio of debt securities on December 31, 2022 and 2023 are shown below:
Face Value Term
12% DEF Corp. P1,000,000 10 years
10% GHI Corp. 2,000,000 12 years
12% JKL Corp. 3,000,000 15 years

All of the bonds were acquired on January 2, 2022 when the effective rate was 10%. Prevailing market rate of
interest at the end of 2022 and 2023 were 12% and 8% respectively. The above securities were classified as
financial asset at amortized cost.

Required:
1. How much is the unrealized gain (loss) to be reported in the statement of profit or loss for 2022?
2. How much is the unrealized gain (loss) to be reported in the statement of profit or loss for 2023?
3. How much is the interest income to be reported in the company’s income statement for 2022?
4. How much is the interest income to be reported in the company’s income statement for 2023?
5. What is the carrying value of the securities on December 31, 2022?
6. What is the carrying value of the securities on December 31, 2023?
7. If the GHI bonds were sold at 100 on January 2, 2024, how much is the realized gain (loss)?