AUDIT OF INVESTMENTS

Problem 1 The following investment in Trading Securities account appears in the books of CAP, INC.

Date Explanation Debit Credit

2019
Jan. 1 Balance P5,349,000
31 Sold Robusta ordinary P640,920
Mar. 31 Bought Wilma ordinary 365,000
June 30 Dividend on Bulik ordinary 300,000
July 31 Sold Bulik ordinary 262,500
Aug. 1 Sold Gudo bonds 675,000

The audit work papers of the preceding year show that the account balance as of January 1, 2019,
consisted of the following:

Robusta Company ordinary:

30,000 shares, purchased in June 2016, P20 per share…….………………..….…P600,000
60,000 shares, purchased in August 2017, P16 per share……………………...... 960,000
45,000 shares, purchased in May 2018 , P22 per share………………………....... 990,000

Wilma Company ordinary:

60,000 shares, purchased in January 2018, P33 per share……..………………1,980,000

Bulik Company ordinary:

3,000 shares, purchased in August 2017, P73 per share (par P100)…………. 219,000

Gudo Company 15% bonds:

600 bonds, P1,000 each, purchased in July 2018, at par
(Interest dates: February 1 and August 1)…………………………………………….. 600,000
P5,349,000

Your examination discloses the following:

1) On January 31, 2019, 30,000 ordinary shares of the Robusta Company purchased in May 2018
Were sold for P640,920.

2) On March 31, 2019, 15,000 ordinary shares of Wilma Company were purchased at P24.25 per
Share plus brokerage fee, for P365,000.

3) In June 2019, the Bulik Company paid a 100% ordinary share dividend on ordinary shares.

4) In July 2019, CAP, INC. sold to its president for P125 per share, 3,000 ordinary shares of Bulik
Company, for which the president gave his check for P262,500 and a letter in which he agreed to
pay the balance upon demand of the treasure of the company.
 5) On August 1, 2019, CAP, INC., sold its Gudo Company 15% bonds at 110 plus accrued Interest

6) The total market value of the securities at year- end amounted to P4,500,00

Questions:

1. What is the gain on sale of Bulik Company shares on July 31,2019?

A. P109,500 B. P153,000 C. P156,000 D. P265,500

2. What is the gain on sale of Gudo Company bonds on August 1, 2019?

A. P 0 B. P45,000 C. P60,000 D. P75,000

3. The adjusting entry for the sale of Robusta Company ordinary shares on January 31, 2019,
Should include a
A. Debit to Loss on sale of trading securities for P19,080.
B. Credit to Gain on sale of trading securities for P19,080.
C. Debit to Cash for P640,920
D. Credit to Investment in trading securities for P660,000.

4. The December 31, 2019, carrying amount (before market adjustment) of CAP, INC.’s
Investment in trading securities is
A. P4,233,750 B. P4,343,250 C. P4,344,500 D. P4,500,000

5. What amount of unrealized gain should be reported in the income statement for the year
ended December 31, 2019?
A. P155,500 B. P156,750 C. P158,000 D. P266,250

Problem NO. 2

Magnolia Corp. invested its excess cash in equity securities during 2018. The business model for these
investment 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 P 90,000 P 126,000
Polland Co. 2,000 shares 240,000 252,000
Alabang Corp. 2,000 shares 432,000 360,000
Totals P762,000 P738,000

1. In the December 31, 2018, statement of financial position, what should be reported as carrying
amount of the investments?
A. 738,000 B. P690,000 C. P762,000 D. P810,000
 2. In the 2018 income statement, what amount should be reported as unrealized gain or loss?
A. Unrealized gain of P24,000
B. Unrealized loss of P24,000
C. Unrealized loss of P72,000
D. Unrealized gain of P48,000

(b) During the year 2019, Magnolia Corp. sold 2,000 shares of Polland Co. for P229,200 and purchased
2,000 more shares of LJ Inc, and 1,000 shares of Dwarfy Company. On December 31, 2019,
Magnolia’s equity securities portfolio consisted of the following:

Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares P 90,000 P 120,000
LJ, Inc. 2,000 shares 198,000 240,000
Dwarfy Company 1,000 shares 96,000 72,000
Alabang Corp. 2,000 shares 432,000 132,000
Totals P816,000 P564,000

3. What is the gain or loss on the sale of Polland Co. Investment?

a. P10,800 gain b. P10,800 loss c. P22,800 gain d. P22,800 loss

4. What is the carrying amount of the Investments on December 31, 2019?

a. P816,000 b. P888,000 c. P564,000 d. P492,000

5. What amount of unrealized gain or loss should be reported in the income statements for the
year ended December 31, 2019?
a. P252,000 unrealized gain c. P216,000 unrealized gain
b. P252,000 unrealized loss d. P216,000 unrealized loss

(c) During the year 2020, Magnolia sold 3,000 shares of LJ, Inc. for P239,400 and 500 shares of Dwarfy
Company at a loss of P16,200. On December 31, 2020, Magnolia’s equity investment portfolio consisted
of the following:

Investment Quantity Cost Fair Value

Dwarfy Company 500 shares P48,000 P36,000
Alabang Corp. 2,000 shares 432,000 492,000
Totals P480,000 P528,000

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

a. P120,600 b. P64,800 c. P48,600 d. P136,800

7. What amount of unrealized gain or loss should be reported in the income statement for the
year ended December 31, 2020?
 a. P360,000 unrealized gain
b. P360,000 unrealized loss
c. P48,000 unrealized gain
d. P48,000 unrealized loss

8. In the December 31, 2020, statements of financial position, what should be reported as carrying
amount of trading securities?
a. P480,000 b. P468,000 c. P528,000 d. P540,000

Problem No. 3
Supporting records of MAYON CORPORATION’s trading securities portfolio show the following ebt and
equity securities:
Security Cost Fair Value
400 ordinary shares Concave Co. P254,500 P243,000
P800,000 Tipo Co. 7% bonds 796,500 774,000
P1,200,000 Turkey Co. 7 ½ % bonds 1,207,500 1,218,900
Totals P2,258,500 P2,235,900

Interest dates on the bonds are January 1 and July 1. Mayon Corporation uses the income approach to
record the purchase of bonds with accrued interest. During 2019 and 2020 , Mayon completed the
following transactions related to trading securities.

2019
Jan 1 Received semiannual interest on bonds. Assume that the appropriate adjusting entry was made
on December 31, 2018.
April 1 Sold P600,000 of 7 ½ % Turkey bonds at 102 plus accrued interest.
May 21 Received dividend of P1.25 per share on the Concave ordinary share capital. The dividend had
not been recorded on the declaration date.
July 1 Received semiannual interest on bonds and then sold the 7% Tipo bonds at 97 ½.
Aug 15 Purchased 200 shares of Newman, Inc. ordinary share capital at P580 per share plus brokerage
fees of P500.
Nov. 1 Purchased P500,000 of 8% Toll Co. bonds at 101 plus accrued interest. Brokerage fees were
P1,250. Interest dates are January 1 and July 1.
Dec. 31 Market prices of securities were:
Concave ordinary shares P550
7 ½ % Turkey bonds 101 ¾
8% Toll bonds 101
Newman ordinary shares P583.75

2020
Jan. 2 Recorded the receipts of semiannual interest on bonds.
Feb. 1 Sold the remaining 7 ½ % Turkey bonds at 101 plus accrued interest.

Questions:
1. What is the total interest and dividend income for 2019?
 a. P125,166 c. P91,417
b. P164,416 d. P98,804

2. What amount should be reported as gain on sale of trading securities in 2019?

a. P2,550 c. P8,550
b. P6,000 d. P3,450

3. What amount of unrealized gain or loss should be reported in the income statement for the year
ended December 31, 2019?
a. P21,200 unrealized gain
b. P21,200 unrealized loss
c. P6,150 unrealized gain
d. P6,150 unrealized loss

4. What is the carrying amount of the remaining trading securities on December 31, 2019?
a. P1,481,000 c. P1,473,450
b. P1,450,450 d. P1,452,250

5. What is the loss on the sale of the remaining Turkey bonds on February 1, 2020?
a. P4,500 c. P13,500
b. P10,500 d. P750

Problem 4

SANTOL CORP. invested its excess cash in non-trading equity securities during 2019. On initial
recognition, the entity made an irrevocable election to present its securities at fair value through other
comprehensive income (FVOCI). As of December 31, 2019, the company’s securities portfolio consisted
of the following:

Investee Company Shares Cost Market Value

Kelly Inc. 30,000 P450,000 425,000
Ejoy Corp. 60,000 1,500,000 1,610,000
Yogi Enterprises 60,000 2,160,000 2,300,000
Totals P4,110,000 P4,335,000

During the year 2020, Santol sold 60,000 shares of Eloy Corp. for P1,700,000 and purchased 60,000
additional shares of Kelly, Inc. and 30,000 shares of Kongga Company.

On December 31, 2020, Santol’s portfolio of non-trading equity securities comprised the following:

Investee Company Shares Cost Market Value

Kelly, Inc. 30,000 P450,000 P500,000
Kelly, Inc. 60,000 1,300,000 1,450,000
Kongga Company 30,000 520,000 480,000
Yogi Enterprise 60,000 2,160,000 700,000
Totals P4,430,000 P3,310,000
During the year 2021, Santol sold all the Kelly, Inc. shares for P2,300,000 and 15,000 shares of Kongga
Company at a loss of P90,000. On December 31, 2021, Santol’s portfolio of non-trading equity securities
consisted of the following:

Investee Company Shares Cost Market Value

Yogi Enterprises 60,000 P2,160,000 P4,200,000
Kongga Company 15,000 260,000 180,000
Totals P2,420,000 P4,380,000

Questions:

1. What total amount should be credited to retained earnings as a result of the sale of Eloy Corp.
securities in 2020?
a. P200,000 b. P110,000 c. P90,000 d. P20,000

2. What unrealized loss on the remaining financial assets should be reported in the 2020
statement of comprehensive income as component of other comprehensive income?
a. P1,600,000 b. P1,640,000 c. P1,415,000 d. P1,300,000

3. What cumulative amount of unrealized loss should be reported as component of other

comprehensive income in the statement of changes in equity on December 31, 2020?
a. P1,415,000 b. P1,300,000 c. P335,000 d. P225,000

4. What unrealized gain on the remaining financial assets should be reported in the 2021
statement of comprehensive income as component of other comprehensive income?
a. P1,960,000 b. P60,000 c. P3,440,000 d. P3,500,000

5. What cumulative amount of unrealized gain should be reported as component of other

comprehensive income in the statement of changes in equity on December 31,2021?
a. P1,505,000 b. P1,960,000 c. P1,480,000 d. P3,440,000

Problem 5

Coolong co. holds debt securities within a business model whose objective is achieved both by collecting
contractual cash flows and selling the debt securities. The contractual cash flows are solely payments of
principal and interest on specified dates.

The following amortization schedule relates to its 5 –year P1,000,000, 7% bonds purchased on
December 31, 2016, for P1,086,565. The bonds were purchased to yield 5% interest.

Date Interest Received Interest Income Premium Amortized Cost

Amortization
12.31.16 P1,086,565
12.31.17 P70,000 P54,328 P15,672 1,070,893
12.31.18 70,000 53,545 16,455 1,054,438
12.31.19 70,000 52,722 17,728 1,037,160
12.31.20 70,000 51,858 18,142 1,019,018
12.31.21 70,000 50,982 19,018 1,000,000
*Adjustment due to rounding

The following schedule presents the amortized cost and fair value of the bonds at year-end.

Fair Value Amortized Cost

December 31, 2017 P1,065,000 P1,070,893
December 31, 2018 1,075,000 1,054,438
December 31, 2019 1,056,500 1,037,160
December 31, 2020 1,030,000 1,019,018
December 31, 2021 1,000,000 1,000,000

1. What amount should be reported as investment in bond in the statement of financial position of
Coloong Co. on December 31, 2018?
a. P1,086,565 c. P1,0750,000
b. P1,054,438 d. P1,065,000

2. What amount of unrealized gain should be shown a component of other comprehensive income
in the 2018 statement of comprehensive?
a. P26,455 c. P10,000
b. P20,562 d. P16,455

3. What amount of unrealized loss should be shown as component of other comprehensive

income in the 2019 statement of comprehensive income?
a. P14,393 c. P19,340
b. P18,500 d. P1,222

4. What amount of unrealized loss should be shown as component of other comprehensive

income in the 2020 statement of comprehensive income?
a. P8,350 c. P25,233
b. P26,500 d. P10,990

5. What amount of unrealized gain should be shown in the 2020 statement of changes in equity?
a. P26,455 c. P25,233
b. P16,883 d. P10,990