Problems Audit of Investments

Cordillera Career Development College
COLLEGE OF BUSINESS EDUCATION AND ADMINISTRATION

Buyagan, Poblacion, La Trinidad, Benguet
PROBLEM 1:
MAGNOLIA CORP. invested its excess cash in equity securities during 2011. The business model for these
investments is to profit form trading on price changes.
a. As of December 31, 2011, the equity investments 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, 2011, statement of financial position, what should be reported as carrying amount
of the investment?
A. P369,000 C. P381,000
B. P345,000 D. P405,000
2. In the 2011 income statement, what amount should be reported as unrealized gain or loss?
A. Unrealized gain of P12,000 C. Unrealized loss of P36,000
B. Unrealized loss of P12,000 D. Unrealized gain of P24,000
b. During the year 2012, 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, 2012, Magnolias equity
securities portfolio consisted of the following
LJ, Inc. 1,000 shares P45,000 P63,000
LJ, Inc. 2,000 shares 99,000 120,000
Dwarfy Company 1,000 shares 48,000 36,000
Totals P408,000 P282,000
3. What is the gain or loss on the sale of Polland Co. investment?

A. P5,4000 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, 2012?
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, 2012?
A. P126,000 unrealized gain
B. P126,000 unrealized loss
C. P108,000 unrealized gain
D. P108,000 unrealized loss
c. During the year 2013, 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, 2013, Magnolias equity investment portfolio consisted of
the following.
Dwarfy Company 500 shares P24,000 P18,000
Totals P240,000 P264,000
6. What should be reported as loss on sale of trading securities in 2013?
A. P60,300 C. P24,300
B. P32,400 D. P68,400
7. What amount or unrealized gain or loss should be reported in the income statement for the year ended
December 31, 2013?
A. P180,000 unrealized gain C. P24,000 unrealized gain
B. P180,000 unrealized loss D. P24,000 unrealized loss
8. In the December 31, 2013, statement of financial position, what should e reported as carrying amount
of trading securities?
A. P240,000 C. P246,000
B. P234,000 D. P270,000
PROBLEM 2:
During the course of your audit of the financial statements of FISHING CORPORATION for the year ended
December 31, 2012, you found a new account Investment in Equity Securities. Your audit revealed that during
2012, Fishing began a program of investments, and all investment related transactions were entered in this
account. Your analysis of this account for 2012 follows:
Fishing Corporation
Analysis of Investment in Equity Securities
For the Year Ended December 31, 2012
debit credit
(a)
Salmon Company Ordinary Shares
February 14 Purchased 12,000 shares @ P55 per share P660,000
July 26 Received 1,200 ordinary shares if Salmon Company as a
share dividend (Memorandum entry in General ledger.)
September 28 Sold the 1,200 of ordinary shares of Salmon Company
received July 26 @ P70 per share P84,000
(b)
Tamban, Inc. Ordinary Shares
April 30 Purchased 60,000 shares @ P40 per share P2,400,000
October 28 Received dividend of P1.20 per share P72,000
Additional information:
a. The fair value for each security as of the 2012 sate of each transaction follow:
Security Feb. 14 April 30 July 26 Sept. 28 Dec. 31
Salmon company P55 P62 P70 P74
Tamban. Inc. P40 32
Fishing Crop. 25 28 30 33 35
b. All of the investment of Fishing Corporation to be non-trading. Fishing Corporation designates its
investment in these non-trading securities as available-for-sale.
1. What amount should be reported as gain on sale of non-trading equity securities in 2012?
A. P18,000 C. P24,000
B. P6,000 D. P0
2. The receipt of 1,200 share dividend would cause the investment balance to increase by
A. P74,400 C. P66,000
B. P84,000 D. P0
3. What entry is necessary to correct the recording of the cash dividend received from Tamban, Inc.?
A. Cash 72,000
Dividend income 72,000
B. Cash 72,000
Investment in equity securities 72,000
C. Investment in equity securities 72,000
Dividend income 72,000
D. Dividend income 72,000
Investment in equity securities 72,000
4. What amount of unrealized gain or loss should be reported in the 2012 statement of comprehensive
income as component of other comprehensive income?
A. P192,000 gain C. P480,000 gain
B. P192,000 loss D. P480,000 loss
5. What amount should be reported as Investment in Equity Securities in the statement of financial
position on December 31, 2012?
A. P2,808,000 C. P2,520,000
B. P3,000,000 D. P3,288,000
PROBLEM 3:
Shown below is an amortization schedule to ANGER COMPANYs 5-year, P500,000 bond with a 7% interest rate
and a 5% yield, purchased on December 31, 2009, for P543,300.
date Interest Interest Premium Carrying

received income amortization amount

12/31/09 P543,300
12/31/10 P35,000 P27,165 P7,835 535,465
12/31/11 35,000 26,773 8,227 527,238
12/31/12 35,000 26,362 8,638 518,600
12/31/13 35,000 25,930 9,070 509,530
12/31/14 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, 2010 P535,465 P532,500
December 31, 2011 527,328 537,500
December 31, 2012 518,600 528,250
December 31, 2013 509,530 515,000
December 31, 2014 500,000 500,000
Required:
a. Prepare the journal entry to record the purchase of these bonds on December 31, 2009, assuming the bonds
are held as financial assets measured at amortized cost.
b. Prepare the journal entry(ies) related to these bonds for 2010
c. Prepare the journal entry(ies) related to these bonds for 2012
d. What should be reported as the carrying amount of these bonds in the statement of financial position on
December 31, 2013?
PROBLEM 4:
Supporting records of MAYON CORPORATIONs trading securities portfolio show the following debt and equity
securities:
Security Cost Fair Value
200 ordinary shares Concave Co. P127,250 P121,500
P400,000 Tipo Co. 7% bonds 398,250 387,000
P600,000 Turkey Co. 7 1/2% bonds 603,750 609,450
Totals P1,129,250 P1,117,950
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 2012 and 2013, Mayon completed the following transactions
related to trading securities:
2012
January 1 Received semiannual interest on bonds. Assume that the appropriate adjusting entry made on
December 31, 2011
April 1 Sold P300,000 of 7 % Turkey bonds at 102 plus accrued interest. Brokerage fees were P1,000
May 1 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 . Brokerage fees
were P1,250
August 15 purchased 100 shares of Newman, Inc. ordinary share capital at P580 per share plus brokerage
fees of P250
November 1 Purchased P250,000 of 8% Toll Co. Bonds at 101 plus accrued interest. Brokerage fees were
P625. Interest dates are January 1 and July 1
December 31 Market prices of securities were:

Concave ordinary shares P550
7 % Turkey bonds 101
8% Toll bonds 101
Newman ordinary shares P583.75
2013
January 2 recorded the receipt of semiannual interest on bonds
February 1 sold the remaining 7 % Turkey bonds at 101 plus accrued interest. Brokerage fees were P1,500
1. What is the total interest and dividend income for 2012?

A. P62,583 C.P45,708
B. P82,208 D. P49,402
2. What amount should be reported as gain on sale of trading securities in 2012?
A. P2,025 C. P4,275
B. P6,376 D. P3,125
3. What amount of unrealized gain or loss should be reported in the income statement for the year ended
December 31, 2012?
A. P10,600 unrealized gain C. P3,075 unrealized gain
B. P10,600 unrealized loss D. P3,075 unrealized loss
4. What is the carrying amount of the remaining trading securities on December 31, 2012?
A. P740,500 C. P P736,725
B. P725,225 D. P P726,125
5. What is the loss on the sale of the Turkey bonds on February 1, 2013?
A. P3,750 C. P6,750
B. P5,250 D. P375
6. Prepare journal entries for the preceding transaction and to accrue interest on December 31, 2012.
Ignore amortization of premium or discount on bonds.
PROBLEM 5:
KALUGONG CO. designates purchased debt securities as available for sale. The following amortization schedule
relates to its 5-year, P1,000,000, 7% bonds purchased on December 31, 2010 for P1.086.565. the bonds were
purchased to yield 5% interest.
date Interest Interest Premium Amortized

received income amortization cost
12.31.10 P1,086,565
12.31.11 P70,000 P54,328 P15,672 1,070,893
12.31.12 70,000 53,545 16,455 1,054,438
12.31.13 70,000 52,722 17,278 1,037,160
12.31.14 70,000 51,858 29,142 1,019,018
12,31,15 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, 2011 P1,065,000 P1,070,893
December 31, 2012 1,075,000 1,054,438
December 31, 2013 1,056,500 1,037,160
December 31, 2014 1,030,000 1,019,018
December 31, 2015 1,000,000 1,000,000
1. What amount should be reported as investment in available for sale securities in the statement of
financial position of Kalugong Co. on December 31, 2012?
A. P1,086,565 C. P1,075,000
B. P1,054,438 D. P1,065,000
2. What amount of unrealized gain should be shown as component of other comprehensive income in the
2012 statement of comprehensive income?
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
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
A. P8,350 C. P9,792
B. P26,500 D. P10,982
5. What amount of unrealized gain should be shown in the 2014 statement of changes in equity?
A. P26,455 C. P25,233
B. P16,883 D P10,990
PROBLEM 6:
BUKIDNON CORP. has a policy of investing idle cash in equity securities. It has made periodic investments in its
principal supplier, Nocon Company. Bukidnon currently owns 12% of Nocons outstanding ordinary shares.
Cherry Kosme, Bukidnons assistant controller, has gathered the following information about the companys
investments in equity securities.
a. Bukidnon has trading equity investment in Delta Corp. and Polygon company. During 2012, Bukidnon
purchased 100,000 shares of Delta Cop. For P4,200,000; these shares have a fair value of P4,800,000 at
December 31, 2012. The investment in Polygon consists of 50,000 shares acquired in March 2012 at
P60 per share and currently has a value of P2,160,000.
b. Bukidnons 12% ownership on Nocon Company has a fair value of P66,675,000 on December 31, 2012.
The securities were purchased prior to 2012 for P67,500,000 and was valued at P64,500,000 on
December 31, 2011. Bukidnon has not changed its holdings in the current year.
1. What amount of unrealized loss should be reported as component of other comprehensive income on
Bukidnons December 31, 2011 statement of comprehensive income?
A. P1,065,000 C. P825,000
B. P0 D. P3,000,000
2. What is the cumulative unrealized gain/loss that should be shown on the statement of changes in equity
for the year ended December 31, 2012?
A. P2,175,000 unrealized gain C. P825,000 unrealized loss
B. P1,065,000 unrealized loss` D. P1,935,000 unrealized gain
3. What amount of unrealized gain/loss should be reported on Bukidnons income statement for the year
ended December 31, 2012?
A. P600,000 unrealized gain C. P825,000 unrealized loss
B. P240,000 unrealized loss D. P1,065,000 unrealized loss
PROBLEM 7:
On the acquisition date, POMELO COMPANY designates purchased debt and equity securities as available for-
sale. Pomelos intent in buying investment securities is to make them available for when circumstances warrant,
not to earn profit from short-term fluctuations in price, and not necessarily to old debt securities to maturity.
Pomelos Companys fiscal year ends on December 31. No investments were held by the company at the
beginning of the year. Described below are the companys investment related transactions:
2012
March 1 Purchased 30,000 PG, Inc. ordinary shares for P750,000, including brokerage fees and
commissions.
April 15 purchased P1,000,000 of 10% bonds at face value from OW Corporation
July 23 received cash dividends of P60,000 on the investment in Corporation bonds
October 15 Received semiannual interest on the investment in OW Corporation Bonds
October 16 Sold the OW Corporation bonds for P1,100,000
November 2 Purchased 250,000 ESP Co. preference shares for P12,500,000, including brokerage fees
and commissions
December 31 recorded the necessary adjusting entries relating to the investments. The market values
of the investments are P30 per share for PG, Inc. and P44 per share for ESP Co.
Preference shares
2013
January 27 Sold half the PG, Inc. shares for P65 per share.
March 2 Sold the ESP Co. preference shares for P78 per share
1. What is the gain (loss) on the sale of the OW Corporation bonds on October 16, 2012?
A. P0 C. P(100,000)
B. P200,000 D. P100,000
2. What is the total amount that would be reported on Pomelo Companys December 31, 2012, income
statement relative to these investments?
A. P210,000 C. P110,000
B. P260,000 D. P160,000
3. How much unrealized gain (loss) should be reported in profit of loss in 2012?
A. P150,000 C. P100,000
B. P(1,500,000) D. P0
4. What amount of gain on sale of PG, Inc. shares on January 27, 2013, should Pomelo recognize?
A. P75,000 C. P450,000
B. P600,000 D. P300,000
5. What is the gain on the sale of the ESP Co. preference shares on March 2, 2013?
A. P5,500 ,000 C. P7,000,000
B. P9,000,000 D. P1,500,00
PROBLEM 8:
Your audit of KALABASA CORPORATIONs investments in debt and equity securities reveals the following
information:
a. On January 1, 2012, X Company issued P1,000,000 in debt securities. The stated interest is 9%, with
interest payable semiannually, on June 30 and December 31. On February 1, Kalabasa purchased these
debt securities from an investor who acquired them when they were originally issued. Kalabasa paid the
investor an amount equal to the face value of the securities plus accrued interest. The securities were
designated as held-for-trading.
b. On June 1, kalabasa purchased 10,000 shares of equity securities for P50 per share. These securities
were acquired as and available-for-sale investment. Kalabasa paid P13,900 brokers commission on the
purchase.
1. On initial recognition, a financial asset or financial liability is measured at

A. Acquisition cost, i.e., the consideration paid or received plus any directly attributable transaction cots to
the acquisition or issuance of the financial asset or financial liability
B. The consideration paid or received for the financial asset or financial liability
C. Fair Value. For items that are not measured at fair value through profit or loss, transaction costs are also
included in the initial measurement.
D. Zero
2. The entry to record the acquisition of debt on February 1 is
A. Investment in trading securities 1,007,500
Cash 1,007,500
B. Investment in trading securities 992,500
Interest income 15,000
Cash 1,007,500
C. Investment in trading securities 1,000,000
Unrealized loss on trading securities 7,500
Cash 1,007,500
D. Investment in trading securities 1,000,000
Interest income 7,500
Cash 1,007,500
3. The entry to record the purchase of equity securities on June 1 is
A. Investment in available-for-sale securities 500,000
Brokers commission expense 13,000
Cash 513,000
B. Investment in available-for-sale securities 513,000
Cash 513,000
C. Investment in trading securities 513,000
Cash 513,000
D. Investment in trading securities 500,000
Brokers commission expense 13,000
Cash 513,000
PROBLEM 9:
On January 1, 2012, RAMBUTAN CORP. purchased debt securities for cash of P765,540. The securities have a
face value of P600,000, and they mature in 15 years. The securities carry fixed interest of 10%, that is receivable
semiannually, on June 30 and December 31. The prevailing market interest rate on these debt securities is 7%
compounded semiannually. Rambutan Corp. intends and has the financial resources to hold these securities to
maturity.
1. The carrying value of the debt securities on December 31, 2012, at amortized cost using the effective
interest rate method is
A. P771,840 C. P765,540
B. P759,016 D. P600,000
2. The interest income to be reported for 2012 using the effective interest rate method is
A. P66,524 C. P60,000
B. P6,524 D. P53,476
PROBLEM 10:
CHICO COMPANY purchased the following available-for-sale securities 2011:
Fair Value
Security Cost Dec. 31, 2009
X P450,000 P500,000
Y 500,000 800,000
On July 28, 2012, Chico sold all the shares of Security Y for a total of P835,000. As of December 31, 2012, the
shares Security X had a fair value of P200,000. No other activity occurred during 2012 in relation to the
available-for-sale securities portfolio.
1. What amount should Chico Company report as realized gain in the 2012 income statement?
A. P35,000 C. P300,000
B. P335,000 D. P265,000
2. What is the cumulative unrealized gain (loss) to be classified as component of other comprehensive
income at December 31, 2012?
A. P300,000 C. P(300,000)
B. P150,000 D. P(250,000)
PROBLEM 11:
PAPAYA, INC. purchased the following securities during 2012:
Security Category No. of shares Total Cost

A1 Corp. stock Trading 25,000 P450,000
B2 Co. stock Available-for-sale 5,000 1,100,000
C3, Inc. stock Available-for-sale 125,000 2,125,000
D4 Corp. bonds Held-to-maturity ---- 1,200,000
E5 Co. bonds Trading ---- 550,000
The following transactions related to Papaya, Inc.s investments occurred during 2012:
a. Received interest from D4 Corp. and E5 company bonds totaling P181,500
b. Dividends received on the equity securities held amounted to P88,000
c. Sold 10,000 shares of the A1 Corp. stock at P17 per share and 12,500 shares of the C3, Inc. stock at P19
per share.
1. What is the gain (loss) on the sale of A1 Corp. stock?

A. P10,000 C. P78,000
B. P(10,000) D. P0
2. What is the gain (loss) on the sale of C3, Inc. stock?

A. P(25,000) C. P113,000
B. P25,000 D. P0
PROBLEM 12:
The following investment-related transactions were completed by DALANDAN CORP. during 2012:
a. Purchased P3,000,000 of X Company 7% bonds, paying 102.5 plus accrued interest of P52,500. In
addition, the company paid brokerage fee of P15,000. Dalandan classified these bonds as a trading
security.
b. Purchase 30,000 shares of Y Company ordinary shares at P125 per share plus brokerage fees of P28,500.
Dalandan classified this stock as an available-for-sale security.
c. Received semiannual interest on the X company bonds.
d. Sold 4,500 shares of Y company at P132 per share
e. Sold P4480,000 of X company 7% bonds at 102, plus accrued interest of P2,790
1. The X Company bonds should be initially measured and recognized at

A. P3,090,000 C. P3,000,000
B. P3,075,000 D. P3,142,500
2. The realized gain or loss on the sale of X Company bonds is
A. P390 gain C. P4,800 loss
B. P2,010 loss D. P2,400 loss
3. The 30,000 Y Company shares acquired should be initially measured and recognized at
A. P3,778,500 C. P3,721,500
B. P3,750,000 D. P3,988,500
4. The realized gain or loss on the sale of Y Company stock is
A. P27,225 gain C. P27,225 loss
B. P31,500 gain D. O31,500 loss
PROBLEM 13:
SINELAS COMPANY purchased as a long-term investment P160 million of 8% bonds, dated January 1, on January
1, 2012. The companys management does not intend to hold these bonds until maturity but to have them
available for sale when circumstances warrant. On the acquisition date, the market yield of bonds with similar
risk and maturity was 10%. The company paid P132 million for the price of the bonds. Interest is received
semiannually on June 30 and December 31. Due to changes in market conditions, the fair value of the bonds at
December 31, 2012, was P140 million.
1. At what amount will Sinelas Company report its investment in the December 31, 2012, statement of
financial position?
A. P132.2 million C. P132.41 million
B. P140 million D. P160 million
2. The unrealized holding gain or loss to be classified as component other comprehensive income at
December 31, 2012, is
A. P8.39 million holding gain C. P7.59 million holding gain
B. P8.39 million holding loss D. P7.59 million holding loss
3. The amount of interest income to be reported in Sinelas Companys income statement for the year ended
December 31, 2012, is
B. P12.8 million D. P13.21 million
PROBLEM 14:
STRAWBERRY COMPANY has the following securities in its available-for-sale portfolio of securities on
December 31, 2011:
Security Shares Cost Fair Value
Danica Co. ordinary shares 4,500 P220,500 P207,000
Rose Corp. ordinary shares 15,000 540,000 525,000
Assunta, Inc. preference shares 1,200 180,000 184,000
Totals P940,500 P916,800
All of the following securities were bought in 2011. In 2012, strawberry had the following transactions relating
to its investments:
April 1 sold the 4,500 ordinary shares of Danica Co. for P65 per share.
May 1 bought 2,100 ordinary shares of Rita Corp. at P75 plus brokers fee of P5,200
Strawberrys portfolio of available-for-sale securities appeared as follows on December 31, 2012:

Security Shares Cost Fair Value
Rose Corp. ordinary shares 15,000 540,000 525,000
Rita Corp. ordinary shares 2,100 157,500* 151,200
Assunta, Inc. preference shares 1,200 180,000 174,000
Totals P877,500 P850,200
*the P5,200 brokers fee was recorded as expense.
1. What is the realized gain or loss on the sale of Danica Co. ordinary shares on April 1, 2012?
A. P72,000 gain C. P85,500 loss
B. P85,500 gain D. P0
2. The 2,100 shares of Rita Corp. purchased on May 1, 2012, should be initially measured at
A. P151,200 C. P162,700
B. P156,400 D. P157,500
3. Strawberrys December 31, 2012, statement of financial position should report investment in available-
for-sale securities at
A. P850,200 C. P881,400
B. P877,500 D. P916,800
PROBLEM 15:
SANTOL CORP. invested its excess cash in available-for-sale securities (AFS) during 2010. As of December 31,
2010, the companys AFS securities portfolio consisted of the following:
Investee Shares Cost Fair Value
Company
Kelly, Inc. 30,000 P450,000 425,000
Eloy corp. 60,000 1,500,000 1,610,000
Yogi Enterprises 60,000 2,160,000 2,300,000
P4,110,000 P4,335,000
During the year 2011, Santol sold 60,000 shares of Eloy Corp. for P1,600,000 and purchased 60,000 additional
shares of Kelly, Inc. and 30,000 shares of Kongga Company.
On December 31, 2011, Santols portfolio of AFS securities comprised the following:
Company
Kelly, Inc. 30,000 P450,000 425,000
Kelly, Inc. 60,000 1,300,000 1,450,000
Kongga Company 30,000 520,000 480,000
Yogi Enterprises 60,000 2,160,000 700,000
P4,430,000 P3,130,000
During the year 2012, 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, 2012, Santols portfolio of AFS consisted of the following:
Company
Yogi Enterprises 60,000 P2,160,000 P4,200,000
Kongga Company 15,000 260,000 180,000
P2,420,000 P4,380,000
1. What should be reported on Santols Statement of Financial position as of December 31, 2010?
Unrealized
Holding Gain on
AFS Securities AFS Securities
A. P4,335,000 P0
B. 4,110,000 0
C. 4,085,000 0
D. 4,335,000 225,000
2. What should be reported on Santols statement of financial position as of December 31, 2011?
Unrealized
Holding Loss on
A. P3,130,000 P0
B. 3,130,000 1,300,000
C. 4,430,000 0
D. 2,450,000 1,980,000
3. What should be reported on Santols statement of financial position as of December 31, 2012?
Unrealized
Holding gain on
A. P4,380,000 P1,960,000
B. 2,420,000 0
C. 4,380,000 0
D. 2,340,000 2,090,000
4. What is the realized gain or loss on the sale of Eloy Corp. shares in 2011?
A. P10,000 loss C. P100,000 gain
B. P120,000 loss D. P90,000 gain
5. What is the net realized gain on the sale of securities in 2012?
A. P550,000 C. P350,000
B. P460,000 D. P260,000
PROBLEM 16:
PEAR COMPANY investment portfolio contains the following securities on December 31, 2011:
Security Shares Cost Market Value Classified as
Omar Co. Ordinary 150,000 P3,000,000 P2,850,000 Trading
Godling Inc. preference 60,000 1,200,000 1,290,000 Trading
Sonata Co. ordinary 600,000 34,200,000 33,900,000 Investment in
(30% ownership) associate
Jordan Co. ordinary 750,000 2,025,000 1,500,000 Available-for-sale
Pear Companys investment had the following market values at December 31, 2012:
Omar Co. ordinary P3,060,000
Godling, Inc. preference 1,290,000
Sonata Co. ordinary 33,450,000
Jordan Co. ordinary 1,700,000
1. What valuation entries are required at December 31, 2011, assuming that al of the above securities were
acquired in 2011 and none of the indicated declines in market value are considered other than temporary?
2. Assume that Jordan Co.s ordinary shares market decline is considered other than temporary. What
valuation entries are required at December 31, 2011, under this change in assumption?
3. Assume that the investment categories remain the same and that al declines in 2011 and 2012 are
temporary except for the 2011 decline in Jordan Co.s ordinary shares. What valuation entries are required
at December 31, 2012?
PROBLEM 17:
On January 2, 2010, PLUM COMPANY purchased as a long-term investment a debt instrument with a 5-year term
for its fair value of P1,386,275. The instrument has a principal amount of P1,500,000 and carries a fixed interest
of 8% annually. The effective interest is determined to hold the debt instrument until maturity.
During 2012, the issuer of the instrument is in financial difficulties and it becomes probable that the issuer will
be put into administration by a receiver. The fair value of the instrument is estimated to be P750,000 at the end
of 2012, calculated by discounting the expected future cash flows at 10%. No cash flows are received during
2013. At the end of 2013, the issuer is released from administration and Plum receives a letter from the receiver
stating that the issuer will be able to meet its remaining obligations, including interest and repayment of
principal.
1. What is the book value of the held-to-maturity investment at the end of 2011?
A. P1,347,157 C. P1,500,000
B. P1,460,882 D. P1,425,393
2. What amount of impairment loss should be recognized in 2012?
A. P697,932 C. P636,275
B. P750,000 D. P675,393
3. How much interest income should be recognized in 2013?
A. P24,793 C. P75,000
B. P0 D. P120,000
4. What amount of impairment loss reversal should be recognized in 2013?
A. P697,932 C. P750,000
B. P647,725 D. P0
5. How much discount amortization should be recognized in 2014?
A. P27,275 C. P120,000
B. P0 D. P75,000
PROBLEM 18:
The investment in AFS securities account in the general ledger of PEACH CO. is reproduced below:
Investment in Available-for-sale (AFS) Securities

2012 2012
January 1 balance P1,410,000 September 11 P390,000
June 1 3,150,000 November 29 2,700,000
Your examination of the companys records reveals the following information:

a. the January 1 balance consists of the following:
shares Cost
Abe Co. 15,000 P630,000
Bea Co. 12,000 780,000
Total P 1,410,000
b. On March 15, Peach Co. received 3,000 ordinary shares of Bea as stock dividend. The market value of Bea
shares shortly after declaration of the dividend was P73 per share.
c. On June 1, Peach Co. purchased 3,000 Eba Co. P1,000 bonds for P3,150,000, including accrued interest.
The bonds earn interest at 20% per annum (payable every March 1 and September 1) and will mature
on June 1, 2022.
d. On September 11, 6,000 ordinary shares of Bea were sold at P75 per share
e. On September 29, the Eba bonds were sold for P2,550,000, plus accrued interest.
1. The Eba Co. bonds should be initially measured and recognized at

A. P3,000,000 C. P2,850,000
B. P3,150,000 D. P2,550,000
2. What amount of gain or loss should be recognized on the sale of the Bea Co. stock?
A. P60,000 gain C. P138,000 gain
B. P330,000 loss D. P0
3. What amount of gain or loss should be recognized on the sale of the Eba Co. bonds?
A. P450,000 loss C. P450,000 gain
B. P300,000 loss D. P300,000 gain
PROBLEM 19:
CHERRY, INC. received dividends from its investments in ordinary shares during the year ended December 31,
2012, as follows:
a. A cash dividend of P720,000 is received from JJ Corporation. (Cherry, Inc. owns a 2% interest in JJ)
b. A cash dividend of P3,600,000 is received for W Corporation. (Cherry, Inc. owns a 30% interest in W)
c. A stock dividend of 18,000 shares from YY Company was received on December 15, 2012, on which date
the quoted market value of YYs shares was P20 per share. Cherry, Inc. owns less than 1% of YYs
ordinary shares.
What amount of dividend income should be reported be Cherry, Inc. in its 2012 income statement?
A. P1,080,000 C. P4,320,000
B. P4,680,000 D. P720,000
PROBLEM 20:
BERRIES COMPANY owns a 5% interest in ST Corporation, which declared a cash dividend of P3,720,000 on
November 27, 2012, to shareholders of record on December 20, 2012, payable on January 15, 2013. In addition,
on October 15, 2012, Berries Company received a liquidation dividend of P100,000 from VG Corporation.
Berries Company owns 6% of VG Corporation.
What amount of dividend income should be included in Berries Companys income statement for the year ended
December 31, 2012?
A. P186,000 C. P191,000
B. P3,720,000 D. P181,000
PROBLEM 21:
(Equity method)
DURIAN CORP. purchased 40% of Associate Companys outstanding ordinary shares on January 2, 2012, for
P270 million. The book value of Associate Companys 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 exceed book values by P12.5 million and P112.5 million,
respectively. All inventory on hand at the purchase date was sold during Associate Company reported net
income of P110 million for the year ended December 31, 2012, and paid cash dividends of P40 million. The fair
value of Durians investment in associate was P300 million at December 31, 2012.
1. Of the amount paid for the acquisition of Associate Companys ordinary shares, how much is attributable to
goodwill?
A. P50 million C. P40 million
2. What is the investment balance at December 31, 2012?
3. At what amount will Durian Corp. report its investment income in its 2012 income statement?
PROBLEM 22:
(Equity method)
On January 4, 2012, EGGPLANT COMPANY paid P38 million for 2 million shares of Turko Co. ordinary shares.
The stock investment represents a 25% interest on the net assets of Turko and gave Eggplant the ability to
exercise significant influence over Turkos operations. The book value of Turkos net assets was P106 million.
The fair market value of Turkos depreciable assets exceed their book value by P20 million. These assets had an
average remaining useful life of 5 years. The remainder of the excess of the cost of the investment over the book
value of net assets purchased was attributable to goodwill.
On December 28, 2012, Eggplant received dividends of P1.50 per share. Turko reported net income of P30
million for the year ended December 31, 2012. The market value of Turkos ordinary shares at December 31,
2012, was P27.50 per share.
1. What portion of the investment cost is attributable to goodwill?

A. P11.5 MILLION c. P5 million
2. What is the carrying value of the investment in Turko stock on December 31, 2012?
A. P45.5 million C. P55 million
PROBLEM 23:
On January 4, 2012, TOMATO CORP. paid P1,296,000 for 40,000 ordinary shares of Baron Company. The
investment represents a 30% interest in the net assets of Baron and gave Tomato the ability to exercise
significant influence over Barons operating and financial policy decisions. Tomato received dividends of P1 per
share on December 4, 2012, and Baron reported net income of P640,000 for the year ended December 31, 2012.
The market value of Barons ordinary shares at December 31, 2012, was P32 per share. The book value of
Barons net assets was P3,200,000 and:
The fair market value of Barons depreciable assets, with an average remaining useful life of 8 years,
exceeded their book value by P320,000.
The remainder of the excess of the cost of the investment over the book value of net assets purchased
was attributable to goodwill.
1. What amount of the investment cost is attributable to goodwill?
A. P240,000 C. P336,000
B. P96,000 D. P144,000
2. What amount of investment revenue should be reported in Tomatos income statement for the year ended
December 31, 2012?
A. P120,000 C. P180,000
B. P108,000 D. P192,000
3. What is the carrying value of the investment in Baron ordinary shares on December 31, 2012?
A. P1,280,000 C. P1,296,000
B. P1,436,000 D. P1,368,000
Assume that the 40,000 shares represent a 10% interest in the net assets of Baron rather than a 30% interest.
4. What amount of investment revenue should be reported in Tomatos income statement for the year ended
December 31, 2012?
A. P40,000 C. P60,000
B. P64,000 D. P180,000
5. What is the carrying value of the investment in baron ordinary shares at December 31, 2012?
A. P1,296,000 C. P1,280,000
B. P1,436,000 D. P1,236,000
PROBLEM 24:
Equity method
CUCUMBER CORP. bought 40% of the outstanding ordinary shares of Super Company on January 2, 2012. At the
date of purchase, the book value of Supers net assets was P77.5 million. The book values and fair values for all
statement of financial position items were the same except for inventory and plant facilities. The fair value
exceeded book value by P500,000 for the inventory and by P2 million for the plant facilities. The estimated life
of the plant facilities is 8 years. All inventory acquired was sold during 2012. Super reported net income of P14
million for the year ended December 31, 2012, and paid a cash dividend of P3 million. Cucumbers statement of
financial position as of December 31, 2012, shows an amount of P44.1 million as its investment in Super
Company.
1. What amount should Cucumber report as its income from investment in Super Company for the year ended
December 31, 2012?
2. What is the acquisition cost of Cucumbers investment in Super Company?
A. P40 million C. P45.6 million
3. Of the amount paid by Cucumber for the 40% interest in Super Company, how much is attributable to
goodwill?
A. P8 million C. P8.8 million
B. P8.2 million D. P9 million
4. What should Cucumber report in its statement of cash flows regarding its investment in Super Company?
A. P40 million cash outflow from investing activities and P1.2 million cash inflow among operating
activities.
B. P45.6 million cash outflow from investing activities and P5.3 million cash inflow among operating
activities
C. P40 million cash outflow from financing activities and P1.2 million cash inflow among operating
activities
D. P39.4 million cash outflow from investing activities and P3 million cash inflow among operating
activities
PROBLEM 25:
On June 30, 2012, CABBAGE COMPANY purchased 25% of the outstanding ordinary shares of IB Co. at a total
cost of P2,100,000. The book value of IB Co.s net assets on acquisition date was P7,200,000. For the following
reasons, Cabbage was willing to pay more than book value for the IB Co. shares:
IB Co. has depreciable assets with a current fair value of P180,000 more than their book value. These
assets have a remaining useful life of 10 years.
IB Co. owns a tract of land with a current fair value of P900,000 more then its carrying amount.
All other identifiable tangible and intangible assets of IB Co. have current fair values that are equal to
their carrying amounts.
IB Co. reported net income of P1,620,000, earned evenly during current year ended December 31, 2012. Also in
the current year, it declared and paid cash dividends of P315,000 to its ordinary shareholders. Market value of
IB Co.s ordinary shares at December 31, 2012, is P9 million. Cabbage Companys financial year-end is December
31.
1. What is the total amount of goodwill of IB Co. based on the price paid by Cabbage Company?
A. P300,000 C. P120,000
B. P1,080,000 D. P30,000
2. What amount of investment income should Cabbage report in its income statement for the year ended
December 31, 2012, under the fair value method?
A. P78,750 C. P228,750
B. P202,500 D. P71,250
3. What amount of investment income should cabbage report in its income statement for the year ended
December 31, 2012, under the equity method?
A. P202,500 C. P78,750
B. P200,250 D. P123,750
4. Under the equity method, the carrying value of the Cabbage Companys investment in ordinary shares of IB
Co. on December 31, 2012, should be
A. P2,221,500 C. P2,070,000
B. P2,100,000 D. P2,250,000
5. What amount should Cabbage Company report in its December 31, 2012, statement of financial position as
its investment in IB Co. under the fair value method?
A. P2,250,000 C. P2,221,500
B. P2,070,000 D. P2,100,000
PROBLEM 26: (Equity method)

LETTUCE CO. purchased 40% of MU Corp. on April 1, 2012, for P500,000 when MUs book value was P1,260,000.
On the date of acquisition, the market value of MUs net assets equaled their book values except for the
following:
MUs equipment has a fair value of P50,000 less than its book value. The equipment has a remaining
useful life of 10 years.
MUs building has a fair value of P40,000 than its book value. The building has a remaining useful life of
20 years.
MUs results of operations in 2012 and 2013 are as follows:

2012 net income P150,000
2013 net loss P30,000
MU paid cash dividends of P20,000 and P10,000 in 2012 and 2013, respectively.
1. What amount of investment income should be reported on Lettuce Companys income statement for the year
ended December 31, 2012?
A. P44,100 C. P61,200
B. P58,800 D. P45,900
2. The investment loss to be reported on Lettuce Companys 2013 income statements
A. P10,800 C. P13,200
B. P8,100 D. P12,000
3. What is the carrying value of the stock investment on December 31, 2012?
A. P536,100 C. P553,200
B. P537,900 D. P500,000
4. What is the carrying value of the stock investment on December 31, 2013?
A. P521,300 C. P523,100
B. P536,000 D. P500,000
PROBLEM 27:
Equity method
On January 2, 2012, OKRA CORP. paid P1,600,000 for the purchase of 40% of the ordinary shares of Thunder
Company. The statement of financial position of Thunder at the date of acquisition shows the following
information:
Assets subject to depreciation (remaining useful life is 8 years) P2,400,000
Assets not subject to depreciation 800,000
Liabilities 400,000
The book value and fair value are the same for assets not subject to depreciation and liabilities. The fair market
value of Thunders assets subject to depreciation is P2,720,000. Thunder depreciates its assets using the
straight-line method. Thunders intangibles are amortized over a 20-year period. Net income for the year ended
December 31, 2012, is P640,000. It declares and pays dividends of P500,000 in 2012.
5. What amount of the investment cost is attributable to goodwill?

A. P352,000 C. P128,000
B. P480,000 D. P608,000
6. What is the carrying value of the stock investment at December 31, 2012?
A. P1,622,400 C. P1,784,000
B. P1,600,000 D. P1,640,000
PROBLEM 28: (discontinuance of Equity method)

KANGKONG COMPANY purchased 250,000 shares of Secret Co. ordinary shares on July 1, 2012, at P66 per share,
which reflected book value as of that date. At the time of purchase, Secret Co. had 1,000 ordinary shares
outstanding. Kangkong had no ownership interest in Secret prior to this purchase. Secret reported net income of
P3,360,000 for the six months ended June 30, 2012. Kangkong received a dividend of P420,000 from Secret on
August 1, 2012. Secret reported net income of P7,200,000 for the year ended December 31, 2012, and again paid
Kangkong dividends of P420,000.
On January 1, 2013, Kangkong sold 100,000 ordinary shares of Secret for P68 per share and reclassified the
remaining stock as available-for-sale securities. The quoted market price of such investment on January 1, 2013
was P69 per share. Secret reported net income of P7,440,000 for the year ended December 31, 2013, and paid
Kangkong dividends of P240,000. The fair value of Secret ordinary shares at December 31, 2013 was P70 per
share.
1. What is the carrying value of the stock investment at December 31, 2012?
2. The total amount of gain to be reported in the 2013 income statement is
3. What amount of unrealized gain should be reported in the 2013 statement of comprehensive income as
component of other comprehensive income?
4. The carrying value of the retained investment to be shown in the statement of financial position of
December 31, 2013 is

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COLLEGE OF BUSINESS EDUCATION AND ADMINISTRATION

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

date Interest Interest Premium Carrying

received income amortization amount

December 31 Market prices of securities were:

1. What is the total interest and dividend income for 2012?

date Interest Interest Premium Amortized

*adjustment due to rounding

April 15 purchased P1,000,000 of 10% bonds at face value from OW Corporation

July 23 received cash dividends of P60,000 on the investment in Corporation bonds

October 15 Received semiannual interest on the investment in OW Corporation Bonds

October 16 Sold the OW Corporation bonds for P1,100,000

1. On initial recognition, a financial asset or financial liability is measured at

Security Category No. of shares Total Cost

1. What is the gain (loss) on the sale of A1 Corp. stock?

2. What is the gain (loss) on the sale of C3, Inc. stock?

1. The X Company bonds should be initially measured and recognized at

Strawberrys portfolio of available-for-sale securities appeared as follows on December 31, 2012:

Investment in Available-for-sale (AFS) Securities

Your examination of the companys records reveals the following information:

1. The Eba Co. bonds should be initially measured and recognized at

1. What portion of the investment cost is attributable to goodwill?

PROBLEM 26: (Equity method)

MUs results of operations in 2012 and 2013 are as follows:

5. What amount of the investment cost is attributable to goodwill?

PROBLEM 28: (discontinuance of Equity method)

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