AUD PROBS 05

AUDIT OF INVESTMENTS

PROBLEM NO. 1

MAGNOLIA CORP. invested its excess cash in equity securities during 2014. The business model for these
investments is to profit from trading on price changes.

(a) As of December 31, 2014, the equity investments portfolio consisted of the following:
Investments Quantity Cost Fair Value
LJ, Inc. 1,000 shares ₱ 90,000 ₱126,000
Polland Co. 2,000 shares 240,000 252,000
Alabang Corp. 2,000 shares 432,000 360,000
Totals 762,000 ₱738,000

1. In the December 31, 2014, statement of financial position, what should be reported as carrying
amount of the investments?
A. ₱738,000 C. ₱762,000
B. ₱690,000 D. ₱810,000

2. In the 2014 income statement, what amount should be reported as unrealized gain or loss?
A. Unrealized of gain of ₱24,000 C. Unrealized of loss of ₱72,000
B. Unrealized of loss of ₱24,000 D. Unrealized of gain of ₱48,000

(b) During the year 2015, Magnolia Corp. sold 2,000 shares of Polland Co. for of ₱229,200 and
purchased 2,000 more shares of LJ, Inc. and 1,000 shares of Dwarfy Company. On December 31,
2015, Magnolia’ equity securities portfolio consisted of the following
Investments Quantity Cost Fair Value
LJ, Inc. 1,000 shares ₱ 90,000 ₱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
Total ₱816,000 ₱564,000

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

A. ₱10,800 gain C. ₱22,800 gain
B. ₱10,800 loss D. ₱22,800 loss

4. What is the carrying amount of the investments on December 31, 21015?

A. ₱816,000 C. ₱564,000
B. ₱888,000 D. ₱492,000

5. What amount of unrealized gain or loss should be reported in the income statement for the
year ended December 31, 2015?
A. ₱252,000 unrealized gain C. ₱216,000 unrealized gain
B. ₱252,000 unrealized loss D. ₱216,000 unrealized loss

(c) During the year 2016, Magnolia sold 3,000 shares of LJ, Inc. For ₱239,400 and 500 shares of Dwarfy
Company at a loss of ₱16,200. On December 31, 2016, Magnolia’s equity investment portfolio
consisted of the following.

Investments Quantity Cost Fair Value

Dwarfy Company 500 shares ₱ 48,000 ₱ 36,000
Alabang Corp. 2,000 shares 432,000 492,000
Total ₱480,000 ₱528,000
6. What should be reported as loss on sale securities in 2016?
A. ₱120,600 C. ₱48,600
B. ₱64,800 D. ₱136,800

7. What amount of unrealized gain or loss should be reported in the income statement for the
year ended December 31, 2016?

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AUD PROBS 05
A. ₱360,000 unrealized gain C. ₱48,000 unrealized gain
B. ₱360,000 unrealized loss D. ₱48,000 unrealized loss

8. In the December 31, 2016, statement of financial position, what should be reported as carrying
amount of trading securities?
A. ₱480,000 C. ₱528,000
B. ₱468,000 D. ₱540,000

PROBLEM NO. 2

Supporting records of MAYON CORPORTATION’S trading securities portfolio show the following debt and
equity securities”

Security Cost Fair Value

400 ordinary shares Concave Co. ₱ 254,500 ₱ 243,000
₱800,000 Tipo Co. 7% bonds 796,500 774,000
₱1,200,000 Turkey Co. 7 1/2 % bonds 1,207,500 1,218,900
Totals ₱2,258,500 ₱2,235,900

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 2015 and 2016, Mayon completed the following
transactions related to trading securities:

2015
Jan. 1 Received semi-annual interest on bonds. Assume that that the appropriate adjusting entry
was made on December 31, 2014.
April 1 Sold ₱600,000 of 7 ½% Turkey bonds at 102 plus accrued interest. Brokerage fees were
₱2,000.
May 21 Received dividend of ₱1.25 per share on the Concave ordinary share capital. The dividend
had not been recorded on the declaration date.
July 1 Received semi-annual interest on bonds and then sold the 7% Tipo bonds at 97 1/2.
Brokerage fees were ₱2,500.
Aug. 15 Purchased 200 shares of Newman, Inc. ordinary share capital at ₱580 per share plus
brokerage fees of ₱500
Nov. 1 Purchased ₱500,000 of 8% of Toll Co. bonds at 101 plus accrued interest. Brokerage fees
were ₱1,250. Interest dates are January 1 and July 1.
Dec. 31 Market prices of securities were:

Concave ordinary shares ₱550

7 ½% Turkey bonds 101 ¾
8% Toll bonds 101
Newman ordinary shares ₱583.75

2016
Jan. 2 Recorded the receipt of semi-annual interest on bonds.
Feb. 1 Sold the remaining 7 ½% Turkey bonds at 101 plus accrued interest. Brokerage fees were
₱3,000.

(a) 1. What is the total interest and dividend income for 2015?
A. ₱125,166 C. ₱91,417
B. ₱164,416 D. ₱98,804

2. What amount should be reported as gain on sale of trading securities in 2015?

A. ₱4,050 C. ₱8,550
B. ₱12,752 D. ₱9,375

3. What amount of unrealized gain or loss should be reported in the income statement for the year
ended December 31, 2015?
A. ₱21,200 unrealized gain B. ₱21,200 unrealized loss

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C. ₱6,150 unrealized gain D. ₱6,150 unrealized loss

4. What is the carrying amount of the remaining trading securities on December 31, 2015?
A. ₱1,481,000 C. ₱1,473,450
B. ₱1,450,450 D. ₱1,452,250

5. What is the loss on the sale of the remaining Turkey bonds on February 1, 2016?
A. ₱7,500 C. ₱13,500
B. ₱10,500 D. ₱750

(b) Prepare journal entries for the preceding transactions and to accurate interest on December 31, 2015.
Ignore amortization of premium or discount on bonds.

PROBLEM NO. 3

SANTOL CORP. invested its excess cash in non-trading equity securities during 2015. 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, 2016, the company’s securities portfolio consisted of the following:

Investee Company Shares Cost Market Value

Kelly, Inc. 30,000 ₱ 450,000 ₱ 425,000
Eloy Corp. 60,000 1,500,000 1,610,000
Yogi enterprises 60,000 2,160,000 2,300,000
Totals ₱4,110,000 ₱4,335,000

During the year 2017, Santol sold 60,000 shares of Eloy corp. for ₱1,700,000 and purchased 60,000
additional shares of Kelly, Inc. and 30,000 shares of Kongga Company.

On December 31, 2017, Santol’s portfolio for non-trading equity securities comprised the following:

Investee Company Shares Cost Market Value

Kelly, Inc. 30,000 ₱ 450,000 ₱ 500,000
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
Totals ₱4,430,000 ₱3,130,000

During the year 2018, 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, 2018, Santol’s portfolio of non-trading equity securities
consisted of the following:

Investee Company Shares Cost Market Value

Yogi Enterprises 60,000 ₱ 2,160,000 ₱ 4,200,000
Kongga Company 15,000 260,000 180,000
Totals ₱2,420,000 ₱4,380,000

1. What total amount should be credited to retained earnings as a result of the sale of Eloy Corp.
securities in 2017?
A. ₱200,000 B. ₱110,000 C. ₱90,000 D. ₱20,000

2. What unrealized loss on the remaining financial assets should be reported in the 2017 statement
of comprehensive income as component of other comprehensive income?
A. ₱1,600,000 B. ₱1,640,000 C. ₱1,415,000 D. ₱1,300,000

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) AP-7805-AUDIT OF INVESTMENTS

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, 2017?
A. ₱1,415,000 C. ₱335,000
B. ₱1,300,000 D. ₱225,000

4. What unrealized gain on the remaining financial assets should be reported in the 2018 statement
of comprehensive income as component of other comprehensive income?
A. ₱1,960,000 C. ₱3,440,000
B. ₱60,000 D. ₱3,500,000

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, 2018?
A. ₱1,505,000 C. ₱1,480,000
B. ₱1,960,000 D. ₱3,440,000

PROBLEM NO. 4

DURIAN CORP. Purchased 40% of Associate Company’s outstanding ordinary shares on January 2, 2015, for
₱540 million. The book value of Associate Company’s net assets (shareholders equity) at the purchase date
totaled ₱900 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 ₱25 million and ₱225 million,
respectively. All inventory on hand at the purchase date was sold during 2015. The buildings have average
remaining useful lives of 15 years. Associate Company reported net income of ₱220 million for the year
ended December 31, 2015, and paid cash dividends of ₱80 million. The fair value Durian investment in
associate was ₱600 million at December 31, 2015.

1. Of the amount paid for the acquisition of Associate Company’s ordinary shares, how much is
attribute to goodwill?
A. ₱100 million C. ₱80 million
B. ₱50 million D. ₱180 million

2. What is the investment balance at December 31, 2015?

A. ₱540 million C. ₱580 million
B. ₱600 million D. ₱596 million

3. At what amount will Durian Corp. report its investment revenue in its 2015 income statement?
A. ₱88 million C. ₱40 million
B. ₱72 million D. ₱32 million

PROBLEM NO. 5

1. A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the
auditor is unable to count the securities at the balance sheet date, the auditor most likely will
A. Request the bank to confirm to the auditor the contents of the safe deposit box ta the balance
sheet date.
B. Examine supporting evidence for transactions occurring during the year.
C. Count the securities at a subsequent date and confirm with bank whether securities were
added or remove since the balance sheet date.
D. Request the client to have the bank seal the safe-deposit box until the auditor can count the
securities at a subsequent date,

2. When an auditor is unable to inspect and count a client’s investment securities until after the
balance sheet date, the bank were the securities are held in a safe-deposit box should be asked to
A. Verify any difference between the contents of the box and balances in the client’s subsidiary
ledger.
B. Provide a list of securities added and removed from the box between the balance sheet date
and the security count date.
C. Count the securities in the box so that the auditor will have an independent direct
verification.

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D. Confirm that there has been no access to the box between the balance sheet date and the
security count date.

3. Which of the following is not one of the auditor’s primary objectives in an audit of trading
securities?
A. To determine whether securities are authentic.
B. To determine whether securities are the property of the client.
C. To determine whether securities actually exist.
D. To determine whether securities are property classified on the balance sheet date.

4. Apol Boba, CPA observe the count of securities on December 31, 2015. She records the serial
numbers of the securities and reconciles them and the number of shares with company records.
Which fraud should be detected by this procedure?
A. An investee company declared and paid a stock dividend on December 15. The stock certificate
for the additional shares was received directly by the treasurer who made no record of the
receipt and embezzled the shares.
B. The treasurer embezzled and sold securities on April 4. She speculated successfully with
proceeds and replaced the securities on December 29.
C. The treasurer borrowed securities on July 15 to use as collateral for a personal loan. He repaid
the loan and returned the securities on December 2.
D. The treasurer embezzled interest receipts from bonds by having the payments mailed directly
to him.

5. Which of the following is the least effective audit procedure regarding the existence assertion for
the securities held by the auditee?
A. Examination of paid checks issued in payment of securities purchased.
B. Vouching all changes during the year to supporting documents.
C. Simultaneous count of liquid assets.
D. Confirmation from the custodian.

6. An auditee is holding equity securities as collateral for a debt. The auditor should
A. Determine from data published in the financial press that the auditee has recorded dividend
income from the collateral.
B. Ascertain the value of the securities.
C. Ascertain that the amount recorded for the collateral in the investment account is equal to its
fair value at the balance sheet date.
D. Verify that the client has taken title to the securities.

7. Which of the following is the most effect audit procedure for verification of dividends earned on
investments in equity securities?
A. Tracing deposited dividend checks to the cash receipt book.
B. Reconciling the amounts received with published dividend records.
C. Comparing the amounts received with preceding year dividends received.
D. Recomputing selected extensions and footings of dividends schedule and comparing totals to
the general ledger.

8. In confirming with an outside agent, such as a financial institution, that the agent is holding
investment securities in the client’s name, an auditor most likely gathers evidence in support of
management’s financial statement assertions of existence and
A. Valuation C. Completeness
B. Rights and obligations D. Presentations and disclosure

9. In establishing the existence and ownership of an investment held by a corporation in the form of
publicly traded stock, an auditor should inspect the securities and
A. Obtain written representations from management confirming that the securities are properly
classified as trading securities.
B. Inspect the audited financial statements of the investee company.
C. Confirm the number of shares held by an independent company.
D. Determine that the investment is carried at fair value.

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10. An auditor is most likely to verify the interest earned on bond investment by
A. Verifying the receipt and deposit of interest checks
B. Confirming the bond interest rate with the issuer of the bonds.
C. Recomputing the interest earned on the basis of face amount, interest rate, and period held.
D. Testing controls relevant to cash receipts.

11. Which of the following provides the best form of evidence pertaining to the annual valuation of an
investment in which the independent auditor’s client own a 30% voting interest?
A. Market quotations of the investee company’s stock.
B. Current fair value on the investee company’s assets.
C. Historical cost of the investee company’s assets.
D. Audited financial statements of the investee company.

12. In verifying the amount of goodwill recorded by a client, the most convincing evidence an auditor
can obtain is by comparing the recorded value of assets acquired with
A. Assessed value as evidenced by tax bills.
B. Seller’s book of value as evidence by financial statements.
C. Insured value as evidenced by insurance policies.
D. Appraised value as evidenced by independent appraisals.

13. The auditor can best verify a client’s bond sinking fund transactions and year-end balance by
A. Confirmation with individual holders of retired bonds.
B. Confirmation with the bond trustee.
C. Recomputation of interest expense, interest payable, and amortization of bond discount or
premium.
D. Examination and count of the bonds retired during the year.

14. An auditor who physically examines securities should insist that a client representative be present
in order to
A. Detect fraudulent activities.
B. Lend authority to the auditor’s directives.
C. Coordinate the return of securities to the proper locations.
D. Acknowledge the receipts of securities returned.

15. In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain
the reasonableness of the
A. Classification between current noncurrent portfolios.
B. Valuation of marketable equity securities.
C. Existence on unrealized gains or losses in the portfolio.
D. Completeness of recorded investment income.

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