ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41  May 2021 CPA Licensure Examination  Quizzer

AUDITING (Auditing Problems) S. Ireneo  C. Espenilla

AP-600Q: INVESTING CYCLE – AUDIT OF INVESTMENTS

PROBLEM 1:
The following data and information pertain to the audit of sole “Investment in Debt Securities” account
of HK Corporation for the year ended December 31, 2020:

Audit notes:
A. As per requested schedule the client’s accountant submitted the year-end fair value of this
financial asset and other related figures:

Face Value Cost Fair Value

VZ Bonds 10% 2,500,000 2,380,000* 2,550,000
*includes brokers fee payment of P80,000

B. The financial asset is dated January 1, 2020 and matures on December 31, 2022 and pays
interest annually every December 31 with an effective yield rate of 12%.

C. The audit client has irrevocably elected the fair value option. However, the client’s accountant
inadvertently used a different business model to account its financial asset that is based on the
collection of contractual cash flows through sole payments of principal and interest and sale of
the financial asset in the open market.

As a result of your audit findings:

1. Assuming no correcting entries are made, the income statement for 2020 is:
a. Understated by P134,400 c. Overstated by P80,000
b. Understated by P250,000 d. Overstated by P115,600
2. The amount of unrealized gain that should be reported as a component of other comprehensive
income for 2020 is:
a. None c. P250,000
b. P115,600 d. P134,400
3. The adjusting entry to correct the reclassification of the business model adopted by the entity
would include:
a. A credit to brokerage fee expense of P80,000.
b. A debit to gain from change in fair value by P250,000.
c. A credit to unrealized gain – OCI by P134,400
d. A debit to interest income by 35,600.

PROBLEM 2:
The following information was obtained in an audit of the equity and debt investment portfolio account,
carried at fair value through other comprehensive income, of Darkin Corporation as of December 31,
2020:

Equity Securities (Non-trading instruments)

Shares Cost Fair value
T Inc. 100,000 4,850,000 5,050,000
V Corp. 125,000 5,900,000 5,725,000

Debt Security (Business model based on realizing fair value changes)

Face value Cost Fair value
K Inc. 140,000 147,000 136,500

Transactions during the 2020 audit disclosed the following:

a. On September 4, 2020, the entity recorded a sale of 50,000 shares of T Inc. by a debit to
“Cash” for its proceeds of P2,460,000, net of P40,000 transaction cost, and a credit to
Financial Asset at FMVOCI/L at fair value of P2,540,000, net of P110,000 estimated transaction
cost. The difference was recognized as “Loss on disposal of equity investment”. Moreover, the
cumulative gain previously recognized in the other comprehensive income on these shares sold
amounting to P320,000 was closed to Retained earnings.

b. On December 31, 2020, you discovered that V Corp. experienced a severe financial difficulty so
that the fair market value of its equity investment had fallen to P5,310,000. The client
accountant overlooked this transaction and reflected the financial asset at P5,725,000 (the fair
value of the investment last remeasurement date).

c. The entity’s initial business model for its K Inc. bonds was to collect contractual cash flows and
to sell them in the open market. On December 31, 2020, it decided to adopt another business
model of managing its financial asset and made the proper disclosure. However, the client

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accountant failed to record the reclassification and the premium amortization of P2,000. The
fair value of the financial asset, net of P2,500 estimated transaction cost, did not change
throughout 2020.

Based on your analysis:

4. The correct realized gain or loss to be recognized in the profit or loss as a result of the sale of
50,000 T Inc. shares is:
a. None c. P150,000
b. P40,000 d. P190,000
5. The further decline in the fair value of the V Corp. shares would require a correcting entry by:
a. A debit to impairment loss at P415,000.
b. A debit to unrealized loss – FMV OCI/L at P590,000.
c. A debit to impairment loss at P590,000.
d. A debit to unrealized loss – FMV OCI/L at P415,000.
6. The correcting entry related to K Inc. bonds on December 31 ,2020 should be:
a. Interest Income 2,000
Financial Asset – FMVPL 136,500
Financial Asset = FMVOCI/L 138,500
b. Interest Income 2,000
Financial Asset – FMVOCI/L 500
Unrealized Holding Loss 2,500
c. Interest Income 2,000
Financial Asset – FMVOCI/L 2,000
d. Financial Asset – FMVPL 137,000
Interest Income 2,000
Financial Asset – FMVOCI/L 136,500
Unrealized Loss 2,500

7. The adjusted equity investment balance in the statement of financial position as of December
31, 2020 is:
a. P10,250,000 c. P10,360,000
b. P10,775,000 d. P10,387,000

PROBLEM 3:
Pinay Corp. had the following portfolio of financial instruments of the December 31, 2018. All securities
were acquired at the beginning of 2018:
Denomination/ Recorded
Security Face Value Acquisition Cost
Alpha shares 100,000 shares P5,250,000
Beta shares 40,000 shares 2,350,000
10%, Delta bonds, 3 years P2,000,000 par 1,951,126

Audit notes:
a. Alpha shares were acquired and were designated as financial asset 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 shares were sold at P58 per share on July 1, 2019.

b. Beta shares were and were designated as financial asset at fair value through other
comprehensive income/losses. 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, 2019 at P59
per share.

c. The Delta bonds were acquired on January 1, 2018, when the prevailing market rate of interest
was at 11%. Interest are collectible every December 31. Half of the Delta bonds were sold on
June 30, 2019 at P1.1M.

d. Additional information on the securities are as follows:

Security Fair value Fair value
Dec. 31, 2018 Dec. 31, 2019
Alpha shares P55/share P62/share
Beta shares 57.50/share 64/share
10%, Delta bonds, 3 years 9% yield: 12% yield:
P2,035,182 ?
Requirements: Determine the adjusted balances of the following:
8. What is the realized gain or loss on sale of Alpha shares in 2019?
a. 150,000 c. 275,000
b. 200,000 d. 400,000

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9. What is the realized gain or loss sale on Beta shares in 2019 under PFRS 9, Financial
Instruments?
a. 75,000 c. 15,000
b. 22,500 d. none
10. Assuming that the company’s business model has no objective of holding debt securities to
collect contractual cash flows and that securities are held for short-term profit purposes, what
is the realized gain on sale of the Delta bonds in 2019?
a. 63,067 c. 82,409
b. 113,067 d. 32,409
11. Assuming that the company’s business model has an objective of holding debt securities to
collect contractual cash flows, what is the realized gain on sale of the Delta bonds in 2019?
a. 63,067 c. 82,409
b. 113,067 d. 32,409
12. Assuming that the company’s business model has an objective of holding debt securities to
collect contractual cash flows and hold investment available for sale when opportunity arises,
what is the realized gain on sale of the Delta bonds in 2019?
a. 63,067 c. 82,409
b. 113,067 d. 32,409
13. 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 investments that shall be
presented as financial asset fair market value through profit or loss (trading securities)?
a. 3,100,000 c. 5,064,285
b. 4,082,143 d. 4,700,000
14. Assuming that the company’s business model has no objective of holding debt securities to
collect contractual cash flows and that debt securities are held for short-term profit purposes,
what is the total carrying value of investments that shall be presented as financial asset fair
market value through profit or loss (trading securities)?
a. 3,100,000 c. 5,064,285
b. 4,082,143 d. 4,700,000
15. Assuming that the company’s business model has an objective of holding debt securities to
collect contractual cash flows, what is the unrealized holding gain/loss to be reported in the
profit/loss for 2019?
a. 250,000 c. 122,402
b. 350,000 d. 314,552
16. Assuming that the company’s business model has no objective of holding debt securities to
collect contractual cash flows and that debt securities are held for short-term profit purposes,
what is the unrealized holding gain/loss to be reported in the profit/loss for 2019?
a. 250,000 c. 122,402
b. 350,000 d. 314,552
17. Assuming that the company’s business model has an objective of holding debt securities to
collect contractual cash flows and hold investment available for sale when opportunity arises,
what is the unrealized holding gain/loss to be reported in the SHE portion of the Statement of
Financial Position?
a. 250,000 c. 122,402
b. 350,000 d. 314,552

PROBLEM 4:
Benshoppe Inc. had the following portfolio of financial assets as of December 31, 2020. All the
financial asset were acquired in 2020:

Financial asset Acquisition Cost

Aye Corp. Stocks, 20,000 shares P590,000
Bee Inc. Stocks, 40,000 shares 1,100,000
See Co. 10%, P2M bonds 1,973,000
Dee Corp. Stocks, 50,000 shares 2,400,000

Audit notes:
a. Aye Corp. shares were acquired with an intention of generating short-term profits from the
share price’s fluctuations. The company paid P29.50 per share, which included the P0.50 per
share broker’s fees and commissions. The shares were acquired on February 20, 2020. A P2
per share cash dividends were received on March 30. These dividends were declared by Aye
Corp. on January 20, 2020 to stockholders as of record date March 1, 2020.

b. The company paid P27.50 per share, including P0.50 per share brokers’ fee on the acquisition
of Bee Inc. on March 1, 2020. These shares were acquired for trading purposes. A P3 per share
dividends were received from the said shares on May 3, 2020. These dividends were declared
on April 1 to stockholders as of record date April 20.

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c. See Co. bonds which pay semi-annual interest every June 30 and December 31, were acquired
on October 1, 2020 at P1,973,000, when the prevailing effective interest rate on similar
instrument was at 12%. The bonds shall mature on December 31, 2022. The company has a
business model of holding debt securities for short-term profits.

d. Dee Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and
commissions on June 30, 2020. Dee Corp. had a total of 200,000 shares outstanding on the
same date. The company received P5 dividends per share form Dee on December 20, 2020.

e. The following information were deemed relevant at year-end and no entries had been made
yet by the company to reflect any of the following information:

Aye Corp. Bee Inc. See Co. Dee Corp.

Net income in 2020 P1,200,000 P1,500,000 P2,000,000 P2,240,000
Fair Value P35/sh P25/sh 11% P51/sh

Requirements:

18. What is the unrealized holding gain/loss to be reported in the 2020 statement of
comprehensive income?
a. 1,948 c. 121,948
b. 51,948 d. 122,750
19. What is the correct carrying value of investments that should be presented as current asset?
a. 3,665,750 c. 3,664,948
b. 3,543,000 d. 3,765,250
20. What is the correct carrying value of investments that should be presented as non-current?
a. 2,280,000 c. 2,430,000
b. 2,150,000 d. 2,550,000
21. How much in total should be recognized in the income statement in relation the investments?
a. 261,948 c. 571,948
b. 541,948 d. 542,750
22. Assuming that the company’s business model regarding debt securities has an objective of
collecting contractual cash flows, what is the correct carrying value of investments that should
be presented as non-current?
a. 4,394,948 c. 4,395,750
b. 4,362,390 d. 4,360,690
23. Assuming that the company’s business model regarding debt securities has an objective of
collecting contractual cash flows, how much in total should be presented in the income
statement in relation to the investments?
a. 461,948 c. 537,690
b. 525,750 d. 507,690

PROBLEM 5:
Sitaw Corp. acquired and holds debt and equity securities as investment. Equity securities are
accounted for as financial asset at fair value through other comprehensive income, while debt
securities are accounted for under the business model where the objective is to collect contractual cash
flows from the investments.

Described below are the company’s investment-related transactions from 2018 to 2019:
2018
a. The company purchased on March 1, 1 million PATATAS , Inc. common shares for P62 million,
which included the brokerage fees and commissions at P2 million.

b. The company purchased on April 15, P100 million of 10% bonds at face value from SIBUY
Corporation.

c. On July 2, the company received cash dividends of P1.5 million on the investment in PATATAS ,
Inc. common shares.

d. On October 15, the company received the semiannual interest of P5 million on the investment
in SIBUY Corporation bonds.

e. Sitaw Corp. sold half of the SIBUY Corporation bonds for P51.25 million on October 16.

f. Sitaw Corp. purchased 250,000 BAWA Co. preferred shares for P20 million which included
brokerage fees and commissions at P1 million on November 11.

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g. On December 31, the market values of the investments are P64 per share for PATATAS , Inc.
and P74 per share for BAWA Co. preferred stock. In addition, SIBUY bonds were quoted at
110.

h. Also, on December 31, the company recorded a transfer of all PATATAS shares to financial
asset at fair value through profit or loss caption.

2019
i. The company sold half the PATATAS Inc. shares for P65 per share on February 14.

j. The company sold the BAWA Co. preferred stock for P78 per share on March 15.

REQUIREMENTS:
24. What is the gain (loss) on the sale of the SIBUY Corporation bonds on October 16, 2018?
a. 1.25 million b. 3.75 million c. (1.25 million) d. (3.75 million)

25. What is the total unrealized capital related to the investment to be reported at the balance
sheet date December 31, 2018?
a. 1.5 million b. 0.5 million c. 1.75 million d. 0.75 million

26. What is the total dividend and interest income from the investments to be reported in the
company’s 2018 income statement?
a. 8.583 million b. 7.583 million c. 7.542 million d. 7.5 million

27. What is the gain (loss) on the sale of the PATATAS , Inc. shares in 2019, under PFRS 9,
Financial Instruments?
a. 1.5 million b. 0.5 million c. (1.5 million) d. None

28. What is the gain (loss) on the sale of the BAWA Co. preferred shares in 2019, under PFRS 9,
Financial Instruments?
a. 1.5 million b. 0.5 million c. (1.5 million) d. None

PROBLEM 6:
Mariah Corp. has the following non-trading equity securities on December 31, 2018:

Fair Value
Security # of Shares Cost (12/31/18)
ABC ordinary shares 9,000 P441,000 P46 per share
DEF ordinary shares 30,000 1,080,000 P35 per share
GHI preference shares 2,400 360,000 P154 per share

Audit notes:
a. The above securities were all bought in 2018. On the initial recognition, Mariah made an
irrevocable election to present gain/loss on the said securities to other comprehensive income.

b. On April 1, 2019, the company sold all of the ABC ordinary share for P65 per share.

c. On May 1, 2019, the company purchased 4,200 ordinary shares of JKL Corp. at P75 per share.
The company incurred brokers’ fees amounting to P10,400.

d. The following additional information in 2019 were deemed relevant:

Reported Fair Value of
Net Income shares
Dividends Declared* (12/31/19)

ABC ordinary shares P2.00 per share P900,000 P62 per share
DEF ordinary shares P1.50 per share 1,300,000 P38 per share
GHI preference shares P1.00 per share 750,000 P145 per share
JKL ordinary shares P0.75 per share 450,000 P77 per share
*all dividends were declared on December 31, 2019.

Requirements:
Based on the results of your audit answer the following:
29. What is the realized gain on sale of ABC ordinary shares in 2019, under PFRS 9?
a. 144,000 b. 171,000 c. 190,000 d. none

30. What is the unrealized holding gain/loss to be reported in the stockholders’ equity portion of
the 2019 statement of financial position?

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a. 76,800 b. 56,400 c. 46,000 d. 66,400

31. Assuming that the company elected to report gains/losses in the profit or losses instead, what
is the unrealized holding gain/loss to be reported in the 2019 statement of comprehensive
income?
a. 76,800 b. 56,400 c. 46,000 d. 66,400

32. Assuming that the 4,200 JKL shares acquired in 2019 represent 20% interest on JKL’s
outstanding ordinary shares, what is the correct carrying value of the investment in JKL
shares?
a. 412,250 b. 382,250 c. 371,850 d. 401,850

PROBLEM 7:
Your audit of the Dumbo Inc. revealed the following transactions on its “Financial Asset at Fair Market
Value through profit or loss” account:
Date Particulars Debit Credit
1/15/20 Purchased 40,000 shares of ABC at P21.50 per
share and 20,000 shares of XYZ at P13.00
per share. Amount includes transaction
costs amounting to P1.50 per share. P1,120,000

6/30 Purchased 1,000 of DEF Inc.’s 12%, 4 year,

P1,000 face value bonds dated January 1,
2018 and pays annual interest every
December 31. Prevailing interest on the
same date at 14%. Amount includes
accrued interest and transaction costs
amounting to P10 per bond. 1,044,258

7/1 Received 3,000 shares of XYZ as stock

dividends, prevailing market price at P12
per share 36,000

8/5 Sold 15,000 of ABC shares at P15 per share and

5,000 of XYZ shares at P13 per share P290,000

12/1 Sold half of the DEF bonds at 98 plus accrued

interest 515,000

12/30 Received P80,000 in lieu of a 5,000 stock

dividends from its ABC shares 80,000
12/31 BALANCE P1,315,258

Additional information:
On December 31, 2020, 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 on the same date at
P11%.

REQUIREMENTS
33. How much is the total realized gain or (loss) on disposal of bonds on December 1?
a. None b. 2,871 c. (32,129) d. (2,871)

34. 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

35. How much should be the unrealized holding gain to be recorded in the income statement for
the year 2014?
a. 27,379 b. 57,376 c. 64,876 d. 140,709

36. How much interest income should be recorded in the income statement?
a. 60,000 b. 55,000 c. 58,179 d. 67,629

37. How much dividend income should be recorded in the income statement?
a. 0 b. 36,000 c. 80,000 d. 116,000

38. 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

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PROBLEM 8:
The following information appear on the “Available-for-sale Marketable Securities”/”Financial Asset at
FMV trough Other Comprehensive Income/Loss” account of NYU Corp. for the year 2020:

Date Particulars Debit Credit

1/1/20 Beginning balance comprising of 1,000 SMC shares at
market value of P250/share and 2,000 ABI shares
at market value of P350/share. P950,000
4/1 Purchased 5-year, 12%, 500,000 TDI Corp. bonds at
a prevailing interest rate of 9%. Interests are
payable every March 31. 558,345
11/5 Sold 400 shares of SMC at P230 per share and 800
shares of ABI shares at P325 per share. P352,000
12/31 Sold 300,000 face value TDI bonds at 95 plus
accrued interest. 312,000
12/31 BALANCE P844,345

Additional information:
a. The original acquisition cost of SMC and ABI shares were at P260 per share and P330 per
share, respectively.

b. On December 31, the fair market values of SMC and ABI shares were at P275 per share and
P340 per share, respectively.

Requirements:
39. How much is the realized loss on sale to be reported in the profit or loss from the sale of
securities on November 5?
a. None b. 4,000 c. 8,000 d. 16,000

40. How much is the realized loss on partial sale of the TDI bonds?
a. 45,620 b. 50,007 c. 83,345 d. 91,240

41. How much is the unrealized holding gain or (loss) to be reported in the statement of financial
position?
a. 9,413 b. (9,413) c. 51,413 d. (51,413)

42. What is the balance of the investment in available for sale securities to be reported in the
statement of financial position?
a. 772,413 b. 793,413 c. 763,000 d. 742,000

PROBLEM 9:
On December 31, 2019 Vegas Corp.’s statement of financial position showed the following balances to
its securities accounts:

Financial Asset at Fair Value Through Profit or Loss

Cost Market
10,000 shares of ABC stock P1,500,000 P1,525,000
8,000 shares of DEF stock 1,100,000 1,056,500
10%, GHI bonds purchased at face value
(interests payable semi- annually on
January and July). 500,000* 373,500
*face value

Financial Asset at Fair Value Through Other Comprehensive Income or Loss

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

During 2020 the following transactions took place:

1/1: Received the semi-annual interest from GHI.

3/1: Purchased 3,000 additional shares of ABC stocks for P459,000 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 shares for P124 per share.

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7/1: Received semi-annul interest from GHI.

9/1: Purchased 400 of PQR’s 5 year, 12%, P1,000 bonds at 93 plus accrued interest. The bonds are
dated January 1, 2020. The bonds was designated as investment at fair value through profit
or loss.

The market values of the stocks and bonds on December 31, 2020 are as follows:
ABC stocks P153.20
DEF stocks 137.00
GHI bonds 82.22 (Quoted price)
JKL stocks 110.50
MNO stocks P44.00
PQR bonds 98.00 (Quoted price)

Requirements:

43. 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)

44. How much is the realized gain or (loss) on sale of JKL shares?
a. (8,000) b. 8,000 c. (24,000) d. none.

45. How much is the unrealized holding gain to be reported in the 2020 income statement?
a. 64,950 b. 49,750 c. 10,250 d. 84,950

46. How much is the unrealized holding loss to be reported in the 2020 statement of financial
position?
a. 121,000 b. 125,000 c. 129,000 d. 145,000

PROBLEM 10:
The following subsidiary ledgers show the Investment at Fair Value Through Profit or Losses of Hart
Corp. for the year 2020:
BLACK INC.
Date Particulars Debit Credit
June 2 Purchase of 2,000 shares P570,000
30 Adjusted to market value; credit to
retained earnings 30,000
July 5 Sold 1,000 shares at P450 P450,000
Aug. 20 Received 50% share dividends
(debited at par value); credit to
dividend income 150,000
Sept. 15 Stocks were split 2 for 1; credit to
investment income 450,000
Oct. 11 Sold 1,000 shares at P150 150,000

WHITE INC.
Date Particulars Debit Credit
Feb 2 Purchase 20,000 shares P3,000,000
28 Cash dividend to share of record
February 15, declared January 15 90,000
June 1 Sold 20,000 shares at P195 3,900,000
Aug. 5 Purchased 50,000 shares 7,500,000
Nov. 20 Cash received from sale of 20,000
shares after a November 1
declaration of P15 cash dividend per
share to shareholders of record as of
December 1 3,700,000
Dec. 15 Cash dividends received 450,000

Black Inc. shares and White Inc. shares were selling at P150 and P190, respectively, as of December
31, 2020.

Requirements:
47. What is the total gain on sale of Black Inc. shares?
a. 165,000 c. 220,000
b. 205,000 d. 245,000
48. What is the total gain on sale of White Inc. shares?
a. 1,300,000 c. 1,390,000
b. 1,600,000 d. 1,690,000

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49. What is the unrealized holding gain or loss to be reported in the Hart’s 2020 Income
Statement?
a. 0 c. 1,210,000
b. 1,660,000 d. 1,310,000
50. At what amount should Hart report its investment in its 2020 Statement of Financial Position?
a. 5,812,500 c. 6,150,000
b. 5,850,000 d. 6,000,000

PROBLEM 11:
On January 4, 2020, 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 a 30% interest in the net assets Suzuki Inc. and gave Isuzu the ability to
exercise significant influence over Suzuki. Isuzu received dividends of P6 per share on December 4,
2020, and Suzuki reported net income of P1,280,000 for the year ended December 31, 2020. The
market value of Suzuki’s shares at December 31, 2020 was P64 per share with cost to sell at a
minimal amount.

You also ascertained the following information:

On January 4, 2020, 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:
51. What amount of investment is attributable to goodwill?
a. 480,000 b. 192,000 c. 672,000 d. 288,000

52. What amount of investment income should be reported in Isuzu’s income statement for the
year ended December 31, 2020?
a. 240,000 b. 216,000 c. 360,000 d. 384.000

53. What is the carrying value of investment in Suzuki’s ordinary share on December 31, 2020?
a. 2,560,000 b. 2,712,000 c. 2,592,000 d. 2,736,000

54. What total/net amount should be reported in Suzuki’s income statement for the year ended
December 31, 2020?
a. 240,000 b. 208,000 c. 60,000 d. 180,000

55. Assuming that the company had 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, 2020?
a. 240,000 b. 208,000 c. 60,000 d. 180,000

56. In relation to item 5 above, what is the carrying value of the investment at December 31,
2020?
a. 2,592,000 b. 2,712,000 c. 2,560,000 d. 2,472,000

PROBLEM 12:
On January 2, 2020, Pacquaio Corp. acquired 50,000 ordinary shares of Morales Inc. at P325 per
share. Morales’ books contained the following selected information as of the last reporting date,
December 31, 2019:

Ordinary shares, 100 par value, 200,000 shares issued and outstanding P20,000,000
10% Preference shares, 50 par value, 100,000 shares 5,000,000
issued and outstanding
Share premium on ordinary shares 15,000,000
Accumulated profits as of December 31, 2019 20,000,000
Net income for the year 2019 5,000,000

Dividends were declared and paid on preference shares on December 31, 2019.

Morales’ Building which had a remaining life of 5 years was understated by P4,000,000 on the
acquisition date. Any remaining excess over the book value, is attributed to unidentifiable asset.

On December 31, 2020, Morales reported a total net income of P2.5M.

Requirements:

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57. What is the share in the net income of the associate assuming that the preference shares are
cumulative?
a. 625,000 b. 500,000 c. 425,000 d. 300,000

58. What is the balance of the associate investment assuming that the preference shares are
cumulative?
a. 16,875,000 b. 16,750,000 c. 16,675,000 d. 16,550,000

59. What is the share in the net income of the associate assuming that the preference shares are
non-cumulative?
a. 625,000 b. 500,000 c. 425,000 d. 300,000

60. What is the balance of associate investment assuming that the preference shares are non-
cumulative?
a. 16,875,000 b. 16,750,000 c. 16,675,000 d. 16,550,000

PROBLEM 13:
Black Corporation owns 300,000 of White Inc.’s 1,000,000 shares issued and outstanding purchased
on January 2, 2020 at P20 per share. White’s net assets had a book value on the said date at P16M.
The excess of acquisition cost over book value of net assets acquired was attributed to the total
understatement of White’s Land and Building with a 5 year average useful life at P800,000 and
P1,200,000, respectively. The balance of the excess was attributed to White’s unidentifiable asset.

White Inc. declared P800,000 cash dividends by the end of 2020 and reported a total comprehensive
income amounting to P2,000,000 which is net of an unrealized holding loss from its investment at fair
value through other comprehensive income amounting to P500,000.

Requirements:
61. How much from the acquisition cost on January 2020, is attributed to unidentifiable asset?
a. 600,000 b. 1,200,000 c. 2,000,000 d. 4,000,000

62. How much investment income should be reported in Black Corporation’s profit or loss?
a. 678,000 b. 750,000 c. 600,000 d. 528,000

63. How much total/net amount should be reported in Black Corporation’s 2020 statement of
comprehensive income?
a. 678,000 b. 750,000 c. 600,000 d. 528,000

64. What is the carrying value of the investment in White Inc. as of December 31, 2020?
a. 6,528,000 b. 6,288,000 c. 6,678,000 d. 6,438,000

65. Assuming that White Inc. issued additional 200,000 shares at P30 per shares to other
stockholders early in January of 2021, what shall be the total gain or loss on dilution to be
recognized in the 2021 profit or loss, provided further that the dilution is considered as a “true
sale”?
a. 25,000. b. 427,000 c. 452,000 d. none.

66. Assuming that White Inc. issued additional 200,000 shares at P30 per shares to other
stockholders early in January of 2021, what shall be the total gain or loss on dilution to be
recognized in the 2021 profit or loss, provided further that goodwill is not considered “deemed
sold”?
a. 125,000. b. 527,000 c. 552,000 d. none.

67. Assuming that Black Corporation sold 120,000 of its investment in White Corporation at P30
per share, how much is the total gain on cessation should be recognized in the 2021 profit or
loss?
a. 1,627,200 b. 1,084,800 c. 2,562,000 d. 2,712,000

68. Using the information in the previous item, how much from the gain/loss is realized?
a. 1,024,800 b. 1,537,200 c. 2,562,000 d. 2,712,000

PROBLEM 14:
On January 1, 2020, Analen Inc., paid P700,000 for 10,000 shares of Bel Company’s voting ordinary
shares, which was a 10% interest in Bel. At that date the net assets of Bel totaled P6,000,000. The
fair values of all of Bel’s identifiable assets and liabilities were equal to their book values. Analen does
not have the ability to exercise significant influence over the operating and financial policies of Bel.
Analen received dividends of P0.90 per share from Bel on October 1, 2020. Bel reported net income of
P400,000 for the year ended December 31, 2020.

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On July 1, 2021, Analen paid P2,400,00 for 30,000 additional shares of Bel Company’s voting ordinary
shares, which represents a 30% investment in Bel. The fair values of all of Bel’s identifiable assets net
of liabilities were equal to their book values of P6,500,000. As a result of this transaction, Analen has
the ability to exercise significant influence over the operating and financial policies of Bel. Analen
received dividends of P1.10 per share from Bel on April 1, 2021, and P1.35 per share on October 1,
2021. Bel reported net income of P500,000 for the year ended December 31, 2021, and P200,000 for
the 6 months ended December 31, 2021. Analen does not amortize goodwill but evaluates at each
year-end its possible impairment. No impairment on goodwill has been observed though.

Case 1: If the step-acquisition of investment in associate was accounted for under “Cost-Based
Approach, with Catch-up Adjustment”:

69. How much investment income should Analen record in its 2021 income statement?
a. 30,000 b. 80,000 c. 91,000 d. 110,000

70. How much should the company present its investment in Bel in its 2021 statement of financial
position?
a. 3,176,000 b. 3,126,000 c. 3,226,000 d. 3,326,000

Case 2: If the step-acquisition of investment in associate was accounted for under “Cost-Based
Approach, without Catch-up Adjustment”:

71. How much investment income should Analen record in its 2021 income statement?
a. 30,000 b. 80,000 c. 91,000 d. 110,000

72. How much should the company present its investment in Bel in its 2021 statement of financial
position?
a. 3,176,000 b. 3,126,000 c. 3,226,000 d. 3,326,000

Case 3: If the step-acquisition of investment in associate was accounted for under “Fair Market
Value Approach, without Catch-up Adjustment”:

73. How much investment income should Analen record in its 2021 income statement?
a. 30,000 b. 80,000 c. 91,000 d. 110,000

74. How much should the company present its investment in Bel in its 2021 statement of financial
position?
a. 3,176,000 b. 3,126,000 c. 3,226,000 d. 3,326,000

PROBLEM 15:
In line with your audit of Orion Corp.’s investment accounts as of December 31, 2018, you ascertained
the following information:
Investment type CV Per books
Investment in bonds P4,000,000
Investment in stocks 6,200,000
Investment property 3,500,000
Audit notes:
a. The investment in bonds which shall mature on December 31, 2020 were acquired in January
1, 2017 when the prevailing market rate of interest was at 10%. Interest at 12% is collectible
from the bonds every December 31. The acquisition was recorded by the client as a debit to
Investment in bonds at face value with the difference between the face value and the total
consideration given up to interest income. Interest collected in 2017 and 2018 were
appropriately recorded. No other entry relating to the investment was made by the client.
Further investigation revealed that the company business model with regard debt security
investment has an objective of collecting contractual cash flows. The prevailing market rate of
interest was at 11% and 9% at the end of 2017 and 2018, respectively.

b. The investment in stocks is for 40,000 shares of Telecom Corp.’s ordinary shares acquired in
September 30, 2017. The shares were originally acquired at P145 per share. The book value of
the net assets of Telecom Corp. on this date was at P25M and its total outstanding shares was
at 200,000. Telecom’s depreciable assets with average remaining life of 10 years were
understated on this date.

The fair value of Telecom Corp.’s shares were at P155 per share at the end of 2017. The
company recorded the remeasurement (from the acquisition cost to fair value) of the
investment at the end of 2017 and recognized the same as unrealized holding gain in the 2014
profit/loss. The only other entry made by the client related to the investment was the receipt

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of P2 per share dividend by the end of 2017 and P4 per share dividend in 2018 as dividend
income.

Further investigation revealed the following relevant information:

Telecom Corp. 2017 2018
Net income for the year P3,800,000 P5,200,000
Foreign exchange loss – OCL - 400,000
Unrealized holding gain – OCI 300,000
Fair value 155 per share 169 per share

c. The investment property was a building-factory converted on June 30, 2018 as a property for
lease since the company decided to discontinue its production segment. The factory was
originally acquired at P5M on January 1, 2015 and was depreciated using straight-line method
over a 10 year useful life. The company elected to use the fair value method in measuring its
investment property. The fair value of the building on June 30, 2018 was at P3.6M. On
December 31, 2018 the fair value of the building is at P3.2M.

Required:
75. What is the correct carrying value of the investment in bonds as of December 31, 2018?
a. 4,198,948 b. 4,068,501. c. 4,138,843. d. 4,211,093.

76. What is the retroactive adjustment to the retained earnings, beginning as a result of your audit
of the investment in bonds?
a. 198,948. b. 138,843. c. 253,589. d. 226,441.

77. Assuming that the investment in bonds accounted for under the investment category where
the business model has an objective of holding debt securities primarily to generate short-term
profits, what is the unrealized holding gain/loss to be recognized in the 2018 profit or loss?
a. 113,345 b. 138,843. c. 432,101 d. none.

78. What is the correct carrying value of the investment in stocks as of December 31, 2018?
a. 6,760,000. b. 6,670,000. c. 6,770,000 d. 7,180,000.

79. What is the retroactive adjustment to the retained earnings, beginning as a result of your audit
of the investment in stocks?
a. 310,000. b. 400,000 c. 490,000. d. 90,000.

80. Assuming that on December 31, 2018, Orion Corp. sold 10,000 shares of its investment in
Telecom shares at the prevailing fair value, how much is the total gain/loss to be recognized in
the profit or loss in 2018 as a result of the transaction?
a. 90,000. b. 70,000. c. 52,500. d.17,500.

81. How much should be recognized in the statement of comprehensive income upon the
reclassification of the building from PPE to Investment?
a. none. b. 350,000. c. 100,000. d. 400,000.

82. How much should be recognized in the profit or loss for 2018 as a result of the year-end
remeasurement of the investment property?
a. none. b. 350,000. c. 100,000. d. 400,000.

PROBLEM 16:
Jude Corporation acquired a building on January 1, 2018. The acquisition cost was P5,000,000 payable
at the rate of P1M at the beginning of each year starting January 1, 2018. 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, 2018 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:

2018 2019 2020
Appraised values P4,600,000 P4,100,000 P4,300,000

Requirements:
83. How much should the property be initially recognized?
a. 4,037,349 b. 4,585,200 c. 4,500,000 d. 5,067,427

84. What is the carrying value property of the as of December 31, 2018, 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

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85. Using the information in number 2, how much impairment loss should be recognized from the
asset in the 2018 profit or loss?
a. none b. P40,000 c. 140,000 d. 200,000

86. What is the carrying value of the property as of December 31, 2020, assuming that 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

87. Using the information in number 4, how much impairment recovery gain should be recognized
from the asset in the 2020 profit or loss?
a. none b. P40,000 c. 38,261 d. 88,261

88. Assuming that the building is originally categorized as owner occupied upon acquisition but was
transferred to investment property at the end of 2020, how much gain or loss from transfer
should be recognized in the income statement assuming that investment properties are carried
at fair value method?
a. none b. 40,000 c. 140,000 d. 200,000

89. Assuming that the building is originally categorized as investment property upon acquisition
but was transferred to owner-occupied property at the end of 2020, how much gain or loss
from transfer should be recognized in the income statement assuming that investment
properties are carried at fair value method?
a. none b. 40,000 c. 140,000 d. 200,000

PROBLEM 17:
Your audit of Dado Company’s other long-term investments resulted to the following information:
a. Dado Company insured the life of its president for P4,000,000, the corporation being the
beneficiary of an ordinary life policy. The monthly premium is P8,000 payable every first day
of the month.

b. The policy is dated January 1, 2012, and carries the following cash surrender values:
End of Policy Year Cash Surrender Value
2012 P0
2013 0
2014 25,200
2015 30,000
2016 39,600
2017 50,400

c. The company follows the calendar year as its fiscal period.

d. The company received dividends in 2015, 2016 and 2017 at P8,000, P9,600 and P11,200,
respectively.

e. The president died on October 31, 2017 and the policy is collected on December 1, 2017.
Requirements:
90. What is the life insurance expense to reported in 2014?
a. 96,000 b. 87,600 c. 79,600 d. 83,200

91. What is the life insurance expense to reported in 2015?

a. 96,000 b. 91,200 c. 79,600 d. 83,200

92. What is the life insurance expense to reported in 2016?

a. 96,000 b. 86,400 c. 76,800 d. 83,200

93. What is the life insurance expense to be reported in 2017?

a. 96,000 b. 74,000 c. 85,200 d. 59,800

94. What is the gain on life insurance policy settlement in 2017?

a. 3,951,400 b. 4,000,000 c. 3,935,400 d. 3,940,200

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