AUDIT OF INVESTMENTS IN EQUITY
AND DEBT SECURITIES
PROBLEM 1
The following transactions of the Angat Company were completed during the
year 2010:
Jan.2 Purchased 20,000 shares of Bulacan Auto C, for P40 per
share plus brokerage costs of P4,500. These shares were
classified as held for trading
Feb. 1 Purchased 20,000 shares of Malolos Company ordinary
shares at P125 per share plus brokerage fees of P19,000.
Angat classifies these shares as available for sale
Apr. 1 Purchased P2,000,000 of RP Treasury 7% bonds, paying
102.5 plus accrued interest of P35,000. In addition, the
company paid brokerage fees of P18,000. Angat classified
these bonds as held for trading
Jul.1 Received semiannual interest on the RP Treasury Bonds
Aug.1 Sold P500,000 of RP Treasury 7% bonds at 103 plus
accrued interest
Oct.1 Sold 3,000 shares of Malolos at its fair value of P132 per
share
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Gain or loss on sale of P500,000 RP Treasury Bonds on Aug. 1, 2010
a. P15,000 gain b. P2,500 gain
c. P2,000 loss d. P7,500 loss
..\ANSWER\EQUITY & DEPT.SEC\P1-Q1.doc
2. Disregarding income taxes, reclassification adjustment for other
comprehensive income on the sale of 3,000 Malolos shares on
October 1, 2010
a. P18,150 b. (P18,150)
c. P21,000 d. (P21,000)
..\ANSWER\EQUITY & DEPT.SEC\P1-Q2.doc
3. Gain or loss on sale of 3,000 Malolos shares on October 1, 2010
a. P18,150 loss b. P18,150 gain
c. P2,000 gain d. P21,000 gain
..\ANSWER\EQUITY & DEPT.SEC\P1-Q3.doc
4. Gain or loss arising from change in the fair value of securities to be
recognized in 2010 profit or loss
a. P92,500 b. P74,500
c. P97,000 d. P80,000
..\ANSWER\EQUITY & DEPT.SEC\P1-Q4.doc
5. Net unrealized gain in accumulated other comprehensive income in equity
as of Dec.31,2010
a. P68,850 b. P85,000
c. P66,000 d. P 0
..\ANSWER\EQUITY & DEPT.SEC\P1-Q5.doc
PROBLEM 2
On December 31, 2008, Magalang Co purchased equity securities as
trading securities. Pertinent data are as follows:
Fair value
Cost 12/31/2010 12/31/2009
C Company P900,000 P780,000 P880,000
P Company 1,100,000 1,240,000 1,120,000
A Company 2,000,000 1,720,000 1,920,000
Total P4,000,000 P3,740,000 P3,920,000
On December 31, 2010, Magalang transferred its investment in security
A from trading to available-for sale because Magalang intends to
retain security A as a long term investment.
Question:
What total amount of gain or loss on its securities should be included in
Magalang’s 2010 profit or loss?
a. P20,000 gain b. P260,000 loss
c. P180,000 loss d. P180,000 gain
..\ANSWER\EQUITY & DEPT.SEC\P2-Q1.doc
PROBLEM 3
On December 31, 2008, Masantol Co. purchased equity securities as
available-for-sale securities. Pertinent data are as follows:
Fair value
Cost 12/31/2010 12/31/2009
C Company P900,000 P780,000 P880,000
P Company 1,100,000 1,240,000 1,120,000
A Company 2,000,000 1,720,000 1,920,000
Total P4,000,000 P3,740,000 P3,920,000
On December 31, 2010, Masantol transferred its investment in security P
from available-for sale to financial asset at fair value through profit
or loss.
Question:
How much should e reported as net unrealized loss in AFS in
(accumulated) equity as of December 31, 2010?
a. P300,000 b. P260,000
c. P0 d. P400,000
..\ANSWER\EQUITY & DEPT.SEC\P3-Q1.doc
PROBLEM 4
Meycauayan Inc. acquired 50,000 ordinary shares of AAA for P5 per share
and 125,000 ordinary shares of BBB for P10 per share on January 2,
2009. Both AAA Inc. and BBB Corp. have 500,000 ordinary shares
outstanding. Both securities are being held as long term investments.
Changes in retained earnings for AAA and BBB for 2009 and 2010 are
as follows:
AAA, Inc. BBB Corp
Retained earnings (deficit), 1/1/09 P1,000,000 (P175,000)
Cash dividends, 2009 (125,000)
Profit for 2009 200,000 325,000
Retained earnings, Dec. 31, 2009 1,075,000 150,000
Cash dividends, 2010 (150,000) (50,000)
Profit for 2010 300,000 125,000
Retained earnings, Dec.31, 2010 P1,225,000 P225,000
Market value of share: 12/31/09 P7.00 P12.00
12/31/10 6.50 15.00
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The income from investment in AAA, Inc. in 2010 is
a. P15,000 b. P1,000 c. P12,500 d. P 0
..\ANSWER\EQUITY & DEPT.SEC\P4-Q1.doc
2. The income from investment in BBB, Inc. in 2009 is
a. P31,250 b. P81,250 c. P2,500 d. P 0
..\ANSWER\EQUITY & DEPT.SEC\P4-Q2.doc
3. The carrying amount of Investment in AAA, Inc. as Dec.31, 2010 is
a. P250,000 b. P350,000 c. P325,000 d. P 252,500
..\ANSWER\EQUITY & DEPT.SEC\P4-Q3.doc
4. The carrying amount of Investment in BBB, Inc. as December 31, 2010 is
a. P1,250,000 b. P1,268,750 c. P1,875,000 d. P1,350,000
..\ANSWER\EQUITY & DEPT.SEC\P4-Q4.doc
5. How much should be reported as net unrealized gain or loss on AFS
(accumulated) in equity as of December 31, 2010?
a. P75,000 gain b. P25,000 loss
c. P25,000 gain d. P 0
..\ANSWER\EQUITY & DEPT.SEC\P4-Q5.doc
PROBLEM 5
On January 1, 2009, Capas Corporation purchased P1,000,000 10%
bonds designated as held-to-maturity. The bonds were purchased to
yield 12%. Interest is payable annually every December 31. The bonds
mature on December 31, 2013. On December 31, 2009 the bonds were
selling at 99. On December 31, 2010, Capas sold P500,000 face value
bonds at 101. The bonds were selling at 103 on December 31, 2013.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Round off present value factors to four decimal places)
1. The purchase price of the bonds on January 1, 2009 is
a. P927,880 b. P946,480
c. P1,075,796 d. P939,230
..\ANSWER\EQUITY & DEPT.SEC\P5-Q1.doc
2. The carrying amount of the investment in bonds on December 31, 2009 is
a. P1,063,376 b. P951,938
c. P960,058 d. P939,226
..\ANSWER\EQUITY & DEPT.SEC\P5-Q2.doc
3. How much s the realized gain on sale of the investment in bonds in 2010?
a. P41,060 b. P29,034 c. P35,387 d. P10,000
..\ANSWER\EQUITY & DEPT.SEC\P5-Q3.doc
4. How much is the net unrealized gain in accumulated other
comprehensive income in equity as of December 31, 2010?
a. P39,034 b. P29,033 c. P31,917 d. P 0
..\ANSWER\EQUITY & DEPT.SEC\P5-Q4.doc
5. How much is the net unrealized gain in accumulated other
comprehensive income in equity as of December 31, 2011?
a. P39,034 b. P29,034 c. P31,917 d. P0
..\ANSWER\EQUITY & DEPT.SEC\P5-Q5.doc
PROBLEM 6
On January 1, 2009, Bamban Corporation purchased P4,000,000 10%
bonds for P3,711,520 and designated as available-for-sale. The bonds
were purchased to yield 12%. Interest is payable annually every
December 31. The bonds mature on December 31, 2013. The bonds
were selling at 99 and 98 on December 31, 2009 and 2010,
respectively. Because of the change in intention and ability, Bamban
reclassified the investment to held0to-maturity on December 31, 2011.
On the date of reclassification, the prevailing market interest rate is
9%.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Round off present value factors to four decimal places and final
answers to nearest hundred)
1. How much is the net unrealized gain in accumulated other
comprehensive income in equity as of December 31, 2010?
a. P112,300 b. P208,500 c. P90,800 d. P40,000
..\ANSWER\EQUITY & DEPT.SEC\P6-Q1.doc
2. How much is the net unrealized gain in accumulated other
comprehensive income in equity as of December 31, 2011?
a. P205,780 b. P358,900 c. P93,500 d. P0
..\ANSWER\EQUITY & DEPT.SEC\P6-Q2.doc
3. How much should be recognized in 2012 profit or loss related to this
investment in bonds?
a. P366,300 b. P396,400 c. P463,800 d. P400,000
..\ANSWER\EQUITY & DEPT.SEC\P6-Q3.doc
4. How much is the net unrealized gain in accumulated other comprehensive
income in equity as of December 31, 2012
a. P0b. P175,700 c. P172,100 d. P400,000
..\ANSWER\EQUITY & DEPT.SEC\P6-Q4.doc
5. How much is the carrying amount of the investment in bonds on December
31, 2012?
a. P4,036,800 b. P3,928,400
c. P4,006,700 d. P4,104,100
..\ANSWER\EQUITY & DEPT.SEC\P6-Q5.doc
PROBLEM 7
Pura Company purchased investment in bonds on January 1, 2009. At this
date, the cost and fair value is P1,000,000. The bonds are classified
as available-for-sale. On December 31, 2009 the bonds were selling
at 90. Because of the significant financial difficulty of the issuer, the
bonds are considered impaired on December 31, 2010 when the
bonds are quoted 70. On December 31, 2011, the bonds are quoted
at 95. The increase in the fair value of the bonds on December 31,
2011 is due to the improvement of the issuer’s credit rating.
QUESTIONS:
1. How much should be recognized in 2010 profit or loss as a result of
the fair value changes?
a. P300,000 b. P200,000 c. P100,000 d. P 0
..\ANSWER\EQUITY & DEPT.SEC\P7-Q1.doc
2. How much should be recognized in 2011 profit or loss as a result of the
fair value changes?
a. P250,000 b. P200,000 c. P100,000 d. P 0
..\ANSWER\EQUITY & DEPT.SEC\P7-Q2.doc
PROBLEM 8
Candon, Inc. completed the construction of a building at the end of 2008
for a total cost of P20 million. The building is estimated to be
economically useful for 25 years. The building was constructed for the
purpose of earning rentals under operating leases. The tenants began
occupying the building after its completion. The company opted to use
the fair value model to measure the building. An independent valuation
expect was used by the company to estimate the fair value of the
building on an annual basis. According to the expert the fair values of
the building at the end of 2008, 2009 and 2010 were P22 million , P24
million and 25 million, respectibely.
The company’s business expanded in 2009. As a result, the company
started to use the building in its operations on January 1, 2010.
Because of the change in use, the company reclassified the building
from investment property, plant and equipment.
QUESTION:
How much is the carrying amount of the building on December 31, 2010?
a. P24,000,000 b. P23,040 c. P23,000,000 d.P21,120,000
..\ANSWER\EQUITY & DEPT.SEC\P8-Q1.doc
PROBLEM 9
Dagupan, Inc. owns a building purchased on January 1, 2006 for P100
million. The building was used as the company’s head office. The building
has an estimated useful life of 25 years. In 2010, the company
transferred its head office and decide to lease out the old building.
Tenants began occupying the old building by the end of 2010. On
December 31, 2010, the company reclassified the building as investment
property to be carries at fair value. The fair value on the date of
reclassification was P85 million.
QUESTION:
How much should be recognized in the 2010 profit or loss as a result of the
transfer from owner-occupied to investment property?
a. P15,0000,0000 b. P1,000,000
c. P5,000,000 d. P 0
..\ANSWER\EQUITY & DEPT.SEC\P9-Q1.doc
