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COLEGIO DE DAGUPAN
Arellano St., Dagupan City
AUDITING PROBLEMS
INVESTMENTS IN EQUITY SECURITIES
INVESTMENTS
Are assets held by an entity for the accretion of wealth through distribution such as interest, royalties, dividends and
rentals, for capital appreciation or for other benefits to the investing entity such as those obtained through trading
relationships.
Equity instrument
Equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its
liabilities.
• Ordinary shares
• Certain preference shares
• Warrants or written call options
An investment in equity security is a financial asset since it is an equity instrument of another entity.
INITIAL RECOGNITION
Financial assets are recognized on the Statement of Financial Position when the entity becomes party to the
contractual provisions of the instrument.
INITIAL MEASUREMENT
All financial assets are measured initially at fair value, plus, for those financial assets not classified at fair value
through profit or loss, directly attributable transaction costs.
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CDD: Auditing Problems – Investments
determined by key management personnel (per PAS 24 Related Party Disclosure). The assessment therefore is not on
an instrument by instrument basis – rather the overall business model of the entity
However, a single entity might have more than one business model, which may then result in different categories of
financial assets. Although the focus is on the collection of contractual cash flows, it is not necessary to hold all of the
assets to their contractual maturity. This means that sales of assets can occur without prejudicing the assertion that
they are held for the collection of contractual cash flows.
For instruments denominated in foreign currency, the assessment is made on the basis of the currency in which the
instrument is denominated (FX movements between the foreign currency and functional currency are not taken into
account when analyzing the contractual terms).
A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery
of the asset within the time frame established generally by regulation or convention in the marketplace concerned.
A regular way purchase or sale of financial assets is recognized and derecognized using either trade date or
settlement date accounting. The method used is to be applied consistently for all purchases and sales of financial
assets that belong to the same category of financial asset as defined in PAS 39 (note that for this purpose assets held
for trading form a different category from assets designated at fair value through profit or loss). The choice of method
is an accounting policy.
Under trade date accounting, the financial asset and liability are recognized on the date the enterprise commits to the
purchase.
Under settlement date accounting, the financial asset is recognized on the date it is delivered.
Summary of recognition and derecognition in a regular way purchase and sale of financial assets:
1. If Brayden applies the trade date accounting method to account for regular-way purchases of its securities, how
much should be recognized as trading securities on December 31, 2011?
a. P800,000 c. P802,000
b. P801,000 d. P 0
2. If Brayden applies the settlement date accounting method to account for regular-way purchases of its securities,
how much should be recognized as trading securities on December 31, 2011?
a. P800,000 c. P802,000
b. P801,000 d. P 0
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CDD: Auditing Problems – Investments
On December 28, 2011 (trade date), Luke Corp. enters into a contract to sell an equity security classified as available
for sale (AFS) for its current fair value of P303,000. The asset was acquired a year ago and its cost was P300,000. On
December 31, 2011 (financial year-end), the fair value of the asset is P303,600. On January 5, 2012 (settlement date),
the asset's fair value is P303,900.
1. If Luke uses the trade date method to account for regular-way sales of its securities, how much is the carrying
amount of AFS at December 31, 2011?
a. P303,000 c. P303,900
b. P303,600 d. P 0
2. If Luke uses the settlement date method to account for regular-way sales of its securities, how much is the
carrying amount of AFS at December 31, 2011?
a. P303,000 c. P900
b. P303,600 d. P 0
SUBSEQUENT MEASUREMENT
Nonmar-
FVTPL FVTOCI ketable
Measurement at reporting date Fair value Fair value Cost
Changes in Fair Value (Unrealized gains P/L OCI Ignore
or Loss) (Equity)
Note
Unrealized holding gain or loss is also called paper gain or loss.
The unrealized gain or loss that was recognized during the year for the Fair Value through Other comprehensive
Income is presented in the Statement of Other Comprehensive Income.
The accumulated balance of unrealized gain or loss for the Fair Value through Other Comprehensive Income
(FVTOCI) is presented in the Statement Financial Position and Statement of Changes in Equity.
FVTOCI
Fair value (measurement date) XX
Less: Cost XX
Unrealized gains or loss - OCI XX
Formula:
Consideration received xx
Less: Dividend acquired (dividend-on) xx
Transaction cost xx
Net selling price xx
Add: New asset obtained xx
Less: New liability assumed xx
Total xx
Less: Carrying amount (@ date of derecognition) xx
Gain (loss) on derecognition – P&L xx
Note:
The dividend income of the investment sold is deducted from the consideration received if the entity sold the
investment in between the date of declaration and date of record of dividends.
PROBLEM NO. 3 Basic Journal Entries- Acquisitions in Between Dates of Declaration and Record
The Lurid Company has the following transactions relating to its investments during 2015:
January 5 Acquired 16,000 shares of Defray Co. for P1,600,000 paying additional P10,000 for brokerage and
another P5,000 for commission.
February 14: Received dividends from Defray Co. declared January 2, 2015 to the stockholder of record January 10,
2015, P16,000.
On December 31, 2015 the market values per share of the Defray stock is P95:
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CDD: Auditing Problems – Investments
On December 31, 2016 the market values per share of the Defray stock is P120.
Questions:
Based on the above data, answer the following:
Case No. 1: Assume that the above securities are classified as fair value through profit or loss
1. Unrealized gain (or loss) on December 31, 2014 to be presented in the statement of financial position.
a. Nil c. (50,000)
b. 50,000 d. 10,000
Case No. 2: Assume that the above securities are classified as fair value through other comprehensive income
3. Unrealized gain (or loss) on December 31, 2014 to be presented in the statement of financial position.
a. Nil c. (50,000)
b. 50,000 d. 10,000
5. Prepare all the necessary entries for the years 2014 and 2015 (for both FVTPL and FVTOCI).
4. Cash received in lieu As if the stocks were received and subsequently sold at the amount of cash received.
Stock dividend Gain or loss shall be recognized equal to the difference between the net selling price
and carrying value of the investment sold.
Carrying value = (CV before stock dividend/(Orig. shares +stock dividend) x stock
dividend)
5. Shares received in lieu of Income at the fair value of the stock received. In the absence of the FV, the income is
cash dividend equal to the cash dividends that would have been received.
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CDD: Auditing Problems – Investments
a. When SR The cost of investment includes
Is exercised FVTPL: only the subscription price
FVTOCI: a)subscription price plus
b. cost of the stock rights exercised.
b. When FVTOCI: Debit to loss on stock rights and credit stock rights.
Expired
Required:
Assume the following independent cases, record the receipt of the share dividends on the Contentious’ assuming:
Case No. 1: Contentious received 10% ordinary shares as Share Dividends.
Case No. 2: Contentious received 1,000 preference shares as Share Dividends. Each preference share has a fair value
of P100.
Questions:
Based on the above data, answer the following:
1. How much is the dividend income to be recognized in 2015?
a. Nil c. 30,000
b. 60,000 d. 15,000
Questions:
Based on the above data, answer the following:
1. How much is the dividend income to be recognized in 2014?
a. Nil c. 135,000
b. 75,000 d. 123,000
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CDD: Auditing Problems – Investments
On July 15, 2015, Mars exercised all the stock rights. The share is quoted right-on at P90.
Questions:
Based on the above data, answer the following:
1. Assuming that the above securities are FVTPL, the stock rights should be initially recognized at
a. Nil c. 100,000
b. 200,000 d. 150,000
2. Assuming that the above securities are FVTOCI, the stock rights should be initially recognized at
a. Nil c. 100,000
b. 200,000 d. 150,000
3. Assuming that the above securities are FVTPL, the cost of investment acquired through exercised of stock rights
should be
a. Nil c. 600,000
b. 400,000 d. 200,000
4. Assuming that the above securities are FVTOCI, the cost of investment acquired through exercised of stock rights
should be
a. Nil c. 600,000
b. 400,000 d. 200,000
Questions:
Based on the above data, answer the following:
1. Compute for the theoretical value of the rights assuming, the stock is selling right-on
a. Nil c. 12
b. 10 d. 27
2. Compute for the theoretical value of the rights assuming, the stock is selling ex-right
a. Nil c. 12
b. 10 d. 27
EXCHANGE OF ONE FINANCIAL ASSET INTO ANOTHER FINANCIAL ASSET (FOR EXAMPLE CONVERSION OF
INVESTMENT IN CONVERTIBLE PREFERENCE SHARES)
Paragraph 3.2.1 of PFRS 9 provides that if, as a result of a transfer, a financial asset is derecognized in its entirety but
the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing
liability, the entity shall recognize the new financial asset,
Fair value of the new financial asset XX
Less carrying amount (or cost) of the old financial asset XX
Gain or loss on exchange XX
COMPREHENSIVE PROBLEMS
PROBLEM NO. 10 Trading Securities
You were able to obtain the following ledger details of Trading Securities in connection with your audit of the MUND
Corporation for the year ended December 31, 2011:
Date Particulars DR CR
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Date Particulars DR CR
Jan. 10 Purchase of FRANZ Co. – 6,000 shares
P1,440,000
Feb. 20 Purchase of SCAL Co. – 7,200 shares 1,800,000
Mar. 01 Sale of SCAL Co. – 2,400 shares 540,000
May 31 Receipt of FRANZ share dividend– Offsetting Credit to
retained earnings 132,000
Aug. 15 Sale of FRANZ Stocks – 4,800 shares 1,176,000
Sep. 01 Sale of FRANZ Stocks – 1,200 shares 276,000
From the Philippine Stock Exchange, the FRANZ dividends were analyzed as follows:
At December 31, 2011, FRANZ and SCAL shares were selling at P210 and P240 per share, respectively.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
February 14 Received dividends from ARP Co. declared January 4, 2015 to the stockholders of record February 1,
2015, P16,000.
June 1 -sold 500 shares of RVFE, after a 10% stock dividend (bonus share) was received, for P35 per
share.
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CDD: Auditing Problems – Investments
October 18 Sold 2,500 shares of DJOA Inc. for P40,000. Commissions and taxes for P5,000 were paid for the sale.
November 15 Received dividends of P2 per share from DJOA Inc. declared on October 16, 2015 to the stockholders
of record October 31, 2015.
On December 31, 2015 the following are the available market values per share:
Questions:
Based on the above and the result of your audit, determine the following:
1. The correct cost of investment acquired on January 5.
a. 884,000 c. 864,000
b. 900,000 d. 884,000
The market value of the stocks and bonds on December 31, 2006 are as follows:
ABC stocks P153. 20
DEF stocks 137.00
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CDD: Auditing Problems – Investments
GHI bonds 82.22 (quoted Price)
JKL stocks 110.50
MNO stocks P44.00
PQR bonds 98.00 (quoted Price)
REQUIREMENTS:
1. 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)
3. How much is the unrealized holding gain to be reported in the 2006 income statement?
a. 64, 950 b. 49, 750 c. 10, 250 d. 191, 450
4. How much is the unrealized holding loss to be reported in the 2006 balance sheet?
a. 121, 000 b. 125, 000 c. 129, 000 d. 188, 000
INVESTMENT IN ASSOCIATE
7 The existence of significant influence by an investor is usually evidenced in one or more of the following ways:
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about dividends or other
distributions;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.
The Standard does not require the equity method to be applied when an associate is acquired and held with a view to
its disposal within twelve months of acquisition.
INVESTMENT IN ASSOCIATE
1 Beg. Balance Dividends received 4
or Acquisition cost Amortization of excess excldg GW 5
2 Share in the net Impairment of GW
income of associate
3 Share in revaluation Balance end
Surplus
Formula:
Acquisition cost (or purchase price) XX
Less fair value of the net asset acquired XX
Excess attributable to depreciable or amortizable
Asset or Goodwill (if negative, after reassessment of the
purchase price, gain on bus. Com) XX
PROBLEM NO. 13 Investment in Associate with Inventories, Machinery and Land - Land Was Subsequently
Sold
On January 1, 2015, Mebeilyn Co. acquired 25,000 ordinary shares out of the 100,000 outstanding ordinary shares of
Lloren Inc. for P4,000,000. Lloren’s assets and liabilities approximate their fair values except for inventories with
carrying amount of P600,000 and fair value of P400,000, machinery with carrying amount of P3,000,000 and fair
value of P1,500,000 and land with carrying amount of P1,200,000 and fair value of P1,800,000. The remaining useful
life of the machinery is 10 years. Lloren’s net assets have a book value of P12,000,000.
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CDD: Auditing Problems – Investments
On December 31, 2015, Lloren reported net income of P4,000,000 and declared and paid dividends of P1,000,000.
On April 30, 2016, the land of Lloren was sold at a gain of P100,000.
On December 31, 2016, Lloren reported net income of P5,000,000 and declared and paid dividends of P1,400,000.
Questions:
Based on the above date, answer the following:
1. How much is the implied goodwill from acquisition?
a. 1,275,000 c. 575,000
b. 950,000 d. 1,000,000
2. How much is the net share in the profit or loss of the associate (investment income) in 2015?
a. 937,500 c. 1,087,500
b. 1,000,000 d. 950,000
3. How much is the carrying amount of the investment as of December 31, 2015?
a. 4,687,500 c. 4,837,500
b. 5,087,500 d. 4,700,000
4. How much is the net share in the profit or loss of the associate (investment income) in 2016?
a. 1,250,000 c. 1,162,500
b. 1,137,500 d. 1,112,500
5. How much is the carrying amount of the investment as of December 31, 2016?
a. 6,125,000 c. 5,775,000
b. 6,150,000 d. 6,100,000
The total preference dividend is deducted from the net income if:
Cumulative preference share Deduct the preference dividends whether or not such dividends are declared.
Noncumulative preference share Deduct the preference dividends only when declared.
PROBLEM NO. 14
On January 1, 2009, NCPAR Company acquired 20% of the outstanding ordinary shares of BRAYDEN Company for
P4,000,000. This investment gave NCPAR the ability to exercise significant influence over BRAYDEN. The book value
of the acquired shares was P3,000,000. The excess of cost over book value was attributed to a depreciable assets
which was undervalued on BRAYDEN’ statement of financial position and which had a remaining useful life of ten
years.
For the year ended December 31, 2009, BRAYDEN’ share capital outstanding is as follows:
10% cumulative preference share capital 2,500,000
Ordinary share capital 10,000,000
BRAYDEN reported net income P1,500,000 for the year ended December 31, 2009.
CASE NO. 1- Assuming the cumulative preference share is treated as equity by BRAYDEN and that BRAYDEN declared
dividends of P300,000 on the preference shares, answer the following:
1. What amount should NCPAR record as investment income for the year ended December 31, 2009?
2. What amount should NCPAR record as investment in associate for the year ended December 31, 2009?
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Driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – H008
CDD: Auditing Problems – Investments
CASE NO. 2- Assume instead that the preference shares are non-cumulative preference share treated as equity by
BRAYDEN and that BRAYDEN declared dividends of P300,000 on the preference shares, answer the following:
1. What amount should NCPAR record as investment income for the year ended December 31, 2009?
2. What amount should NCPAR record as investment in associate for the year ended December 31, 2009?
CASE NO. 3- Assuming the cumulative preference share is treated as Financial liability by BRAYDEN, answer the
following:
1. What amount should NCPAR record as investment income for the year ended December 31, 2009?
2. What amount should NCPAR record as investment in associate for the year ended December 31, 2009?
Also, Jean’s net income for the year ended December 31, 2014 was P12 million and Jean declared and paid cash
dividends of P2.5 million.
The fair value of David’s investment in Jean securities is as follows: December 31, 2013, P3,200,000; December 31,
2014, P3,100,000; and December 31, 2015, P13 million.
On January 2, 2015, David purchased an additional 20% of Jean’s stock for P5,600,000 cash when the carrying amount
of Jean’s net assets was P25,000,000. The excess was attributable to building having a remaining life of 8 years.
Jean’s net income for the year ended December 31, 2015 was P15 million and Jean declared and paid cash dividends
of P3 million.
Required:
A. Based on the above and the result of your audit, determine the following:
1. The unrealized gain or loss to be presented in the other comprehensive income as of December 31, 2013.
2. The income from investment in Jean Company to be recognized in 2014 profit or loss is:
3. The adjustment to retained earnings as of January 2, 2015 as a result of the acquisition of the additional 30%
interest in Jean Company is:
4. The income from investment in Jean Company to be recognized in 2015 profit or loss is:
5. The carrying amount of the investment in Jean Company as of December 31, 2015 is:
On January 2, 2015, James sold half of its investment at P28 million and reclassified its remaining investment to Fair
Value through other comprehensive income. The fair value of the shares this date amounted to P285 per share. Lyn’s
net income for the year ended December 31, 2015, was P160 million. During 2015, Lyn declared and paid cash
dividends of P28 million. On December 31, 2015, the fair value of the shares amounted to P290 per share.
Required:
A. Compute for the following:
1) What is the investment balance on December 31, 2014?
2) What is the gain on sale of 100,000 shares on January 2, 2015?
3) What is the total amount that should be recognized in profit or loss on January 2, 2015?
4) What is the unrealized gain to be recognized in the December 31, 2015 statement of financial position?
Downstream Transactions
‘Downstream’ transactions are, for example, sales of assets from the investor to an associate. The investor’s share in
the associate’s profits and losses resulting from these transactions is eliminated.
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CDD: Auditing Problems – Investments
When downstream transactions provide evidence of a reduction in the net realizable value of the assets to be sold or
contributed, or of an impairment loss of those assets, those losses shall be recognized in full by the investor. When
upstream transactions provide evidence of a reduction in the net realizable value of the assets to be purchased or of
an impairment loss of those assets, the investor shall recognize its share in those losses.
The share in the profit or loss of an associate is recognized only to the extent of unrelated investors’ interest in the
associate. If the transaction is:
• Downstream sale - eliminate the entire unrealized profit. (i.e. 100%)
• Upstream sale - eliminate the investor’s share in unrealized profit. (percentage of ownership)
Basic Formula:
Net income x percentage of ownership XX
Less: Unrealized profit on upstream sale x percentage of ownership ( XX )
Add: Realized profit on upstream sale x percentage of ownership XX
Less: Unrealized profit on downstream sale ( XX )
Add: Realized profit on downstream sale XX
Share in the net income XX
PROBLEM NO. 17
On January 1, 2015, Myrah Company acquired 30% of the ordinary shares of an associate for P4,000,000. On this date,
all the identifiable assets and liabilities of the associate were recorded at fair value. An analysis of the acquisition
showed that goodwill of P200,000 was acquired.
The net income and dividend of the associate for 2015 and 2016 were as follows:
2015 2016
Net income 2,000,000 3,000,000
Dividend paid 800,000 1,200,000
On January 3, 2015, Myrah Company sold an equipment costing P600,000 to the associate Company for P800,000. The
equipment has a remaining life of 5 years.
In December 2015, the associate sold inventory to Myrah Company for P700,000. The cost of the inventory was
P600,000. This inventory remained unsold by Myrah Company on December 31, 2015. However, it was sold by Myrah
Company in 2016.
In December 2016, the associate sold inventory to Myrah Company for P550,000. The cost of the inventory was
P400,000. This inventory remained unsold by Myrah Company on December 31, 2016.
Questions:
Based on the above date, determine the following:
1. Net share in the net income (or loss) of the associate in 2015
a. 600,000 c. 410,000
b. 440,000 d. 760,000
2. Net share in the net income (or loss) of the associate in 2016
a. 900,000 c. 860,000
b. 865,000 d. 925,000
5. Assuming the company is a small/medium entity and uses the equity method, the carrying amount of investment
on December 31, 2016 is
a. 4,310,000 c. 4,695,000
b. 4,500,000 d. 4,635,000
PROBLEM NO. 18
The following two subsidiary accounts reflect the trading securities of Jordano Company for the year 2005:
LOYAL COMPANY
Date Transactions Shares Ref. Debit Credit
Jan. 16 Purchase 20,000 CD P1,900,000
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Driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – H008
CDD: Auditing Problems – Investments
31 Raised to market value, offset
credit to retained earnings GJ 100,000
Mar. 30 Sale at P150 10,000 CR P1,500,000
June 10 Stock dividend at par 10,000 GJ 1,000,000
July 29 Sale at P110 10,000 CR . 1,100,000
Totals P3,000,000 P 2,600,000
FAITHFUL CORP.
Date Transactions Shares Ref. Debit Credit
Sep. 05 Purchase 20,000 CD P1,000,000
28 Cash dividends to stockholders of
record Sept. 15, declared Aug. 15 P 50,000
CR
Oct. 01 Purchase 50,000 CD 2,500,000
05 Sale at P65 20,000 CR 1,000,000
Nov.30 Cash collected for sale made on
Nov. 10, after a Nov. 1 declaration
of P5 cash dividend per share to
stockholders on record as of
December 1
20,000 CR 3,300,000
Dec.15 Cash dividend received CR . 150,000
Totals P3,500,000 P4,500,000
On January 2, 2005, Jordano Company purchased 39,000 shares of Trustworthy Co.’s 200,000 shares of outstanding
common stock for P1,170,000. On that date, the carrying amount of the acquired shares on Trustworthy Co.’s books
was P810,000. Jordano attributed the excess of cost over carrying amount to goodwill.
During 2005, Jordano’s president gained a seat on Trustworthy’s board of directors. Trustworthy reported earnings
of P800,000 for the year ended December 31, 2005, and declared and paid cash dividends of P200,000 during 2005.
On December 31, 2005, Trustworthy’s common stock was trading at P30 per share.
QUESTIONS:
SUGGESTED ANSWERS: C, A, B, A, D, A, A, A, C
END OF HANDOUTS!
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Driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – H008