AUDIT OF INVESTMENTS AND INTANGIBLE ASSETS

EXERCISE 1

Given below is a list of securities and other assets that may qualify as investments.

Equity securities of another company where no control nor significant

influence exist. The company elected to report gains/losses in the
profits/losses 100,000
Equity securities of another company where no control nor significant
influence exist. The company elected to report gains/losses in the other
comprehensive income 150,000
20% equity securities of another company quoted in an active market 500,000
51 equity securities of another company quoted in an active market 1,400,000
Equity securities of the company quoted in an active market reacquired with
an intention of reissuance in latter period for short term profit. 500,000
Debt security of another company quoted in an active market. Business model
of the company has an objective to hold debt securities for short term
profits. 100,000
Debt security of another company quoted in an active market. Business model
of the company has an objective of collecting contractual cash flows from
the bonds which are primarily in the form of interest and principal 500,000
Real property held for resale in the ordinary course of the business 500,000
Real property held for speculation purposes 700,000
Real property held as current factory site 1,000,000
Real property of a manufacturing business being leased out to another party
under operating lease 900,000
Land held for undetermined future used 800,000
Land held to be used as future plant site 400,000
Real property being developed as an investment property 300,000

REQUIREMENTS:

1. How much from the list above is to be categorized as financial asset at fair value
through profit or loss?
A. 0 B. 100,000 C. 200,000 D. 500,000

2. How much from the list above is to be categorized as financial asset at fair value
through OCI.
A. 150,000 B. 180,000 C. 200,000 D. 350,000

3. How much from the list above is to be categorized as investment at amortized cost?
A. 0 B. 500,000 C. 600,000 D. 750,000

4. How much from the list above is to be categorized as investment in associate?

A. 0 B. 500,000 C. 600,000 D. 750,000

5. How much from the list above is to be categorized as investment in subsidiary?

A. 0 B. 1,000,000 C. 1,200,000 D. 1,400,000

6. How much from the list above is to be categorized as investment in property?

A. 2,400,000 B. 2,700,000 C. 2,800,000 D. 3,100,000

EXERCISE 2

Pinky Corp had the following portfolio of financial instruments of the December 31, 2013.
All securities were acquired at the beginning of 2013:

Security Denomination/ Recorded

Face Value Acquisition Cost
Alpha Shares 100,000 shares P5,250,000
Beta Shares 40,000 shares 2,350,000
10% Delta bonds, 3 year 2,000,000 par 1,951,126

Audit Notes:

APPLIED AUDITING PART I

 AUDIT OF INVESTMENTS AND INTANGIBLE ASSETS

a. Alpha Shares were acquired and designated as financial assets 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 shard were sold at P58 per share on
July 1, 2014.

b. Beta Shares were acquired and designated as financial asset at fair value through
OCI. 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, 2014 at P59 per
share.

c. The Delta Bonds were acquired when the prevailing market interest rate of 11%.
Interest re collectible every December 31. Half of the Delta Bonds were sold on
June 30, 2014 at 1.1M

d. Additional information on the securities are as follows:

Security Fair Value Fair Value
December 31, 2013 December 31, 2014
Alpha Shares P55 per share P62 per share
Beta Shares P57.50 per share P64 per share
10% Delta bonds, 3 year 9% yield 12% yield
2,035,182 ?
REQUIREMENTS:

1. What is the realised gain or loss on sale of Alpha shares in 2014?

A. 150,000 B. 200,000 C. 275,000 D. 400,000

2. What is the realised gain or loss on the Beta shares in 2014 under PAS 39?
A. 75,000 B. 22,500 C. 15,000 D. None

3. Assuming that the company’s business model has no objective of holding debt
securities to collect contractual cash flows, what is the realised gain on sale of
the Delta bonds in 2014?
A. 63,067 B. 113,067 C. 82,409 D. 32,409

4. Assuming that the company’s business model has an objective of holding debt
securities to collect contractual cash flows, what is the realised gain on sale of
the Delta bonds in 2014?
B. 63,067 B. 113,067 C. 82,409 D. 32,409

5. 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
the investment that shall be presented as financial asset for market value through
profit or loss?
A. 3,100,000 B. 4,082,000 5,064,000 D. 4,700,000

6. Assuming that the company’s business model has no objective of holding debt
securities to collect contractual cash flows, what is the total carrying value of
the investment that shall be presented as financial asset for market value through
profit or loss?
B. 3,100,000 B. 4,082,000 5,064,000 D. 4,700,000

EXERCISE 3

On December 31, 2013, Vegas corporation’s statement of financial position showed the
following balances to its securities account.

Financial asset at fair value through profit or loss.

Cost Market Value

10,000 shares of ABC stock 1,500,000 1,525,000
8,000 shares of DM stock 1,100,000 1,056,000
10%, GHI bonds purchased at face
value interest payable semi annual
on January and July 500,000 373,500

Financial assets at fair value through other comprehensive income

Cost Market Value

10,000 shares of JKL stock 1,180,000 1,260,000
APPLIED AUDITING PART I
 AUDIT OF INVESTMENTS AND INTANGIBLE ASSETS

20,000 shares of MNO stock 980,000 1,100,000

During 2014 the following transactions took place.

1/1: Receive the semi annual interest from GHI

3/1: Purchased 3,000 additional shares of ABC stocks for 459,000 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 stocks for P124 per share.

7/1: Received semi annual interest form GHI.

9/1: Purchased 400 of PQR’s 5 year, 12%, 1,000 at 93 plus accrued interest. The
bonds are dated at January 01, 2004. The bonds was designated as investment
at fair value through profit or loss.

The market values of the stocks and bonds on December 31, 2014 are as follows:

ABC stocks P153.20

DEF stocks 137.00
GHI bonds 82.22 quoted price
JKL stocks 110.50
MNO stocks 44.00
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)

2. How much is the realized gain or loss on the sale of JKL stocks under PAS 39?
A. (8,000) B. 8,000 C. (24,000) D. 24,000

3. How much is the realized gain or loss on the sale of JKL stocks under PFRS 9?
A. (8,000) B. 8,000 C. (24,000) D. None

4. How much is the unrealized holding gain to be reported in the 2014 income statement?
A. 64,950 B. 49,750 C. 10,250 D. 84,950

5. How much is the unrealized holding gain to be reported in the 2014 statement of
financial position?
B. 121,000 B. 125,000 C. 129,000 D. 145,000

EXERCISE 4

On January 4, 2014 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 30% interest in the net assets of Suzuki Inc. and gave Isuzu
the ability to exercise significant influence over Suzuki. Isuzu received dividends of P6
per share on December 4, 2014, and Suzuki reported net income of P1,280,000 for the year
ended December 31, 2014. The market value of Suzuki’s share at December 32, 2014 was P64
per share with cost to sell at a minimal amount.

You also ascertained the following information:

On January 04, 2014, 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:

1. What amount of investment is attributable to goodwill?

A. 480,000 B. 192,000 C. 672,000 D. 288,000

APPLIED AUDITING PART I

 AUDIT OF INVESTMENTS AND INTANGIBLE ASSETS

2. What amount of investment income should be reported in Isuzu’s income statement for
the year ended December 31, 2014?
A. 240,000 B. 216,000 C. 360,000 D. 384,000

3. What is the carrying value of the Suzuki’s ordinary share on December 31, 2014?
A. 2,560,000 B. 2,712,000 C. 2,592,000 D. 2,736,000

4. What total/net amount should be reported in Suzuki’s income statement for the year
ended December 31, 2014?
A. 240,000 B. 208,000 C. 60,000 D. 180,000

5. Assuming that the company has 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, 2014?
A. 240,000 B. 208,000 C. 60,000 D. 180,000

6. In relation to item 5 above, what is the carrying value of the investment at December
31, 2014?
A. 2,592,000 B. 2,712,000 C. 2,560,000 D. 2,472,000

EXERCISE 5

The accounting records of Alyssa Corp. which was organized in 2013 include only one
account for all intangible assets. The following is a summary of the items debited to the
said account in 2013 and 2014.

Date Particulars Amount

Jul. 1, 2013 Franchise(indefinite term) P1,260,000
Oct. 1 Leased advance payments(2year term,
Starting Oct 1, 2013) 840,000
Dec. 31 Net loss for 2013 including incorporation
Fees, P30,000, and related legal fees of
Organizing the business P150,000 480,000
Jan. 2, 2014 Purchase patent 10 year life 2,220,000
Mar. 1 Cost of developing recipe 2,250,000
Apr. 1 Purchased of goodwill 8,352,000
Jul. 1 Legal fee for successful defense of the
patent purchased in Jan. 1, 2014 379,500

Audit notes:

a. On December 31, 2013, the management estimates that the annual net future cash flows
from the franchise’s continued use was at P180,000. On December 31, 2014, this
estimate was revised due to decline in product demand to P150,000 annually.

b. On December 31, 2014, the estimated annual net future cash flows from the patent’s
continued use was 337,822 for its remaining life.

c. The prevailing market rate of interest as of December 31, 2013 and 2014 was
consistent at 12%.

REQUIREMENTS:

1. What is the correct carrying value of the Franchise as of December 31, 2014?
A. 1,200,000 B. 1,250,000 C. 1,260,000 D. 1,310,000

2. What is the correct carrying value of the Patent as of December 31, 2014?
A. 1,998,000 B. 1,800,000 C. 1,900,000 D. 1,880,000

3. What is the total retroactive adjustment to retained earnings beginning in 2014 as

a result of your Audit?
A. 585,000 B. 480,000 C. 900,000 D. 420,000

4. What is the total amount chargeable to expense for the current year 2014 as a result
of your audit?
A. 3,479,500 B. 2,861,500 C. 3,049,500 D. 3,059,500

EXERCISE 6
APPLIED AUDITING PART I
 AUDIT OF INVESTMENTS AND INTANGIBLE ASSETS

The following information pertains to Colgate Company’s intangible assets:

a. January 1, 2014, the company signed an agreement to operate as a franchise of Happy

Inc. for an initial franchise fee of 3 million. Of the amount 600 was paid when the
agreement was signed and the balance payable in 4 annual equal payments at the
beginning of each year starting 2015. The agreement provides that the down payment
is not refundable and that no future services are required for the franchisor. The
discount rate appropriate to the agreement is 14% which is implicit rate The similar
loans. The agreement provides for a 5% continuing franchise fee based on that
revenue of the franchise. Colgate had a total revenue of 18 million in 2014. The
company further estimates that the net future cash flows from continued use of the
franchise is at P250,000 annually.

b. Colgate also incurred P2.6M prior to 2014 of experimental and development cost in
its laboratory to develop a patent which was granted by the government at the
beginning of 2014. Legal fees and other costs associated with its registration
totaled 544,000. The company estimates that the use file life of the patent was
eight years.

c. A trademark was purchased form another company for P1M on January 2, 2012.
Expenditures totaling to 326,400 for successfully defending the trademark was
incurred in July 1, 2014. By the end of 2012 and 2013, estimates place future net
annual cash flows from trademark at P200,000 for its remaining life. By the end of
2014, the estimate had been revised to P80,000 because of recent technological
development in the industry.

d. The prevailing market rate of interest were at 9%, 9.5% and 10% ate the end of 2012,
2013 and 2014, respectively.

e. Assuming that the intangible assets had the following definite life from date of
acquisition: Franchise, 10 years; Patent, 8 years; Trademark, 10 years.

REQUIREMENTS:

1. What is the carrying value of the franchise at the end of 2014?

A. 1,439,765 B. 2,113,405 C. 2,348,227 D. 2,500,000

2. What is the carrying value of the patent at the end of 2014?

A. 544,000 B. 476,000 C. 516,800 D. 512,000

3. What is the carrying value of the trademark at the end of 2014?

A. 389,474 B. 700,000 C. 750,000 D. 800,000

APPLIED AUDITING PART I