Problems Audit of Investments PDF

Cordillera Career Development College
COLLEGE OF BUSINESS EDUCATION AND ADMINISTRATION

Buyagan, Poblacion, La Trinidad, Benguet
PROBLEM 1:
MAGNOLIA CORP. invested its excess cash in equity securities during 2011. The business model
for these investments is to profit form trading on price changes.
a. As of December 31, 2011, the equity investments portfolio consisted of the following:
Investment Quantity Cost Fair
Value
LJ, Inc. 1,000 shares P45,000 P63,000
Polland Co. 2,000 shares 120,000 126,000
Alabang Corp. 2,000 shares 216,000 180,0
00
Totals P381,000 P369,00
0
1. In the December 31, 2011, statement of financial position, what should be reported as
carrying amount of the investment?
A. P369,000 C. P381,000
B. P345,000 D. P405,000
2. In the 2011 income statement, what amount should be reported as unrealized gain or
loss?
A. Unrealized gain of P12,000 C. Unrealized loss of P36,000
B. Unrealized loss of P12,000 D. Unrealized gain of P24,000
b. During the year 2012, Magnolia Corp. sold 2,000 shares of Polland Co. for P114,600 and
purchased 2,000 more shares of LJ, Inc. and 1,000 shares of Dwarfy Company. On
December 31, 2012, Magnolia’s equity securities portfolio consisted of the following
Investment Quantity Cost Fair
Value
LJ, Inc. 1,000 P45,000 P63,000
shares
LJ, Inc. 2,000 99,000 120,000
shares
Dwarfy Company 1,000 48,000 36,000
shares
Alabang Corp. 2,000 216,0 66,00
shares 00 0
Totals P408,00 P282,00
0 0
3. What is the gain or loss on the sale of Polland Co. investment?

A. P5,4000 gain C. P11,400 gain
B. P5,400 loss D. P11,400 loss
4. What is the carrying amount of the investments on December 31, 2012?
A. P408,000 C. P282,000
B. P444,000 D. P246,000
5. What amount of unrealized gain or loss should be reported in the income statement for
the year ended December 31, 2012?
A. P126,000 unrealized gain
B. P126,000 unrealized loss
C. P108,000 unrealized gain
D. P108,000 unrealized loss
c. During the year 2013, Magnolia sold 3,000 shares of LJ, Inc. for P119,700 and 500 shares
of Dwarfy Company at a loss of P8,100. On December 31, 2013, Magnolia’s equity
investment portfolio consisted of the following.
Investment Quantity Cost Fair Value
Dwarfy 500 shares P24,000 P18,000
Company
Alabang Corp. 2,000 216,000 246,00
shares 0
Totals P240,000 P264,000

6. What should be reported as loss on sale of trading securities in 2013?
A. P60,300 C. P24,300
B. P32,400 D. P68,400
7. What amount or unrealized gain or loss should be reported in the income statement for
A. P180,000 unrealized gain C. P24,000 unrealized gain
B. P180,000 unrealized loss D. P24,000 unrealized loss
8. In the December 31, 2013, statement of financial position, what should e reported as
carrying amount of trading securities?
A. P240,000 C. P246,000
B. P234,000 D. P270,000
PROBLEM 2:
During the course of your audit of the financial statements of FISHING CORPORATION for the
year ended December 31, 2012, you found a new account “Investment in Equity Securities.”
Your audit revealed that during 2012, Fishing began a program of investments, and all
investment related transactions were entered in this account. Your analysis of this account for
2012 follows:
Fishing Corporation
Analysis of Investment in Equity Securities
For the Year Ended December 31, 2012
debit credit
(a)
Salmon Company Ordinary Shares
February 14 Purchased 12,000 shares @ P55 per share P660,000
July 26 Received 1,200 ordinary shares if Salmon
Company as a share dividend (Memorandum
entry in General ledger.)
September Sold the 1,200 of ordinary shares of Salmon
28 Company received July 26 @ P70 per share P84,00
0
(b)
Tamban, Inc. Ordinary Shares
April 30 Purchased 60,000 shares @ P40 per share P2,400,0
00
October 28 Received dividend of P1.20 per share P72,00
0
Additional information:
a. The fair value for each security as of the 2012 sate of each transaction follow:
Security Feb. April July Sept. Dec.
14 30 26 28 31
Salmon company P55 P62 P70 P74
Tamban. Inc. P40 32
Fishing Crop. 25 28 30 33 35
b. All of the investment of Fishing Corporation to be non-trading. Fishing Corporation

designates its investment in these non-trading securities as available-for-sale.
1. What amount should be reported as gain on sale of non-trading equity securities in

2012?
A. P18,000 C. P24,000
B. P6,000 D. P0
2. The receipt of 1,200 share dividend would cause the investment balance to increase by
A. P74,400 C. P66,000
B. P84,000 D. P0
3. What entry is necessary to correct the recording of the cash dividend received from
Tamban, Inc.?
A. Cash 72,000
Dividend income 72,000
B. Cash 72,000
Investment in equity securities 72,000
C. Investment in equity securities 72,000
Dividend income 72,000
D. Dividend income 72,000
Investment in equity securities 72,000
4. What amount of unrealized gain or loss should be reported in the 2012 statement of
comprehensive income as component of other comprehensive income?
A. P192,000 gain C. P480,000 gain
B. P192,000 loss D. P480,000 loss
5. What amount should be reported as Investment in Equity Securities in the statement of
financial position on December 31, 2012?
A. P2,808,000 C. P2,520,000
B. P3,000,000 D. P3,288,000
PROBLEM 3:
Shown below is an amortization schedule to ANGER COMPANY’s 5-year, P500,000 bond with a
7% interest rate and a 5% yield, purchased on December 31, 2009, for P543,300.
date Interest Interes Premium Carrying

receive t amortizati amount
d incom on
e
12/31/0 P543,30
9 0
12/31/1 P35,00 P27,16 P7,835 535,465
0 0 5
12/31/1 35,000 26,773 8,227 527,238
1
12/31/1 35,000 26,362 8,638 518,600
2
12/31/1 35,000 25,930 9,070 509,530
3
12/31/1 35,000 25,470 9,530 500,000
4
The following shows a comparison of the amortized cost and fair value of the bonds at year-
end:
Amortized Fair
cost value
December 31, P535,465 P532,500
2010
December 31, 527,328 537,500
2011
December 31, 518,600 528,250
2012
December 31, 509,530 515,000
2013
December 31, 500,000 500,000
2014
Required:
a. Prepare the journal entry to record the purchase of these bonds on December 31, 2009,
assuming the bonds are held as financial assets measured at amortized cost.
b. Prepare the journal entry(ies) related to these bonds for 2010
c. Prepare the journal entry(ies) related to these bonds for 2012
d. What should be reported as the carrying amount of these bonds in the statement of
financial position on December 31, 2013?
PROBLEM 4:
Supporting records of MAYON CORPORATION’s trading securities portfolio show the following
debt and equity securities:
Security Cost Fair Value
200 ordinary shares Concave Co. P127,250 P121,500
P400,000 Tipo Co. 7% bonds 398,250 387,000
P600,000 Turkey Co. 7 1/2% 603,750 609,45
bonds 0
Totals P1,129,250 P1,117,9
50
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 2012 and 2013, Mayon
completed the following transactions related to trading securities:
2012
January 1 Received semiannual interest on bonds. Assume that the appropriate adjusting
entry made on December 31, 2011
April 1 Sold P300,000 of 7 ½% Turkey bonds at 102 plus accrued interest. Brokerage fees
were P1,000
May 1 Received dividend of P1.25 per share on the Concave ordinary share capital. The
dividend had not been recorded on the declaration date.
July 1 received semiannual interest on bonds and then sold the 7% Tipo bonds at 97 ½.
Brokerage fees were P1,250
August 15 purchased 100 shares of Newman, Inc. ordinary share capital at P580 per share
plus brokerage fees of P250
November 1 Purchased P250,000 of 8% Toll Co. Bonds at 101 plus accrued interest. Brokerage
fees were P625. Interest dates are January 1 and July 1
December 31 Market prices of securities were:

Concave ordinary shares P550
7 ½% Turkey bonds 101 ¾
8% Toll bonds 101
Newman ordinary shares P583.75
2013
January 2 recorded the receipt of semiannual interest on bonds
February 1 sold the remaining 7 ½% Turkey bonds at 101 plus accrued interest. Brokerage
fees were P1,500
1. What is the total interest and dividend income for 2012?

A. P62,583 C.P45,708
B. P82,208 D. P49,402
2. What amount should be reported as gain on sale of trading securities in 2012?
A. P2,025 C. P4,275
B. P6,376 D. P3,125
3. What amount of unrealized gain or loss should be reported in the income statement for
A. P10,600 unrealized gain C. P3,075 unrealized gain
B. P10,600 unrealized loss D. P3,075 unrealized loss
4. What is the carrying amount of the remaining trading securities on December 31,
2012?
A. P740,500 C. P P736,725
B. P725,225 D. P P726,125
5. What is the loss on the sale of the Turkey bonds on February 1, 2013?
A. P3,750 C. P6,750
B. P5,250 D. P375
6. Prepare journal entries for the preceding transaction and to accrue interest on
December 31, 2012. Ignore amortization of premium or discount on bonds.
PROBLEM 5:
KALUGONG CO. designates purchased debt securities as available for sale. The following
amortization schedule relates to its 5-year, P1,000,000, 7% bonds purchased on December 31,
2010 for P1.086.565. the bonds were purchased to yield 5% interest.
date Interest Interest Premium Amortized

received income amortization cost
12.31.1 P1,086,565
0
12.31.1 P70,000 P54,328 P15,672 1,070,893
1
12.31.1 70,000 53,545 16,455 1,054,438
2
12.31.1 70,000 52,722 17,278 1,037,160
3
12.31.1 70,000 51,858 29,142 1,019,018
4
12,31,1 70,000 50,982* 19,018 1,000,000
5
*adjustment due to rounding
The following schedule presents the amortized cost and fair value of the bonds at year-end.
Fair value Amortized
cost
December 31, P1,065,00 P1,070,893
2011 0
December 31, 1,075,000 1,054,438
2012
December 31, 1,056,500 1,037,160
2013
December 31, 1,030,000 1,019,018
2014
December 31, 1,000,000 1,000,000
2015
1. What amount should be reported as investment in available for sale securities in the
statement of financial position of Kalugong Co. on December 31, 2012?
A. P1,086,565 C. P1,075,000
B. P1,054,438 D. P1,065,000
2. What amount of unrealized gain should be shown as component of other comprehensive
income in the 2012 statement of comprehensive income?
A. P26,455 C. P10,000
B. P20,562 D. P16,455
3. What amount of unrealized loss should be shown as component of other comprehensive
A. P14,393 C. P19,340
B. P18,500 D. P1,222
4. What amount of unrealized loss should be shown as component of other comprehensive
A. P8,350 C. P9,792
B. P26,500 D. P10,982
5. What amount of unrealized gain should be shown in the 2014 statement of changes in
equity?
A. P26,455 C. P25,233
B. P16,883 D P10,990
PROBLEM 6:
BUKIDNON CORP. has a policy of investing idle cash in equity securities. It has made periodic
investments in its principal supplier, Nocon Company. Bukidnon currently owns 12% of Nocon’s
outstanding ordinary shares.
Cherry Kosme, Bukidnon’s assistant controller, has gathered the following information about
the company’s investments in equity securities.
a. Bukidnon has trading equity investment in Delta Corp. and Polygon company. During
2012, Bukidnon purchased 100,000 shares of Delta Cop. For P4,200,000; these shares
have a fair value of P4,800,000 at December 31, 2012. The investment in Polygon
consists of 50,000 shares acquired in March 2012 at P60 per share and currently has a
value of P2,160,000.
b. Bukidnon’s 12% ownership on Nocon Company has a fair value of P66,675,000 on
December 31, 2012. The securities were purchased prior to 2012 for P67,500,000 and
was valued at P64,500,000 on December 31, 2011. Bukidnon has not changed its
holdings in the current year.
1. What amount of unrealized loss should be reported as component of other comprehensive

income on Bukidnon’s December 31, 2011 statement of comprehensive income?
A. P1,065,000 C. P825,000
B. P0 D. P3,000,000
2. What is the cumulative unrealized gain/loss that should be shown on the statement of
changes in equity for the year ended December 31, 2012?
A. P2,175,000 unrealized gain C. P825,000 unrealized loss
B. P1,065,000 unrealized loss` D. P1,935,000 unrealized gain
3. What amount of unrealized gain/loss should be reported on Bukidnon’s income statement
for the year ended December 31, 2012?
A. P600,000 unrealized gain C. P825,000 unrealized loss
B. P240,000 unrealized loss D. P1,065,000 unrealized loss
PROBLEM 7:
On the acquisition date, POMELO COMPANY designates purchased debt and equity securities
as available –for-sale. Pomelo’s intent in buying investment securities is to make them
available for when circumstances warrant, not to earn profit from short-term fluctuations in
price, and not necessarily to old debt securities to maturity.
Pomelo’s Company’s fiscal year ends on December 31. No investments were held by the
company at the beginning of the year. Described below are the company’s investment related
transactions:
2012
March 1 Purchased 30,000 PG, Inc. ordinary shares for P750,000, including
brokerage fees and
commissions.
April 15 purchased P1,000,000 of 10% bonds at face value from OW Corporation
July 23 received cash dividends of P60,000 on the investment in Corporation bonds
October 15 Received semiannual interest on the investment in OW Corporation Bonds
October 16 Sold the OW Corporation bonds for P1,100,000
November 2 Purchased 250,000 ESP Co. preference shares for P12,500,000, including
brokerage fees
and commissions
December 31 recorded the necessary adjusting entries relating to the investments. The
market values
of the investments are P30 per share for PG, Inc. and P44 per share for ESP
Co. Preference shares
2013
January 27 Sold half the PG, Inc. shares for P65 per share.
March 2 Sold the ESP Co. preference shares for P78 per share
1. What is the gain (loss) on the sale of the OW Corporation bonds on October 16, 2012?
A. P0 C. P(100,000)
B. P200,000 D. P100,000
2. What is the total amount that would be reported on Pomelo Company’s December 31,
2012, income statement relative to these investments?
A. P210,000 C. P110,000
B. P260,000 D. P160,000
3. How much unrealized gain (loss) should be reported in profit of loss in 2012?
A. P150,000 C. P100,000
B. P(1,500,000) D. P0
4. What amount of gain on sale of PG, Inc. shares on January 27, 2013, should Pomelo
recognize?
A. P75,000 C. P450,000
B. P600,000 D. P300,000
5. What is the gain on the sale of the ESP Co. preference shares on March 2, 2013?
A. P5,500 ,000 C. P7,000,000
B. P9,000,000 D. P1,500,00
PROBLEM 8:
Your audit of KALABASA CORPORATION’s investments in debt and equity securities reveals the
following information:
a. On January 1, 2012, X Company issued P1,000,000 in debt securities. The stated interest
is 9%, with interest payable semiannually, on June 30 and December 31. On February 1,
Kalabasa purchased these debt securities from an investor who acquired them when
they were originally issued. Kalabasa paid the investor an amount equal to the face
value of the securities plus accrued interest. The securities were designated as held-for-
trading.
b. On June 1, kalabasa purchased 10,000 shares of equity securities for P50 per share.
These securities were acquired as and available-for-sale investment. Kalabasa paid
P13,900 broker’s commission on the purchase.
1. On initial recognition, a financial asset or financial liability is measured at

A. Acquisition cost, i.e., the consideration paid or received plus any directly attributable
transaction cots to the acquisition or issuance of the financial asset or financial liability
B. The consideration paid or received for the financial asset or financial liability
C. Fair Value. For items that are not measured at fair value through profit or loss,
transaction costs are also included in the initial measurement.
D. Zero
2. The entry to record the acquisition of debt on February 1 is
A. Investment in trading securities 1,007,500
Cash 1,007,500
B. Investment in trading securities 992,500
Interest income 15,000
Cash 1,007,500
C. Investment in trading securities 1,000,000
Unrealized loss on trading securities 7,500
Cash 1,007,500
D. Investment in trading securities 1,000,000
Interest income 7,500
Cash 1,007,500
3. The entry to record the purchase of equity securities on June 1 is
A. Investment in available-for-sale securities 500,000
Broker’s commission expense 13,000
Cash 513,000
B. Investment in available-for-sale securities 513,000

Cash 513,000
C. Investment in trading securities 513,000
Cash 513,000
D. Investment in trading securities 500,000
Broker’s commission expense 13,000
Cash 513,000
PROBLEM 9:
On January 1, 2012, RAMBUTAN CORP. purchased debt securities for cash of P765,540. The
securities have a face value of P600,000, and they mature in 15 years. The securities carry
fixed interest of 10%, that is receivable semiannually, on June 30 and December 31. The
prevailing market interest rate on these debt securities is 7% compounded semiannually.
Rambutan Corp. intends and has the financial resources to hold these securities to maturity.
1. The carrying value of the debt securities on December 31, 2012, at amortized cost using
the effective interest rate method is
A. P771,840 C. P765,540
B. P759,016 D. P600,000
2. The interest income to be reported for 2012 using the effective interest rate method is
A. P66,524 C. P60,000
B. P6,524 D. P53,476
PROBLEM 10:
CHICO COMPANY purchased the following available-for-sale securities 2011:
Fair Value
Security Cost Dec. 31, 2009
X P450,000 P500,000
Y 500,000 800,000
On July 28, 2012, Chico sold all the shares of Security Y for a total of P835,000. As of
December 31, 2012, the shares Security X had a fair value of P200,000. No other activity
occurred during 2012 in relation to the available-for-sale securities portfolio.
1. What amount should Chico Company report as realized gain in the 2012 income
statement?
A. P35,000 C. P300,000
B. P335,000 D. P265,000
2. What is the cumulative unrealized gain (loss) to be classified as component of other
comprehensive income at December 31, 2012?
A. P300,000 C. P(300,000)
B. P150,000 D. P(250,000)
PROBLEM 11:
PAPAYA, INC. purchased the following securities during 2012:
Security Category No. of Total

shares Cost
A1 Corp. stock Trading 25,000 P450,000
B2 Co. stock Available-for- 5,000 1,100,000
sale
C3, Inc. stock Available-for- 125,000 2,125,000
sale
D4 Corp. Held-to- ---- 1,200,000
bonds maturity
E5 Co. bonds Trading ---- 550,000
The following transactions related to Papaya, Inc.’s investments occurred during 2012:
a. Received interest from D4 Corp. and E5 company bonds totaling P181,500
b. Dividends received on the equity securities held amounted to P88,000
c. Sold 10,000 shares of the A1 Corp. stock at P17 per share and 12,500 shares of the C3,
Inc. stock at P19 per share.
1. What is the gain (loss) on the sale of A1 Corp. stock?

A. P10,000 C. P78,000
B. P(10,000) D. P0
2. What is the gain (loss) on the sale of C3, Inc. stock?
A. P(25,000) C. P113,000
B. P25,000 D. P0
PROBLEM 12:
The following investment-related transactions were completed by DALANDAN CORP. during
2012:
a. Purchased P3,000,000 of X Company 7% bonds, paying 102.5 plus accrued interest of
P52,500. In addition, the company paid brokerage fee of P15,000. Dalandan classified
these bonds as a trading security.
b. Purchase 30,000 shares of Y Company ordinary shares at P125 per share plus brokerage
fees of P28,500. Dalandan classified this stock as an available-for-sale security.
c. Received semiannual interest on the X company bonds.
d. Sold 4,500 shares of Y company at P132 per share
e. Sold P4480,000 of X company 7% bonds at 102, plus accrued interest of P2,790
1. The X Company bonds should be initially measured and recognized at

A. P3,090,000 C. P3,000,000
B. P3,075,000 D. P3,142,500
2. The realized gain or loss on the sale of X Company bonds is
A. P390 gain C. P4,800 loss
B. P2,010 loss D. P2,400 loss
3. The 30,000 Y Company shares acquired should be initially measured and recognized at
A. P3,778,500 C. P3,721,500
B. P3,750,000 D. P3,988,500
4. The realized gain or loss on the sale of Y Company stock is
A. P27,225 gain C. P27,225 loss
B. P31,500 gain D. O31,500 loss
PROBLEM 13:
SINELAS COMPANY purchased as a long-term investment P160 million of 8% bonds, dated
January 1, on January 1, 2012. The company’s management does not intend to hold these
bonds until maturity but to have them available for sale when circumstances warrant. On the
acquisition date, the market yield of bonds with similar risk and maturity was 10%. The
company paid P132 million for the price of the bonds. Interest is received semiannually on June
30 and December 31. Due to changes in market conditions, the fair value of the bonds at
December 31, 2012, was P140 million.
1. At what amount will Sinelas Company report its investment in the December 31, 2012,
statement of financial position?
A. P132.2 million C. P132.41 million
B. P140 million D. P160 million
2. The unrealized holding gain or loss to be classified as component other comprehensive
income at December 31, 2012, is
A. P8.39 million holding gain C. P7.59 million holding gain
B. P8.39 million holding loss D. P7.59 million holding loss
3. The amount of interest income to be reported in Sinelas Company’s income statement for
the year ended December 31, 2012, is
B. P12.8 million D. P13.21 million
PROBLEM 14:
STRAWBERRY COMPANY has the following securities in its available-for-sale portfolio of
securities on December 31, 2011:
Security Shares Cost Fair
Value
Danica Co. ordinary 4,500 P220,500 P207,000
shares
Rose Corp. ordinary 15,000 540,000 525,000
shares
Assunta, Inc. preference 1,200 180,000 184,000
shares
Totals P940,500 P916,800
All of the following securities were bought in 2011. In 2012, strawberry had the following
transactions relating to its investments:
April 1 sold the 4,500 ordinary shares of Danica Co. for P65 per share.
May 1 bought 2,100 ordinary shares of Rita Corp. at P75 plus broker’s fee of P5,200
Strawberry’s portfolio of available-for-sale securities appeared as follows on December 31,

2012:
Security Shares Cost Fair
Value
Rose Corp. ordinary 15,000 540,000 525,000
shares
Rita Corp. ordinary shares 2,100 157,500* 151,200
Assunta, Inc. preference 1,200 180,000 174,00
shares 0
Totals P877,500 P850,200
*the P5,200 broker’s fee was recorded as expense.
1. What is the realized gain or loss on the sale of Danica Co. ordinary shares on April 1,
2012?
A. P72,000 gain C. P85,500 loss
B. P85,500 gain D. P0
2. The 2,100 shares of Rita Corp. purchased on May 1, 2012, should be initially measured at
A. P151,200 C. P162,700
B. P156,400 D. P157,500
3. Strawberry’s December 31, 2012, statement of financial position should report investment
in available-for-sale securities at
A. P850,200 C. P881,400
B. P877,500 D. P916,800
PROBLEM 15:
SANTOL CORP. invested its excess cash in available-for-sale securities (AFS) during 2010. As of
December 31, 2010, the company’s AFS securities portfolio consisted of the following:
Investee Shares Cost Fair Value
Company
Kelly, Inc. 30,000 P450,000 425,000
Eloy corp. 60,000 1,500,000 1,610,000
Yogi Enterprises 60,000 2,160,00 2,300,00
0 0
P4,110,00 P4,335,00
0 0
During the year 2011, Santol sold 60,000 shares of Eloy Corp. for P1,600,000 and purchased
60,000 additional shares of Kelly, Inc. and 30,000 shares of Kongga Company.
On December 31, 2011, Santol’s portfolio of AFS securities comprised the following:
Company
Kelly, Inc. 30,000 P450,000 425,000
Kelly, Inc. 60,000 1,300,000 1,450,000
Kongga 30,000 520,000 480,000
Company
Yogi Enterprises 60,000 2,160,00 700,000
0
P4,430,00 P3,130,00
0 0
During the year 2012, 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, 2012, Santol’s portfolio of AFS
consisted of the following:
Company
Yogi Enterprises 60,000 P2,160,000 P4,200,000
Kongga 15,000 260,000 180,000
Company
P2,420,00 P4,380,00
0 0
1. What should be reported on Santol’s Statement of Financial position as of December 31,

2010?
Unrealized
Holding Gain
AFS on AFS
Securities Securities
A. P4,335,000 P0
B. 4,110,000 0
C. 4,085,000 0
D. 4,335,000 225,000
2. What should be reported on Santol’s statement of financial position as of December 31,

2011?
Unrealized
Holding Loss
AFS on AFS
A. P3,130,000 P0
B. 3,130,000 1,300,000
C. 4,430,000 0
D. 2,450,000 1,980,000
3. What should be reported on Santol’s statement of financial position as of December 31,

2012?
Unrealized
Holding gain
AFS on AFS
A. P4,380,000 P1,960,000
B. 2,420,000 0
C. 4,380,000 0
D. 2,340,000 2,090,000
4. What is the realized gain or loss on the sale of Eloy Corp. shares in 2011?
A. P10,000 loss C. P100,000 gain
B. P120,000 loss D. P90,000 gain
5. What is the net realized gain on the sale of securities in 2012?
A. P550,000 C. P350,000
B. P460,000 D. P260,000
PROBLEM 16:
PEAR COMPANY’ investment portfolio contains the following securities on December 31, 2011:
Security Shares Cost Market Classified as
Value
Omar Co. Ordinary 150,000 P3,000,00 P2,850,000 Trading
0
Godling Inc. 60,000 1,200,000 1,290,000 Trading
preference
Sonata Co. ordinary 600,000 34,200,00 33,900,000 Investment in
(30% ownership) 0 associate
Jordan Co. ordinary 750,000 2,025,000 1,500,000 Available-for-
sale
Pear Company’s investment had the following market values at December 31, 2012:
Omar Co. ordinary P3,060,000
Godling, Inc. preference 1,290,000
Sonata Co. ordinary 33,450,000
Jordan Co. ordinary 1,700,000
1. What valuation entries are required at December 31, 2011, assuming that al of the above
securities were acquired in 2011 and none of the indicated declines in market value are
considered other than temporary?
2. Assume that Jordan Co.’s ordinary shares market decline is considered other than
temporary. What valuation entries are required at December 31, 2011, under this change in
assumption?
3. Assume that the investment categories remain the same and that al declines in 2011 and
2012 are temporary except for the 2011 decline in Jordan Co.’s ordinary shares. What
valuation entries are required at December 31, 2012?
PROBLEM 17:
On January 2, 2010, PLUM COMPANY purchased as a long-term investment a debt instrument
with a 5-year term for its fair value of P1,386,275. The instrument has a principal amount of
P1,500,000 and carries a fixed interest of 8% annually. The effective interest is determined to
hold the debt instrument until maturity.
During 2012, the issuer of the instrument is in financial difficulties and it becomes probable
that the issuer will be put into administration by a receiver. The fair value of the instrument is
estimated to be P750,000 at the end of 2012, calculated by discounting the expected future
cash flows at 10%. No cash flows are received during 2013. At the end of 2013, the issuer is
released from administration and Plum receives a letter from the receiver stating that the
issuer will be able to meet its remaining obligations, including interest and repayment of
principal.
1. What is the book value of the held-to-maturity investment at the end of 2011?
A. P1,347,157 C. P1,500,000
B. P1,460,882 D. P1,425,393
2. What amount of impairment loss should be recognized in 2012?
A. P697,932 C. P636,275
B. P750,000 D. P675,393
3. How much interest income should be recognized in 2013?
A. P24,793 C. P75,000
B. P0 D. P120,000
4. What amount of impairment loss reversal should be recognized in 2013?
A. P697,932 C. P750,000
B. P647,725 D. P0
5. How much discount amortization should be recognized in 2014?
A. P27,275 C. P120,000
B. P0 D. P75,000
PROBLEM 18:
The investment in AFS securities account in the general ledger of PEACH CO. is reproduced
below:
Investment in Available-for-sale (AFS) Securities

2012 2012
January 1 balance P1,410,000 September 11 P390,000
June 1 3,150,000 November 29 2,700,000
Your examination of the company’s records reveals the following information:

a. the January 1 balance consists of the following:
shares Cost
Abe Co. 15,000 P630,000
Bea Co. 12,000 780,000
Total P
1,410,000
b. On March 15, Peach Co. received 3,000 ordinary shares of Bea as stock dividend. The
market value of Bea shares shortly after declaration of the dividend was P73 per share.
c. On June 1, Peach Co. purchased 3,000 Eba Co. P1,000 bonds for P3,150,000, including
accrued interest. The bonds earn interest at 20% per annum (payable every March 1
and September 1) and will mature on June 1, 2022.
d. On September 11, 6,000 ordinary shares of Bea were sold at P75 per share
e. On September 29, the Eba bonds were sold for P2,550,000, plus accrued interest.
1. The Eba Co. bonds should be initially measured and recognized at

A. P3,000,000 C. P2,850,000
B. P3,150,000 D. P2,550,000
2. What amount of gain or loss should be recognized on the sale of the Bea Co. stock?
A. P60,000 gain C. P138,000 gain
B. P330,000 loss D. P0
3. What amount of gain or loss should be recognized on the sale of the Eba Co. bonds?
A. P450,000 loss C. P450,000 gain
B. P300,000 loss D. P300,000 gain
PROBLEM 19:
CHERRY, INC. received dividends from its investments in ordinary shares during the year ended
December 31, 2012, as follows:
a. A cash dividend of P720,000 is received from JJ Corporation. (Cherry, Inc. owns a 2%
interest in JJ)
b. A cash dividend of P3,600,000 is received for W Corporation. (Cherry, Inc. owns a 30%
interest in W)
c. A stock dividend of 18,000 shares from YY Company was received on December 15,
2012, on which date the quoted market value of YY’s shares was P20 per share. Cherry,
Inc. owns less than 1% of YY’s ordinary shares.
What amount of dividend income should be reported be Cherry, Inc. in its 2012 income
statement?
A. P1,080,000 C. P4,320,000
B. P4,680,000 D. P720,000
PROBLEM 20:
BERRIES COMPANY owns a 5% interest in ST Corporation, which declared a cash dividend of
P3,720,000 on November 27, 2012, to shareholders of record on December 20, 2012, payable
on January 15, 2013. In addition, on October 15, 2012, Berries Company received a liquidation
dividend of P100,000 from VG Corporation. Berries Company owns 6% of VG Corporation.
What amount of dividend income should be included in Berries Company’s income statement
for the year ended December 31, 2012?
A. P186,000 C. P191,000
B. P3,720,000 D. P181,000
PROBLEM 21:
(Equity method)
DURIAN CORP. purchased 40% of Associate Company’s outstanding ordinary shares on January
2, 2012, for P270 million. The book value of Associate Company’s net assets (shareholders’
Equity) at the purchase date totaled P450 million. Book Values and Fair values were the same
for all financial statement items except for inventory and buildings, for which fair values
exceed book values by P12.5 million and P112.5 million, respectively. All inventory on hand at
the purchase date was sold during Associate Company reported net income of P110 million for
the year ended December 31, 2012, and paid cash dividends of P40 million. The fair value of
Durian’s investment in associate was P300 million at December 31, 2012.
1. Of the amount paid for the acquisition of Associate Company’s ordinary shares, how much
is attributable to goodwill?
A. P50 million C. P40 million
2. What is the investment balance at December 31, 2012?
3. At what amount will Durian Corp. report its investment income in its 2012 income
statement?
PROBLEM 22:
(Equity method)
On January 4, 2012, EGGPLANT COMPANY paid P38 million for 2 million shares of Turko Co.
ordinary shares. The stock investment represents a 25% interest on the net assets of Turko and
gave Eggplant the ability to exercise significant influence over Turko’s operations. The book
value of Turko’s net assets was P106 million. The fair market value of Turko’s depreciable
assets exceed their book value by P20 million. These assets had an average remaining useful
life of 5 years. The remainder of the excess of the cost of the investment over the book value
of net assets purchased was attributable to goodwill.
On December 28, 2012, Eggplant received dividends of P1.50 per share. Turko reported net
income of P30 million for the year ended December 31, 2012. The market value of Turko’s
ordinary shares at December 31, 2012, was P27.50 per share.
1. What portion of the investment cost is attributable to goodwill?

A. P11.5 MILLION c. P5 million
2. What is the carrying value of the investment in Turko stock on December 31, 2012?
A. P45.5 million C. P55 million
PROBLEM 23:
On January 4, 2012, TOMATO CORP. paid P1,296,000 for 40,000 ordinary shares of Baron
Company. The investment represents a 30% interest in the net assets of Baron and gave
Tomato the ability to exercise significant influence over Baron’s operating and financial policy
decisions. Tomato received dividends of P1 per share on December 4, 2012, and Baron
reported net income of P640,000 for the year ended December 31, 2012. The market value of
Baron’s ordinary shares at December 31, 2012, was P32 per share. The book value of Baron’s
net assets was P3,200,000 and:
 The fair market value of Baron’s depreciable assets, with an average remaining useful
life of 8 years, exceeded their book value by P320,000.
 The remainder of the excess of the cost of the investment over the book value of net
assets purchased was attributable to goodwill.
1. What amount of the investment cost is attributable to goodwill?
A. P240,000 C. P336,000
B. P96,000 D. P144,000
2. What amount of investment revenue should be reported in Tomato’s income statement for
A. P120,000 C. P180,000
B. P108,000 D. P192,000
3. What is the carrying value of the investment in Baron ordinary shares on December 31,
2012?
A. P1,280,000 C. P1,296,000
B. P1,436,000 D. P1,368,000
Assume that the 40,000 shares represent a 10% interest in the net assets of Baron rather
than a 30% interest.
4. What amount of investment revenue should be reported in Tomato’s income statement for
A. P40,000 C. P60,000
B. P64,000 D. P180,000
5. What is the carrying value of the investment in baron ordinary shares at December 31,
2012?
A. P1,296,000 C. P1,280,000
B. P1,436,000 D. P1,236,000
PROBLEM 24:
Equity method
CUCUMBER CORP. bought 40% of the outstanding ordinary shares of Super Company on
January 2, 2012. At the date of purchase, the book value of Super’s net assets was P77.5
million. The book values and fair values for all statement of financial position items were the
same except for inventory and plant facilities. The fair value exceeded book value by P500,000
for the inventory and by P2 million for the plant facilities. The estimated life of the plant
facilities is 8 years. All inventory acquired was sold during 2012. Super reported net income of
P14 million for the year ended December 31, 2012, and paid a cash dividend of P3 million.
Cucumber’s statement of financial position as of December 31, 2012, shows an amount of
P44.1 million as its investment in Super Company.
1. What amount should Cucumber report as its income from investment in Super Company for
2. What is the acquisition cost of Cucumber’s investment in Super Company?
A. P40 million C. P45.6 million
3. Of the amount paid by Cucumber for the 40% interest in Super Company, how much is
attributable to goodwill?
A. P8 million C. P8.8 million
B. P8.2 million D. P9 million
4. What should Cucumber report in its statement of cash flows regarding its investment in
Super Company?
A. P40 million cash outflow from investing activities and P1.2 million cash inflow among
operating activities.
B. P45.6 million cash outflow from investing activities and P5.3 million cash inflow among
operating activities
C. P40 million cash outflow from financing activities and P1.2 million cash inflow among
D. P39.4 million cash outflow from investing activities and P3 million cash inflow among
PROBLEM 25:
On June 30, 2012, CABBAGE COMPANY purchased 25% of the outstanding ordinary shares of IB
Co. at a total cost of P2,100,000. The book value of IB Co.’s net assets on acquisition date was
P7,200,000. For the following reasons, Cabbage was willing to pay more than book value for
the IB Co. shares:
 IB Co. has depreciable assets with a current fair value of P180,000 more than their book
value. These assets have a remaining useful life of 10 years.
 IB Co. owns a tract of land with a current fair value of P900,000 more then its carrying
amount.
 All other identifiable tangible and intangible assets of IB Co. have current fair values that
are equal to their carrying amounts.
IB Co. reported net income of P1,620,000, earned evenly during current year ended December
31, 2012. Also in the current year, it declared and paid cash dividends of P315,000 to its
ordinary shareholders. Market value of IB Co.’s ordinary shares at December 31, 2012, is P9
million. Cabbage Company’s financial year-end is December 31.
1. What is the total amount of goodwill of IB Co. based on the price paid by Cabbage
Company?
A. P300,000 C. P120,000
B. P1,080,000 D. P30,000
2. What amount of investment income should Cabbage report in its income statement for the
year ended December 31, 2012, under the fair value method?
A. P78,750 C. P228,750
B. P202,500 D. P71,250
3. What amount of investment income should cabbage report in its income statement for the
year ended December 31, 2012, under the equity method?
A. P202,500 C. P78,750
B. P200,250 D. P123,750
4. Under the equity method, the carrying value of the Cabbage Company’s investment in
ordinary shares of IB Co. on December 31, 2012, should be
A. P2,221,500 C. P2,070,000
B. P2,100,000 D. P2,250,000
5. What amount should Cabbage Company report in its December 31, 2012, statement of
financial position as its investment in IB Co. under the fair value method?
A. P2,250,000 C. P2,221,500
B. P2,070,000 D. P2,100,000
PROBLEM 26: (Equity method)

LETTUCE CO. purchased 40% of MU Corp. on April 1, 2012, for P500,000 when MU’s book value
was P1,260,000. On the date of acquisition, the market value of MU’s net assets equaled their
book values except for the following:
 MU’s equipment has a fair value of P50,000 less than its book value. The equipment has
a remaining useful life of 10 years.
 MU’s building has a fair value of P40,000 than its book value. The building has a
remaining useful life of 20 years.
MU’s results of operations in 2012 and 2013 are as follows:

2012 net income P150,000
2013 net loss P30,000
MU paid cash dividends of P20,000 and P10,000 in 2012 and 2013, respectively.
1. What amount of investment income should be reported on Lettuce Company’s income

statement for the year ended December 31, 2012?
A. P44,100 C. P61,200
B. P58,800 D. P45,900
2. The investment loss to be reported on Lettuce Company’s 2013 income statements
A. P10,800 C. P13,200
B. P8,100 D. P12,000
3. What is the carrying value of the stock investment on December 31, 2012?
A. P536,100 C. P553,200
B. P537,900 D. P500,000
4. What is the carrying value of the stock investment on December 31, 2013?
A. P521,300 C. P523,100
B. P536,000 D. P500,000
PROBLEM 27:
Equity method
On January 2, 2012, OKRA CORP. paid P1,600,000 for the purchase of 40% of the ordinary
shares of Thunder Company. The statement of financial position of Thunder at the date of
acquisition shows the following information:
Assets subject to depreciation (remaining useful life is 8 years) P2,400,000
Assets not subject to depreciation 800,000
Liabilities 400,000
The book value and fair value are the same for assets not subject to depreciation and
liabilities. The fair market value of Thunder’s assets subject to depreciation is P2,720,000.
Thunder depreciates its assets using the straight-line method. Thunder’s intangibles are
amortized over a 20-year period. Net income for the year ended December 31, 2012, is
P640,000. It declares and pays dividends of P500,000 in 2012.
5. What amount of the investment cost is attributable to goodwill?

A. P352,000 C. P128,000
B. P480,000 D. P608,000
6. What is the carrying value of the stock investment at December 31, 2012?
A. P1,622,400 C. P1,784,000
B. P1,600,000 D. P1,640,000
PROBLEM 28: (discontinuance of Equity method)

KANGKONG COMPANY purchased 250,000 shares of Secret Co. ordinary shares on July 1, 2012,
at P66 per share, which reflected book value as of that date. At the time of purchase, Secret
Co. had 1,000 ordinary shares outstanding. Kangkong had no ownership interest in Secret prior
to this purchase. Secret reported net income of P3,360,000 for the six months ended June 30,
2012. Kangkong received a dividend of P420,000 from Secret on August 1, 2012. Secret
reported net income of P7,200,000 for the year ended December 31, 2012, and again paid
Kangkong dividends of P420,000.
On January 1, 2013, Kangkong sold 100,000 ordinary shares of Secret for P68 per share and
reclassified the remaining stock as available-for-sale securities. The quoted market price of
such investment on January 1, 2013 was P69 per share. Secret reported net income of
P7,440,000 for the year ended December 31, 2013, and paid Kangkong dividends of P240,000.
The fair value of Secret ordinary shares at December 31, 2013 was P70 per share.
1. What is the carrying value of the stock investment at December 31, 2012?
2. The total amount of gain to be reported in the 2013 income statement is
3. What amount of unrealized gain should be reported in the 2013 statement of
comprehensive income as component of other comprehensive income?
4. The carrying value of the retained investment to be shown in the statement of financial
position of December 31, 2013 is

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Cordillera Career Development College

COLLEGE OF BUSINESS EDUCATION AND ADMINISTRATION

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

Totals P240,000 P264,000

b. All of the investment of Fishing Corporation to be non-trading. Fishing Corporation

1. What amount should be reported as gain on sale of non-trading equity securities in

date Interest Interes Premium Carrying

December 31 Market prices of securities were:

1. What is the total interest and dividend income for 2012?

date Interest Interest Premium Amortized

1. What amount of unrealized loss should be reported as component of other comprehensive

April 15 purchased P1,000,000 of 10% bonds at face value from OW Corporation

July 23 received cash dividends of P60,000 on the investment in Corporation bonds

October 15 Received semiannual interest on the investment in OW Corporation Bonds

October 16 Sold the OW Corporation bonds for P1,100,000

1. On initial recognition, a financial asset or financial liability is measured at

B. Investment in available-for-sale securities 513,000

Security Category No. of Total

1. What is the gain (loss) on the sale of A1 Corp. stock?

1. The X Company bonds should be initially measured and recognized at

Strawberry’s portfolio of available-for-sale securities appeared as follows on December 31,

1. What should be reported on Santol’s Statement of Financial position as of December 31,

2. What should be reported on Santol’s statement of financial position as of December 31,

3. What should be reported on Santol’s statement of financial position as of December 31,

Investment in Available-for-sale (AFS) Securities

Your examination of the company’s records reveals the following information:

1. The Eba Co. bonds should be initially measured and recognized at

1. What portion of the investment cost is attributable to goodwill?

PROBLEM 26: (Equity method)

MU’s results of operations in 2012 and 2013 are as follows:

1. What amount of investment income should be reported on Lettuce Company’s income

5. What amount of the investment cost is attributable to goodwill?

PROBLEM 28: (discontinuance of Equity method)

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