FAR EASTERN UNIVERSITY

INSTITUTEOF ACCOUNTS, BUSINESS AND FINANCE

Department of Accountancy & Internal Auditing

AUDITING PROBLEMS
First Semester AY 2017-2018
QUIZ 11 – AUDIT OF INVESTMENT (STRAIGHT PROBLEMS)
Name Date
(Family Name) (First Name) (Middle Name) Section
Professo Day/Tim
r e
Stud. No. Score /56 items
Room Rating

SOLUTION GUIDE

Problem Question
No. No. YOUR ANSWER HERE
1 1 P 2,500 gain
2 P 18,150 gain
3 P 92,500
4 P 68,850

2 5 P 112,500
6 P 10,227 gain
7 P 46,875 loss
8 P 64,375
9 P 67,773

3 10 P 40,000 loss
11 P 48,000
12 P 24,000 gain
13 P 132,000
14 P 852,000

4 15 P 700,000
16 P 4,400,000
17 P 3,000,000
18 P 612,500
19 P 2,687,500

5 20 P 0.00 or NONE

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Instructions:
Solve the requirements of the following problems. Your final answer must be written on the ANSWER SHEET
provided. Supporting computation is not necessary.

Problem 1
The following transactions of the Angat Company were completed during the year 2017:

Jan. 2 Purchased 20,000 shares of Bulacan Auto Co. for P40 per share plus brokerage costs of P
4,500. These shares were classified as trading securities.

Feb. 1 Purchased 20,000 shares of Malolos Company common stock at P125 per share plus
brokerage fees of P 19,000. Angat classifies this stock as and available-for-sale security.

Apr. 1 Purchased P 2,000,000 of RP Treasury 7% bonds, paying 102.5 plus accrued interest of P
35,000. In addition, the company paid brokerage fees of P 18,000. Angat classified these
bonds as a trading security.

Jul. 1 Received semiannual interest on the RP Treasury Bonds.

Aug 1 Sold P 500,000 of RP Treasury 7% bonds at 103 plus accrued interest.

Oct. 1 Sold 3,000 shares of Malolos at P132 per share.

The market values of the stocks and bonds on December 31, 2017, are as follows:

Bulacan Auto Co. P P45 per share

Malolos Company P P130 per share

RP Treasury 7% bonds 102

Based on the above and the result of your audit, determine the following:

1. Gain or loss on sale of P 500,000 RP Treasury Bonds on August 1, 2017.

ANSWER: P 2,500 gain

SOLUTION:
Sales proceeds (P500,000 x 1.03) P 515,000
Less cost of RP Treasury bonds sold (P500,000 x 1.025)* 512,500
Gain on sale of P500,000 RP Treasury Bonds P 2,500

* PAS 39 par. 43 states that when a financial asset or financial liability is recognized initially, an
entity shall measure it at its fair value plus, in the case of a financial asset or financial liability
not at fair value through profit or loss, transaction costs that are directly attributable to the
acquisition or issue of financial asset or financial liability. Therefore, the transaction costs (e.g.
brokerage fees) should be expensed for trading securities.

2. Gain or loss on sale of 3,000 Malolos shares on October 1, 2017.

ANSWER: P 18,150 gain

SOLUTION:
Sales proceeds (3,000 shares x P132) P 396,000
Less cost of shares sold {[(20,000 x P125) + P19,000] x 3/20} 377,850
Gain on sale of 3,000 Malolos shares P 18,150

3. What amount of unrealized gain should be shown as component of income in 2017?

ANSWER: P 92,500

SOLUTION:
Cost of Bulacan Auto Co. shares (20,000 x P40) P 800,000
Cost of RP Treasury 7% bonds (P2,000,000 x 1.025) 2,050,000
Cost of P500,000 RP Treasury bonds sold (see no. 1) ( 512,500)
Trading securities, 12/31/17 before mark-to-market P 2,337,500
Fair value of trading securities, 12/31/17 (see below) 2,430,000
Unrealized gain on TS to be reported on the IS P 92,500

Bulacan Auto Co. (20,000 x P45) P 900,000

RP Treasury 7% bonds (P1,500,000 x 1.02) 1,530,200

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 Fair value of trading securities, 12/31/17 P 2,430,000

4. What amount of unrealized gain should be shown as component of equity as of December 31, 2017?
ANSWER: P 68,850

SOLUTION:
Cost of Malolos Company shares [(20,000 x P125) + P19,000] P 2,519,000
Cost of 3,000 shares sold (see no. 2) (377,850)
AFS, 12/31/17 before mark-to-market P 2,141,150
Fair value of AFS, 12/31/17 [(20,000 - 3,000) x P130] 2,210,000
Unrealized gain-AFS, 12/31/17 to be reported under SHE P P 68,850

Problem 2
You were engaged by Balagtas Company to audit its financial statements for the year 2017. During the course
of your audit, you noted that the following trading securities were properly reported as current assets at
December 31, 2016:

Cost Market
France Corporation, 5,000 shares, convertible preferred shares P 450,000 P 487,500
Ces, Inc., 30,000 shares of common stock 675,000 742,500
Coo Co., 10,000 shares of common stock 618,750 450,000
P 1,743,750 P 1,680,000

The following sale and conversion transactions transpired during 2017:

Mar. 1 Sold 12,500 shares of Ces for P 33.75 per share.

Apr. 1 Sold 2,500 shares of Coo for P 45 per share.
Sep. 21 Converted 2,500 shares of France’s preferred stock into 7,500 shares of France’s common
stock, when the market price was P 78.75 per share for the preferred stock and P47.25 per
share for the common stock.

The following 2017 dividend information pertains to stocks owned by Balagtas:

Jan. 2 Coo issued a 10% stock dividend when the market price of Coo’s common
stock was P 49.50 per share.
March 31 and Sept. 30 France paid dividends of P 2.50 per share on its preferred stock, to
stockholders of record on March 15 and September 15, respectively. France did
not pay dividends on its common stock during 2017.

Market prices per share of the securities were as follows:

12/31/2017 12/31/2016
France Corp., preferred 92.25 97.50
France Corp., common 42.75 38.25
Ces, Inc., common 22.50 24.75
Coo Co., common 40.50 45.00

All of the foregoing stocks are listed in the Philippine Stock Exchange. Declines in market value from cost
would not be considered permanent.

Based on the above and the result of your audit, you are to provide the answers to the following:

5. How much is the gain on sale of 12,500 Ces shares?

ANSWER: P 112,500 gain

SOLUTION:
Sales proceeds (12,500 shares x P33.75) P 421,875
Less CV of Ces shares sold (12.5/30 x P742,500) 309,375
Gain on sale of 12,500 Ces shares P 112,500

6. How much is the gain or loss on sale of 2,500 Coo shares?

ANSWER: P 10,227 gain

SOLUTION:
Sales proceeds (2,500 shares x P45) P 112,500
Less CV of Coo shares sold (P450,000 x 2,500/11,000*) 102,273
Gain on sale of 2,500 Coo shares P 10,227

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7. How much is the gain or loss on conversion of 2,500 France preferred stock into 15,000 common stock?
ANSWER: P 46,875 loss

SOLUTION:
Fair value of preferred stock (2,500 shares x P78.75) P 196,875
Less CV of shares converted (P487,500 x 2.5/5) 243,750
Loss on conversion of 2,500 France preferred shares P 46,875

8. How much is the total dividend income for the year 2017?
ANSWER: P 64,375

SOLUTION:
From France (5,000 shares x P2.50 x 2) P 25,000
From Ces [(30,000 - 12,500) x P2.25) 39,375
Total dividend income in 2006 P 64,375

9. How much should be reported as unrealized gain on trading securities in the company’s income statement
for the year 2017?
ANSWER: P 67,773

SOLUTION:
Trading securities, 1/1/17 P 1,680,000
CV of Ces shares sold (see no. 1) (309,375)
CV of Coo shares sold (see no. 2) (102,273)
CV of France preferred shares converted (see no. 3) (243,750)
Cost of 7,500 France common shares received (see no. 3) 196,875
Trading securities, 12/31/17 before mark-to-market P 1,221,477
Fair value of trading securities, 12/31/17 (see below) 1,289,250
Unrealized gain on trading securities P 67,773

France Corp., preferred [(5,000 - 2,500) x P92.25] P 230,625

France Corp. – Common (7,500 x P42.75) 320,625
Ces, Inc., common [(30,000 - 12,500) x P22.50] 393,750
Coo Co., common {[(10,000 x 1.1) - 2,500] x P40.50} 344,250
Fair value of trading securities, 12/31/17 P 1,289,250

Problem 3
You were able to obtain the following ledger details of Trading Securities in connection with your audit of the
Bocaue Corporation for the year ended December 31, 2017:

Particulars Date Ref. Debit Credit

Purchase of GOOD Co. – 4,000 shares 1-14 CV 960,000
Purchase of LUCK Co. – 4,800 shares 2-20 CV 1,200,000
Sale of LUCK Co. – 1,600 shares 3-01 CR 360,000
Receipt of GOOD Stock Dividend – Offsetting
Credit to retained earnings 5-31 JV 88,000
Sale of GOOD Stocks – 3,200 shares 8-15 CR 784,000
Sale of GOOD Stocks – 800 shares 10-1 CR 184,000

From the Philippine Stock Exchange, the GOOD dividends were analyzed as follows:

Kind Declared Record Payment Rate

Cash 01-02 01-15 01-31 P20/share
Stock 05-02 05-15 05-31 10%
Cash 08-01 08-30 09-15 P30/share

At December 31, 2017, GOOD and LUCK shares were selling at P210 and P240 per share, respectively.

Based on the above and the result of your audit, determine the following:

10. Gain or loss on sale of 1,600 LUCK shares on March 1, 2017

ANSWER: P 40,000 loss

SOLUTION:
Sales proceeds P 360,000
Less CV of shares sold (P1,200,000 x 1,600/4,800) 400,000
Loss on sale of 1,600 Luck shares on 3/1/06 P 40,000

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11. Gain on sale of 3,200 GOOD shares on August 15, 2017
ANSWER: P 48,000

SOLUTION:
Total proceeds P 784,000
Less dividends sold (3,200 shares x P30) 96,000
Sales proceeds P 688,000
Less CV of investment sold (P880,000* x 3,200/4,400**) 640,000
Gain on sale of 3,200 Good shares on 9/15/06 P 48,000

Computation of adjusted cost of Good Co. shares

Total cash paid P 960,000
Less purchased dividend (4,000 x P20) 80,000
Adjusted cost P 880,000

12. Gain or loss on sale of 800 GOOD shares on October 1, 2017

ANSWER: P 24,000 gain

SOLUTION:
Sales proceeds P 184,000
Less CV of investment sold (P880,000 x 800/4,400) 160,000
Gain on sale of 800 Good shares on 10/1/17 P 24,000

13. Dividend income for the year 2017

ANSWER: P 132,000

SOLUTION:
Dividend income - Declared Aug. 1 (4,400 shares x P30) P 132,000

14. Carrying value of Trading Securities as of December 31, 2017

ANSWER: P 852,000

SOLUTION:
Good Co. [(4,000 x 1.1) - 3,200 - 800] = 400 x P210 P 84,000
Luck Co. (4,800 - 1,600) = 3,200 x P240 768,000
Carrying value of trading securities, 12/31/017 P 852,000

Problem 4
In connection with your audit of Hogonoy Company’s financial statements, you were able to gather the
following subsidiary account which reflect the marketable securities of the company for the year 2006:

HUGO CORPORATION
Date Transactions Shares Debit Credit

09/01 - Purchase 40,000 P 2,000,000

09/30 - Cash dividends to stockholders of
record 9/15, declared 8/15 P 100,000
10/01 - Purchase 100,00 5,000,000
0
10/15 - Sale at P 65 40,000 2,000,000
11/30 - Cash collected for sale made on
11/10, after a 11/1 declaration of P 5
cash dividend per share to
stockholders on record as of 12/1 40,000 6,600,000
12/15 - Cash dividend received 300,000
TOTAL P 7,000,000 P 9,000,000

Hogonoy, Inc. acquired 30% of Pugo Corporation’s voting stock on January 1, 2005 for P 5,000,000. During
2005, Pugo earned P 2,000,000 and paid dividends of P 1,250,000. Hogonoy’s 30% interest in Pugo gives
Hogonoy the ability to exercise significant influence over Pugo’s operating and financial policies. During 2006,
Pugo earned P 2,500,000 and paid dividends of P 750,000 on April 1 and P 750,000 on October 1. On July 1,
2006, Hogonoy sold half of its investment in Pugo for P 3,300,000 cash.

Based on the above and the result of your audit, answer the following:

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15. The gain on sale of 40,000 shares of Hugo Corp. on October 15 is
ANSWER: P 700,000
SOLUTION:
Sales proceeds (40,000 shares x P65) 2,600,000
Less cost of investment sold:
Cash paid 2,000,000
Less Purchase dividend 100,000 1,900,000
Gain on sales of investment 700,000

16. The gain on sale of 40,000 shares of Hugo Corp. on November 10 is

ANSWER: P 4,400,000

SOLUTION:
Total proceeds P 6,600,000
Less dividends sold (40,000 shares x P5) 200,000
Sales proceeds P 6,400,000
Less cost of investment sold (P5,000,000 x 40/100) 2,000,000
Gain on sale of 40,000 shares of Hugo Corp., 11/10 P 4,400,000

17. The carrying value of the Company’s investment in Hugo Corp. on December 31, 2006 is
ANSWER: P 3,000,000

SOLUTION:
Acquisition cost, 10/1 purchase P 5,000,000
Less cost of investment sold on 11/10 (see no. 16) 2,000,000
Gain on sale of 3,200 Good shares on 9/15/06 P 3,000,000

18. The gain on sale of investment in Pugo Corp. is

ANSWER: P 612,500

SOLUTION:
Proceeds on sale of investment P 3,300,000
Less carrying amount of investment sold:
Acquisition cost, 1/1/05 P 5,000,000
Share in net income for 2005 (P 2,000,000 x 30%) 600,000
Dividends received in 2005 (P 1,250,000 x 30%) (375,000)
Carrying value, 12/31/05 P 5,225,000
Share in net income up to 7/1/06 (P 2,500,000 x 6/12 x 30%) 375,000
Dividends received up to 7/1/06 (P 750,000 x 30%) (225,000)
Carrying value, 7/1/06 P 5,375,000
Multiply by 1/2 2,687,500
Gain on sale of investment P 612,500

19. The carrying value of the Company’s investment in Pugo Corp. on December 31, 2006 is
ANSWER: P 2,687,500

SOLUTION:
Carrying value, 7/1/06 P 5,375,000
Less carrying amount of investment sold (see no. 18) 2,687,500
Gain on sale of 3,200 Good shares on 9/15/06 P 2,687,500

Problem 5
At December 31, 2016, the statement of financial position of DEE Corporation reported the Investment in
Equity Securities at P 2,800,000 (cost, P 3,000,000). At December 31, 2017, the market valuation of the
portfolio was P 2,980,000. What should DEE Corporation report on its 2017 Income Statement as a result of
the increase in the market value of the investments in 2017?

ANSWER:
NONE or P 0.00. This is a financial asset – FVOCI.