AUDITING PROBLEMS-INVESTMENTS
Prob.1) At December 31, 2017, the balance sheet of Dante Corp. reported the following as investments in
available-for-sale marketable equity securities (long-term):
Investments in long-term marketable equity security at cost 300,000
Less allowance to reduce equity security to market 30,000
270,000
At Dec. 31, 2018, the market valuation of the portfolio was P295,000. What should D Corp.
report on its 2018 Statement of Income as a result of the increase in the market value of the investments
in 20187? _______________________________________
Prob.2) On December 31, 2018, the Malden Corp. presented the Investment in Bonds (AFS) account as follows:
INVESTMENT IN BONDS (4%, 2015)
Jan. 16, 2016 31,032 Aug.31, 2017 8,325
Oct. 31, 2018 15,700
The bonds acquired on Jan.16, 2016, for a total cash outlay of P31,032, had a face value of P30,000.
Interest is paid every Jan. 1 and July 1. The maturity of the bonds is July 1, 2020.
Interest was paid regularly. The bonds sold on Aug.31, 2017, had a face value of P7,500, and the bonds
sold on Oct. 31, 2018, had a face value of P15,000. The amounts credited to the investment account
represent the proceeds from the sale of bonds, including accrued interest. The corporation uses the
calendar year as its accounting period. The corporation has failed to make any adjusting entries for
accrued interest since the bonds were acquired.
Prepare journal entry (ies) as of December 31, 2018.
Prob. 3) On June 30, 2018, Fiesta Company puchased 25% of the outstanding ordinary shares of XY Company
at a total cost of P2,100,000. The book value of XY Co's net assets on acquisition date ws P7,200,000. For
the following reasons, Fiesta was willing to pay more than book value for the XY Co. stock:
a) XY has depreciable assets with a current fair value of P180,000 more than their book value. These assets
have remaining useful life of 10 years.
b) XY Co. owns a tract of land with a current fair value of P900,000 more than its carrying amount.
c) All other identifiable tangible and intangible assets of XY Co. have currrent fair values that are equal to
their carrying amounts.
XY Co. reported net income of P1,620,000, earned evenly during the current year ended Dec. 31, 2018.
Also in the current year, it declared and paid cash dividends of P315,000 to its ordinary shareholders. Market
value of XY Co.'s ordinary shares at Dec. 31, 2018 is P9.5 million. Fiesta Company's financial year end is
December 31.
1) What is the total amount of goodwill of XY Co. based on the price paid by Fiesta Company? _____________
2) What amount of investment revenue should Fiesta report on its income statement for the year ended
December 31, 2018, under the cost method? ________________________________
3) What amount of investment revenue should Fiesta report on the income statement for the year ended
Dec. 31, 2018, under the equity method? ____________________________
4) Under the equity method, the carrying value of the Fiesta Company's investment in ordinary shares of XY Co.
on December 31, 2018 should be_______________________________.
5) What amount should Fiesta Company report on its December 31, 2018 balance sheet as adjustment in
its investment in XY Co. under the cost/fair value method? ______________________________
Problem 4- Violet Company's investment portfolio contains the following securities on December 31, 2016:
Security Shares Cost MV Classified as
Oslo Co. ordinary 150,000 P6,000,000 P 5,700,000 Trading
Grand, Inc. Pref. Shares 60,000 2,400,000 2,580,000 Trading
Sunday Co. ordinary 600,000 68,400,000 67,800,00 Inv. In Associate
(30% ownership)
Jack Co. Ordinary 750,000 4,050,000 3,000,000 AFS
The investments have the following market values at December 31, 2017:
Oslo Co. ordinary P 6,120,000
Grand, Inc. Pref. Shares 2,580,000
Sunday Co. ordinary 66,900,000
Jack Co. ordinary 3,400,000
1) The valuation entry on Trading Securities at December 31, 2016, assuming the securites were acquired
in 2016 and none of the indicated declines in market value are considered other than temporary, will involve:
a) P120,000 debit to Unrealized holding loss (through Profit and Loss)
b) P120,000 debit to Unrealized holding loss (Equity)
c) P120,000 credit to Unrealized holding gain (Profit and loss)
d) no adjustment
2) The valuation entry required on AFS securities at Dec. 31, 2016, assuming that the securities were acquried
in 2015 and none of the indicated declines in market value are considered other than temporary, will involve:
a) a P1,050,000 debit to Unrealized holding loss on AFS (Equity)
b) a P1,050,000 debit to Unrealized holding loss on AFS (Profit & Loss)
c) a P1,050,000 credit to Unrealized holding tain on AFS (equity)
d) no adjustment needed
3) The valuation entry on Investments in Associates required at Dec. 31, 2016, assuming that the indicated
decline in value is temporary, will involve:
a) No adjustment
b) A P600,000 debit to Unrealized holding loss (equity)
c) a P600,000 debit to Unrealized holding loss (profit and loss)
d) A P600,000 credit to Unrealized holding gain (equity)
4) Assume that the investment categories remain the same and that all declines in 2016 and 2017 are
temporary except for the 2016 decline in Jack Co's ordinary shares. The valuation entry required at Dec.31,
2017 on Trading securities will involve:
a) no adjustment
b) a credit to Unrealized holding gain (equity) of P420,000
c) a credit to Unrealized holding gain (profit and loss) of P420,000
d) a debit to Unrealized holding loss (profit and loss) of P420,000
5) Assume that the investment categories remain the same and that all declines in 2016 and 2017 are
temporary except for the 2016 decline in Jack Cio's ordinary shares. The valuation entry on AFS securities
required at Dec. 31, 2017 will involve:
a) a credit of P400,000 to Unrealized holding gain (equity)
b) a credit of P400,000 to Unrealized Holding gain (profit and loss)
c) a debit of P400,000 to Unrealized Holding gain (equity)
d) no adjustment
account as follows:
nd the bonds
s of XY Company
7,200,000. For
. These assets
holders. Market
? _____________
y shares of XY Co.
ry, will involve:
es were acquried
ry, will involve:
the indicated
red at Dec.31,
AFS securities
