Auditing Investments 1

AUDITING-INVESTMENTS
Prob. 1) Wright t Company was established with a P1,000,000 cash investment by owners on Jan. 1, 2019
and entered into the following transactions during 2019:
Sales 2,700,000
Cash expenses (2,100,000)
Purchase of building on Jan. 1 600,000
Purchase of trading securities 500,000
Sale of trading securities (cost , P100,000) 220,000
Purchase of available for sale securities 400,000
Sale of available for sale securities (cost, P100,000) 30,000
Additional information:
Balance in accounts receivable on Dec. 31 250,000
Depreciation expense for the year 70,000
Market value of remaining trading securities on Dec. 31 260,000
Market value of remaining AFS securities on Dec. 31 380,000
Instructions: 1) Prepare an income statement for 2019.
2) Prepare a complete statement of cash flow for 2019. Use the indirect method of reporting
cash from operating activities.
3) Prepare a Statement of Financial Position as of December 31, 2019
Problem 2- Kiwi Company invested in a debt instrument on July 1, 2016+. At this date, the cost and fair
value of the instrument is P1,000,000. The company's practice is to buy securities to be available for
sale when circumstances warrant. The following table sets out the changes in the fair value of
the debt instrument and the nature of the changes in each year:
Year Fair Value Change Nature of Change
2017 (P100,000) no objective evidence of impairment
2018 (P200,000) objective evidence of impairment
2019 P15,000 objective evidence of reversal of impairment
1) The impairment loss to be recognized in 2017 is __________________
2) The impairment loss to be recognized in 2018 is __________________
3) The amount of reversal of impairment loss to be recognized in profit and loss in 2019 is ______________.
4) At the end of 2019, the AFS security should be stated at ____________________________
5) Assume the same facts, except that the investment is in equity security. At the end of 2019, the amount of
impairment loss reversal to be recognized in profit and loss is __________________________
Problem 3: During 2019, Watermelon Co. purchased P10M of 5-year, 8% bonds issued by XYZ Company.
Watermelon intends and is able to hold these bonds to maturity. However, after it acquired the bonds at par,
Watermelon sold 10% of the bond portfolio for P950,000. The cost and the fair value of the remaining held-to-
maturity portfolio were P9M and P8.55M,respectively.
1) What amount of gain or loss should Watermelon recognize on the sale of the bonds? __________________
2) The remaining held-to-maturity portfolio should be transferred to:
a) AFS at fair value of P8.55M c) AFS at cost of P9M
b) Trading securities at FC of P8.55M d) Trading securities at cost of P9M
Problem 4: The following investment-related transactons were completed by Daffodil Company during 2018.
a) Purchased P3,000,000 of AB Company 7% bonds, paying 102.5 plus accrued interest of P52,500. In
addition, the company paid brokerage fees of P10,000. Daffodil classified these bonds as a trading security.
b) Purchased 30,000 shares of CD Company ordinary shares at P125 per share plus brokerage fees of
P30,000. Daffodil classified this stock as an AFS security.
c) Received semi-annual interest on the AB Company bonds.

d) Sold 4,500 shares of CD Company at P132 per share.
e)n Sold P480,000 of AB Company bonds at P102, plus accrued interest of P2,790.
1) The AB Company bonds should be initially measured and recognized at ______________

2) The realized gain or loss on the sale of AB Company bonds is ______________________
3) The realized gain or loss on the sale of CD Company stock is ______________________
4) The realized gain or loss on the sale of CD Company stock is ______________________
Problem 5: RST Company has purchased 100,000 shares of MNO Corp. at a cost of P1M which represents
10%b shareholding. RST Co. has the intent and ability to hold this investment for the long term and plans to
classify it as held-to-maturity and measure it at cost. In which of the following categories can the management
of RST Co. classify this investment in equity securities?
a) Held -to-maturity- Yes or No - _______________ c) Trading- Yes or No- _______
b) Available for sale- Yes or No- ________________
Problem 6: Cherry Company received dividends from its investments in ordinary shares during the year ended
Dec. 31, 2019, as follows:
a) Cash dividend of P720,000 is received from JJ Corp. (Cherry, Inc. owns a 2% interest in JJ)
b) Cash dividend of P3,600,000 is received from VV Corp (Cherry owns a 30% interest in VV)
c) A stock dividend of 18,000 shares from YY Company was received on Dec. 15, 2019, on which date the
quoted MV of YY's shares was P20 per share. Cherry,Inc. owns less than 1%b of YY's ordinary share.
What amount of dividend revenue should be reported by Cherry, Inc. in its 2019 income statement?
Problem 7- Pure Company purchased investment in bonds on Jan.1,2017. As of this date, the cost and fair
value is P1.0M. The bonds are classified as available for sale. On Dec.31,2017, the bonds were selling
at P90. Because of the signficant financial difficulty of the issuer, the bonds are considered impaired
on Dec.31,2018 when the bonds are quoted at P70. On Dec. 31,2019, the bonds are quoted at 95. The increase
in the fair value of the bonds is due to the improvement of the issuer's credit rating.
a)How much should be recognized in 2018 profit or loss as a result of the fair value change?
b) How much should be recognized in 2019 profit or loss as a result of the fair value changes?

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AUDITING-INVESTMENTS

c) Received semi-annual interest on the AB Company bonds.

1) The AB Company bonds should be initially measured and recognized at ______________

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