JOSE RIZAL UNIVERSITY

ACCOUNTANCY asa cpa

INVESTING CYCLE

Learning Objectives:
At the end of the learning activities, the student should be able to:
1. Describe the functions and related activities involved in investing cycle.
2. Discuss the procedures in an auditor’s consideration of an entity’s internal control
system related to the investing.
3. Describe the nature of the substantive audit procedures involved in the audit of
investments.

T
OVERVIEW OF THE INVESTING CYCLE
he inventory cycle transactions involving cash outflows to acquire financial
instruments (debt or equity) like trading and available for sale securities or held-to-
maturity securities and cash inflows derived from disposal of securities and
realization of periodic earnings (interest or dividends).

CONSIDERING THE INTERNAL CONTROL

A
AUTHORIZATION
ll investment acquisitions and sales should require specific authorization by the
board of directors or its investment's committee because it requires substantial
amounts. Investment made without regard to management's policies could expose
the company's high-risk venture that may result to significant losses.

T
CUSTODY
he company should have a designated custodian who has physical control over its
investment securities. To reduce the risk of losses, theft, or damage, the securities
should be kept in a reproof sale or vault and access to them should be restricted to
the custodian. The absence of physical control over investment securities is an
invitation to fraud because any can take and sell them. If the loss cannot be recovered, both
investment and income are overstated.
If investment securities are to be kept externally, an independent party (banks,
brokerage firm or trust company) may be designated as company's custodian. Since
custodian does not have direct access/contact with company personnel who maintain
investment records, possibility of concealing fraud is minimized.
Any withdrawals of securities in the hands of an outside custodian should be made by
at least two designated high-ranking company officials.

I
RECORDKEEPING
nvestment subsidiary records may not be maintained if there is only a small number of
investment transactions. In these instances, investments can be properly accounted for
and controlled through GL account. The need to maintain detailed records of
investments arises when the company has a large number of investments. Each
investment will have a subsidiary record that shows its specific description (common or
preferred), certificate serial number, the name in which it is registered and its cost.
To ensure accuracy, the investment subsidiary records should be reconciled to related
GL control account on a periodic basis. Differences should be promptly and adequately
investigated and adjustments if any, should be made. An individual other than the
 JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

subsidiary record clerk, person who maintains control account, the custodian of securities or
one who is involved in cash activities, should perform the reconciliation.
Periodic securities count and reconciliation with investments records to verify existence
and check the accuracy of investment records. An individual that does not perform tasks,
which are enumerated above, odes this on a surprise basis. Differences should be promptly
and adequately investigated and adjustments, if any, should be made.

PERIODIC SECURITIES COUNT AND RECONCILIATION

WITH INVESTMENT RECORDS

O
n a surprise basis by individual other than the securities custodian, the person that
maintains the control accounts, the subsidiary records clerk, and those involved in the
activities should perform a physical count of securities on hand periodically.

During the count, a count sheet (list of securities on hand) should be prepared. It includes
details like specific description, name of the entity represented by the certificate, name of
which is registered, interest or dividend rate, due date (bonds), certificate serial number,
face or par value, and number of shares.

The details above should be compared to the investment subsidiary records and to the
related general ledger control account. Differences should be promptly and adequately
investigated.

Securities that are entrusted to third parties for custodianship or as collateral, evidence of its
existence can be obtained through confirmation procedures.

SAT OF INVESTMENTS AND RELATED ACCOUNTS

T
he audit of investment securities typically involves analytical review procedures and
one or more tests of details. The following table presents the specific audit objectives
and the appropriate audit procedures for management assertions:

ASSERTIONS SPECIFIC AUDIT SUBSTANTIVE TESTS

OBJECTIVES
 Existence or occurrence  All securities that exist  Securities count
 Rights and are owned by the  Confirmation
 Completeness company and are properly  Analytical review
 Valuation recorded. procedures
 Revenues, gains and  Analyses of accounts
losses are properly  Recalculations
recorded.  Vouching
 Valuation is in conformity  Inquiries
with PAS/PFRS. Decline in
 Presentation and market value is properly
Disclosures accounted.  Evaluation of market
 Pledged securities are value adjustments
properly identified and  Analytical review
disclosed. procedures
 Financial statement  Inquiries as to securities
presentation is pledged.
appropriate and  Review of loan
disclosures are adequate. agreements for pledging
 Confirmation of pledged
marketable securities
 JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

 Review financial
statements presentation
and disclosures for
compliance with PAS/PFRS

ANALYSIS OF CHANGES IN INVESTMENT SECURITIES

The analysis should include columns for purchases, sales, and other dispositions of securities
during the year, as well as the balances of investments at the end of the current year. In
addition, 1) unrealized holding loss of available for sale securities beginning balance and
changes of which should be included in the information; 2) analysis of income; proceeds
from sales and other dispositions including gains and losses; market values at the end of the
period are part of the information.

Beginning balances can be traced to prior year’s working paper while the ending balance,
are verified through: 1) reconcile to the related GL accounts; 2) physical count; 3)
confirmation to other parties; and 4) comparison of market values of securities with
published sources.

Purchases, sales, and other dispositions of securities during the audit period should be
vouched to supporting documentation like brokers’ advices. Traced amounts received from
sales to the cash receipts books or bank statements. Prices paid or received can be
compared with quoted market prices at transaction dates.

Interest earned, received and accrued can be verified thru independent calculations using
information provided from the ledger or indicated in the certificates or confirmations.

Other Substantive Tests

1. Analytical review procedures. It involves comparison of account balances from prior
period to current period including actual with budget. Relate changes to unrealized
holding losses of available-for-sale securities to its market values and dispositions.
Compare average yield to expected yield for each type of investment.
2. Securities count. The custodian of the client should be present at all times; the client’s
representative should acknowledge in writing that the securities were returned intact;
prepare a list of securities counted including signatures of individuals who counted the
securities; and during the count, the exact names and descriptions of securities should
be verified (check by noting the signatures, corporate seal in the investment
certificates).
3. Confirmation of securities held by third parties. A positive confirmation should be sent to
the custodian to prepare a detailed list of securities owned by the client including
information about any amounts due to or from the custodian.
4. Test of carrying values and evaluation of accounting methods. Comparison of carrying
value (cost) with market values of the investment securities.
5. Review of financial statements presentation and adequacy of disclosures.
 JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

PROBELM 1
During 2017, MAYE Company purchased marketable securities as a trading investment. For
the year ended December 31,2017, the company recognized an unrealized loss of P230,000.
There were no security transactions during 2018. Pertinent information at December
31,2018 is as follows:

Security Cost Market Value

AYE-AYE P 2,450,000 P 2,300,000
YAE-YAE 1,800,000 1,820,000

P 4,250,000 P 4,120,000

REQUIRED: Compute the correct balance of investment account on December 31,2017.

 JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

PROBLEM 2
During 2017, MAHAL Company purchased trading securities. The cost and market value at
December 31,2017 were as follows:

Securities # of Shares Unit Cost 2017 Market 2018

Value Market
Value
ANNA 1,000 P 280.00 P 340,000 P 350,000
RACHEL 10,000 170.00 1,530,000 -
AMOR 20,000 157.50 2,950,000 3,000,000
1)

The client company sold 10,000 shares of RACHEL stock on January 15,2018, for P150 per
share, incurring P150,000 in brokerage commission and taxes. The client recorded this
transaction by crediting the investment account at the amount of proceeds net of incidental
costs.

REQUIRED: Compute the Investment balance and prepare audit adjusting journal entries on
December 31,2018.

PROBLEM 3
The following account appears on the books of ELOHIM Company. Prepare any necessary
correcting entries, assuming that the debt investment is held – to – maturity securities.
 JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

Date Transactions Unit Cost Debit Credit

8/01/08 Purchased 10 bonds at 90 plus
interest of P400 P 900 P 9,400

10/01/0 Received P600 interest P 600

8
Sold 5 bonds, sales price plus
11/01/0 interest, less commission 4,400
8

PROBLEM 4
The following transactions for the investments of GOD’SGLORYUNFOLD Company (your
client) took place in 2015, these are classified as Available for sale securities:
 JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

Date Transactions
02/10 The client company acquired 1,000 shares of Glory Co. common stock
at P88 per share.

03/31 Glory issued a 10% stock dividend to common stockholders.

06/30 Glory issued rights to common stockholders for the acquisition of one
additional share at P90 for every shares held. The common stock was
trading ex – rights at P114 a share and rights had a market value of P6
per right.
07/13
The client exercised 1,000 rights to acquire new shares.
07/20
The remaining 100 rights were sold for P5.50 each.
10/12
The client sold 400 shares of Glory common stock for P30,000. The
shares sold were specifically identified as being from those acquired on
February 10.

Required: Based on the foregoing data, compute the following:

1) Gain or loss on sale of stock rights
2) Gain or loss on sale of stock
3) The correct balance of investments.

PROBLEM 5
You are engaged to audit the marketable securities of BATCH215 Company. In your inquiries,
the accountant presented to you the account of investments.
 JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

Date Particulars Debit Credit

2015
01/01 Beginning balance P 75,000

03/15 Purchased 2,000 shares of GRAZE common at

P100 per share P2,000 for commission 200,000

04/10 Sold 50 shares of BARTOLMS Co. at P10 per

share, less P15 for commission P 500

06/30 Received 50% stock dividend from BART Co. P 4,950

07/15 Received 50% stock dividend from RICH, Inc. 5,400

07/31 Sold 100 shares of Rich, Inc. at P30 each, P30

commission P 3,000

10/01 Purchased 10 BERTOLDS Bonds at 110, plus

interest accrued to date; commission 11,500
amounted to P110
11/15
Proceeds from sale of 200 shares of GRAZE; 26,000
no commission involved
12/01
Proceeds from sale of 4 bonds at 105,
including interest to date; commission 4,240
involved amounted to P42
12/30
Sold 50 shares of BARTOLMS at P20 per 1,000
share, no commission involved

Additional information that were found helpful to your analysis are as follows:
1) Beginning balance (agrees with your working papers last year)
a. BARTOLMS CO., COMMON – 5,000 shares P 11,000
b. RICH, INC., COMMON – 900 shares 19,000
c. YLEVOL Corp., COMMON – 15,000 shares 45,000
2) Commission were recorded as expense
3) Details of BERTOLDS Bonds:
a. Face value P 1,000 per bond
b. Interest rate 12%
c. Interest dates May 1 and November 1

Required:
Prepare the following:
1) Adjusting entries – December 31,2015
2) Working papers

Problem No. 6
ANYANG CORP., invested its excess cash in marketable equity securities during 2012. The
securities do not qualify as financial asset held for trading. Anyang Corp. has made an
irrevocable election to present in other comprehensive income subsequent changes in fair
 JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

value of its Investment securities. As of December 31, 2012, the company’s securities
portfolio consisted of the following.

Investee Company Shares Cost Fair Value

Kandong Inc. 30,000 P1,350,000 P1,275,000
Egoy Corp. 60,000 4,5000,000 4,830,000
Yoga Enterprises 60,000 6,480,000 6,900,000
Totals P12,330,000 P13,005,000

During the year 2013, Anyang Corp. sold 60,000 shares of Egoy Corp. for P4,800,000 and
purchased 60,000 additional shares of Kandong, Inc. and 30,000 shares of Kongga Company.

On December 31, 2013, Anyang Copr.’s portfolio of securities comprised the following:

Investee Company Share Cost Fair

s Value
Kandong, Inc. 30,000 P1,350,000 P1,500,00
0
Kandong, Inc. 60,000 3,900,000 4,350,000
Kongga Company 30,000 1,560,000 1,440,000
Yoga Enterprise 60,000 6,480,000 2,100,000
Totals P13,290,000 P9,390,00
0

During the year 2014, Anyang Corp sold all the Kandong, Inc. shares. Also 15,000 shares of
Kongga Company were sold at a loss of P270,000. The net realized gain on sale securities in
2014 amounted to P1,440,000. On December 31, 2014, Anyang Corp.’s portfolio of securities
consisted of the following:

Investee Share Cost Fair Value

Company s
Yoga Enterprises 60,000 P6,480,00 P12,600,00
0 0
Kongga Company 15,000 780,000 540,000
Totals P7,260,00 P13,140,00
0 0

1. For the year ended December 31, 2013, Anyang’s Statement of Comprehensive
Income should report unrealized loss of
2. What amount of unrealized loss should be reported in Anyang’s December 31, 2013
Statement of Changes in Equity?
3. How much was received by Anyang from the sale of its Investment in Kandong
securities in 2014?
4. Anyang’s Statement of Financial Position should report investment in equity securities
of
Dec.31, Dec.31, Dec.31,
2014 2013 2012
5. What amount should be reported as unrealized gain in Anyang’s Statement of
Changes in Equity for 2014?
 JOSE RIZAL UNIVERSITY
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Trading Securities (securities at fair value – profit/loss)

Specific Learning Objectives: At the end of the lesson, the students will be able to:
 Understand the nature and concepts of trading securities.
 Prepare journal entries for transactions affecting short-term marketable
securities.
 Understand the nature of the trading securities issues and their effect on
financial statement accounts.
 Identify financial statement presentation and required disclosures relating to
inventories.

Investments
Investments are assets held by enterprise for the accretion of wealth through distribution such as interest,
royalties, dividends and rentals, for capital appreciation or for other benefits to the investing enterprise
such as those obtained through trading operations. These investments are classified as long-term or
short-term depending on their maturity dates.

Financial instruments are contract that gives rise to both financial asset and financial liability of another
enterprise.

Trading securities are generally purchased and sold in the exchange market to generate short-term gains
or profits. These are: (1) inventories of stock securities for sale held by brokers (2) active and frequent
for buying and selling securities held by banks in order to generate profits.

Securities at fair value – other comprehensive income

Securirities - OCI are purchased and held indefinitely and available to be sold when the need for liquid
funds arises during the operating cycle. Securities at amortized cost are debt securities with fixed or
determinable payments and fixed maturities that enterprise has the positive intent and ability to hold to
maturity. IFRS 9 Provides that financial assets are initially recorded at cost, however, subsequent to the
acquisition, these assets are recorded as follows:
 Trading securities are reported at fair value;
 Securities at fair value – OCI are reported at fair value;
 Securities at amortized cost (net of discount, premium and impairment);
 Loans and receivable originated by the enterprise and not held for trading are reported at amortized
cost less impairment; and
 Financial assets of which fair value cannot be reliably measured are also reported at amortized cost
less any impairment in value.

Accounting for Stock Rights and Stock Split

Nature and Concepts. The acquisition of equity securities for the purpose of accruing income through
dividends and increase in market value or controlling another enterprise. Equity securities represent
ownership shares such as common and preferred stock, it may also represent rights, and options to
acquire additional shares.

Transactions Recognition Measurement Valuation

1. Receipt of Dividend
1.1 Cash Part of Income D/S(# of S) Face value
1.2 Property Part of Income CV or Cost CV/Cost
1.3 Stock MEMO Increases # of S Cost is
unchanged
2. Receipt of Rights MEMO MV Allocated Cost
3. Stock Split MEMO Increases # of S Cost is
 JOSE RIZAL UNIVERSITY
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1. Hilton, Inc. has trading securities purchased during 2013. At the end of 2013, the securities had total
market value of P525,000. As of December 31, 2014, the records show cost and market values as
follows:
Investment Cost Market Value
1 P100,000 P 90,000
2 190,000 210,000
3 250,000 235,000
The gain or loss that would be reported in profit or loss as a result of the valuation of the securities at the
end of 2014 is
a. P 5,000 b. P10,000 c. P20,000 d. P25,000
2. On January 1, 2013, the Pacita Corporation purchased marketable equity securities to be held as
trading for P2,000,000. The company also paid commission, taxes and other transaction costs
amounting to P50,000. The securities had the following market values at December 31, 2013 and
2014, respectively: P1,750,000 and P2,100,000. No securities were sold during 2013. What amount
of unrealized gain or loss should be reported in the 2013 profit or loss section of the statement of
comprehensive income?
a. P200,000 loss b. P250,000 loss c. P50,000 gain d. P100,000 gain
3. On January 1, 2013, the Pacita Corporation purchased marketable equity securities for P2,000,000.
The company also paid commission, taxes and other transaction costs amounting to P50,000.
Because the securities were acquired not for immediate trading, Pacita exercised its option to
measure the change in fair value through other comprehensive income. The securities had the
following market values at December 31, 2013 and 2014 respectively: P1,750,000 and P2,100,000.
No securities were sold during 2013 or 2014. What amount of unrealized gain or loss should be
reported in the December 31, 2014 statement of financial position as a component of shareholders’
equity?
a. P200,000 unrealized loss b. P250,000 unrealized loss
c. P50,000 unrealized gain d. P100,000 unrealized gain
4. Silahis Trading made investments in non- trading equity ecurities. The cumulative “Holding Gain or
Loss” account has a debit balance of P12,900 at December 31, Year 1. An analysis of the
investments on December 31, Year 1 showed the following
No. of Shares or Face Value Cost Fair Value
Asia Textile ordinary 600 shares P307,500 P270,000
S- Mart, Inc. ordinary 225 shares 76,500 90,000
RJ Company ordinary 2,000 shares 269,500 280,600
P653,500 P640,600
On July 1, Year 2, the shares of S- Mart were sold for P70,000. The balance of the equity pertaining
to these shares was transferred to the retained earnings account. On December 31, Year 2, Asia
Textile shares were quoted at P440 per share; RJ shares were quoted at P138 per share. How much
is the required debit to other comprehensive income account at the end of Year 2?
a. P43,500 b. P37,000 c. P30,600 d. P10,600
5. Bayview Company bought 1,000 shares of PLDT shares as equity investments at fair value on
January 10, Year 2 at P150 per share and paid P2,250 as brokerage fee. On December 5, Year 1, a
P10 dividend per share of PLDT had been declared to be paid on April 30, Year 2 to shareholders of
January 31, Year 2. There were no other transactions in Year 2 affecting the investment in PLDT.
At what amount should the investment in equity securities be initially recognized on January 10, Year
2?
 JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

a. P142,250 b. P150,000 c. P152,250 d. P162,250

6. On December 30, 2012, Aloha Company purchased 10,000 ordinary shares of Sun Valley
Corporation at P150 per share. At the time of the purchase, Sun Valley has an outstanding 50,000
shares with a total shareholders’ equity of P7,500,000. For the year 2013, Sun Valley reported profit
of P3,000,000. On December 30, Aloha received a cash dividend of P50 per share. Aloha uses
the equity method. What is the investment carrying value at December 31, 2013?
a. P2,600,000 b. 2,100,000 c. P1,600,000 d. P1,500,000
7. During Year 1, Peninsula Corporation acquired, financial asset at fair value through profit or loss,
ordinary shares of RPP Company as follows:
Lot Date No. of Shares Cost Per Share Total Cost
A January 25 800 P560 P448,000
B April 5 600 600 360,000
RPP Company effected a 20% bonus issue on February 14, Year Stock rights on ordinary shares
were issued on October 30, Year 1, entitling holders to purchase one new ordinary share at P450 for
each ten shares held. On this date, the stock ex-rights were being traded at P620 per share. On
November 8, Year 1, Peninsula sold 500 rights that pertained to Lot A. Sales price was P20.00 per
right. The corporation paid a brokerage fee of P 500 on the sale of the stock rights. Peninsula
exercised the remaining rights on November 11.Year 1. Fair value of each share on December 31
was P650.How many new ordinary shares of RPP were acquired by Peninsula through the exercised
of the rights?
a. 168 shares b. 140 shares c. 118 shares d. 106 shares
8. Use the same information given in MC24. How much total
income from investments shall Peninsula Corporation report
during Year 1?
a. P9,500 .b. P18,020 c. P27,520 d. P28,020
9. Holiday, Inc. had the following transactions in the ordinary
shares of May Corporation :
January 5 Bought 4,000 ordinary shares, P100 par, at 88.
June 15 Received 10% bonus issue.
August 31 Received P4 cash dividend for each ordinary share.
October 10 Received stock rights to buy one new share at P100 for every 5 shares held.
Market value of stock ex-right, P156.
November 15 Sold all stock rights at P4 per right.
What is the revised cost per share after receipt of the bonus issue?
a. P75 b. P80 c. P85 d. P90
10. On January 1, 2013, IBM Company paid P1,200,000 for 40,000 ordinary shares of Apple Corp., which
represent a 25% investment in the net assets of Apple. IBM has the ability to exercise significant
influence over Apple. IBM received a dividend of P3 per share from Apple in 2013. The reported profit
of Apple for the year ended December 31, 2013 was P640,000. The balance of IBM’s Investment in
Apple at December 31, 2013 should be
a. P1,200,000 b. P1,240,000 c. P1,360,000 d. P1,480,000
11. On December 31, 2013, Year 1 Penthouse Company held 1,000 ordinary shares of X Co. in its
portfolio of long-term investments in equity securities. The shares were designated as at fair value
through other comprehensive income. The shares had a cost of P150 per share and had a market
value of P130 per share at Dec. 31, Year 1. During Year 2, Penthouse acquired the following
investments, all of which were designated as at fair value through other comprehensive income: 900
ordinary shares of Y Co. for P180 per share and 800 ordinary shares of Z Co. for P220 per share. At
the end of Year 2, market values per share were: X - P140; Y - P170; Z – P140. The adjusting entry
on December 31, Year 2 would
a. increase unrealized loss by P35,000
b. increase unrealized loss by P15,000
c. decrease unrealized loss by P20,000
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d. decrease unrealized loss by P15,000

12. Use the same information given in MC28. What is the net unrealized loss account balance reported in
the shareholders’ equity section of Penthouse’s statement of financial position at December 31, Year
2?
a. P35,000 b. P20,000 c. P15,000 d. P0
13. On January 1, 2013, Inkjet Co. acquired 40% of GIC Company by purchasing 8,000 shares for
P1,440,000. On the date of acquisition, Inkjet calculated that its share of the excess of the fair value
over the book value of GIC’s depreciable assets was P150,000 and that the purchased goodwill was
P120,000. At the end of 2013, GIC reported profit of P450,000 and paid dividends of P7.00 per share.
Inkjet depreciates depreciable assets over a 2-year remaining life. What is the amount of income
Inkjet would report from its investment in GIC for the year ended December 31, 2013?
a. P172,000 b. P167,000 c. P105,000 d. P 56,000
14. On April 1, 2011, Village Company purchased 25,000 ordinary shares of Sulo Co. at P180 per
share, which reflected book value as of that date. At the time of the purchase, Sulo had 100,000
ordinary shares outstanding. Village had no ownership interest in Sulo before the purchase. The first
quarter statement ending March 31, 2011 of Sulo recorded earnings of P480,000. For the year ended
December 31, 2011, Sulo reported profit of P2,400,000. Sulo paid Village dividends of P60,000 on
June 1and again P60,000 on December 31, 2011. During 2012, Sulo reported profit of P2,000,000
and paid dividends of P2,000,000 to its shareholders. On January 1, 2013, Village sold 10,000
ordinary shares of Sulo for P200 per share. For the year ended December 31, 2013, the reported
profit of Sulo was P2,500,000 and dividends of P60,000 were paid to Village. The market value of
Sulo shares remained unchanged during the year 2013. The carrying value of Village investments in
Sulo on December 31, 2011 was
a. P4,860,000 b. P4,980,000 c. P4,500,000 d. P3,900,000
15. Use the same information given in MC31. The carrying value of Village investments in Sulo on
December 31, 2013 was
a. P3,000,000 b. P2,988,000 c. P2,961,000 d. P2,916,000
16. Use the same information given in MC31. The gain of Village on the sale of 10,000 ordinary shares of
Sulo was
a. P200,000 b. P 56,000 c. P 8,000 d. P 0
17. On January 1, 2013, Admiral Company purchased 10,000 ordinary shares of LTS Corp., a large,
publicly-traded company listed on a major stock exchange. In December, LTS distributed a 20%
bonus issue when the par value was P100 per share and the market value was P500 per share. How
much income should Admiral Co. report?
a. P0 b. P200,000 c, P1,000,000 d. P4,000,000
18. Carlston, Inc. purchased 10%, of Toy Co.’s 100,000 outstanding ordinary shares on January 1, 2013,
for P500,000. On December 31, 2013, Carlston purchased an additional 20,000 shares of Toy for
P1,500,000. The market price of the shares previously held by Carlston was P750,000 on this date.
Toy had not issued any additional share during 2013. Toy reported earnings of P3,000,000 for 2013.
What amount should Carlston report in its December 31, 2013, statement of financial position as
investment in Toy?
a. P1,700,000 b. P2,000,000 c. P2,250,000 d. P2,300,000
19. Las Palmas, Inc. bought 40% of Adams’ outstanding ordinary Shares on January 2, 2013, for
P4,000,000. The carrying amount of Adams net assets at the purchase date totaled P9,000,000.
Fair values and carrying amounts were the same for all items except for plant and inventories, for
which fair values exceeded their carrying amounts by P9,000,000 and P100,000, respectively. The
plant has an 18-year life. All inventories were sold during 2013. During 2013, Adams reported profit of
P1,200,000 and paid a P200,000 cash dividend. What amount should Las Palmas report in its
statement of Comprehensive income from its investment in Adams for the year ended December 31,
2013?
a. P480,000 b. P420,000 c. P360,000 d. P320,000
 JOSE RIZAL UNIVERSITY
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20. Use the same information given in MC36. What is the investment carrying value reported in Las
Palmas’ statement of financial position at December 31, 2013?
a. P4,400,000 b. P4,380,000 c. P4,340,000 d. P4,000,000
21. Hope Company bought 20% of Prudence Company’s ordinary share on January 1, 2013 for
P3,700,000. The carrying amount of Prudence’s net assets at purchase date totaled P16,000,000.
Fair values and carrying amounts were the same for all items, except for land and inventory, for which
fair values exceed their carrying amounts by P3,000,000 and P1,000,000 respectively. All inventories
at January 1, 2013 were sold during 2013. During 2013, Prudence reported profit of P5,500,000 and
paid P1,500,000 cash dividend.
What amount should Hope report as income from investment in its 2013 profit or loss section of the
statement of comprehensive income?
a. P300,000 b. P900,000 c. P1,100,000 d. P1,200,000
22. Use the same information given in MC38. What amount should Hope report as investment in
associate on December 31, 2013?
a. P3,700,000 b P4,300,000 c. P4,500,000 d. P4,600,000
23. On September 1, Year 2, the Lucky Company acquired P1,000,000 faced value, 12% bonds of Key
Company at 104. The bonds were dated May 1, Year 2, and mature on April 30, year 5, with interest
payable each October 31 and April 30. The company did not elect to measure the securities at fair
value. What entry should Lucky make to record the purchase of the bonds on September 1, Year2?
Debit Credit
a. Debt Investments 1,040,000
Interest Receivable 40,000
Cash 1,080,000
b. Debt Investments 1,080,000
Cash 1,080,000
c. Debt Investments 1,080,000
Interest receivable 40,000
Cash 1,040,000
d. Debt Investments 1,000,000
Premium on Debt Investments 80,000
Cash 1,080,000
24. On July 1, Year 2, Marvelous Company purchased P10 million of West Company’s 8% bonds due on
July 1, Year 10. Based on the company’s business model for the portfolio of investments, Marvelous
designates the bonds as investments measured at amortized cost. The bonds, which pay interest
semiannually on January 1 and July 1 were purchased for P8,750,000 to yield10%. In this
statement of comprehensive income for the year ended December 31, Year 2, Marvelous should
report interest income of
a. P350,000 b. P400,000 c. P437,500 d. P500,000
25. On July 1, Year 2, Superb Company purchased 4,000 of the P1,000 face amount, 8% bonds of Oat
Corp. for P3,692,000 to yield 10% per annum. The bonds, which mature on July 1, Year 5, pay
interest semiannually on January 1 and July 1. Superb classifies the securities as at amortized cost.
What is the investment carrying value at December 31, Year 2?
a. P3,975,400 b. P3,741,000 c. P3,716,600 d. P3,667,400
26. Use the same information given in MC42. How much is the interest revenue reported by Superb in its
statement of comprehensive income for year ended December 31, Year 2?
a. P200,000 b. P190,800 c. P184,600 d. P160,000
27. On January 1, Year 2, Grand Company purchased as held for collection investments P1,000,000 face
value of Greek Company’s 8% bonds for P912,400. The bonds were purchased to yield 10% interest
annually on January 1. What amount should Grand report on its December 31, Year 2 statement of
financial position for held for collection investment?
a. P1,000,000 b. P 923,000 c. P 912,000 d. P 901,000
 JOSE RIZAL UNIVERSITY
ACCOUNTANCY asa cpa

28. On June 1, Year 1, Fantastic Company purchased as held for collection securities 8,000 of the
P1,000 face value, 8% bonds of Universe Company for P7,383,000. The bonds were purchased to
yield 10% interest. Interest is payable semiannually on December 1 and June 1. The bonds mature
on June 1, Year 5. On June 1, Year 2, Fantastic sold the bonds for P7,850,000. This amount includes
the appropriate accrued interest. What is the gain or loss on the sale of the bond investment?
a. P368,700 b. P366,240 c. P 48,700 d. P 46,242
29. On July 1, 2012, Sprakenheit Company purchased P500,000 face value Swazzeg Company 8%
bonds for P455,000 plus accrued interest to yield 10%. The bonds were designated as at fair value
through profit or loss. The bonds mature on January 1, 2016 and pay interest annually on January 1.
On December 31, 2012,the bonds had a market value of P472,500. On February 14,2013,
Sprakenheit sold the bonds for P460,000 plus accrued Interest. On its December 31, 2012 statement
of financial position, what amount should Sprakenhheit report as debt investments?
a. P455,000 b. P457,750 c. P460,000 d. P472,500
30. Use the same information given in MC46. What is the interest income reported by Sprakenheit for the
year 2012?
a. P18,200 b. P20,000 c. P22,750 d. P25,000
31. Use the same information given in MC46. What is the gain (loss) on the sale of the securities in
2013?
a. P12,500 b. P 5,000 c. P (5,000) d. P (12,500)
32. ** Shangri-La bought the shares of Crossing, Inc. (classified as available for sale) as follows:
June 10, 2012 2,000 shares at P100 P200,000
December 5, 2012 3,000 shares at P120 P360,000
P560,000
The following were the transaction for 2013:
January 10 Received cash dividend at P10 per share
June 20 Received 20% bonus issue
December 10 Sold 3,000 shares at P120 per share
How much is the gain on the sale of the shares assuming the average cost approach is used?
a. P 0 b. P 60,000 c. P 80,000 d. P100,000
33. ** Use the same information given in MC49, assuming that the first-in, first-out method of identifying
the shares sold was used, how much is the gain on the sale of the shares?
a. P0 b. P 60,000 c. P 80,000 d. P100,000