AUDIT OF INVESTMENTS

VARIOUS CLASSIFICATIONS OF INVESTMENT

1) Financial instruments at “fair value through profit or loss”

“Fair value through profit or loss” means that at each balance sheet date the asset or liability is re-
measured to fair value and any movement in that fair value is taken directly to the income
statement.

2) Fair value through other comprehensive income —financial assets are classified and measured at
fair value through other comprehensive income if they are held in a business model whose objective
is achieved by both collecting contractual cash flows and selling financial assets.

3) Investment in associate refers to the investment in an entity in which the investor has significant
influence but does not have full control like a parent and a subsidiary relationship. Usually, the
investor has a significant impact when it has 20% to 50% of shares of another entity.

4) Financial Asset at Amortized Cost

Amortized cost applies to debts that meet the following criteria:
a) A contractual cash flow of financial assets which are on repayment plans of principals and
interests that occur on scheduled dates.
b) A business model of companies that own assets to collect their contractual cash flows instead of
selling.
 ILLUSTRATIVE PROBLEMS
Problem 1
The following data pertains to UMUSTKNOW Corporation’s investments in marketable securities:
Fair Value (Market Value)
Securities Cost 12/31/22 12/31/21
Financial Asset at Fair Value through Profit &
Loss (FA @ FV – P&L)/Trading Securities P 150,000 P 155,000 P 100,000
Financial Asset at Fair Value through Other
Comprehensive Income (FA @ FV –
OCI)/Available-for-Sale P 150,000 P 130,000 P 126,000

Required:
1) What amount should UMUSTKNOW Corporation report as unrealized holding gain in its 2022
statement of income?
a) P 65,000 c) P 55,000.
b) P 60,000 d) P 50,000
2) What amount should UMUSTKNOW Corporation report as unrealized loss on marketable
equity securities at December 31, 2022, in cumulative (accumulated) other comprehensive income
in stockholders’ equity?
a) P 20,000. c) P 10,000
b) P 13,000 d) P 0
Solution 1. C Solution 2. A
Market value – 1/1/2022 P 100,000 Cost P 150,000
Market value – 12/31/2022 155,000 Market value – 12/31/2022 130,000
Unrealized holding gain P 55,000 Unrealized holding loss P 20,00
Problem 2
The following information pertains to NOWORNEVER, Inc.’s portfolio of marketable investments for the
year ended December 31, 2022:
Fair Value 2022 Activities Fair Value
Securities Cost 12/31/2021 Purchases Sales 12/31/2022
Financial Asset @ Amortized
Cost (Held-to-maturity)
Security ABC P 100,000 P95,000
Financial Asset @ Fair Value
Through Profit & Loss
(Trading Security)
Security DEFP P 150,000 P 100,000 P 155,000
Financial Asset @ Fair Value
Through Other
Comprehensive Income
(Available-for-sale)
 Security GHI P 190,000 P 165,000 P 175,000
 Security JKL 170,000 175,000 P 160,000
Security ABC was purchased at par (face value). All declines in fair values are considered
to be temporary

Required:
1) The carrying value of security ABC at December 31, 2022 is?
a) P 95,000 c) P 100,000.
b) P 98,000 d) P 105,000
2) The carrying value of security DEF at December 31, 2022 is?
a) P 100,000 c) P 150,000
b) P 120,000 d) P 155,000.
3) The recognized gain or (loss) on sale of security GHI is
a) P (40,000) c) P (15,000)
b) P (25,000) d) P (10,000)
5) The unrealized holding gain or (loss) to be reported in 2022 net income is
a) P 55,000. c) P 15,000
b) P (25,000) d) P (5,000)
6) Unrealized gain or loss to be reported at December 31, 2022, as a separate component of
stockholders’ equity entitled “cumulative (accumulated) other comprehensive income” is
a) P (20,000) c) P (10,000)
b) P 15,000 d) P 5,000

Solution
1) C Cost since the security is considered as4) C
Financial Asset @ Amortized Cost (Held-to- Selling Price P 175,000
maturity) which is measured at amortized Cost 190,000
cost and not at fair value (market value). Loss P( 15,000)
Moreover, acquired at face value (with no(sales proceeds is always compared with the cost
discount and premium to be amortized) to determine any gain or loss)
2) D measured at fair value (market value) at5) A
reporting period (year-end) Market value – 1/1/22 P 100,000
Market value – 12/31/22 155,000
Unrealized holding gain P 55,000
(Prior year’s market value is compared with the
current year’s market value)
3) A measured at fair value (market value) at 6) C
reporting period (year-end) Cost P 170,000
Market value – 12/31/22 160,000
Net Unrealized holding gain (loss) P 10,000
Unrealized holding gain for 2021 P 5,000
Unrealized holding loss for 2022 (15,000)
Cumulative compre. income (loss P (10,000)
 MULTIPLE CHOICE PROBLEM

At December 31, 2022, MOVINGUP Corporation had the following investments that were purchased
during 2020, its first year of operations:

Securities Cost Fair Value

1) Financial Asset @ Fair Value through Profit & Loss
(Trading Securities)
 Security A P 700,000 P 725,000
 Security B 210,000 200,000
Totals P 910,000 P 925,000
2) Financial Asset @ Fair Value through Other
Comprehensive Income (Available-For-Sale
Securities)
 Security C P 500,000 P 560,000
 Security D 850,000 865,000
Totals P 1,350,00 P 1,425,000
3) Financial Asset @ Amortized Cost (Held-to Maturity)
 Security E P 970,000 P 980,000
 Security F 412,000 409,000
Totals P 1,382,000 P 1,389,000

No investments were sold during 2022. All securities except Security D and Security F are considered
short-term investments. None of the market changes is considered permanent

Required:
1) The amount of investment to be reported as current assets is:
a) P 2,465,000 c) P 2,380,000
b) P 2,455,000. d) P 1,485,000
2) The amount of investment to be reported as non-current assets is:
a) P 1,389,000 c) P 1,277,000.
b) P 1,382,000 d) P 1,274,000
3) The unrealized gain (or loss) component of income before taxes is:
a) P 15,000. c) P 97,000
b) P 75,000 d) P 100,000
4) The unrealized gain (or loss) component of shareholders’ equity is:
a) P 82,000 c) P 60,000
b) P 75,000. d) P 12,000
Solution:
1) B 3) A
Security A P 725,000 at mv FA @ FV – P&L – cost P 910,000
Security B 200,000 at mv FA @ FV – P&L – mv 925,000
Security C 560,000 at mv Holding gain P 15,000
Security E 970,000 at cost
Total P 2,465,000
2) C 4) B
Security D P 865,000 at mv FA @ FV - OCI – cost P 1,350,000
Security F 412,000 at cost FA @ FC - OCI – mv 1,425,000
Total P 1,277,000 Holding gain P 75,000