Solution To AP05 - Investments
Solution To AP05 - Investments
Solution To AP05 - Investments
The fair value of JR's investment in Judi securities is as follows: December 31, 2018,
P570,000; December 31, 2019, P525,000; December 31, 2020, P2,200,000.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
3. If the entity used the ‘fair value as deemed cost approach’ in accordance with PIC
Q&A No. 2019-06, the carrying amount of the investment in Judi Corp. as of
December 31, 2020 is
a. P2,200,000 c. P2,190,000
b. P2,195,000 d. P2,100,000
4. If the entity used the ‘accumulated cost approach’ in accordance with PIC Q&A
No. 2019-06, the carrying amount of the investment in Judi Corp. as of December
31, 2020 is
a. P2,200,000 c. P2,195,000
b. P2,198,125 d. P2,173,125
5. Which of the following provides the best form of evidence pertaining to the annual
valuation of an investment in which the independent auditor’s client owns a 30%
voting interest?
a. Market quotations of the investee company’s stock.
b. Current fair value of the investee company’s assets.
c. Historical cost of the investee company’s assets.
d. Audited financial statements of the investee company.
Questions 1 and 2
FA@FVTOCI
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1/13/18 Acquisition 500,000 :
12/31/18 Inc in FV 70,000 :
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12/31/18 Balance 570,000 :
: 12/31/19 Dec in FV 45,000
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12/31/19 Balance 525,000 :
Journal Entry:
12/31/18-Increase in FV
FA@FVTOCI 70,000
Unrealized Gain/Loss-OCI 70,000
12/31/18-Dividend
Cash 15,000
Dividend income 15,000
12/31/19- Decrease in FV
Unrealized gain/loss-OCI 45,000
FA@FVTOCI 45,000
12/31/19-Dividend
Cash 20,000
Dividend income 20,000
Investment in Associates
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01/02/20 Acquisition (30%)1,575,000 :
01/02/20 Reclassification 525,000 :
12/31/20 Net Income :
(550,000 x 40%) 220,000 : 12/31/20 Dividend 70,000
: 12/31/20 Deprec 55,000
12/31/20 Balance 2,195,000 :
========
Journal Entry
01/02/20 - Purchased an additional 30% of Judi's stock
Investment in Associates 1,575,000
Cash 1,575,000
12/31/20- Dividend
Cash 70,000
Investment in Associates 70,000
12/31/20- Depreciation
Investment income 55,000
Investment in Associates 55,000
Investment in Associates
------------------------------------------------------------------------------------------------------
01/02/20 Acquisition (30%)1,575,000 :
01/02/20 Reclassification 500,000 :
12/31/20 Net Income :
(550,000 x 40%) 220,000 : 12/31/20 Dividend 70,000
: 12/31/20 Deprec 51,875
12/31/20 Balance 2,173,125 :
========
Journal Entry
01/02/20 - Purchased an additional 30% of Judi's stock
Investment in Associates 1,575,000
Cash 1,575,000
Purchased cost 1,575,000
+ Reclass investment 12/31/2019 500,000
--------------
Total 2,075,000
-Book Value of acquired asset
(4,150,000 x 40%) 1,660,000
-------------
Excess to be depreciated
for eight years 415,000
Divide by 8 year 8 years
--------------
Yearly depreciation 51,875
========
12/31/20- Dividend
Cash 70,000
Investment in Associates 70,000
12/31/20- Depreciation
Investment income 51,875
Investment in Associates 51,875
PROBLEM NO. 1
You were able to obtain the following ledger details of Equity investment-FVTPL in connection with
your audit of the I Will Corporation for the year ended December 31, 2020:
Date Particulars DR CR
Jan. 10 Purchase of Emong
Co. – 6,000 shares P1,440,000
Feb. 20 Purchase of Bobads
Co. – 7,200 shares 1,800,000
Mar. 1 Sale of Bobads Co. –
540,000
2,400 shares
May 31 Receipt of Emong
share dividend–
Offsetting Credit to 132,000
retained earnings
Aug. 15 Sale of Emong –
4,800 shares 1,176,000
Sept. 1 Sale of Emong –
1,200 shares 276,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. In relation to March 1 transaction, the necessary adjusting journal entry includes
a. A debit to Loss of P60,000
b. A credit to Equity investment-FVTPL of P600,000
c. Both a and b
d. Neither a nor b
2. In relation to August 15 transaction, the necessary adjusting journal entry includes
a. A debit to Equity investment-FVTPL of P216,000
b. A debit to Loss of P15,300
c. A credit to Gain of P216,000
d. A credit to Equity investment-FVTPL of P15,300
The LEE BUYS COMPANY had acquired interest in a promising local company, the
Silver Tab Company. During your audit of the company’s accounts for the year
2020, which was a first audit, you obtained the following:
Dividend Income
2020 January. 2 P120,000
April 1 150,000
August 10 10,000
December 20 100,000
29 Sold 10,000 Silver Tab Company shares at P90. Cash was received on
January 5, 2021.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Loss on sale of 50,000 Silver Tab Company shares on July 15
a. P250,000 c. P1,300,000
b. P850,000 d. P0
2. Gain on sale of 10,000 Silver Tab Company shares on December 29
a. P330,000 c. P300,000
b. P310,000 d. P0
3. Adjusted balance of Investment in Silver Tab Company as of December 31, 2020
a. P5,130,000 c. P5,580,000
b. P5,570,000 d. P5,640,000
4. Dividend income for the year ended Dec. 31, 2020
a. P120,000 c. P180,000
b. P160,000 d. P280,000
5. Which of the following is the most effective audit procedure for verification of dividends
earned on investments in equity securities?
a. Tracing deposited dividend checks to the cash receipts book.
b. Reconciling amount received with published dividend records.
c. Comparing the amounts received with preceding year dividends received.
d. Recomputing selected extensions and footings of dividend schedules and comparing
totals to the general ledger.
Date Entry Made Correct Entry(PFRS) Audit Adjustments
Jan 2 Cash 120,000 Cash 120,000 Dividend income 120,000
Dividend Income 120,000 Dividend Rec 120,000 Dividend rec
120,000
March 2 Investment in Investment in Dividend Inc. 30,000
Silver Tab Co. 2,100,000 Silver Tab Co. 2,070,000 Investment in
Cash 2,100,000 Dividend Inc 30,000 Silver Tab Co.
30,000 x Php70=2,100,000 Cash 2,100,000 30,000
Dividend Income
---------------------------------------------------------------------------------------
: Unadjusted Balance 380,000
Jan 2 120,000 :
March 2 30,000 :
Aug 10 10,000 :
Dec 20 100,000 :
---------------------------------------------------------------------------------------
: Adjusted Balance 120,000
=======================
SOLUTION GUIDE:
PROBLEM NO. 3
Your audit of the Norte Corp. disclosed that the company owned the following securities on
December 31, 2019:
FA@FVTPL
Security Shares Cost Fair value
Vigan, Inc. 9,600 P144,000 P184,000
Laoag, Inc. 16,000 432,000 288,000
10% , P200,000
face value ,
Santiago bonds
(interest payable
every Jan. 1 and 158,400 163,440
Jul. 1)
Total P734,400 P635,440
FA@FVTOCI
Security Shares Cost Fair value
Candon 32,000 P1,376,00 P1,540,000 164,000
Products 0
Pagudpud, Inc. 240,000 6,240,000 5,840,000 (400,000)
Batac, Inc. 80,000 960,000 1,280,000 307,200 for 76,800 shs
Total P8,576,00 P8,660,000 71,200
0
Close to RE
(1,280,000-960,000) x 3,200/80,000 = 12,800
Increase in FV for security sold 3,200
----------
16,000
======
FA@AC
Amortized
Cost Fair value
12%, 2,000,000 face
value, Ilocos bonds
(interest payable
annually every Dec. P1,926,000 P1,900,000
31)
During 2020, the following transactions occurred:
The fair values of the shares and bonds on December 31, 2020, are as follows:
The company’s accounting policy is that when an equity investment classified as FVTOCI is
sold, the accumulated OCI amount is transferred to retained earnings.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
4. In relation to the sale of 3,200 Batac, Inc. shares on May 15, the net amount to be
recognized in profit or loss
a. P13,600 c. P800
b. P 2,400 d. Nil
FA@FVTPL FA@FVTOCI
Security
Vigan 9,600@Php22 = Php211,200 Candon 32,000@ Php42 = Php1,344,000
Laoag 8,000@Php15 = 120,000 Pagudpud 240,000@Php28 = 6,720,000
Santiago bonds 151,200 Batac Inc 76,800@Php18 = 1,382,400
Ilocos bonds 2,020,000
----------------- -------------------
Php482,400 Php11,466,400
========= ============
Dec 31 - Because of the change in business model, the entity transferred the Ilocos bonds to
FA@FVTOCI
FA@FVTOCI (2,000,000 x 101) 2,020,000
FA@AC (1,926,000 +29,640*) 1,955,640
Gain on conversion 64,360
PROBLEM NO. 4
Investment in Bonds
1/1/20 P1,051,510
Investment in Bonds
The entity uses the ‘held for collection’ business model for acquired and originated debt
instruments.
P1,000,000, 10% bonds, purchased for P1,051,510 including transaction costs of P20,000.
Interest is payable annually every December 31. The bonds mature on December 31, 2022.
The effective interest rate is 8%.
The prevailing market rate for the bonds is 9% at December 31, 2020.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
3. The net amount to be recognized in 2020 profit or loss related to these investments is
a. P384,121 c. P134,121
b. P284,121 d. P114,121
Adjustments
July 1, 2020 – gain Php 50,000
Dec 31, 2020- Sale 150,000
Interest income on Bonds Investment
(refer to amortization- No. 2) 84,121**
----------------------
Php 284,121
============
4. If the investment in bonds is FVTOCI, the carrying amount as of December 31, 2020 is
overstated by
a. P15,880 c. P33,900
b. P18,020 d. P38,020
Present Value at 9%
Interest 100,000 x 1.759 = 175,900
Principal 1,000,000 x .8416 = 841,600
------------
Fair Market Value of Bonds at 12/31/20 1,017,500
Carrying Value 12/31/20 1,035,631
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18,131
========
5. An audit procedure that provides evidence about proper valuation of equity securities
classified as FA@FVTPL is
a. Confirmation of securities held by broker.
b. Calculation of premium or discount amortization.
c. Recalculation of investment carrying amount by applying the equity method.
d. Comparison of carrying amount with current market quotations.
Journal Entry
Date Entry Made Correct Entry Audit Adjustment
01/01/18 Investment in O/S 1,000,000 Investment in RE 50,000
Cash 1,000,000 O/S 950,000 Investment in
Transaction cost 50,000 O/S 50,000
Cash 1,000,000
12/31/18 Investment in O/S 200,000 Investment in Investment in
Unrealize gain/ O/S 250,000 O/S 50,000
Loss-OCI 200,000 Unrealized gain/ Unrealized Gain/
Loss-PL 250,000 Loss-OCI 200,000
(1,200,000-950,000 = 250,000) RE (Unrealized
Gain/loss ) 250,000