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IV – AUDIT OF INVESTMENTSPROBLEM NO. 1The following transactions of the Angat Company were completed during the year 2006 :Jan. 2 Purchased 20 ,000 shares of Bulacan Auto Co. for P40 per share plus brokerage costs of P4,500. These shares were classified as trading securities.Feb. 1 Purchased 20,000 ...

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IV – AUDIT OF INVESTMENTS PROBLEM NO. 1 The following transactions of the Angat Company were completed during the year 2006: Jan. 2

Purchased 20,000 shares of Bulacan Auto Co. for P40 per share plus brokerage costs of P4,500. These shares were classified as trading securities.

Feb. 1

Purchased 20,000 shares of Malolos Company common stock at P125 per share plus brokerage fees of P19,000. Angat classifies this stock as and available-for -sale security.

Apr. 1

Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5 plus accrued interest of P35,000. In addition, the company paid brokerage fees of P18,000. Angat classified these bonds as a trading security.

Jul. 1

Received semiannual interest on the RP Treasury Bonds.

Aug. 1

Sold P500,000 of RP Treasury 7% bonds at 103 plus accrued interest.

Oct. 1

Sold 3,000 shares of Malolos at P132 per share.

The market values of the stocks and bonds on December 31, 2006, are as follows: Bulacan Auto Co. P45 per share Malolos Company P130 per share RP Treasury 7% bonds 102 QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Gain or loss on sale of P500,000 RP Treasury Bonds on August 1, 2006 a. P15,000 gain c. P2,000 loss b. P 2,500 gain d. P7,500 loss 2. Gain or loss on sale of 3,0 00 Malolos shares on October 1, 2006 a. P18,150 loss c. P 2,000 gain b. P18,150 gain d. P21,000 gain

103

3. What amount of unrealized gain should be shown as component of income in 2006? a. P92,500 c. P74,500 b. P97,000 d. P80,000 4. What amount of unrealized gain should be shown as component of equity as of December 31, 2006? a. P68,850 c. P66,000 b. P85,000 d. P 0 Suggested Solution: Question No. 1 Sales proceeds (P500,000 x 1.03) Less cost of RP Treasury bonds sold (P500,000 x 1.025)* Gain on sale of P500,000 RP Treasury Bonds

P515,000 512,500 P 2,500

* PAS 39 par. 43 states that when a financial asset or financial liability is recognized initially, an entity shall measure it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of financial asset or financial liability. Therefore, the transaction costs (e.g. brokerage fees) should be expensed for trading securities.

Question No. 2 Sales proceeds (3,000 shares x P132) Less cost of shares sold {[(20,000 x P125) + P19,000] x 3/20} Gain on sale of 3,000 Malolos shares

P396,000 377,850 P 18,150

Question No. 3 Cost of Bulacan Auto Co. shares (20,000 x P40) Cost of RP Treasury 7% bonds (P2,000,000 x 1.025) Cost of P500,000 RP Treasury bonds sold (see no. 1) Trading securities, 12/31/06 before mark-to-market Fair value of trading securities, 12/31/06 (see below) Unrealized gain on TS to be reported on the IS Bulacan Auto Co. (20,000 x P45) RP Treasury 7% bonds (P1,500,000 x 1.02) Fair value of trading securities, 12/31/06

104

P 800,000 2,050,000 ( 512,500) 2,337,500 2,430,000 P 92,500 P 900,000 1,530,200 P2,430,000

Question No. 4 Cost of Malolos Company shares [(20,000 x P125) + P19,000] Cost of 3,000 shares sold (see no. 2) AFS, 12/31/06 before mark-to-market Fair value of AFS, 12/31/06 [(20,000 - 3,000) x P130] Unrealized gain-AFS, 12/31/06 to be reported under SHE

P2,519,000 (377,850) 2,141,150 2,210,000 P 68,850

Answers: 1) B; 2) B; 3) A; 4) A

PROBLEM NO. 2 You were engaged by Balagtas Company to audit its financial statements for the year 2006. During the course of your audit, you noted that the following trading securities were properly reported as current assets at December 31, 2005: France Corporation, 5,000 shares, convertible preferred shares Ces, Inc., 30,000 shares of common stock Coo Co., 10,000 shares of common stock

Cost

Market

P 450,000 675,000 618,750 P1,743,750

P 487,500 742,500 450,000 P1,680,000

The following sale and conversion transactions transpired during 2006: Mar. 1

Sold 12,500 shares of Ces for P33.75 per share.

April 1

Sold 2,500 shares of Coo for P45 per share.

Sept. 21

Converted 2,500 shares of France’s preferred stock into 7,500 shares of France’s common stock, when the market price was P78.75 per share for the preferred stock and P47.25 per share for the common stock.

The following 2006 dividend information pertains to stocks owned by Balagtas: Jan. 2

Coo issued a 10% stock dividend when the market price of Coo’s common stock was P49.50 per share.

March 31 and Sept. 30

France paid dividends of P2.50 per share on its preferred stock, to stockholders of record on March 15 and September 15, respectively. France did not pay dividends on its common stock during 2006. 105

July 1

Ces paid a P2.25 per share dividend on its common stock.

Market prices per share of the securities were as follows: France Corp., preferred France Corp., common Ces, Inc., common Coo Co., common

12/31/2006 92.25 42.75 22.50 40.50

12/31/2005 97.50 38.25 24.75 45.00

All of the foregoing stocks are listed in the Philippine Stock Exchange. Declines in market value from cost would not be considered permanent. QUESTIONS: Based on the above and the result of your audit, you are to provide the answers to the following: 1. How much is the gain on sale of 12,500 Ces shares? a. P112,500 c. P140,625 b. P281,250 d. P 0 2. How much is the gain or loss on sale of 2,500 Coo shares? a. P28,125 gain c. P28,125 loss b. P10,227 gain d. P 0 3. How much is the gain or loss on conversion of 2,500 France preferred stock into 15,000 common stock? a. P 28,125 loss c. P46,875 loss b. P129,375 gain d. P 0 4. How much is the total dividend income for the year 2006? a. P 64,375 c. P 51,875 b. P101,375 d. P364,375 5. How much should be reported as unrealized gain on trading securities in the company’s income statement for the year 2006? a. P 4,500 c. P59,250 b. P67,773 d. P 0 Suggested Solution: Question No. 1 Sales proceeds (12,500 shares x P33.75) Less CV of Ces shares sold (12.5/30 x P742,500) Gain on sale of 12,500 Ces shares 106

P421,875 309,375 P112,500

Question No. 2 Sales proceeds (2,500 shares x P45) Less CV of Coo shares sold (P450,000 x 2,500/11,000*) Gain on sale of 2,500 Coo shares

P112,500 102,273 P 10,227

* total number of shares after 10% stock dividends (10,000 x 1.1)

Question No. 3 Fair value of preferred stock (2,500 shares x P78.75) Less CV of shares converted (P487,500 x 2.5/5) Loss on conversion of 2,500 France preferred shares Question No. 4 From France (5,000 shares x P2.50 x 2) From Ces [(30,000 - 12,500) x P2.25) Total dividend income in 2006

P196,875 243,750 P 46,875

P25,000 39,375 P64,375

Question No. 5 Trading securities, 1/1/06 CV of Ces shares sold (see no. 1) CV of Coo shares sold (see no. 2) CV of France preferred shares converted (see no. 3) Cost of 7,500 France common shares received (see no. 3) Trading securities, 12/31/06 before mark-to-market Fair value of trading securities, 12/31/06 (see below) Unrealized gain on trading securities France Corp., preferred [(5,000 - 2,500) x P92.25] France Corp. – Common (7,500 x P42.75) Ces, Inc., common [(30,000 - 12,500) x P22.50] Coo Co., common {[(10,000 x 1.1) - 2,500] x P40.50} Fair value of trading securities, 12/31/06

P1,680,000 (309,375) (102,273) (243,750) 196,875 1,221,477 1,289,250 P 67,773 P 230,625 320,625 393,750 344,250 P1,289,250

Answers: 1) A; 2) B; 3) C; 4) A; 5) B

PROBLEM NO. 3 You were able to obtain the following ledger details of Trading Securities in connection with your audit of the Bocaue Corporation for the year ended December 31, 2006:

107

Particulars Purchase of GOOD Co. – 4,000 shares

Date 1-14

Ref. CV

DR P 960,000

CR

Purchase of LUCK Co. – 4,800 shares

2-20

CV

1,200,000

Sale of LUCK Co. – 1,600 shares

3-01

CR

Receipt of GOOD Stock Dividend – Offsetting Credit to retained earnings

5-31

JV

Sale of GOOD Stocks – 3,200 shares

8-15

CR

784,000

Sale of GOOD Stocks – 800 shares

10-1

CR

184,000

360,000

88,000

From the Philippine Stock Exchange, the GOOD dividends were analyzed as follows: Kind Cash Stock Cash

Declared 01-02 05-02 08-01

Record 01-15 05-15 08-30

Payment 01-31 05-31 09-15

Rate P20/share 10% P30/share

At December 31, 2006, GOOD and LUCK shares were selling at P210 and P240 per share, respectively. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Gain or loss on sale of 1,6 00 LUCK shares on March 1, 2006 a. P360,000 gain c. P40,000 loss b. P200,000 loss d. P40,000 gain 2. Gain on sale of 3,200 GOOD shares on August 15, 2006 a. P 48,000 c. P16,000 b. P144,000 d. P 0 3. Gain or loss on sale of 800 GOOD shares on October 1, 2006 a. P 8,000 gain c. P 8,000 loss d. P24,000 gain b. P24,000 loss 4. Dividend income for the year 2006 a. P132,000 b. P300,000

108

c. P212,000 d. P 0

5. Carrying value of Trading Securities as of December 31, 2006 a. P768,000 c. P880,000 b. P852,000 d. P768,000 Suggested Solution: Question No. 1 Sales proceeds Less CV of shares sold (P1,200,000 x 1,600/4,800) Loss on sale of 1,600 Luck shares on 3/1/06

P360,000 400,000 P 40,000

Question No. 2 Total proceeds Less dividends sold (3,200 shares x P30) Sales proceeds Less CV of investment sold (P880,000* x 3,200/4,400**) Gain on sale of 3,200 Good shares on 9/15/06

P784,000 96,000 688,000 640,000 P 48,000

Computation of adjusted cost of Good Co. shares Total cash paid Less purchased dividend (4,000 x P20) Adjusted cost

P960,000 80,000 P880,000

*

**After 10% stock dividend

Question No. 3 Sales proceeds Less CV of investment sold (P880,000 x 800/4,400) Gain on sale of 800 Good shares on 10/1/06 Question No. 4 Dividend income - Declared Aug. 1 (4,400 shares x P30) Question No. 5 Good Co. [(4,000 x 1.1) - 3,200 - 800] = 400 x P210 Luck Co. (4,800 - 1,600) = 3,200 x P240 Carrying value of trading securities, 12/31/06 Answers: 1) C; 2) A; 3) D; 4) A, 5) B

109

P184,000 160,000 P 24,000

P132,000

P 84,000 768,000 P852,000

PROBLEM NO. 4 In connection with your audit of the financial statements of the Guiguinto Company for the year 2006, the following Available for Sale Securities and Dividend Income accounts were presented to you:

04/03 12/02

Available for Sale Securities Description Ref. Purchased 20,000 shares common, par value P50, BUSTOS Co. VR-69 10,000 shares BUSTOS Co. received as stock dividend CJ-30 Sold 10,000 shares @ P25 CR-44 Sold 4,000 shares @ P60 CR-65

Date 03/30 08/30

Dividend Income Description Ref. Stock dividend SJ-8 BUSTOS Company common CR-52

Date 01/08

03/30

Debit

Credit

780,000 500,000 250,000 240,000

Debit

Credit 500,000 100,000

The following information was obtained during your examination: 1.

From independent sources, you determine the following dividend information: Type of Dividend Stock Cash Cash

2.

Date Declared 02/14/2006 08/01/2006 12/01/2006

Date of Record 02/28/2006 08/15/2006 12/15/2006

Date of Payment 03/30/2006 08/30/2006 01/02/2007

Rate 50% P5/share 20%

Closing market quotation as at December 31, 2006: Bid 13-3/4

BUSTOS Company common

Asked 16-1/2

QUESTIONS: Based on the above and the result of your audit, answer the following: 1. How much is the gain or loss on the April 3, 2006 sale? a. P10,000 loss c. P140,000 loss b. P10,000 gain d. P 0 2. How much is the gain on the December 2, 2006 sale? a. P136,000 c. P84,000 b. P 96,000 d. P 0 110

3. How much is the total dividend income for the year 2006? a. P600,000 c. P100,000 b. P800,000 d. P300,000 4. How much is the adjusted balance of Available for Sale Securities as of December 31, 2006? a. P290,000 c. P220,000 b. P264,000 d. P416,000 5. How much is the Unrealized Loss on AFS as of December 31, 2006? a. P196,000 c. P152,000 b. P 70,000 d. P 0 Suggested Solution: Question No. 1 Sales proceeds (10,000 shares x P25) Less CV of investment sold (P780,000 x 10/30*) Loss on sale of AFS on 4/3/06

P250,000 260,000 P 10,000

*After 50% stock dividend

Question No. 2 Total proceeds (4,000 shares x P60) Less dividends sold (4,000 shares x P50 x 20%) Net sales proceeds Less CV of investment sold (P780,000 x 4/30) Gain on sale of AFS on 12/2/06

P240,000 40,000 200,000 104,000 P 96,000

Question No. 3 Cash dividends declared, 8/1/2006 (20,000 shares x P5) Cash dividends declared, 12/1/2006 (20,000 shares x P50 x 20%) Total dividend income Question No. 4 Shares purchased, 1/08 Shares received as stock dividend Sold, 4/3 Sold, 12/2 Balance, 12/31/06 Multiply by market value/share, 12/31/06 Carrying value of AFS, 12/31/06 111

P100,000

200,000 P300,000

20,000 10,000 (10,000) (4,000) 16,000 13.75 P220,000

Note: Application guidance par. 72 of PAS 39 states that the appropriate market price for an asset held or liability to be issued is usually the current bid price and, for an asset to be acquired or liability held, the asking price. Question No. 5 Acquisition cost CV of 10,000 shares sold, 4/3 (see no. 1) CV of 4,000 shares sold, 12/2 (see no. 2) AFS, 12/31/06 before mark-to-market Fair value of AFS, 12/31/06 Unrealized loss on AFS, 12/31/06

P780,000 (260,000) (104,000) 416,000 220,000 P196,000

Answers: 1) A; 2) B; 3) D; 4) C, 5) A PROBLEM NO. 5 Your audit of the Baliuag Corporation disclosed that the company owned the following securities on December 31, 2005: Trading securities: Security Sputnik, Inc. Explorer, Inc. 10% , P100,000 face value , Vanguard bonds (interest payable semiannually on Jan. 1 and Jul. 1) Total

Shares 4,800 8,000

Cost P 72,000 216,000

Market P 92,000 144,000

79,200 P367,200

81,720 P317,720

Available-for-sale securities: Security Score Products Tiros, Inc. Midas, Inc. Total

Shares 16,000 120,000 40,000

Cost P 688,000 3,120,000 480,000 P4,288,000

Market P 720,000 2,920,000 640,000 P4,280,000

Held to maturity: 12%, 1,000,000 face value, Discoverer bonds (interest payable annually every Dec. 31)

112

Cost

Book value

P950,000

P963,000

During 2006, the following transactions occurred: Jan. 1

Receive interest on the Vanguard bonds.

Mar. 1

Sold 4,000 shares of Explorer Inc. stock for P76,000.

May 15

Sold 1,600 shares of Midas, Inc. for P15 per share.

July 1

Received interest on the Vanguard bonds.

Dec. 31

Received interest on the Discoverer bonds.

31

Transferred the Discoverer bonds to the available-for-sale portfolio. The bonds were selling at 101 on this date. The bonds were purchased on January 2, 2005. The discount was amortized using the effective interest method.

The market values of the stocks and bonds on December 31, 2006, are as follows: Sputnik, Inc. Explorer, Inc. 10% Vanguard bonds Score Products Tiros, Inc. Midas, Inc.

P22 per share P15 per share P75,600 P42 per share P28 per share P18 per share

QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Gain or loss on sale of 4,000 Explorer, Inc. shares on March 1, 2006 a. P4,000 loss c. P32,000 loss b. P4,000 gain d. P32,000 gain 2. Realized gain or loss on sale of 1,600 Midas, Inc. shares on May 15, 2006 a. P4,800 loss c. P1,600 loss b. P4,800 gain d. P1,600 gain 3. Total interest income for the year 2006? a. P130,000 c. P144,820 b. P125,560 d. P143,000 4. The amount that should be reported as unrealized gain in the statement of changes in equity regarding transfer of Discoverer bonds to AFS? a. P47,000 c. P61,820 b. P32,180 d. P 0

113

5. Carrying value of Trading Securities and Available-for-sale securities as of December 31, 2006 should be Trading securities Available-for-sale securities a. P241,200 P5,733,200 b. P301,200 P4,723,200 c. P241,200 P5,762,000 d. P301,200 P5,720,800 Suggested Solution: Question No. 1 Sales proceeds Less CV of shares sold (P144,000 x 4/8) Loss on sale of 4,000 Explorer, Inc. shares

P76,000 72,000 P 4,000

Question No. 2 Sales proceeds (1,600 shares x P15) Unrealized gain on the shares sold(P160,000 x 1.6/40) Total Less CV of shares sold (P640,000 x 1.6/40) Realized gain on sale of 1,600 Midas, Inc. shares

P24,000 6,400 30,400 25,600 P 4,800

Alternative computation: Sales proceeds (1,600 shares x P15) Cost of shares sold (P480,000 x 1.6/40) Realized gain on sale of 1,600 Midas, Inc. shares Question No. 3 Vanguard bonds (P100,000 x 10%) Discoverer bonds (P963,000 x 14%*) Total interest income for 2006

P 10,000 134,820 P144,820

*Computation of effective interest rate: Carrying value, 12/31/05 Less carrying value, 1/2/05 (Cost) Discount amortization for 2005 Add nominal interest (P1,000,000 x 12%) Effective interest Divide by carrying value, 1/2/05 Effective interest rate

P963,000 950,000 13,000 120,000 133,000 950,000 14%

114

P24,000 19,200 P 4,800

Question No. 4 Carrying value, 12/31/05 Add discount amortization in 2006: Effective interest (P963,000 x 14%) Nominal interest (P1,000,000 x 12%) Carrying value, 12/31/06 Fair value of Discoverer bonds on 12/31/06 (P1,000,000 x 1.01) Unrealized gain on transfer of securities to be reported under SHE

P 963,000 P134,820 (120,000)

14, 820 977,820 1,010,000 P 32,180

Question No. 5 Trading securities Sputnik, Inc. (4,800 x P22) Explorer, Inc. [(8,000 - 4,000) x P15] 10% , P100,000 face value , Vanguard bonds Total market value Available-for-sale securities Score Products (16,000 x P42) Tiros, Inc. (120,000 x P28) Midas, Inc. [(40,000 - 1,600) x P18] Discoverer bonds (P1,000,000 x 1.01) Total market value

P105,600 60,000 75,600 P241,200 P 672,000 3,360,000 691,200 1,010,000 P5,733,200

Answers: 1) B; 2) B; 3) C; 4) B, 5) A

PROBLEM NO. 6 In connection with your audit of Hogonoy Company’s financial statements, you were able to gather the following subsidiary account which reflect the marketable securities of the company for the year 2006: Hugo Corp.. Date 9/01

Transactions Purchase

9/30

Cash dividends to stockholders of record 9/15, declared 8/15

10/01

Purchase

10/15

Sale at P65

Shares 40,000

Debit P2,000,000

Credit

P 100,000 100,000 40,000

115

5,000,000 2,000,000

Hugo Corp.. Date 11/30

Transactions Cash collected for sale made on 11/10, after a 11/1 declaration of P5 cash dividend per share to stockholders on record as of 12/1

12/15

Cash ...