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CEBU CPAR CENTERM a n d a u e C I t y AUDITING PROBLEMSAUDIT OF INVESTMENTSPROBLEM NO. 1You were engaged by MISMO COMPANY to audit its financial statements for the year 2005. During the course of your audit, you noted that the following trading securities were properly reported as current assets at ...

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CEBU CPAR CENTER Mandaue CIty

AUDITING PROBLEMS AUDIT OF INVESTMENTS PROBLEM NO. 1 You were engaged by MISMO COMPANY to audit its financial statements for the year 2005. During the course of your audit, you noted that the following trading securities were properly reported as current assets at December 31, 2004: Cost Aquata Corporation, 10,000 shares, convertible preferred shares Andrina, Inc., 60,000 shares of common stock Attina Co., 20,000 shares of common stock

P 900,000 1,350,000 1,237,500 P3,487,500

Market P 975,000 1,485,000 900,000 P3,360,000

The following sale and conversion transactions transpired during 2005: Mar. 27

Sold 25,000 shares of Andrina for P33.75 per share.

April 15

Sold 5,000 shares of Attina for P45 per share.

Sept. 21

Converted 5,000 shares of Aquata’s preferred stock into 15,000 shares of Aquata’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 2005 dividend information pertains to stocks owned by MISMO: Jan. 12

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

March 31 and Sept. 30

Aquata paid dividends of P2.50 per share on its preferred stock, to stockholders of record on March 15 and September 15, respectively. Aquata did not pay dividends on its common stock during 2005.

July 1

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

June 30 and Dec. 31

Adella paid semi-annual dividends of P1.50 on each of these dates. Adella’s net income for the year ended December 31, 2005 was P2,400,000.

On January 2, 2005, MISMO purchased 100,000 shares of Adella Corporation common stock for P3,600,000, representing 20% of Adella’s outstanding common stock and an underlying equity of P3,150,000 in Adella’s net assets on January 2, 2005. MISMO intends to hold Adella’s stock as a long-term investment, with the remaining investments being considered as held for trading. Market prices per share of the securities were as follows: Aquata Corp., preferred Aquata Corp., common Andrina, Inc., common Attina Co., common Adella Corp., common

12/31/2005 92.25 42.75 22.50 40.50 40.00

12/31/2004 97.50 38.25 24.75 45.00 36.75

All of the foregoing stocks are listed in the Philippine Stock Exchange. Declines in market value from cost would not be considered permanent.

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REQUIRED Based on the above and the result of your audit, you are to provide the answers to the following: 1. 2.

How much is the gain on sale of Andrina shares? a. P225,000 b. P281,250 c. P562,500

d. P0

How much is the gain or loss on sale of Attina shares? a. P20,455 gain b. P56,250 gain c. P56,250 loss

d. P0

3.

How much is the gain or loss on conversion of 5,000 Aquata preferred stock into 15,000 common stock? a. P93,750 loss b. P258,750 gain c. P56,250 loss d. P0

4.

How much is the total dividend income for the year 2005? a. P128,750 b. P103,750 c. P202,750

d. P728,750

5.

How much is the net investment income on investment in Adella Corp. in 2005? a. P480,000 b. P457,500 c. P577,500 d. P502,500

6.

How much is the carrying amount of MISMO’s investment in Adella Corp. as of December 31, 2005? a. P3,780,000 b. P3,600,000 c. P3,757,500 d. P4,000,000

7.

Assuming MISMO has no significant influence on Adella Corp., how much is the carrying amount of MISMO’s investment in Adella Corp. as of December 31, 2005? a. P4,000,000 b. P3,600,000 c. P3,757,500 d. P3,780,000

8.

Assuming MISMO has no significant influence on Adella Corp. and the stock of Adella has no reliable fair value, how much is the carrying amount of MISMO’s investment in Adella Corp. as of December 31, 2005? a. P3,600,000 b. P3,780,000 c. P3,757,500 d. P4,000,000

9.

Using the same assumptions in no. 8 and that Adella Corp. declared semi-annual cash dividends of P3 per share, how much is the carrying amount of MISMO’s investment in Adella Corp. as of December 31, 2005? a. P3,480,000 b. P3,757,500 c. P3,235,000 d. P3,600,000

10. The trading securities should be reported on MISMO’s December 31, 2005 balance sheet at a. P2,578,500 b. P2,587,500 c. P5,813,500 d. P2,421,000 11. How much should be reported as unrealized gain on trading securities? a. P135,545 b. P9,000 c. P118,500 d. P0

PROBLEM NO. 2 On December 31, 2004, La Cost Company’s balance sheet showed the following balances related to its securities accounts: Trading securities Available-for-sale securities (AFS) Interest receivable-Mayniladlad water bonds Unrealized gain - AFS

P1,477,500 1,180,000 12,500 100,000

La Cost’s securities portfolio on December 31, 2004, was made up of the following securities: Security Classification Cost 10,000 shares Yeye Bonel Corp. stock Trading P750,000 8,000 shares Totoy Bibo Inc. stock Trading 550,000 10% Mayniladlad water bonds (interest payable semiannually on Jan. 1 and Jul. 1) Trading 250,000

Market P762,500 528,250 186,750

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Security 10,000 shares Bulaklak Inc. stock 20,000 shares Jumbo Hotdog Unlimited Inc. stock

Classification Available for sale Available for sale

Cost 590,000

Market 630,000

490,000

550,000

During 2005, the following transactions took place: Jan. 3

Receive interest on the Mayniladlad water bonds.

Mar. 1

Purchased 3,000 additional shares of Yeye Bonel Corp. stock for P229,500, classified as a trading security.

Apr. 15

Sold 4,000 shares of the Totoy Bibo Inc. stock for P69 per share.

May 4

Sold 4,000 shares of the Bulaklak Inc. stock for P62 per share.

July 1

Received interest on the Mayniladlad water bonds.

Oct. 30

Purchased 15,000 shares of Pasaway Co. stock for P832,500, classified as a trading security.

The market values of the stocks and bonds on December 31, 2005, are as follows: Yeye Bonel Corp. stock Totoy Bibo Inc. stock Pasaway Co. stock Mayniladlad water bonds Bulaklak Inc. stock Jumbo Hotdog Unlimited Inc. stock

P76.60 per share P68.50 per share P55.25 per share P205,550 P61.00 per share P27.00 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 Totoy Bibo Inc. shares on April 15, 2005 c. P11,875 gain d. P11,875 loss a. P1,000 gain b. P1,000 loss

2.

Net realized gain or loss on sale of 4,000 Bulaklak Inc. shares on May 4, 2005 a. P12,000 gain b. P12,000 loss c. P4,000 gain d. P4,000 loss

3.

Carrying value of Trading Securities as of December 31, 2005 a. P2,337,000 b. P2,287,800 c. P2,304,100 d. P2,297,400

4.

Carrying value of Available for Sale Securities as of December 31, 2005 a. P844,000 b. P806,000 c. P906,000 d. P944,000

5.

In 2005, what amount of unrealized gain or loss should be shown as component of income and stockholders’ equity? Income Stockholders’ equity a. P28,725 gain P62,000 gain b. P28,725 gain P22,000 loss c. P32,900 loss P122,000 loss d. P39,600 gain P78,000 gain

PROBLEM NO. 3 GUEST COMPANY has a stock investment in Marciano Corporation. Described below are the transactions pertaining to this investment: a)

On January 2, 1998, GUEST purchased 10,000 shares of P100 par value common stock at P110 per share. The company debited Investment in Stock account.

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b)

The Marciano Corporation was expanding and on March 2, 1999 it issued stock rights to its stockholders. Each right entitles GUEST to purchase one fourth (¼) share of common stock at par. The market value of the stock on that date was P140 per share. There was no quoted price for the rights. No journal entry was made to record the foregoing.

c)

On April 2, 1999, GUEST exercised all its stock rights. The Investment in Stock account was charged for the amount paid.

d)

GUEST’s accountant felt that the cash paid for the new shares was merely an assessment since GUEST’s proportionate share in Marciano was not changed. Hence, he credited all dividends (5% in December of each year) to the Investment in Stock account until the debit was fully offset.

e)

GUEST received a 50% stock dividend from Marciano in December 2003. Because the shares received were expected to be sold, the company’s president instructed the accountant not to make any entry for this dividend. The company did sell the dividend shares in January 2004 for P160 per share. The proceeds from the sale were credited to income.

f)

In December 2004, Marciano’s stocks were split on a two-for-one basis and the new shares were issued as no par shares. GUEST found that each new share was worth P10 more than the P110 per share original acquisition cost. For this reason, GUEST decided to debit the Investment in Stock account with the additional shares received at P120 per share and credited revenue for it.

g)

In August 2005, GUEST sold one half (½) of its holdings in Marciano at P100 per share. The proceeds were credited to the Investment in Stock account. GUEST uses the average method in recording disposals of its investment in stock.

REQUIRED 1.

Prepare the journal entry to record the receipt of stock rights on March 2, 1999.

2.

What is the total cost of the shares acquired on April 2, 1999?

3.

What was the average cost per share of GUEST’s Investment in Stock after the exercise of the stock rights on April 2, 1999?

4.

Compute the amount of cash dividends received by GUEST for the period 1999 to 2002.

5.

Prepare the journal entry to record the stock dividend received.

6.

Determine the gain or loss on the sale of dividend shares received.

7.

How many shares were received by GUEST as a result of the two-for-one stock split?

8.

What journal entry should be made to record the stock split?

9.

How much gain or loss should have been recognized by GUEST from the sale of stocks in August 2005?

10. How much is the unadjusted balance of the Investment in Stock account on December 31, 2005? 11. How much is the adjusted balance of the Investment in Stock account on December 31, 2005?

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PROBLEM NO. 4 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 2005, which was a first audit, you obtained the following: Investment in Silver Tab Company 2003–Jan. 2 2004–Jul. 2 2005–Mar. 2

2005 - Aug. 10

30,000 sh @35 90,000 sh @60 30,000 sh @70

P1,050,000 5,400,000 2,100,000

2005–Jul. 15

50,000 sh @40

P2,000,000

Investment in Red Tab Company P10,000 Dividend Income 2005 January. 2 April 1 August 10 December 20

P120,000 150,000 10,000 100,000

The transactions pertaining to the foregoing for 2005 were as follows: Jan. 2

Received cash dividend (declared on December 1) of P1 per share.

Mar. 2

Bought 30,000 shares at P70 per share.

Apr. 1

Received cash dividend (declared on March 1 to stockholders of record as of March 10) of P1 per share.

July 15

Sold 50,000 shares at P40 per share.

Aug. 10

Received an “extra” dividend in stock of one share of Red Tab Company for every ten shares of Silver Tab Company. The stock dividend had a market value of P3 per share and its book value on the ledger of Silver Tab Company was P1 per share.

Dec. 20

Received cash dividend of P1 per share, declared December 1, out of Silver Tab Company’s “Reserve for Depletion”.

29

Sold 10,000 Silver Tab Company shares at P90. January 5, 2006.

Cash was received on

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, 2005 a. P250,000 b. P1,300,000 c. P850,000 d. P0

2.

Gain on sale of 10,000 Silver Tab Company shares on December 29, 2005 b. P310,000 c. P300,000 d. P0 a. P330,000

3.

Adjusted balance of Investment in Silver Tab Company as of December 31, 2005 a. P5,570,000 b. P5,130,000 c. P5,580,000 d. P5,640,000

4.

Adjusted balance of Investment in Red Tab Company as of December 31, 2005 a. P10,000 b. P20,000 c. P30,000 d. P0

5.

Dividend income for the year ended December 31, 2005 a. P180,000 b. P160,000 c. P150,000

d. P280,000...