chapter 6 caselette - audit of investments

7/25/2019 CHAPTER 6 Caselette - Audit of Investments

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CHAPTER 6 - Audit of Investments

Problem 1

The following data pertains to Rainbow Corporations investments in marketable securities:

Market ValueCost 12!1"# 12!1"$

Trading % 1&"'""" % 1&&'""" % 1""'"""(vailable)for)sale 1&"'""" 1!"'""" 12$'"""

Questions

1* +hat amount should Rainbow Corporation report as unreali,ed holding gain in its 2""#income statement-

a* % $&'""" b* % $"'""" c* % &&'""" d* % &"'"""

2* +hat amount should Rainbow Corporation report as unreali,ed loss on marketable

e.uit/ securities at 0ecember !1' 2""#' in accumulated other comprehensive income instockholders e.uit/-

a* % 2"'""" b* % 1!'""" c* % 1"'""" d* % "

Solution1. C

Market value 1/1/07 P 100,000Market value 12/31/07 155,000Unrealized holdin ain P 55,000

2. !Cost P 150,000

Market value 12/31/07 130,000Unrealized holdin loss P 20,000

Problem 2

The following information pertains to ver/ ow and Then' 3nc*s portfolio of marketable

investments for the /ear ended 0ecember !1' 2""#:

Cost 4air Value 2""# activities 4air value

12!1"$ %urc* 5ales 12!1"#"eld#to#$aturit%

5ecurit/ (6C % 1""'""" % 7&'"""

&radin 'e(urit% 5ecurit/ 04% 1&"'""" % 1""'""" 1&&'"""

!vaila)le#*or#sale

5ecurit/ 893 17"'""" 1$&'""" % 1#&'"""5ecurit/ ;< 1#"'""" 1#&'""" 1$"'"""

5ecurit/ (6C was purchased at par* (ll declines in fair values are considered to be

temporar/*

Questions

1* The carr/ing value of securit/ (6C at 0ecember !1' 2""# isa* % 7&'""" b* % 7='""" c* % 1""'""" d* % 1"&'"""

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2* The carr/ing value of securit/ 04 at 0ecember !1' 2""# isa* % 1""'""" b* % 12"'""" c* % 1&"'""" d* % 1&&'"""

!* The carr/ing value of securit/ ;< at 0ecember !1' 2""# is

a* % 1$"'""" b* % 1$&'""" c* % 1#"'""" d* % 1#&'"""

>* The recogni,ed gain or loss on sale of securit/ 893 isa* % ?>"'"""@ b* % ?2&'"""@ c* % ?1&'"""@ d* % @1"'"""@

&* The unreali,ed holding gain or loss to be reported in 2""# net income is

a* % &&'""" b* % ?2&'"""@ c* % 1&'""" d* % ?&'"""@

$* Anreali,ed gain or loss to be reported at 0ecember !1' 2""#' as a separate componentof stockholders e.uit/ entitled Baccumulated other comprehensive income is

a* % ?2"'"""@ b* % 1&'""" c* % ?1"'"""@ d* % &'"""

Solution1. C Cost sin(e the se(urit% is (onsidered as held#to#$aturit%2. + Market value at %ear#end3. ! Market value at %ear#end

. C'ellin Pri(e P 175,000Cost 1-0,000oss P 15,000

5. !Market value 1/1/07 P 100,000Market value 12/31/07 155,000Unrealized holdin ain P 55,000

. +Cost P 170,000Market value 12/31/07 175,000"oldin ain P 5,000

Problem 3

(t 0ecember !1' 2""#' Maria (ngela Corporation had the following investments that werepurchased during 2""&' its first /ear of operations:

Cost 4air Value

Trading 5ecurities:5ecurit/ ( #""'""" #2&'"""

5ecurit/ 6 21"'""" 2""'"""Totals 71"'""" 72&'"""

5ecurities (vailable for 5ale:

5ecurit/ C &""'""" &$"'"""5ecurit/ 0 =&"'""" =$&'"""

Totals 1'!&"'""" 1'>2&'"""

5ecurities to be 9eld to Maturit/:

5ecurit/ 7#"'""" 7="'"""

5ecurit/ 4 >12'""" >"7'"""Totals 1'!=2'""" 1'!=7'"""

o investments were sold during 2""#* (ll securities eDcept 5ecurit/ 0 and 5ecurit/ 4 are

considered short)term investments* one of the market changes is considered permanent*

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Questions1* The amount of investment to be reported as current assets is:

a* % 2'>$&'""" b* % 2'>&&'""" c* % 2'!="'""" d* % 1'>=&'"""

2* The amount of investment to be reported as non)current assets is:a* % 1'!=7'""" b* % 1'!=2'""" c* % 1'2##'""" d* % 1'2#>'"""

!* The unreali,ed gain ?or loss@ component of income before taDes is:a* % 1&'""" b* % #&'""" c* % 7#'""" d* % 1""'"""

>* The unreali,ed gain ?or loss@ component of shareholders e.uit/ is:a* % =2'""" b* % #&'""" c* % $"'""" d* % 12'"""

Solution1.

'e(urit% ! P 725,000 at $v'e(urit% 200,000 at $v 'e(urit% C 50,000 at $v

'e(urit% -70,000 at (ost &otal P 2,5,000

2. C'e(urit% + P 45,000 at $v'e(urit% 12,000 at (ost &otal P 1,277,000

3. !&radin se(urit% (ost P -10,000&radin se(urit% $v -25,000"oldin ain P 15,000

. !vaila)le#*or#sales se(urit% (ost P 1,350,000!vaila)le#*or#sales se(urit% $v 1,25,000"oldin ain P 75,000

Problem 4

Marc Corporation had investments in marketable debt securities costing %$&"'""" that were

classified as available)for)sale* En une !"' 2""#' Marc Corporation decided to hold theinvestments to maturit/ and accordingl/ reclassified them from the held)to)maturit/categor/ on that date* The investments market value was %&'""" at 0ecember !1'

2""$F %&!"'""" at une !"' 2""#F and %>7"'""" at 0ecember !1' 2""#*

Questions

1* +hat amount of loss from investments should Marc Corporation report in its 2""#income statement-

a* % " b* % >&'""" c* % =&'""" d* % 12"'"""

2* +hat amount should Marc Corporation report as net unreali,ed loss on marketable debt

securities in its 2""# statement of stockholders e.uit/-

a* % 1$"'""" b* % 12"'""" c* % >&'""" d* %>"'"""

Solution

ntr%6 aluation allo8an(e 75,000 Unrealized holdin loss '" 75,000&o (lose the valuation allo8an(e o* last %ear.

M' "&M 530,000 Unrealized holdin loss '" 120,000

M' '!' 50,0001. a 2. ) 9ote6 the unrealized holdin loss should )e a$ortized over the li*e

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o* the se(urit%

Problem 5

Guiters has investments in shares of common stock of ever+in Compan/' bought asfollows:

2""! 1'""" shares H % 1>"'"""2""& &"" shares H % 7"'"""

The following transactions took place in 2""# with respect to these holdings:

(pril 1" 6/ proper resolution' there was a ! for 1 stock split and Guiters Compan/ received

!'""" shares in addition to her original holdings*

ul/ 1" Guiters Compan/ received a %"*$" per share cash dividend and also rights tosubscribed to one share at %>" each for ever/ five shares held* En this date'

shares of stock of ever+in Compan/ were selling eD)rights at %&& per share andrights were selling at %2 each*

ul/ 2" Guiters Compan/ eDercised all her rights b/ bu/ing the new shares and paid

%!$'"""*

ov* 1& Guiters sold 1'""" shares at %$" each' taken from those ac.uired in 2""!' lessbrokers commission of %#&"*

Questions

1* The investment in stock at /ear)end is:

a* % 222'"2! b* % 221'"!1 c* % 22"'7#1 d* % 217'!!>

2* The investment in stock at /ear)end from the 2""! purchase is:

a. % =#'7&! b* % 7"'"&7 c* % 7!'!!! d* % 1"='==7

!* The investment in stock at /ear)end from the 2""& purchase is:

a* % 7"'""" b* % =='>22 c* % =$'=>2 d* % =1'7!1

>* The gain on sale of investment at /ear)end is:

a* % 1>'7#1 b* % 1>'221 c* % 1!'!!! d* % 12'&=!

&* 9ow man/ shares were purchased during the /ear-

a. 7"" shares b* $"" shares c* !"" shares d* 1&" shares

Solution!:ril 10 Me$o entr%;ul% 10 Cash 2,700

+ividend in(o$e 2,700 P135,044 3,000 10,000Aain on sale 1,221 @@@@@ ,-12 'to(k rihts

3,000 135,044!ns8er6

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1. C 2. 3. C . 5. !

Problem 6

Roelito Compan/ has a fiscal /ear ending une !"* ( summar/ of Roelitos transactions inthe capital stocks of oondee Compan/ is presented below' eDcept for several cash dividends

that have no bearing on the situation* 3n all transactions' oondee Compan/ uses thespecific certificate identification method*

The transactions in the 3nvestment of oondee Compan/ common stock are as follows:

5ept "$' 2""" %urchased &"" shares of oondee Compan/ common' par %1"" per share'

at a total cost of %>='&""*

ul/ 1&' 2""! Converted &"" shares of oondee Compan/ preferred stock into &""shares of oondee Compan/ common' in accordance with the conversion

privilege* The preferred shares originall/ cost %>7'"""' and the marketprice at conversion date was %7& per share* The market price of the

common stock at ul/ 1&' 2""!' was %1"1 per share* The transactionshad no commercial substance*

(ug* "#' 2""& Received additional shares of oondee Compan/ common in a two)for)onestock split' in which the par value was reduced from %1"" to %&" pershare*

5ept* "$' 2""& %urchased 1'""" share of oondee Compan/ common at a total cost of

%&!'"""*

0ec* ">' 2""& Dercised the option to receive Roelito share of common for each 1"

shares held' in lieu of a cash dividend of %&*>" for each share held* The

market price of a share was %&>*

0ec* "2' 2""$ Received stock dividend e.ual to 2" percent of the common shares held*

(pr* ">' 2""# Received warrants representing the right to purchase at par Roelito shareof oondee Compan/ common for each ten shares of common owned* En

that date of the issuance of the warrants' the market price of the stockeD)rights was %&=' and the market price of the rights was %2 each*

(pr* 1&' 2""# Roelito Compan/ eDercised the 1'""" rights applicable to the shares

purchased on 5eptember $' 2""&' and sold all remaining rights* The netproceeds from the sale of the rights was %1*=" per right*

une 12' 2""# 5old $"" shares of oondee Compan/ common for %!2'>"" net* The

shares were identified as &"" of those purchased on 5eptember $' 2""&'and 1"" of those purchased (pril 1&' 2""#*

Question

1* The entr/ to record the conversion of preferred stock to common stock on ul/ 1&' 2""!is:

a* 3nvestment H preferred stock >#'&""7'"""

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c* 3nvestment H common stock >#'&""

d* % 1'2>>

&* 8ain on sale of the stocks is:

a* % &'7"" b* % >'$!$ c* % >'&=" d* % !'=>>

$* The audited balance of investment in common stock at 0ecember !1' 2""# is:a* % 1!7'#7$ b* % 1!='!>> c* % 7&'"=1 d* % =7'!>>

#* The number of rights Roelito Compan/ received from oondee Compan/ is:

a* !7'$"" rights b* !"'""" rights c* !'7$" rights d* !'""" rights

=* The cost of the rights received is:

a. % >'=7# b* % &'&"# c* % &'& d* % $'=7"

Solution'e:t , 2000


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;une 12, 2007 Cash 32,00 P51,233DAain on sale ,540

!ns8er61. 2. C 3. ! . + 5. C . ! 7. C 4. C

Problem 7

En 0ecember !1' 2""$' 0ream6ig Compan/ reported as (vailable)for)sale securities:

(ttitude Compan/' &'""" shares of common stock ?a 1I interest@ % 12&'"""3sthe;J Compan/' 1"'""" shares of common stock ?a 2I interest@ 1$"'"""

25uccess Compan/' 2&'""" shares of common stock ?a 1"I interest@ #""'"""Marketable e.uit/ securities' at cost % 7=&'"""

per share*

En ovember 1' 2""#' (ttitude Compan/ paid a cash dividend of %"*#& per share*

En (ugust &' 2""#' 3sthe;J Compan/ issued to all shareholders' stock rights on the

basis of one right per share* Market prices at date of issue were %1!*&" per share ?eD)

right@ of stock and %1*&" per rights* 0ream6ig Compan/ sold all rights on 0ecember 1$'2""# for net proceeds of %1='=""*

En ul/ 1' 2""#' 0ream6ig Compan/ paid %1'&2"'""" for &"'""" additional shares of

25uccess Compan/s common stock which represented a 2"I investment in 25uccessCompan/* The fair value of all of the 25uccess Compan/s identifiable assets net of

liabilities was e.ual to their carr/ing amount of %$'!&"'"""* (s a result of thistransaction' 0ream6ig Compan/ owns !"I of 25uccess Compan/ and can eDercise

significant influence over 25uccess Compan/s operating and financial policies*

0ream6ig Compan/s initial 1"I interest of 2&'""" shares of 25uccess Compan/s

common stock was ac.uired on anuar/ 2' 2""$ for %#""'"""* (t that date' the net

assets of 25uccess Compan/ totaled %&'=""'""" and the fair value of 25uccesssidentifiable assets net of liabilities was e.ual to their carr/ing amount*

Market prices per share of the marketable e.uit/ securities which were all listed in the

stock eDchange' were as follows:

(t 0ecember !12""$ 2""#

(ttitude Compan/ ) common % 22 % 2!

3sthe;J Compan/ H common 1& 1>25uccess Compan/ H common 2# 27

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25uccess Compan/ reported net income and paid dividends of:

Jear nded 0iv* per 5hare

Jear ended 0ecember !1* 2""$ %!&"'""" none5iD months ended une !"' 2""# 2""'""" none

5iD months ended 0ecember !1' 2""# !#"'""" % 1*!" ?dividend was paid on 1"1"#

There were no other intercompan/ transactions between 0ream6ig Compan/ and

25uccess Compan/ and there were no impairment of 25uccess Compan/s asset at /ear)end*

Questions

1* The investment in (ttitude Compan/ common stock at /ear)end is:a* % 12$'&"" b* % 12&'""" c* % 12"'=#& d* % 11!'"""

2* The investment in 3stheke/ Compan/ common stock at /ear)end is:

a* % 1$"'""" b* % 1&"'""" c* % 1>>'""" d* % 1>"'"""

!* The investment in 25uccess Compan/ common stock at /ear)end is:a* % 2'2=='&"" b* % 2'2#"'2&" c* % 2'2$>'""" d* % 2'1#&'"""

>* The recover/ of market decline to be reported in the income statement is:

a* % &"'""" b* % >#'&"" c* % 2'&"" d* % "

&* 0ividend income to be reported in the income statement is:

a* % 1"1'$2& b* % 7#'&"" c* % >'12& d* % "

$* 8ain on sale of stock rights is:

a* % !'$"" b* % 2'="" c* % 1'2"" d* % "

#* The recover/ on market decline in value of investment should bea* Credited to gain on recover/ of market decline*

b* 0ebited to gain on recover/ of market decline*c* Credited to unreali,ed loss on market decline*

d* 0ebited to unreali,ed loss on market decline*

=* The entr/ to adKust the dividend received from 25uccess Compan/ has:a* ( debit to 0ividend 3ncome*

b* ( credit to 0ividend 3ncome*c* ( debit to Retained arnings*

d. ( debit to 3nvestment in .uit/*

SolutionMe$orandu$ entr%Cash ,125

+ividend in(o$e ,125 'to(k rihts 1,000


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Cash 1,520,000 P350,000

5,500 shares ? P 12,500 P 125,000 10,000 shares ? 10,000 1,000&otal P 2,500 P 2-,000

=eHuired !llo8an(e 2,500ess6 einnin )al. 50,000=e(over% 7,500

!ns8er61. ! 2. + 3. ! . + 5. C . 7. C 4. !

Problem 8

(t 0ecember !1' 2""$' (6(RC( 5A8(R CER%ER(T3E properl/ reported as trading the

following e.uit/ securities: Cost Market

5han "'""" >2'"""(,enith Corp*' $'""" shares of common $"'""" $$'"""

Ronette Co*' 2'""" shares of common &&'""" >"'"""

En anuar/ 2' 2""#' (6(RC( 5A8(R CER%ER(T3E purchased 1""'""" shares of agasakiR/uco Compan/ common stock for %1'#""'"""' representing !"I of agasakis outstanding

common stock and an underl/ing e.uit/ of %L'>""'""" in agasaki net assets on anuar/ 2*(6(RC( 5A8(R had no other financial transactions with agasaki during 2""$* (5 a result

of (6(RC( 5A8(Rs ownership of agasaki' (6(RC( 5A8(R has the abilit/ to eDercisesignificant influence over agasakis financial and operating policies*

0uring 2""#' (6(RC( 5A8(R disposed of the following securities:

anuar/ 1= ) sold 2'&"" shares of (,enith Corporation for %1! per share*

une 1 ) sold &"" shares of Ronette Compan/' after a 1"I stock dividend was received'

for %21 per share*

Ectober 1 ) converted &"" shares of 5han


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(pril & and Ectober & ) 5han * The adKusted balance of (,enith common ?cost@ at 0ecember !1' 2""# is:

a* % $"'""" b* % !#'2#! c* % !&'""" d* % 2#'&""

&* The sale of Ronette common on une 1 resulted to a:a* 8ain of %!'2&" b* 2'&"" d* % >1'2&"

#* The adKusted balance of agasaki common ?cost@ at 0ecember !1' 2""# is:a* % 1'=>&'""" b* % 1'=$"'""" c* % 1'#""'""" d* % 1'&>&'"""

=* The total dividend income of (6(RC( 5A8(R at 0ecember !1' 2""# is:

a* % ='>"" b* % &'7"" c* % &'!"" d* % "

7* The total income from investment of (6(RC( 5A8(R from agasaki at 0ecember !1'2""# is:

a* % 1>&'""" b* % 1$"'""" c* % !>&'""" d* % !$"'"""

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1"*(6(RC( 5A8(Rs income statement at 0ecember !1' 2""# will report a:a* o unreali,ed gainloss in market decline*

b* %#'""" unreali,ed loss in market decline*c* %#'""" unreali,ed gain in market decline*

d* %2!'>"" unreali,ed gain in market recover/*

Solution;an 2 500 shares ? P24,000 P20,000'han il% (o$$on sto(k P 20 > 1,500 shares ? 30,000 20,000

!zenith (o$$on P 11 > 3,500 shares ? 34,500 35,000

=onette P 22 > 1,700 shares ? 37,00 2,500 P133,-00 P117,500 aluation !llo8an(e@@@@@@@@@@

=e(over% J 23,00 e. al. 7,000@@@@@ @@@@@

ndin )al. 1,00J sHueeze *iure

!ns8er61. C 2. 3. C . C 5. . C 7. 4. -. + 10. +

Problem 9

(n eDamination of the general ledger account of 9E% CEM%(J discloses the followingtrading securities:

0ebit

?Credit@an* 1" %urchased &'""" shares of %iltel common at %2" per share % 1""'"""

Mar 1& %urchased 2'""" of (65)C6 common at %1& per share !"'"""Ect & %urchased additional 2'""" shares of %iltel common !$'"""

ov > 5old 2'""" stock rights ? !'"""@

% 1$!'"""(dditional information:

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1* The compan/ received stock rights from %iltel common when the market values of %iltelcommon stock and stock rights were %17 and %1 respectivel/* ach right entitles the

holder to ac.uire 1 additional share of common stock for %1= per share on or before0ecember !1' 2""#*

2* The compan/ eDercised its rights to ac.uire 2'""" additional %iltel common shares on

Ectober &' 2""#*

!* En ovember >' 9E% CEM%(J sold 2'""" stock rights at %1*&" each*

>* (t the end of the /ear' shares were .uoted in the stock eDchange as follows:

%iltel Common % 1=(65)C6 common 1>

Question1* nding balance per audit of %iltel common at /ear)end is:

a* % 1>"'""" b* % 1!='""" c* % 1!!'""" d* % 12$'"""

2* nding balance per audit of (65)C6 common at /ear)end is:

a* % 2='""" b* % !"'""" c* % !$'""" d* % !='"""

!* nding balance of investment at /ear)end is:

a* % 1&>'""" b* % 1$!'""" c* % 1#"'""" d* % 1#2'"""

>* (llowance for market decline in value of investment at /ear)end is:a* % " b* % 1"'""" c* % 7'""" d* % !'"""

&* 8ain or loss on stock rights transaction is:

a* % " b* % 2'""" c* % 1'""" d* % &""

$* 5tock rights at 0ecember !1' 2""# is:

a* % " b* % 2'""" c* % 1'""" d* % &""

Solution1. 'to(k rihts 5,000 P100,0002. I6 7,000 shares ? P 13,000 P 133,000

!'#C9 P1 > 2,000 shares ? 24,000 30,000

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P 154,000 P 163,000 = P9,0005. oss on e>:iration o* the rihts 1,000 'to(k rihts 1,000

!ns8er61. + 2. ! 3. . C 5. ! . !

Problem 10J%3


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>* The average unit cost of the no)par shares of stock sold in une 2""# isa* % 1"=*"" b* % #2*"" c* % &"*"" d* % !$*""

&* (s of une !"' 2""#' the balance of stock holdings in C9RRJ M( Chemicals wasa* 2'&"" shares b* !'#&" shares c* >'""" shares d* &'""" shares

$* The &"I stock dividends should be taken up as

a* ( debit to 3nvestment for %12'&""*b* ( credit to 3nvestment for %12'&""*c* ( memorandum entr/*

d* ( credit to income for %2"'"""*

#* The two)for)one split on 0ecember' 2""$ should be taken up as

a* ( memorandum entr/*b* ( debit to investment for %2#'&""*

c* ( credit to income for %1!'#&"*d* ( debit to investment for %2&'"""*

=* The profit on the sale of the stock dividend shares received in 0ecember' 2""& is

a* % 2""'""" b* % 12"'""" c* % 11"'""" d* % #&'"""

7* The profit of J%3 2,500 shares ? P10,00010. C P250,000 :ar > 5F > %ears ? P50,000

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Problem 11

The 5tock 3nvestment account of J(%' 3nc* showed the following details:

5TEC; 3V5TMT1"1 6eg* bal* ?2'""" shrs@ >"'""" 22= Cash dividend 1'"""!!1 %urchased !"" shrs >'&"" >"1 5ale of stock rights !'"""

$!" 5ale of 2!" shares &'"""

1* ( cash dividend of %"*&" per share was received on 4eb* 2=* The adKusting entr/ is:

063T CR03Ta* 5tock 3nvestment 1'""" 0ividend 3ncome 1'"""

b* Retained earnings 1'""" 0ividend 3ncome 1'"""c* 0ividend income 1'""" 5tock investment 1'"""

a* one of the above

2* En March 1&' stock rights were received entitling shareholders to purchase one share for

ever/ five held at %1& per share* Market values on this date were: shares' %2"F rights'%&* The adKusting entr/ to recogni,e the cost allocated to the right is:

063T CR03T

a* 5tock rights ='""" 5tock investment ='"""b* 5tock rights 1"'""" 5tock investment 1"'"""

c* 5tock rights &'""" 5tock investment &'"""b* none of the above

!* En March !1' !"" shares were purchased with the partial eDercise of these rights*

The adKusting entr/' after the adKustment in o* 1> above has been effected' is063T CR03T

a* 5tock investment 7'""" 5tock rights 7'"""

b* 5tock investment $'""" 5tock rights $'"""c* 5tock rights $'""" 5tock investment $'"""

e* none of the above

>* En (pril 1' the remaining rights were sold for %!'"""* The adKusting entr/ is:063T CR03T

a* 5tock investment !'""" 8ain on sale of rights!'"""

b* 5tock investment !'""" 5tock rights 2'"""8ain on sale of rights1'"""

c* 5tock investment 2'""" 5tock rights !'"""'2&" 8ain on sale of stock >'2&"

c* 5tock investment #&" 8ain on sale of stock #&"d* none of the above*

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An"#$%1. ! 2. ! 3. . 5. C

Problem 12

The 3V5TMT account' as of 0ecember !1' 2""#' appearing in the records EJCER%ER(T3E is as follows:

0ate %articular 0ebit Credit

anuar/ 1 6alance 1=='!""anuar/ !1 5old Ventanilla 5tock 21'!$>

March !1 6ought 0on 0ave Common 12'12&une !" 0ividend on 5uson Common 1"'"""

ul/ !1 5old 5uson Common ='#&"(ugust !1 5old asmin bonds 22'"=!

5eptember !" 3nterest on 5ucuahi Mortgage &""

The audit working papers of the preceding /ear show that the account balances as of

anuar/ 1' 2""#' consisted of the following:

Ventanilla Compan/ H Common1'""" shares' purchased in une 177# at %2" per share' %2"'"""*2'""" shares' purchased in (ugust 1777 at %1$ per share' %!2'"""*

1'&"" shares' purchased in Ma/ 2""2 at %22 per share' %!!'"""

0on 0ave Compan/ H Common2'""" shares* %urchased in anuar/ 2""! at %!! per share' %$$'"""

5uson Compan/ H Common

1"" shares purchased in (ugust 2""! at %#! per share' %#'!""

asmin Compan/ &I bonds2 bonds' %1"'""" each purchased in ul/ 2""1 at par' %2"'"""

?3nterest dates 4ebruar/ 1 and (ugust 1@*

5ucuahi Compan/ chattel mortgage on machiner/&' %1"'""" mortgage taken in 5eptember 2""> in settlement of a receivable'

%1"'"""

Jour eDamination discloses the following information:

1* 3n anuar/ 2""#' 1'""" shares of the Ventanilla compan/ common stock purchasedin Ma/ 2""2 were sold for %21'!$> net*

2* 3n March 2""#' &"" shares of 0on 0ave common stock were purchased at %2> per

share plus brokerage' for %12'12&*

!* 3n une 2""#' the 5uson Compan/ paid a 1""I stock dividend on common*

>* 3n ul/ 2""#' EJ CER%ER(T3E sold to its president' for %12& per share' 1""shares of 5uson common stock' for which the president gave his check for %='#&" and a

letter in which he agreed to pa/ the balance upon demand of the treasurer of EJCER%ER(T3E*

16


17/34

&* En (ugust 2""#' the asmin Compan/ redeemed its &I bonds at 11" plus accruedinterest*

$* 3n 5eptember 2""#' EJ CER%ER(T3E received one /ear interest on the %1"'"""

chattel mortgage of 5ucuahi*

Question1* The adKusted balance of 8ain or b* % 1"'21> c* % 1"'=&" d* % 1"'#1>

2* The adKusted balance of 3nvestment at 0ecember !1' 2""# is:

a* % 1'#2= b* % 1&&'>11 c* % 1&>'##& d* % 1&2'$72

!* The 3nvestment at 0ecember !1' 2""# is:a* Everstated b/ % 2'7&! c* Everstated b/ %&'"!$

b* Everstated b/ % 2'!1# d* Everstated b/ %!'"&$

>* 3nvestment in Ventanilla Compan/ common stock at /ear)end is:

a* % $&'""" b* % $!'""" c* % $!'$!$ d* % &2'"""

&* 3nvestment in 0on 0ave Compan/ common stock at /ear)end is:

a* % #='12& b* % $$'""" c* % $1'$2& d* % >7'&""

$* 3nvestment in 5uson Compan/ common stock at /ear)end is:a* % #'!"" b* % !'$&" c* % 2'&"" d* % 1'>&"

Solution1. I6 Cash 21,3


18/34

'""" c* %&"'""" d* %="'"""

2* 3n 5iacors 0ecember !1' 2""# balance sheet' what should be the carr/ing amount of

this investment-

a* %2""'""" b* %2"7'""" c* %22>'""" d* %2!"'"""

!* 3n its 2""= income statement' what amount should 5iacor report as gain from the sale of

half of its investment-a* %2>'&"" b* %!"'&"" c* %!&'""" d* %>&'&""

Solution1.

P40,000 > 30F ? P2,000

2. Pur(hase :ri(e 200,000 in(o$e *ro$ invest$ent 2,000# dividends 15,000ndin )alan(e 12/31/03 20-,000

3.

einnin )alan(e 1/1/0 20-,000 in(o$e *ro$ invest$ent 30,000 100,000 > 30F @@@@@@@alan(e ;une 30 23-,000

'ellin :ri(e 150,000Cost 23-,000 > 1/2 11-,500Aain on sale 30,500

Problem 14

0uring 2""$' Marlisa Compan/ purchased marketable e.uit/ securities as trading securities*(t 0ecember !1' 2""$' the balance in the allowance to reduce marketable e.uit/ securities

to market was %2!'"""* %ertinent information at 0ecember !1' 2""# is as follows:

5ecurit/ Cost Market Value9elen common % 2>&'""" % 2!"'"""

Maritess common 1="'""" 1=2'""" % >2&'""" % >12'"""

En anuar/ 1' 2""#' Marlisa Compan/ paid %#""'""" for 1""'""" shares of


19/34

!"I e.uit/ in book value of 12'""" c* % >1"'""" d* % >"2'"""

2* 3n its 2""# income statement' Marlisa should report a ?an@:

a* 8ain on market recover/ of %='"""*b* 8ain on market recover/ of %1"'"""*

c* Anreali,ed loss of %1!'"""*d* Anreali,ed loss of %1&'"""*

!* 3f Marlisa Compan/ eDercised significant influence over


20/34

+ividend in(o$e 30,000 30F


21/34

12!1"# #'""" &'2#2 1'#2= 1"!'#1712!1"= #'""" &'1=$ 1'=1> 1"1'7"&

12!1"7 #'""" &'"7& 1'7"> 1""'"""

(s of 0ecember !1' 2""#' the 3nvestment in bonds is recorded in the balance sheet at%1"='$$"*

Questions1* The 3nvestment in (donis Compan/ common at /ear)end is:

a* % 1'>#!'""" b* % 1'>#='&"" c* % 1'>="'&"" d* % 1'>=1'"""

2* The income from investment in the (donis Compan/ common at /ear)end is:

a* % 1!1'""" b* % 1!!'&"" c* % 1&7'2&" d* % 1=&'&""

!* The marketable securities at 0ecember !1' 2""# is:a* % =2"'""" b* % =>"'""" c* % 7!"'""" d* % 7&"'"""

>* The amorti,ation of investment in bonds at /ear)end is:

a* % 1'#2= b* % >'7>1 c* % $'$$7 d* % #'"""

&* 3nterest income from the investment in bonds at /ear)end is:a* % #'""" b* % &'!&> c* % &'2#2 d* % &'1=$

$* The investment in bonds at /ear)end is:

a* % 1"='$$" b* % 1"&'>># c* % 1"!'#17 d* % 1""'"""

SolutionCost P 1,00,0009et !sset !(Huired 1,200,000>(ess over (ost P 200,000Undervalue o* asset 140,000720,000 > 25F @@@@@@@@


22/34

Problem 16

RoDanne Compan/s permanent investment consists of the following:

!)/ear =I %1""'""" face value %aul 6onds ?cost@ % 7$'&""Cash surrender value of life insurance of the president 1&'"""

(vailable)for)sale securities held for long)term appreciation

of value ?at cost@ 1="'"""

The cost and market value of these securities are presented here:

Cost Market5on/ 3ncorporate ="'""" 7"'"""

Mack/ Corporation $"'""" $"'"""Ruela Compan/ >"'""" 2"'"""

(dditional information:

1* (ccording to the compan/s treasurer' investment in %aul bonds was ac.uired at the

beginning of the /ear with the intention of selling it when the need for additional workingcapital arises* 3nterest at =I is received annuall/ ever/ anuar/ 1* (ccrued interest on

these bonds had been recorded* ffective interest rate for this t/pe of securities is 1"I*The fair market value of %aul 6onds at the end of the /ear is % 7='"""*

2* (s part of additional compensation' the compan/ insured the life of its president for a

total coverage of %2 million pesos* 3nsurance premium paid during the /ear amountedto %&>'"""* 3ncrease in cash surrender value of &'""" was credited to insurance

eDpense account*

!* 5ubse.uent event review revealed that the /ear)end market decline of Ruela Compan/

stock was other than temporar/*

Questions1* The total (vailable)for)sale securities of RoDanne Compan/ at /ear)end is:

a* % 1#"'""" b* % 1="'""" c* % 1=&'""" d* % 2$='"""

2* The %aul bonds at /ear)end is:

a* % 7='1&" b* % 7='""" c* % 7$'&"" d* % 1""'"""

! The cash surrender value of life insurance at /ear)end is:a* % 1&'""" b* % 2"'""" c* % $7'""" d* % "

>* The 9eld)to)maturit/ securities at /ear)end is:

a* % 7='1&" b* % 7='""" c* % 7$'&"" d* % "

SolutionCurrent M'

3#Kear 4F P100,000 Paul )onds # P -,500

on#ter$


23/34

on#ter$ M', at $arket # 170,000 &otal # P145,000

!9'O=61. C 2. C 3. ! .! 5. C

Problem 17

En anuar/ 1' 2""#' Michelle Co* bought !"I of the outstanding common stock of Manila

Corporation* Michelle Co* accounts for this investment b/ the e.uit/ method* (t the date ofac.uisition of the stock' Manila Corporations net assets had a carr/ing value of%11'=""'"""* (ssets with an average remaining life of & /ears have a current market value

that is %2'$""'""" in eDcess of their carr/ing values* The remaining difference between thepurchase price and the value of the underl/ing stockholders e.uit/ cannot be attributed to

an/ tangible asset* (t the end of 2""#' Manila Corporation reports net income of%!'$""'"""* 0uring the 2""#' Manila Corporation declared and paid cash dividends of

%>""'"""* The balance of Michelles investment in Manila Corporation is %&'722'""" at0ecember !1' 2""#*

Questions

1* +hat is the total adKustment to share of income for 2""#-

a* % 17='""" b* % 1&$'""" c* % 2&$'""" d* % &$2'"""

2* +hat is the total dividend income for 2""#-

a* % " b* % #='""" c* % 1"#'>"" d* % 12"'"""

!* +hat is the ac.uisition cost of Michelle Compan/s investment in Manila Corporation-a* % $'17='""" b* % &'11='""" c* % !'&>"'""" d* % 1'72"'"""

Solution

30F ? 740,000/5 %ears ? P15,000JJJ P00,000 > 30F

!ns8er6

1. 2. ! 3.

Problem 18

The following entries were made b/ the accountant of


24/34


25/34

a* % " b* % 2""'""" c* % $""'""" d* % =""'"""

#* +hat adKusting entr/ should be made at 0ecember !1' 2""#' to correct the investment incommon stock account-

a* 0ividend income &"'""" c* Retained earnings &"'""" 3nvest* 3n C5 &"'""" 3nvest* in C5 &"'"""

b* Retained earnings &"'""" d* o adKusting entr/

0ividend income &"'"""

Solution!dGust$ents6;an 2


26/34

made on ov* 1"' aftera ov* 1 declaration of

%& cash dividend pershare to stockholders

on record as of 0ecember 1* 2"'""" CR !'!""'"""

0ec* 1& Cash dividend received 2"'""" CR NNNNNNNNNN 1&"'"""TET(< % !'&""'""" % >'&""'"""

En anuar/ 2' 2""=' 9E% CEM%(J purchased !7'""" shares of 8E6 6* The gain on sale of 2"'""" shares of (3M 9389 CEM%(J on Ectober & is:

a* % !""'""" b* % !1>'&"" c* % !&"'""" d* % 1'"2='&""

&* The gain on sale of 2"'""" shares of (3M 9389 CEM%(J on ovember 1" is:a* % 1'"""'""" b* % 2'2""'""" c* % 2'!""'""" d* % 2'>""'"""

$* The adKusted balance of the 9E% CEM%(Js 3nvestment in (3M 9389 CEM%(J on0ecember !1' 2""= is:

a* % 1'"""'""" b* % 1'2""'""" c* % 1'!""'""" d* % 1'&""'"""

#* The gain on investment of 9E% CEM%(J from the 3nvestment in 8E0 6


27/34

I6 Cash 1,500,000 M' 1,500,000C6 Cash 1,500,000 M' -50,000 Aain on sale 550,000

!dG6 M' 550,000 Aain on sale 550,000+ividend in(o$e 1,000,000

M' 1,000,000I6 Cash 1,100,000 M' 1,100,000C6 Cash 1,500,000 M' 75,000 Aain on sale 25,000

!dG6 M' 25,000 Aain on sale 25,000

!


28/34

Problem 20

The following are the transaction of 0 8R(C3( CEM%(J for its Marketable 5ecurities:

Marketable Securities

an 1 6eginning balance &='"""

Mar 1& %urchase 1'""" shares of 8race ?common@

at %2"' plus %2'""" commission for broker 2"'"""

(pr !" 5old &"" shares of l 5alvador at %1' less %1&commission for broker >=&

Ma/ 11 %urchased 1"'""" shares ?par %1@ of %residentCompan/ at %"*7" plus %7" commission for

broker 7'"7"

une !" Received 1""I stock dividend from %rince Co*

ul/ !" %urchase &" shares of 0e 8racia at %1>"' plus

%#" commission for broker #'"""

Ect 1 5old Ronald bondsF 1" bonds %1"'>""' plusaccrued interest to date' and less %&"

commission for broker 1"'$&"

ov 1& 5old 2" shares of %rince Compan/ at %2"' nocommission involved >""

ov !" %roceeds from sale of stock rights >'"""

0ec 1 ""

0ec 1" 5old 1& shares of 8race ?common@ at %&&' less

Commission of %1&* =1"

(dditional 3nformation:

1* The beginning balances is detailed as follows:

%rince common' 1"" sharesF par %&" &'"""l 5alvador common' #"'""" sharesF par %1" 2"'"""

Ronald bonds' ?face %1'"""@' 2" bonds' 12I' pa/ablean* 1 and ul/ 1 22'"""

(lta Compan/' 2"" shares 1'"""

Rhinna common' &'&"" shares' %ar %2 1"'"""&='"""

2* 8race issued stock rights to stockholders entitling them to subscribe at par' 1 new

share for ever/ 1" shares held on Ectober !1' 2""#* Market values at date of issuanceof rights were:

28


29/34

5tock' eD)right %#2 per share5tock rights = per share

!* The following commission were unpaid and unrecorded as at 0ecember !1' 2""#:

%2'""" for the purchase of 8race stocks% #" for the purchase of 0e 8racia stocks

>* The following information was obtained relative to dividends which were not in thebooks:

Compan/ 0ate declared ;ind Rate Remarks

%rince Compan/ 121&"# Cash 2"I Received 11$"=%resident Compan/ 12"!"# 5tock 1"I Received 117"=

Rhinna Compan/ "11&"= Cash 1"I Received 1!1"=

Question1* The entr/ to adKust the March 1& transaction on the purchase of 1'""" share of 8race

common is:a* Marketable securities 2'"""

Commission eDpense 2'"""

b* Marketable securities 2'""" Commission pa/able 2'"""

c* Marketable securities 2'"""

Cash 2'""" d* o adKustment

2* The entr/ to adKust the sale of &"" shares of l 5alvador on (pril !" is:

a* Marketable securities !#2 8ain on sale of M5 !#2

b* Marketable securities !>2 Cash !>2

c* Marketable securities !>2

8ain on sale of M5 !>2d* o adKustment

!* The entr/ to adKust the purchase of &" shares of 0e 8racia common on ul/ !" is:

a* Marketable securities #" Commission pa/able #"

b* Treasur/ stock #'"#"

Marketable securities #'""" Commission pa/able #"

c* Treasur/ stock #'""" Marketable securities #'"""

d* o adKustment

>* The entr/ to adKust the sale of 2" shares of %rince common on Ectober 1 is:a*


30/34

d* o adKustment

&* The gain on sale of stock rights is:

a* % 2'""" b* % 1'="" c* % 1'#&" d* % 1'&""

$* The entr/ to adKust the li.uidating dividend on 0ecember 1 is:a* 2 d* % 1"&

7* '1&" d* % #>'#&"

Solution1. Marketa)le se(urities 2,000

rokerLs (o$$ission :a%a)le 2,000&o adGust the Mar(h 15 transa(tion.

2. Marketa)le se(urities 32Aain on sale o* M' 32&o adGust the !:ril 30 transa(tion.'ellin :ri(e P 45 Cost 13

Aain on sale P 323. &reasur% sto(k 7,070

Marketa)le 'e(urities 7,000rokersL (o$$ission :a%a)le 70&o adGust the ;ul% 30 transa(tion.

. oss on sale o* M' 50

Marketa)le se(urities 350


31/34

'to(k rihts 2,200Aain on sale o* 'to(k rihts 1,400&o adGust the transa(tion on 9ov. 30

7. oss on invest$ent 00Marketa)le se(urities 00&o adGust the transa(tion on +e(. 1

4. Marketa)le se(urities 513

Aain on sale o* M' 513&o adGust the transa(tion on +e(. 10'ellin :ri(e P 410Cost 2-7 Aain on sale P 513

-. +ividend re(eiva)le 1,400

+ividend in(o$e 1,400&o re(ord the dividend de(lared )% Prin(e Co$:an%P 50 > 140 shares > 20F ? P 1,400

!ns8er61. 2. C 3. . ! 5. . ! 7. + 4. ! -. C 10.

Problem 21

3n connection with /our audit of the financial statement of the +illiam Compan/ for the /ear

2""#' the following investment in stock and dividend income accounts were presented to/ou:

3nvestment in 5tock 0ebit Credit

une 1=' 2""$ 1"'""" shares common parvalue %&"' 5amson Compan/ !7"'"""

(pril !"' 2""# &'""" shares 5amson Compan/received as stock dividend 2&"'"""

Ma/ 2"' 2""# 5old &'""" shares O %2& 12&'"""0ec* 1"' 2""# 5old 2'""" shares O %$" 12"'"""

0ividend 3ncome

(pril !"' 2""# 5tock dividend 2&"'"""

ov* !"' 2""# 5amson Compan/ common &"'"""

The following information was obtained during /our eDamination:

1* The balance in the investment in stock account at 0ecember !1' 2""$ per /our last

/earPs working papers' was %!7"'"""*

2* 4rom independent sources' /ou determine the following dividend information:

T/pe of 0ate 0ate of 0ate of0ividend 0eclared Record %a/ment Rate

5tock March 1&' 2""# (pril 1' 2""# (pril !"' 2""# &"ICash ov* 1' 2""# ov* 1&' 2""# ov* 2=' 2""# %&share

Cash 0ec* 1' 2""# 0ec* 1&' 2""# an* 2' 2""= 2"I

!* Closing market .uotation as at 0ecember !1' 2""#:6id (sked

5amson Compan/ common 1!Q 1$

Guestions:6ased on the above and the result of /our audit' answer the following:

31


32/34

1* 9ow much is the gain ?loss@ on the Ma/ 2"' 2""# sale-a* % ?#"'"""@ b* % ?&'"""@ c* % &'""" d* % "

2* 9ow much is the gain on the 0ecember 1"' 2""# sale-

a* % $='""" b* % >='""" c* % >2'""" d* % "

!* 9ow much is the total dividend income for the /ear 2""#-a* % >""'""" b* % !""'""" c* % 1&"'""" d* % &"'"""

>* 9ow much is the adKusted balance of investment in stock as of 0ecember !1' 2""#-

a* % 2"='""" b* % 1>&'""" c* % 11#'""" d* % 11"'"""

&* 9ow much is the (llowance for Anreali,ed loss as of 0ecember !1' 2""#-a* % 7='""" b* % !&'""" c* % #'""" d* % "

Solution

!dGust$ents+ividend in(o$e 250,000 ='"""* 3n addition' on anuar/ 1' 2""2' Ruel paid a nonrefundable

32


33/34

deposit of %&"'"""' as well as securit/ deposit of %='""" to be refunded upon eDpiration ofthe lease* The trademark was licensed to app/ Co* for ro/alties of 1"I of sales of the

trademark items* Ro/alties are pa/able semiannuall/ on March 1 ?for sales in ul/ though0ecember of the prior /ear@' and on 5eptember 1 for the sales in anuar/ through une of

the same /ear@*

0uring the /ear ended 0ecember !1' 2""#' Mack/ received cash dividends of %1'""" fromohn/' and %1&'""" from 5on/' whose 2""# net incomes were %#&'""" and %1&"'"""respectivel/* Mack/ also received %>='""" rent from Ruel in 2""# and the following ro/alties

from app/:

March 1 5eptember 12""$ %!'""" %&'"""

2""# >'""" #'"""

app/ estimated that sales of the trademark items would total to %2"'""" for the last halfof 2""#*

Questions

1* 3n Mack/s 2""# income statement' how much should be

reported for ro/alt/ revenue-a* % 1>'""" b* % 1!'""" c* % 11'""" d* % 7'"""

2* 3n Mack/s 2""# income statement' how much should bereported for rental revenue-

a* % >!'""" b* % >='""" c* % &!'""" d* % &!'=""

!* 3n Mack/s 2""# income statement' how much should be reported as the totalinvestment income-

a* % $!'""" b* % #='""" c* % 1"='""" d* % 111'"""

Solution1. +

=o%alt% revenue *or the 1sthal* o* 2007 P 7,000=o%alt% revenue *or the 2ndhal* o* 2007 2,000 P20,000 > 10F&otal ro%alt% revenue P -,000

2. C!nnual rental revenue P 4,0009onre*unda)le de:osit 50,000/10 5,000

&otal rental revenue P 53,0003. C

=o%alt% revenue P -,000=ental revenue 53,000+ividend in(o$e 1,000'hare o* in(o$e *ro$ eHuit% invest$ent 5,000 P150,000 > 30F

&otal invest$ent in(o$e P 104,000

Problem 23

3n anuar/ of /ear 1' +ivine Po8erpaid %>""'""" for 1"'""" shares of &h% Ara(e votingcommon stock' representing 1&I interest in &h% Ara(e* (t this date' the net assets of &h%

Ara(e totaled %2'"""'"""* The fair values of &h% Ara(es identifiable assets and liabilitieswere e.ual to their book values* +ivine Po8erdid not have the abilit/ to eDercise significant

influence over the operating and financial policies of &h% Ara(e* +ivine Po8er receiveddividend of %"*#" per share from &h% Ara(eon Ectober' /ear 1* &h% Ara(ereported net

income of %2&"'""" for /ear ended 0ecember !1' /ear 1* The stock classified as available)for)sale* Market price for the 1"'""" shares was %>&"'"""*

33


34/34

3n ul/ of /ear 2' +ivine Po8erpaid %1'&""'""" for !"'""" additional shares of &h% Ara(es

voting shares' which represents a 2&I interest in &h% Ara(e* The fair value of &h% Ara(esidentifiable assets' net of liabilities' was e.ual to their book values of %>'$""'"""* (s a

result of this transaction' +ivine Po8erhas the abilit/ to eDercise significant influence overthe operating and financial policies of &h% Ara(e* +ivine Po8erreceived dividend of %"*="

per share from &h% Ara(eon (pril' /ear 2' and %1*!& per share from &h% Ara(eon Ectober'/ear 2* &h% Ara(ereported net income for the siD month ended ul/ !1' /ear 2 for %2""'"""and %!""'""" for the /ear ended 0ecember !1' Jear 2*

The market value of the stock at the end of Jear 2 is %&2*

Questions6

1* (mount of income from investment in &h%Ara(ethat should be reported b/ +ivine Po8erin its /ear 1 3ncome 5tatement is:

a* % #'""" b* % !#'&"" c* % '""" d* % =#'&""

2* The carr/ing value of the investment in&h% Ara(ethat should be reported b/ +ivide Po8erin its /ear 1 6alance 5heet is:

a* % !7!'""" b* % >""'""" c* % >>!'""" d* % >&"'"""

!* (mount of income from investment in &h%Ara(ethat should be reported b/ +ivine Po8erin its /ear 2 3ncome 5tatement:

a* % >='&"" b* % #"'""" c* % 12"'""" d* % #1'&""

>* The carr/ing value of the investment in&h% Ara(ethat should be reported b/ +ivide Po8erin its /ear 1 6alance 5heet is:

a* % 1'71$'&"" b* % 1'72!'&"" c* % 1'7!='&"" d* % 2'"="'"""

Solution6Kear 1 !' 00,000

Cash 00,000Cash 7,000

+ividend in(o$e 7,000Kear 2 Cash 4,000

+ividend in(o$e 4,000!' 1,500,000

Cash 1,500,000= )e 7,000

!' 7,000!' eHuit% 37,500

= )e 37,500+ividend in(o$e 4,000

!' 4,000Cash 5,000

!' 5,000!' 30,000

chapter 6 caselette - audit of investments

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