PROBLEM 5

On January 3, 2018, JR Company purchased for P500,000 cash a 10% interest in

Judi Corp. On that date the net assets of Judi had a book value of P3,750,000. The
excess of cost over the underlying equity in net assets is attributable to undervalued
depreciable assets having a remaining life of 10 years from the date of JR's
purchase. The investment in Judi Corp. was designated as FVTOCI.

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.

On January 2, 2020, JR purchased an additional 30% of Judi's stock for P1,575,000

cash when the book value of Judi's net assets was P4,150,000. The excess was
attributable to depreciable assets having a remaining life of 8 years.

During 2018, 2019, and 2020 the following occurred:

Judi Dividends Paid by

Net Income Judi to JR
2018 P350,000 P15,000
2019 400,000 20,000
2020 550,000 70,000
QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The net amount to be recognized in 2018 comprehensive income related to this

investment?
a. P15,000 c. P 85,000
b. P70,000 d. P120,000

2. The net amount to be recognized in 2019 comprehensive income related to this

investment?
a. P20,000 c. (P25,000)
b. (P45,000) d. P15,000

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?
Market quotations of the investee company’s stock.
Current fair value of the investee company’s assets.
Historical cost of the investee company’s assets.
Audited financial statements of the investee company.
Questions 1 and 2
FA@FVTOCI
----------------------------------------------------------------------------------------------------------
1/13/18 Acquisition 500,000 :
12/31/18 Inc in FV 70,000 :
----------------------------------------------------------------------------------------------------------
12/31/18 Balance 570,000 :
: 12/31/19 Dec in FV 45,000
-----------------------------------------------------------------------------------------------------------
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
Net Operating Income xxx
Add: other Income (Expenses)
Dividend Income xxx
Unrealized gain(loss)-PL xxx (xxx)
-----
Net Income before tax xxx
Income tax (xxx)
-----
Net Income after tax xxx To Retained Earnings
Other Comprehensive Income
Unrealized gain(loss)-OCI xxx (xxx) To SHE -Reserve
-----
COMPREHENSIVE INCOME xxx
===
Question No. 1 Net Income to be recognized in 2018 Comprehensive Income
Dividend Income Php 15,000
Unrealized gain(loss)-OCI 70,000
-------------------
Total Php 85,000
===========

Question No. 2 Net Income to be recognized in 2019 Comprehensive Income

Dividend Income Php 20,000
Unrealized gain(loss)-OCI ( 45,000)
--------------------
Total Php ( 25,000)
===========

Question No. 3 Carrying amount, 12/31/20 -‘fair value as deemed cost approach’

Investment in Associates
------------------------------------------------------------------------------------------------------
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

Purchased cost 1,575,000

+ Reclass investment 12/31/2019 525,000
--------------
Total 2,100,000
-Book Value of acquired asset
(4,150,000 x 40%) 1,660,000
-------------
Excess to be depreciated
for eight years 440,000
Divide by 8 year 8 years
--------------
Yearly depreciation 55,000
========

01/02/20 – Reclassification of balance-12/31/19 of FA@FVTOCI

Investment in Associates 525,000
FA@FVTOCI 525,000

12/31/20 – Net Income

Investment in Associates 220,000
Investment income 220,000
( Php550,000 x 40% = Php220,000)

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
Question No. 4 Carrying amount, 12/31/20-‘accumulated cost approach’

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
========

01/02/20 – Reclassification of balance-12/31/19 of FA@FVTOCI (Based on

Acquisition cost)
Investment in Associates 500,000
FA@FVTOCI 500,000

12/31/20 – Net Income

Investment in Associates 220,000
Investment income 220,000
( Php550,000 x 40% = Php220,000)

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 2
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:

Investment in Silver Tab Company

2018–Jan. 2 30,000 sh @35 P1,050,000 2020–Jul. 15 50,000 sh P2,000,000
@40
2019–Jul. 2 90,000 sh @60 5,400,000
2020–Mar. 2 30,000 sh @70 2,100,000

Dividend Income
2020 January. 2 P120,000
April 1 150,000
August 10 10,000
December 20 100,000

Investment in Red Tab Company

2020 - Aug. 10 P10,000
The transactions pertaining to the foregoing for 2020 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 shareholders 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 shares of one share of Red Tab Company
for every ten shares of Silver Tab Company. The share 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. 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
30,000 x Php70=2,100,000 Cash 2,100,000

Apr 1 Cash 150,000 Cash 150,000

Dividend income 150,000 Dividend income 150,000
150,000 x Php 1=Php150,000
July 15 Cash 2,000,000 Cash 2,000,000 Loss on sale 250,000
Loss on sale 250,000 Investment in Investment in
Investment in Silver Tab Co. 2,000,000 Silver Tab Co. 250,000
Silver Tab Co. 2,250,000
50,000 x Php40= Php2,000,000

30,000 x Php35= Php1,050,000

20,000 x Php60= 1,200,000
--------------------
Php2,250,000
============
Aug 10 Investment in Red Investment in Red Dividend Inc 10,000
Tab Co. 10,000 Tab Co. 10,000 Property dividend 10,000
Dividend Income 10,000 Property Dividend 10,000
100,000/10 x Php1 = Php10,000
Dec 20 Cash 100,000 Cash 100,000 Dividend Inc 100,000
Dividend Inc 100,000 Investment in Investment in
7/2/19 70,000 x 1=70,000 Silver Tab Co. 100,000 Silver Tab Co. 100,000
3/2 30,000 x 1 = 30,000
Dec 29 No entry Accounts Rec 900,000 Accounts rec 900,000
Gain on sale 310,000 Gain on sale 310,000
Investment in Investment in
Silver Tab Co. 590,000 Silver Tab Co. 590,000
10,000 x 90 = 900,000
10,000 x 50 = 590,000
------------
310,000
=======
 Investment in Silver Tab Co.
--------------------------------------------------------------------------
Unadjusted balance 6,550,000 : March 2 30,000
: July 15 250,000
: Dec 20 100,000
: Dec 29 590,000
---------------------------------------------------------------------------
Adjusted Balance 5,580,000 :
=========================

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
=======================
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 P1,376,000 P1,540,000 164,000
Products
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 P8,576,000 P8,660,000 71,200

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
======
 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:

Jan. 1 Receive interest on the Santiago bonds.

Mar. 1 Sold 8,000 shares of Laoag Inc. for

P152,000, net of transaction cost of
P7,600.

May 15 Sold 3,200 shares of Batac, Inc. at fair

value of P17 per share. The entity paid
transaction cost of P2,400.

July 1 Received interest on the Santiago bonds.

Dec. 31 Received interest on the Ilocos bonds.

31 Because of the change in business

model, the entity transferred the Ilocos
bonds to FA@FVTOCI. The bonds were
selling at 101 on this date. The bonds
were originally purchased at an effective
rate of 14%.
The fair values of the shares and bonds on December 31, 2020, are as follows:

Vigan, Inc. P22 per share

Laoag, Inc. P15 per share
10% Santiago bonds P151,200
Candon Products P42 per share
Pagudpud, Inc. P28 per share
Batac, Inc. P18 per share

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:

1. Total interest income for the year 2020

a. P251,120 c. P286,000
b. P260,000 d. P289,640

Jan 1 Php 10,000

July 1 10,000
Dec 31 269,640
--------------------
Php 289,640
===========

2. On ‘reclassification date’, the amount to be recognized in other comprehensive income

on the reclassification of Ilocos bonds
a. P123,640 c. P64,360
b. P 94,000 d. Nil

December 31 Journal Entry

3. Gain or loss on sale of 8,000 Laoag, Inc. shares on March 1

a. P8,000 gain c. P64,000 loss
b. P8,000 loss d. P64,000 gain

March 1 Journal Entry

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

May 15 Journal entry (Transaction cost)

1. Adjusted carrying amount of investments as of December 31, 2020
FA@FVTPL FA@FVTOCI
a. P602,400 P 9,446,400
b. P482,400 P 9,446,400
c. P602,400 P11,466,400
d. P482,400 P11,466,400

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
========= ============

2. The accumulated OCI to be reported as separate component of equity at December 31,

2020
a. P840,800 c. P908,800
b. P892,800 d. P924,800

FV 2019 (8,660,000 -51,200+ 2,020,000) Php 10,628,800

FV 2020 11,466,400
-------------------------
Increase in OCI for 2020 837,600
Add: beginning balance 71,200
--------------------------
Accumulated OCI Php 908,800
===============

3. The amount to be recognized in 2020 OCI

a. P840,800 c. P908,800
b. P892,800 d. P924,800
Increase in OCI for 2020 Php 837,600
+ Revaluation for security sold, May 15 3,200
---------------------
Amount Recognized in 2020 OCI Php 840,800
============
Journal Entry

Jan 1- Receive interest on the Santiago bonds.

Cash 10,000
Interest Income 10,000
(200,000 x 10% x ½ = 10,000)

March 1- Sold 8,000 shares of Laoag Inc.

Cash (152,000-7600) 144,400
Transaction cost 7,600
FA@FVTPL (288,000 x 8/16) 144,000
Gain on sale 8,000

May 15 - Sold 3,200 shares of Batac, Inc.

FA@FVTOCI [(3,200 x 17=54,400)-

(1,280,000 x 3,200/80,000=51,200) 3,200
Unrealized Gain/Loss-OCI 3,200

Cash [(3,200 x 17) – 2,400] 52,000

Transaction cost (P&L statement) 2,400
FA@FVTOCI (3,200 x 17) 54,400

Unrealized gain/loss-OCI 16,000

RE 16,000
(1,280,000-960,000) x 3,200/80,000 = 12,800
Increase in FV for shares sold on Ma 15 = 3,200
----------
16,000
======
July 1- Received interest on the Santiago bonds.
Cash 10,000
Interest income 10,000
( 200,000 x 10% x ½ = 10,000)

Dec 31 - Received interest on the Ilocos bonds

Cash (2,000,000 x 12%) 240,000
Investment @ AC 29,640*
Interest income (1,926,000 x 14%) 269,640

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
Assassin Corporation’s accounting records included the following investments:

Investment in Ordinary Shares

1/1/18 P1,000,000 7/1/20 P800,000
12/31/18 200,000
12/31/19 300,000

Investment in Bonds
1/1/20 P1,051,510

During the course of your audit, you noted the following.

Investment in Ordinary Shares

The investment is not designated at FVTOCI.
Acquired on January 1, 2018 at P950,000 plus transaction costs of P50,000.
On July 1, 2020, the entity sold half of the investment for its fair value of P800,000.
Fair value of the investment: December 31, 2018, P1,200,000; December 31, 2019,
P1,500,000; December 31, 2020, P900,000.

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:

1.The carrying amount of Investment in Ordinary Shares as of December 31, 2020 is

misstated by
a. P200,000 over c. P50,000 over
b. P200,000 under d. P50,000 under

Investment in Ordinary Shares

-----------------------------------------------------------------------------------
Unadjusted balance 700,000 :
: 01/01/18 50,000
12/31/18 50,000 :
07/01/20 50,000 :
12/31/20 150,000 :
------------------------------------------------------------------------------------
Adjusted balance 900,000 :
=========================
Under : 900,000 – 700,000 = 200,000

2. The carrying amount of Investment in Bonds as of December 31, 2020 is overstated by

a. P13,900 c. P18,020
b. P15,880 d. P33,900

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

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

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.
 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

12/31/19 Investment in O/S 300,000 Investment in Unrealized gain/

Unrealized gain/ O/S 300,000 Loss-OCI 300,000
Loss 300,000 Unrealized gain/ RE (Unrealized
Loss-PL 300,000 Gain/loss-PL) 300,000
(1,200,000 – 1,500,000 = 300,000)
07/01/20 Cash 800,000 Cash 800,000 Investment in
Investment in Investment in O/S 50,000
O/S (1,500,000/2) 750,000 O/S 800,000 Gain on sale 50,000
Gain on sale 50,000
12/31/20 No entry Investment in Investment in
O/S 150,000 O/S 150,000
Unrealized gain/ Unrealized gain/
Loss-PL 150,000 Loss-PL 150,000
(1500,000/2 – 900,000)