CDD: Auditing Problems Investments

COLEGIO DE DAGUPAN
Arellano St., Dagupan City

AUDITING PROBLEMS
INVESTMENTS IN EQUITY SECURITIES
INVESTMENTS
Are assets held by an entity for the accretion of wealth through distribution such as interest, royalties, dividends and
rentals, for capital appreciation or for other benefits to the investing entity such as those obtained through trading
relationships.
Equity instrument

Equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its
liabilities.
Examples of equity instruments:

Ordinary shares
Certain preference shares
Warrants or written call options

An investment in equity security is a financial asset since it is an equity instrument of another entity.
Standards Applicable for Investments in Ordinary Shares
Types of Investment
Purpose
Financial asset
Dividend/
Speculation
(No significant influence)

Method

Applicable Standard
PAS 39
PAS 32
Fair value
PFRS 7
PFRS 9*
Investment in Associate
Influence
Equity Method
PAS 28
Investment in Joint Venture
PAS 28
Joint control
Equity Method
PFRS 11
Investment in Subsidiary
PAS 27
Control
Consolidation
PFRS 10
*2013 version of PFRS 9 is effective January 1, 2015, while its 2014 version is effective January 1, 2018.
INITIAL RECOGNITION
Financial assets are recognized on the Statement of Financial Position when the entity becomes party to the
contractual provisions of the instrument.
INITIAL MEASUREMENT
All financial assets are measured initially at fair value, plus, for those financial assets not classified at fair value
through profit or loss, directly attributable transaction costs.

INITIAL MEASUREMENT OF INVESTMENTS IN EQUITY SECURITIES

FVTPL
FVTOCI
Fair value
Fair value
Excluding transaction cost
Including transaction cost

Nonmarketable
Purchase price
Including transaction cost

SUBSEQUENT CLASSIFICATION AND MEASUREMENT

An entity shall classify financial assets as subsequently measured at either amortized cost or fair value on the basis
of both:
a) The entitys Business Model for managing the financial assets
b) The Contractual Cash Flow Characteristics of the financial asset.

Option to designate at fair value (Fair Value Option)

An entity may, at initial recognition, designate a financial asset as measured at fair value through profit or loss if
doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an
accounting mismatch) that would otherwise arise from measuring assets or liabilities or recognizing the gains and
losses on them on different bases.
Business Model Assessment
The assessment on the entitys business model centers around whether financial asset are held for the collection of
contractual cash flows. This is based on how the entity is run, and on the objective of the business model as

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CDD: Auditing Problems Investments

determined by key management personnel (per PAS 24 Related Party Disclosure). The assessment therefore is not on
an instrument by instrument basis rather the overall business model of the entity

However, a single entity might have more than one business model, which may then result in different categories of
financial assets. Although the focus is on the collection of contractual cash flows, it is not necessary to hold all of the
assets to their contractual maturity. This means that sales of assets can occur without prejudicing the assertion that
they are held for the collection of contractual cash flows.

Contractual Cash Flow Characteristics

The assessment of the contractual terms for cash flows is carried out on an instrument by instrument basis.
Instruments with cash flows that are solely payments of principal and interest on the principal amount outstanding,
are classified at amortized cost. Interest on the principal amount outstanding is made up from consideration for the
time value of money and for the credit risk associated with the principal amount outstanding during a particular
period and nothing else
For instruments denominated in foreign currency, the assessment is made on the basis of the currency in which the
instrument is denominated (FX movements between the foreign currency and functional currency are not taken into
account when analyzing the contractual terms).
Regular way purchases or sales of a financial asset

A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery
of the asset within the time frame established generally by regulation or convention in the marketplace concerned.
A regular way purchase or sale of financial assets is recognized and derecognized using either trade date or
settlement date accounting. The method used is to be applied consistently for all purchases and sales of financial
assets that belong to the same category of financial asset as defined in PAS 39 (note that for this purpose assets held
for trading form a different category from assets designated at fair value through profit or loss). The choice of method
is an accounting policy.
What is trade date accounting?

Under trade date accounting, the financial asset and liability are recognized on the date the enterprise commits to the
purchase.
What is settlement date accounting?

Under settlement date accounting, the financial asset is recognized on the date it is delivered.
Summary of recognition and derecognition in a regular way purchase and sale of financial assets:

Recognize
Derecognize
Changes in FV from trade date to settlement date (for FA measured at FV):
Purchase
Sale

Trade Date
Commitment date
Commitment date
Recognize
Ignore

Settlement Date
Delivery date
Delivery date
Recognize
Ignore

PROBLEM NO. 1 Sale: Trade Date vs. Settlement Date Accounting

On December 28, 2011, Brayden Company commits itself to purchase a financial asset to be classified as held for
trading for P800,000, its fair value on commitment (trade) date. This security has a fair value of P801,000 and
P802,000 on December 31, 2011 (Brayden's financial year-end), and January 5, 2012 (settlement date), respectively.

1.
2.

If Brayden applies the trade date accounting method to account for regular-way purchases of its securities, how
much should be recognized as trading securities on December 31, 2011?
a. P800,000
c. P802,000
b. P801,000
d. P
0

If Brayden applies the settlement date accounting method to account for regular-way purchases of its securities,
how much should be recognized as trading securities on December 31, 2011?
a. P800,000
c. P802,000
b. P801,000
d. P
0

PROBLEM NO. 2 Purchase: Trade Date vs. Settlement Date Accounting

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On December 28, 2011 (trade date), Luke Corp. enters into a contract to sell an equity security classified as available
for sale (AFS) for its current fair value of P303,000. The asset was acquired a year ago and its cost was P300,000. On
December 31, 2011 (financial year-end), the fair value of the asset is P303,600. On January 5, 2012 (settlement date),
the asset's fair value is P303,900.
1. If Luke uses the trade date method to account for regular-way sales of its securities, how much is the carrying
amount of AFS at December 31, 2011?
a. P303,000
c. P303,900
b. P303,600
d. P
0

2.

If Luke uses the settlement date method to account for regular-way sales of its securities, how much is the
carrying amount of AFS at December 31, 2011?
a. P303,000
c. P900
b. P303,600
d. P 0

SUBSEQUENT MEASUREMENT

Measurement at reporting date

Changes in Fair Value (Unrealized gains
or Loss)

FVTPL
Fair value
P/L

FVTOCI
Fair value
OCI
(Equity)

Nonmarketable
Cost
Ignore

Note
Unrealized holding gain or loss is also called paper gain or loss.
The unrealized gain or loss that was recognized during the year for the Fair Value through Other comprehensive
Income is presented in the Statement of Other Comprehensive Income.
The accumulated balance of unrealized gain or loss for the Fair Value through Other Comprehensive Income
(FVTOCI) is presented in the Statement Financial Position and Statement of Changes in Equity.
Computation of Unrealized Gains or Losses
FVTPL securities
Fair value (measurement date)
Less: Carrying value (Fair value previous reporting
date)
Unrealized gains or loss-P/L
FVTOCI
Fair value (measurement date)
Less: Cost
Unrealized gains or loss - OCI

XX
XX
XX

FVTOCI
Fair value (measurement date)
Less: Carrying value (Fair value previous reporting
date)
Unrealized gains or loss-SOCI

XX
XX
XX

XX
XX
XX

Gain or loss on derecognition

The gain or loss on derecognition is computed as the difference between:
a) the carrying amount (measured at the date of derecognition) and
b) the consideration received (including any new asset obtained less any new liability assumed) shall be recognized
in profit or loss.
Formula:
Consideration received
Less: Dividend acquired (dividend-on)
Transaction cost
Net selling price
Add: New asset obtained
Less: New liability assumed
Total
Less: Carrying amount (@ date of derecognition)
Gain (loss) on derecognition P&L

xx
xx
xx
xx
xx
xx
xx
xx
xx

Note:
The dividend income of the investment sold is deducted from the consideration received if the entity sold the
investment in between the date of declaration and date of record of dividends.

PROBLEM NO. 3 Basic Journal Entries- Acquisitions in Between Dates of Declaration and Record
The Lurid Company has the following transactions relating to its investments during 2015:
January 5 Acquired 16,000 shares of Defray Co. for P1,600,000 paying additional P10,000 for brokerage and
another P5,000 for commission.
February 14: Received dividends from Defray Co. declared January 2, 2015 to the stockholder of record January 10,
2015, P16,000.

On December 31, 2015 the market values per share of the Defray stock is P95:

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On December 31, 2016 the market values per share of the Defray stock is P120.

Required: Prepare all the necessary entries assuming the investment is

1) Trading securities
2) Fair Value through Other Comprehensive Income securities

PROBLEM NO. 4 Derecognition of Financial Assets - Sale of Investment

On January 1, 2015, Haphazard Corp. owns 15,000 ordinary shares representing 15% of the shares outstanding of
Luke Corporation. The ordinary shares were acquired on November 12, 2014 at a cost of P750,000 and have a fair
value of P800,000 on December 31, 2014. On January 2, 2015, Haphazard sold half of its investment for P50 per share
incurring a brokerage and commission expense of P10,000.
Questions:
Based on the above data, answer the following:
Case No. 1: Assume that the above securities are classified as fair value through profit or loss
1. Unrealized gain (or loss) on December 31, 2014 to be presented in the statement of financial position.
a. Nil
c. (50,000)
b. 50,000
d. 10,000

2.

Gain (or loss) on sale on January 2, 2015.

a. Nil
c. (25,000)
b. (35,000)
d. 10,000

Case No. 2: Assume that the above securities are classified as fair value through other comprehensive income
3. Unrealized gain (or loss) on December 31, 2014 to be presented in the statement of financial position.
a. Nil
c. (50,000)
b. 50,000
d. 10,000

4.

Gain or loss on sale on January 2, 2015.

a. Nil
c. (25,000)
b. (35,000)
d. 10,000

5. Prepare all the necessary entries for the years 2014 and 2015 (for both FVTPL and FVTOCI).

DIVIDENDS OUT OF EARNINGS

1. Share Dividends
a. Same class
Recorded as memorandum entry only
b. Different class
Allocate the original cost using the relative fair value method. Journal entry
is(assuming Investment in preference shares were received):
Investment in Preference shares XX
Investment in Ordinary Shares
XX
2.
3.

Cash dividends
Property dividends

4.

Cash received in lieu

Stock dividend

5.

Shares received in lieu of

cash dividend

Recorded as income at the amount of cash receivable

Recorded as income at the fair value of noncash Asset receivable at the date of
declaration.

As if the stocks were received and subsequently sold at the amount of cash received.
Gain or loss shall be recognized equal to the difference between the net selling price
and carrying value of the investment sold.
Carrying value = (CV before stock dividend/(Orig. shares +stock dividend) x stock
dividend)
Income at the fair value of the stock received. In the absence of the FV, the income is
equal to the cash dividends that would have been received.

DIVIDENDS OUT OF CAPITAL

Dividends out of capital are actually liquidating dividend. It is not an income and therefore credited to the investment
account.
Stock split
Special
Assessment
Stock right
FVTPL
FVTOCI

Classification

Recorded as memorandum entry only. No income is recognized.

Recorded by a debit to Investment and credit to cash.

Only memorandum entry

Record the stock rights at its FAIR VALUE by debit to Stock rights and credit to Unrealized gain
(P&L)
This can be considered as derivative thus, presented as current
Assets.

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a. When SR
Is exercised
b. When
Expired

The cost of investment includes

FVTPL: only the subscription price
FVTOCI: a)subscription price plus
b. cost of the stock rights exercised.
FVTOCI: Debit to loss on stock rights and credit stock rights.

Theoretical Value of the rights

a. When the stock is selling right-on:
Market value of stock right-on minus subscription price = Value of one right
Number of rights to purchase one share plus 1
b. When the stock is selling ex-right:
Market value of stock ex-right minus subscription price = Value of one right
Number of rights to purchase one share
PROBLEM NO. 5 Share Dividends
On October 1, 2015, Contentious Corp. owns 15,000 fair value through other comprehensive income shares at a cost of
P750,000. The shares represent 15% of the shares outstanding of Pulsate Corporation. The fair value of the ordinary
shares amounted to P50 per share.

Required:
Assume the following independent cases, record the receipt of the share dividends on the Contentious assuming:
Case No. 1: Contentious received 10% ordinary shares as Share Dividends.
Case No. 2: Contentious received 1,000 preference shares as Share Dividends. Each preference share has a fair value
of P100.

PROBLEM NO. 6 Cash Dividends

On December 1, 2015, Synthetic Corp. owns 15,000 ordinary shares representing 15% of the shares outstanding of
Prowess Corporation. During the same date Prowess declared P4 per share dividends on ordinary shares to the
shareholders of record on December 15 payable on December 31.
Questions:
Based on the above data, answer the following:
1. How much is the dividend income to be recognized in 2015?
a. Nil
c. 30,000
b. 60,000
d. 15,000

2.

Prepare all the necessary entries at the

a. Date of declaration
b. Date of Record
c. Date of Payment

PROBLEM NO. 7 Property Dividends

Doused Company owns 15% of the outstanding ordinary shares of Albeit Corp. On November 1, 2014, Albeit declared
its inventory as property dividends. Data relating to the fair values of the inventory follow:
Total Fair values
Date
of Property Dividends
November 1, 2014
P500,000
December 31, 2014
P900,000
February 15, 2015
P820,000
Questions:
Based on the above data, answer the following:
1. How much is the dividend income to be recognized in 2014?
a. Nil
c. 135,000
b. 75,000
d. 123,000

2.

Prepare all the necessary entries on

a. November 1, 2014
b. December 31, 2014
c. February 15, 2015

PROBLEM NO. 8 Stock Right

On June 15, 2015, Mars Company owns 10,000 shares with a cost of P700,000 of Moon Companys stocks. During the
same period, Moon Company issued stock rights to existing shareholders. Mars received 10,000 stock rights entitling
him to purchase 5,000 new shares at P80. The ordinary share was trading ex-rights at P80 a share and the rights had
a market value P20 per right.

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On July 15, 2015, Mars exercised all the stock rights. The share is quoted right-on at P90.

Questions:
Based on the above data, answer the following:
1. Assuming that the above securities are FVTPL, the stock rights should be initially recognized at
a. Nil
c. 100,000
b. 200,000
d. 150,000

2.
3.
4.

Assuming that the above securities are FVTOCI, the stock rights should be initially recognized at
a. Nil
c. 100,000
b. 200,000
d. 150,000

Assuming that the above securities are FVTPL, the cost of investment acquired through exercised of stock rights
should be
a. Nil
c. 600,000
b. 400,000
d. 200,000

Assuming that the above securities are FVTOCI, the cost of investment acquired through exercised of stock rights
should be
a. Nil
c. 600,000
b. 400,000
d. 200,000

PROBLEM NO. 9 Theoretical Value of Rights

On January 2, 2015, Jupiter Company purchased 10,000 shares of P100 par value ordinary shares at P120 per share of
Saturn Company. On March 2, 2015, Saturn Company issued stock rights to its shareholders. The holder needs five
rights to purchase one share of ordinary stock at par. The market value of the stock on that date was P160 per share.
There was no quoted price for the rights.
Questions:
Based on the above data, answer the following:
1. Compute for the theoretical value of the rights assuming, the stock is selling right-on
a. Nil
c. 12
b. 10
d. 27

2.

Compute for the theoretical value of the rights assuming, the stock is selling ex-right
a. Nil
c. 12
b. 10
d. 27

EXCHANGE OF ONE FINANCIAL ASSET INTO ANOTHER FINANCIAL ASSET (FOR EXAMPLE CONVERSION OF
INVESTMENT IN CONVERTIBLE PREFERENCE SHARES)
Paragraph 3.2.1 of PFRS 9 provides that if, as a result of a transfer, a financial asset is derecognized in its entirety but
the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing
liability, the entity shall recognize the new financial asset,
Fair value of the new financial asset
XX
Less carrying amount (or cost) of the old financial asset
XX
Gain or loss on exchange
XX
The journal entry would be:
Financial Asset-new (at its fair value)
Loss on exchange (if any)
Gain on exchange (if any)
Financial asset (old)

XX
XX

XX
XX

RECLASSIFICATIONS OF INVESTMENTS IN EQUITY SECURITIES

No reclassifications to and from equity securities are allowed since equity securities are classified as FVTOCI, which is
prohibited from reclassification.
COMPREHENSIVE PROBLEMS
PROBLEM NO. 10 Trading Securities

You were able to obtain the following ledger details of Trading Securities in connection with your audit of the MUND
Corporation for the year ended December 31, 2011:
Date

Particulars

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AP by Darrell Joe Asuncion, CPA, MBA

CR

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CDD: Auditing Problems Investments

Date
Jan. 10

Feb. 20
Mar. 01
May 31
Aug. 15
Sep. 01

Particulars
Purchase of FRANZ Co. 6,000 shares

DR

Purchase of SCAL Co. 7,200 shares

Sale of SCAL Co. 2,400 shares
Receipt of FRANZ share dividend Offsetting Credit to
retained earnings
Sale of FRANZ Stocks 4,800 shares
Sale of FRANZ Stocks 1,200 shares

P1,440,000
1,800,000
132,000

CR
540,000
1,176,000
276,000

From the Philippine Stock Exchange, the FRANZ dividends were analyzed as follows:

Nature
Cash
Share
Cash

Declared
01/02/11
05/02/11
08/01/11

Record
01/15/11
05/15/11
08/30/11

Payment
01/31/11
05/31/11
09/15/11

Rate
P20/share
10%
P30/share

At December 31, 2011, FRANZ and SCAL shares were selling at P210 and P240 per share, respectively.
QUESTIONS:

Based on the above and the result of your audit, answer the following:
1.

2.
3.
4.
5.

The gain or loss on sale of 2,400 SCAL shares on March 1, 2011 is

a. P540,000 gain
c. P60,000 loss
b. P300,000 loss
d. P60,000 gain
The net gain/loss on sales of FRANZ shares in 2011 is
a. P108,000 gain
c. P12,000 loss
b. P142,910 gain
d. P 1,090 loss

The total dividend income to be recognized in 2011 is

a. P198,000
c. P36,000
b. P180,000
d. P54,000

The carrying amount of Trading Securities as of December 31, 2011 is overstated by

a. P228,000
c. P102,000
b. P 60,000
d. P
0

The unrealized loss on Trading Securities to be recognized in 2011 profit or loss is

a. P52,910
c. P48,000
b. P42,000
d. P
0

PROBLEM NO. 11 Fair Value through Other Comprehensive Income

At December 31, 2014, BAGCPARS Company properly reported as noncurrent assets the following Fair Value
through Other Comprehensive Income equity securities:
Cost
Market
value
EDA Corporation, 1,000 shares,
Preference share
P 40,000
30,000
DJOA, Inc., 6,000 shares of ordinary share
60,000
90,000
RVFE Co., 2,000 shares of ordinary share
55,000
88,000
Totals
P 155,000
208,000
During 2015, the following transactions occurred among others:
January 5
Acquired 8,000 shares of ARP Co. for P880,000 incurring additional P10,000 for brokerage and
another P10,000 for commission.
February 14
June

Received dividends from ARP Co. declared January 4, 2015 to the stockholders of record February 1,
2015, P16,000.

1 -sold 500 shares of RVFE, after a 10% stock dividend (bonus share) was received, for P35 per
share.

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CDD: Auditing Problems Investments

October 18

November 15

Sold 2,500 shares of DJOA Inc. for P40,000. Commissions and taxes for P5,000 were paid for the sale.

Received dividends of P2 per share from DJOA Inc. declared on October 16, 2015 to the stockholders
of record October 31, 2015.

On December 31, 2015 the following are the available market values per share:

EDA Corporation preference share

DJOA, Inc. - ordinary share
RVFE
ARP Co

P 50
15
45
100

Questions:
Based on the above and the result of your audit, determine the following:
1. The correct cost of investment acquired on January 5.
a. 884,000
c. 864,000
b. 900,000
d. 884,000

2.
3.
4.
5.

The total dividend income during the year.

a. 7,000
c. None
b. 28,000
d. 12,000

The gain or loss on sale of RVFE Inc.

a. 2,500 gain
c. 5,000 gain
b. 2,500 loss
d. 5,000 loss

The gain or loss on sale of DJOA Inc.

a. 5,000 gain
b. 5,000 loss

c. 17,500 gain
d. 17,500 loss

The total adjusted balance of the investment.

a. 979,000
c. 1,001,500
b. 1,006,500
d. 997,000

PROBLEM NO. 12 Trading and FVTOCI

On December 31, 2005 ZEUS CORPs balance sheet showed the following balances to its securities accounts:
Classification
Cost
Market
10, 000 shares of ABC
TRADING
stock
P1, 500, 000
P1,525, 000
8, 000 shares of DEF
TRADING
stock
1, 100, 000
1, 056, 500
10%, GHI bonds
TRADING
purchased at face
value (interest
payale-semi-annually
on January and July)
500, 000
373, 500
10, 000 shares of JKL
FVTOCI
shares
1, 180, 000
1, 260, 000
20, 000 shares MNO
FVTOCI
shares
980,000
1, 100, 000
During 2006 the following transactions took place:

1/1:
3/1:
4/15:
5/4:
7/1:
9/1:

Received the semi-annual interest from GHI.

Purchased 3,000 additional shares of ABC stocks for P459, 000 classified as trading security.
Sold 4, 000 shares of DEF stocks for P138 per share.
Sold 4, 000 shares of JKL shares for P124 per share.
Received semi-annual interest from GHI.
Purchased 400 of PQRs 5-year, 12%, P1, 000 bonds at 93 plus accrued interest. The bonds are dated January
1, 2004. The bonds was designated as fair value through other comprehensive income securities.

The market value of the stocks and bonds on December 31, 2006 are as follows:
ABC stocks
P153. 20
DEF stocks
137.00

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GHI bonds
JKL stocks
MNO stocks
PQR bonds

82.22 (quoted Price)

110.50
P44.00
98.00 (quoted Price)

REQUIREMENTS:
1. How much is the realized gain or (loss) on the sale of DEF stocks?
a. 2, 000 b. (2, 000)
c. 23, 750
d. (23,750)

2. How much is the realized gain or (loss) on sale of JKL shares?

a. (8, 000)
b, 8, 000
c. (24, 000)
d. 24, 000

3. How much is the unrealized holding gain to be reported in the 2006 income statement?
a. 64, 950
b. 49, 750
c. 10, 250
d. 191, 450

4. How much is the unrealized holding loss to be reported in the 2006 balance sheet?
a. 121, 000
b. 125, 000
c. 129, 000
d. 188, 000

INVESTMENT IN ASSOCIATE
7 The existence of significant influence by an investor is usually evidenced in one or more of the following ways:
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about dividends or other
distributions;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.

The Standard does not require the equity method to be applied when an associate is acquired and held with a view to
its disposal within twelve months of acquisition.
INVESTMENT IN ASSOCIATE
1 Beg. Balance
Dividends received
or Acquisition cost
Amortization of excess excldg GW
2 Share in the net
Impairment of GW
income of associate
3 Share in revaluation Balance end
Surplus
Net investment income
2 Amortization of excess
excluding goodwill
3 Impairment of goodwill
Balance end

Share in the net income

of associate

Formula:
Acquisition cost (or purchase price)
Less fair value of the net asset acquired
Excess attributable to depreciable or amortizable
Asset or Goodwill (if negative, after reassessment of the
purchase price, gain on bus. Com)

4
5

XX
XX
XX

PROBLEM NO. 13 Investment in Associate with Inventories, Machinery and Land - Land Was Subsequently
Sold
On January 1, 2015, Mebeilyn Co. acquired 25,000 ordinary shares out of the 100,000 outstanding ordinary shares of
Lloren Inc. for P4,000,000. Llorens assets and liabilities approximate their fair values except for inventories with
carrying amount of P600,000 and fair value of P400,000, machinery with carrying amount of P3,000,000 and fair
value of P1,500,000 and land with carrying amount of P1,200,000 and fair value of P1,800,000. The remaining useful
life of the machinery is 10 years. Llorens net assets have a book value of P12,000,000.

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On December 31, 2015, Lloren reported net income of P4,000,000 and declared and paid dividends of P1,000,000.

On April 30, 2016, the land of Lloren was sold at a gain of P100,000.

On December 31, 2016, Lloren reported net income of P5,000,000 and declared and paid dividends of P1,400,000.
Questions:
Based on the above date, answer the following:
1. How much is the implied goodwill from acquisition?
a. 1,275,000
c. 575,000
b. 950,000
d. 1,000,000

2.
3.
4.
5.

How much is the net share in the profit or loss of the associate (investment income) in 2015?
a. 937,500
c. 1,087,500
b. 1,000,000
d. 950,000

How much is the carrying amount of the investment as of December 31, 2015?
a. 4,687,500
c. 4,837,500
b. 5,087,500
d. 4,700,000

How much is the net share in the profit or loss of the associate (investment income) in 2016?
a. 1,250,000
c. 1,162,500
b. 1,137,500
d. 1,112,500

How much is the carrying amount of the investment as of December 31, 2016?
a. 6,125,000
c. 5,775,000
b. 6,150,000
d. 6,100,000

ASSOCIATE HAVING OUTSTANDING CUMULATIVE PREFERENCE SHARES

If an associate has outstanding cumulative preference shares that are held by parties other than the investor and
classified as equity, the investor computes its share of profits or losses after adjusting for the dividends on such
shares, whether or not the dividends have been declared.
COMPUTATION OF THE SHARE IN THE NET INCOME
Net income of the associate
XX
Less *TOTAL Preference dividend
XX
Net income to ordinary share
XX
X (Percentage of ownership-Ordinary shares) %
Share in net income of the associate
XX
The total preference dividend is deducted from the net income if:
Cumulative preference share
Deduct the preference dividends whether or not such dividends are declared.
Noncumulative preference share Deduct the preference dividends only when declared.

PROBLEM NO. 14
On January 1, 2009, NCPAR Company acquired 20% of the outstanding ordinary shares of BRAYDEN Company for
P4,000,000. This investment gave NCPAR the ability to exercise significant influence over BRAYDEN. The book value
of the acquired shares was P3,000,000. The excess of cost over book value was attributed to a depreciable assets
which was undervalued on BRAYDEN statement of financial position and which had a remaining useful life of ten
years.
For the year ended December 31, 2009, BRAYDEN share capital outstanding is as follows:
10% cumulative preference share capital 2,500,000
Ordinary share capital
10,000,000
BRAYDEN reported net income P1,500,000 for the year ended December 31, 2009.

CASE NO. 1- Assuming the cumulative preference share is treated as equity by BRAYDEN and that BRAYDEN declared
dividends of P300,000 on the preference shares, answer the following:
1. What amount should NCPAR record as investment income for the year ended December 31, 2009?
2. What amount should NCPAR record as investment in associate for the year ended December 31, 2009?

Driven for real excellence!

AP by Darrell Joe Asuncion, CPA, MBA

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CASE NO. 2- Assume instead that the preference shares are non-cumulative preference share treated as equity by
BRAYDEN and that BRAYDEN declared dividends of P300,000 on the preference shares, answer the following:
1. What amount should NCPAR record as investment income for the year ended December 31, 2009?
2. What amount should NCPAR record as investment in associate for the year ended December 31, 2009?

CASE NO. 3- Assuming the cumulative preference share is treated as Financial liability by BRAYDEN, answer the
following:
1. What amount should NCPAR record as investment income for the year ended December 31, 2009?
2. What amount should NCPAR record as investment in associate for the year ended December 31, 2009?

PROBLEM NO. 15 CHANGE FROM COST TO EQUITY METHOD

On January 1, 2013, David Company bought 10% of the outstanding ordinary shares of Jean Construction Company for
P3 million. Their book value was P8 million and the difference was attributable to the fair value of Jeans buildings
exceeding book value. Jeans net income for the year ended December 31, 2013, was P10 million. During 2013, Jean
declared and paid cash dividends of P2 million. The buildings have a remaining life of 10 years. The investment in Jean
is to be held as Fair Value through other comprehensive income.

Also, Jeans net income for the year ended December 31, 2014 was P12 million and Jean declared and paid cash
dividends of P2.5 million.
The fair value of Davids investment in Jean securities is as follows: December 31, 2013, P3,200,000; December 31,
2014, P3,100,000; and December 31, 2015, P13 million.

On January 2, 2015, David purchased an additional 20% of Jeans stock for P5,600,000 cash when the carrying amount
of Jeans net assets was P25,000,000. The excess was attributable to building having a remaining life of 8 years.

Jeans net income for the year ended December 31, 2015 was P15 million and Jean declared and paid cash dividends
of P3 million.
Required:
A. Based on the above and the result of your audit, determine the following:
1. The unrealized gain or loss to be presented in the other comprehensive income as of December 31, 2013.
2. The income from investment in Jean Company to be recognized in 2014 profit or loss is:
3. The adjustment to retained earnings as of January 2, 2015 as a result of the acquisition of the additional 30%
interest in Jean Company is:
4. The income from investment in Jean Company to be recognized in 2015 profit or loss is:
5. The carrying amount of the investment in Jean Company as of December 31, 2015 is:

PROBLEM NO. 16 DISCOUNTINUANCE OF EQUITY METHOD-CHANGE FROM EQUITY

On January 1, 2014, James Company bought 200,000 ordinary shares out of the 1,000,000 outstanding ordinary
shares of Lyn Construction Company for P30 million. Their book value was P130 million and the difference was
attributable to the fair value of Lyns buildings and its land exceeding book value, each accounting for one-half of the
difference. Lyns net income for the year ended December 31, 2014 was P150 million. During 2014, Lyn declared and
paid cash dividends of P30 million. The buildings have a remaining life of 10 years.
On January 2, 2015, James sold half of its investment at P28 million and reclassified its remaining investment to Fair
Value through other comprehensive income. The fair value of the shares this date amounted to P285 per share. Lyns
net income for the year ended December 31, 2015, was P160 million. During 2015, Lyn declared and paid cash
dividends of P28 million. On December 31, 2015, the fair value of the shares amounted to P290 per share.

Required:
A. Compute for the following:
1) What is the investment balance on December 31, 2014?
2) What is the gain on sale of 100,000 shares on January 2, 2015?
3) What is the total amount that should be recognized in profit or loss on January 2, 2015?
4) What is the unrealized gain to be recognized in the December 31, 2015 statement of financial position?

ADJUSTMENT OF INVESTEES OPERATIONS

Upstream Transactions
Profits and losses resulting from upstream and downstream transactions between an investor (including its
consolidated subsidiaries) and an associate are recognized in the investors financial statements only to the extent of
unrelated investors interests in the associate. Upstream transactions are, for example, sales of assets from an
associate to the investor.

Downstream Transactions
Downstream transactions are, for example, sales of assets from the investor to an associate. The investors share in
the associates profits and losses resulting from these transactions is eliminated.

Driven for real excellence!

AP by Darrell Joe Asuncion, CPA, MBA

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CDD: Auditing Problems Investments

When downstream transactions provide evidence of a reduction in the net realizable value of the assets to be sold or
contributed, or of an impairment loss of those assets, those losses shall be recognized in full by the investor. When
upstream transactions provide evidence of a reduction in the net realizable value of the assets to be purchased or of
an impairment loss of those assets, the investor shall recognize its share in those losses.

The share in the profit or loss of an associate is recognized only to the extent of unrelated investors interest in the
associate. If the transaction is:
Downstream sale - eliminate the entire unrealized profit. (i.e. 100%)
Upstream sale - eliminate the investors share in unrealized profit. (percentage of ownership)
Basic Formula:
Net income x percentage of ownership
Less: Unrealized profit on upstream sale x percentage of ownership
Add: Realized profit on upstream sale x percentage of ownership
Less: Unrealized profit on downstream sale
Add: Realized profit on downstream sale
Share in the net income

XX
( XX )
XX
( XX )
XX
XX

PROBLEM NO. 17
On January 1, 2015, Myrah Company acquired 30% of the ordinary shares of an associate for P4,000,000. On this date,
all the identifiable assets and liabilities of the associate were recorded at fair value. An analysis of the acquisition
showed that goodwill of P200,000 was acquired.
The net income and dividend of the associate for 2015 and 2016 were as follows:
2015
2,000,000
800,000

Net income
Dividend paid

2016
3,000,000
1,200,000

On January 3, 2015, Myrah Company sold an equipment costing P600,000 to the associate Company for P800,000. The
equipment has a remaining life of 5 years.

In December 2015, the associate sold inventory to Myrah Company for P700,000. The cost of the inventory was
P600,000. This inventory remained unsold by Myrah Company on December 31, 2015. However, it was sold by Myrah
Company in 2016.
In December 2016, the associate sold inventory to Myrah Company for P550,000. The cost of the inventory was
P400,000. This inventory remained unsold by Myrah Company on December 31, 2016.
Questions:
Based on the above date, determine the following:
1. Net share in the net income (or loss) of the associate in 2015
a. 600,000
c. 410,000
b. 440,000
d. 760,000

2.
3.
4.
5.

Net share in the net income (or loss) of the associate in 2016
a. 900,000
c. 860,000
b. 865,000
d. 925,000

Carrying amount of the investment in associate on December 31, 2015

a. 4,410,000
c. 4,440,000
b. 4,600,000
d. 4,760,000

Carrying amount of the investment in associate on December 31, 2016

a. 5,310,000
c. 5,335,000
b. 5,500,000
d. 5,635,000

Assuming the company is a small/medium entity and uses the equity method, the carrying amount of investment
on December 31, 2016 is
a. 4,310,000
c. 4,695,000
b. 4,500,000
d. 4,635,000

PROBLEM NO. 18

The following two subsidiary accounts reflect the trading securities of Jordano Company for the year 2005:
Date
Jan. 16

Purchase

Transactions

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LOYAL COMPANY
Shares
Ref.
20,000
CD

AP by Darrell Joe Asuncion, CPA, MBA

Debit
P1,900,000

Credit

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CDD: Auditing Problems Investments

31

Mar. 30
June 10
July 29
Date
Sep. 05
28
Oct. 01
05
Nov.30

Dec.15

Raised to market value, offset

credit to retained earnings
Sale at P150
Stock dividend at par
Sale at P110
Totals

10,000
10,000
10,000

FAITHFUL CORP.
Shares
Purchase
20,000
Cash dividends to stockholders of
record Sept. 15, declared Aug. 15
Transactions

Purchase
Sale at P65
Cash collected for sale made on
Nov. 10, after a Nov. 1 declaration
of P5 cash dividend per share to
stockholders on record as of
December 1
Cash dividend received
Totals

50,000
20,000

20,000

GJ
CR
GJ
CR

100,000

1,000,000
.
P3,000,000

Ref.
CD

Debit
P1,000,000

CR
CD
CR

2,500,000

CR
CR

.
P3,500,000

P1,500,000

1,100,000
P 2,600,000
Credit
P 50,000
1,000,000

3,300,000
150,000
P4,500,000

On January 2, 2005, Jordano Company purchased 39,000 shares of Trustworthy Co.s 200,000 shares of outstanding
common stock for P1,170,000. On that date, the carrying amount of the acquired shares on Trustworthy Co.s books
was P810,000. Jordano attributed the excess of cost over carrying amount to goodwill.

During 2005, Jordanos president gained a seat on Trustworthys board of directors. Trustworthy reported earnings
of P800,000 for the year ended December 31, 2005, and declared and paid cash dividends of P200,000 during 2005.
On December 31, 2005, Trustworthys common stock was trading at P30 per share.
QUESTIONS:
1.

2.

3.

4.
5.

6.

7.
8.
9.

The gain on sale of 10,000 shares of Loyal Company on March 30 is

a. P500,000
b. P1,500,000 c. P550,000
d. None
The gain on sale of 10,000 shares of Loyal Company on July 29 is
a. P625,000
b. P337,500
c. P525,000
d. P150,000
The correct acquisition cost of 20,000 shares of Faithful Corp. acquired on September 5 is
a. P3,500,000
b. P950,000
c. P1,000,000 d. P3,450,000
The gain on sale of 20,000 shares of Faithful Corp. October 5 is
a. P350,000
b. P300,000
c. P1,028,500 d. P314,300
The gain on sale of 20,000 shares of Faithful Corp. on November 10 is
a. P1,000,000
b. P2,400,000 c. P2,300,000 d. P2,200,000
The balance of the Companys investment in Loyal Company before mark-to-market on December 31, 2005 is
a. P475,000
b. P500,000
c. P1,475,000 d. P525,000
The adjusted balance of the Companys investment in Faithful Corp. before mark-to-market on December 31,
2005 is
a. P1,500,000
b. P1,350,000 c. P1,200,000 d. P1,000,000
The income from investment in common stock of Trustworthy Company to be reported on the income
statement for the year ended December 31, 2005 is
a. P156,000
b. P159,000
c. P120,000
d. P39,000
The adjusted balance of investment in Trustworthy Company at December 31, 2003 is
a. P1,326,000
b. P1,170,000 c. P1,287,000 d. P1,251,000

SUGGESTED ANSWERS: C, A, B, A, D, A, A, A, C
END OF HANDOUTS!

Driven for real excellence!

AP by Darrell Joe Asuncion, CPA, MBA

13
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