BAPPAUD – APPLIED

AUDITING
Passed by Paula Batalla

AUDIT OF INVENTORY
Prof. Francis O. Mateos, CPA

PROBLEM 1
Magna Corporation, invested its excess cash in equity securities during 2019. The business model for these investments is
to profit from trading on price changes.

 As of December 31, 2019, the equity investment portfolio consisted of the following:

Investment Quantity Cost FV

LL, Inc. 1,000 shares P 45,000 P 63,000
PP, Co. 2,000 shares 120,000 126,000
AA Corp. 2,000 shares 216,000 180,000

Requirements:
1. What should be reported as carrying amount of the investments in the December 31, 2019 statement of financial
position? 369,000

Fair Values of 3 companies (63,000 +126,000 + 180,000) = 369,000

2. What amount should be reported as unrealized gain or loss in the 2019 income statement ? Unrealized loss
12,000

Cost of 3 companies (45,000 + 120,000 + 216,000) =381,000

 During the year 2020, Magna Corp. sold 2,000 shares of PP Co. for P114,600 and purchased 2,000 more shares of
LL Inc, and 1,000 shares of DD Co. on December 31, 2019, Magna’s equity securities portfolio consisted of the
following:

Investment Quantity Cost FV

LL Inc. 1,000 shares P 45,000 P 60,000
LL Inc. 2,000 shares 99,000 120,000
DD Co. 1,000 shares 48,000 36,000
AA Corp. 2,000 shares 216,000 66,000

Requirements:
3. What is the gain or loss on the sale of PP Co. investment? 11,400 loss

Sales price of PP Co. 114,600

Carrying amount 126,000
Loss on PP Co. 11,400
4. What is the carrying amount of the investments on December 31, 2020? 282,000
Fair values (60,000 + 120,000 + 36,000 + 66,000) = 282,000

5. What amount of unrealized gain or loss should be reported in the income statement for the year ended December
31, 2020? Unrealized loss 108,000
Fair value 282,000
Cost(63,000 + 99,000 +48,000 +180,000) = 390,000
Unrealized Loss 108,000

 During the year 2021, Magna sold 3,000 shares of LL Inc. for P119,700 and 500 shares of DD Co. at a loss of
P8,100. On December 31, 2021, Magna’s equity investment portfolio consisted the following:

Investment Quantity Cost FV

DD Co. 500 shares P 24,000 P 18,000
AA Corp. 2,000 shares 216,000 246,000
1|Page FAR - FOMCPA
Requirements:
6. What should be reported as loss on sale of trading securities in 2021? 68,400
Sales price of LL Inc securities 119,700
Carrying amount
1,000 shares 60,000
2,000 shares 120,000 180,000
Loss on sale of LL inc. 60,300
Loss on sale of DD co. 8,100
Total Realized loss 68,400

7. What amount of unrealized gain or loss should be reported in the income statement for the year ended December
31, 2021? Unrealized gain 180,000

Investment Quantity Cost Fair Values

DD co. 500 shares 18,000 18,000
AA corp. 2,000 shares 66,000 246,000
84,000 - 264,000 = 180,000

8. What should be the carrying amount of trading securities in the December 31, 2021? 264,000
Fair Values 264,000

PROBLEM 2
Bukidnon Corp. has a policy of investing idle cash in equity securities. It has made periodic investments in its principal
supplier, Nocon Company. Bukidnon currently owns 12% of Nocon’s outstanding ordinary shares. Cherry Kosme,
company’s secretary, has gathered the following information about the company’s investments in equity securities.
 Bukidnon has trading equity investments in Delta Corp. and Polygon Company. During 2019, Bukidnon
purchased 100,000 shares of Delta Corp. for P2,400,000; these shares have a fair value of P4,800,000 at December
31, 2019. The investment in Polygon consists of 50,000 shares acquired in March 2019 at P60 per share and
currently has a value of P2,160,000.
 Bukidnon’s 12% ownership in Nocon Company has a fair value of P66,675,000 on December 31, 2019. On initial
recognition, Bukidnon made an irrevocable election to present in other comprehensive income subsequent
changes in FV of this investment in equity securities. The securities were purchased prior to 2018 for P67,500,000
and was valued at P64,500,000 on December 31, 2018. Bukidnon has not changed its holdings in the current year.

Requirements:
1. What amount of unrealized loss should be reported as component of OCI on Bukidnon’s statement of
comprehensive income on December 31, 2019? 3,000,000
FV 64,500,000
Cost 67,500,000
Unrealized Loss 3,000,000

2. What is the cumulative unrealized gain/loss that should be reported on the statement of changes in equity for the
year ended December 31, 2019?Unrealized loss 825,000
Fair Values , Dec .2019 66,675,000
Fair Values , Dec. 2018 64,500,000
Unrealized Gain 2,175,000
Unrealized Loss (3,000,000)
Cumulative unrealized loss (825,000)

3. What amount of unrealized gain/loss should be reported on Bukidnon’s income statement for the year ended
December 31, 2019 1,560,000 Unrealized gain
Cost FV UL/UG
Delta Corp. 2,400,000 4,800,000 2,400,000
Polygon Com.(50,000 shares x 60) 3,000.000 2,160,000 (840,000)
5,400,000 6,960,000 1,560,000

PROBLEM 3
On January 1, 2019, Ramp Inc. purchased debt securities for cash P765,540 to be held as financial assets at amortized cost.
The securities have a face value of P600,000, and they mature in 15 years. The securities carry fixed interest of 10% that is

2|Page FAR - FOMCPA

receivable semiannually, on June 30 and December 31. The prevailing market rate on these debt securities is 7%
compounded semiannually.

Requirements:
1. The carrying amount of the debt securities on December 31, 2019, at amortized cost using the effective interest
method. 759,016
Carrying Amount ,1/1/19 765,540
Amort of Premium – Jan 1 –June 30
Nominal Interest (600,000*10%*1/2) 30,0000
Effective Interest (765,540*7%*1/2) (26,794) (3,206)
Carrying Amount June 30,2019 762,334

Amortization of Premium – July 1- Dec 31

Nominal Interest 30,000
Effective Interest(762,334*7%*1/2) (26,682) (3,318)
Carrying Amount at Amortized Cost, 12/31/19 759,016

2. The interest income to be reported for 2019 using the effective interest rate method. 53,476
Interest Income for 2019 ( 26,794 + 26,682) = 53,476

PROBLEM 4
Sign Company purchased P160,000,000 of 8% bonds, dated January 1, on January 1, 2019, to be held as financial assets at
amortized cost. On the acquisition date, the market yield of bonds with similar risk and maturity was 10%. The company
paid P132,000,000 for the price of the bonds. Interest is received semiannually on June 30 and December 31. Due to
changes in market conditions, the FV of the bonds at December 31, 2019 was P140,000,000.

Requirements:
1. What amount will Sign Company report its investment in the December 31, 2019 statement of financial position
132.41 million

Initial Cost 132,000,000

Effective Interest (132 *5%) 6,600,000
Nominal Interest (160 *4%) 6,400,000 200,000
Carrying Amount, June 30 132,200,000
Discount Amortization – July –Dec 31
Effective Interest (132.2*5%) 6,610,000
Nominal Interest(160 *4%0 6,400,000 210,000
Carrying Amount 132,410,000

2. 0
The unrealized gain or loss to be classified as component of OCI at December 31, 2019.
No Unrealized holding gain/loss shall be recognized on financial assets measured at
amortized cost

3. The amount of interest income to be reported in Sign Company’s income statement for the year ended December
31, 2019. 13.21 million
6,600,000 + 6,610,000 = 13,210,000

PROBLEM 5
On January 1, 2019, Mcdonald Company purchased a P2,000,000 face value bonds at a price of P1,824,800 which will yield
an interest rate of 10%. The nominal rate on the bond is 8% payable annually every December 31. The company business
model is to collect contractual cash flows that are solely payments of principal and interest.

On December 31, 2020, Mcdonald Company changed the business model in managing the bonds from collecting contract
cash flows that are solely payments of principal and interest to realizing short term gains. The FMV of the bonds on
January 1, 2021, is 105.

Requirements:
1. What amount should be reported as interest income for 2020? 184,728
Acquisition Price 1,824,800
+ Discount Amortization
Effective Interest (1,824,800 *10%) 182,480

3|Page FAR - FOMCPA

 Nominal Interest (2,000,000 *8%) 160,000 22,480
Carrying Amount 1,847,280 *10% =184,728

2. What is the CA of the bonds on December 31, 2020? 1,872,008

Carrying Amount ,Jan. 2019 1,847,280
+ Discount Amortization
Effective Interest (1,847,280 * 10%) 184,728
Nominal Interest(2,000,000 *8%) 160,000 24,728
Carrying Amount 1,872,008

3. On reclassification date, what amount of gain on reclassification of financial asset should be recognized by
Mcdonald Company? 247,992

Market Value of Bonds Jan 2019 (2,000,000 * 106%) 2,120,000

Carrying amount 1,872,008
Gain on reclassification 247,992

PROBLEM 6
Andy Inc., received dividends from its investments in ordinary shares during the year ended December 31, 2019, as
follows:
 A cash dividend of P720,000 is received from JJ Corp.
 A cash dividend of P3,600,000 is received from VV Corp. (Andy, Inc. owns a 30% interest in VV).
 A stock dividend of 18,000 shares from YY Co. was received on December 15, 2019 on which date the quoted
market value of YY’s shares was P20 per share. Andy, Inc. owns less than 1% of YY’s ordinary shares.

What amount of dividend income should be reported by Andy Inc. in its 2019 income statement? 720,000
Cash Dividend received from JJ Corp.

PROBLEM 7
Trump Corporation purchased 40% of Korea Company’s outstanding ordinary shares on January 2, 2019 for P270,000,000.
The book value of Korea Company’s assets (shareholders’ equity) at the purchase date totalled P450,000,000. Book values
and fair values were the same for all financial statement items except for inventory and buildings, for which FV exceeded
book values by P12,500,000 and P112,500,000, respectively. All inventory on hand at the purchase date was sold during
2019. The building have average remaining useful lives of 15 years.

Korea Company reported net income of P110,000,000 for the year ended December 31, 2019, and paid cash dividends of
P40,000,000. The FV of Trump’s investment in associate was P300,000,000 at December 31, 2019.

Requirements:
1. What is the investment balance at December 31, 2019? 290,000,000
Purchase Price 270,000,000
Share of net income (110,000,000 *40%) 44,000,000
Cash Dividend received (40,000,000* 40%) (16,000,000)
Increase in Cost of Goods sold (12,500,000 * 40%) (5,000,000)
Additional Depreciation
(112,500,000 *40%=45,000,000 /15 years) (3,000,000)
Investment, Dec,2019 290,000,000

2. At what amount will Trump Corp. report its investment income in its 2019 income statement? 36,000,000
Share of Net Income (110,000,000 * 40 %) 44,000,000
Increase of Cost of goods sold (12,500,000 *40%) (5,000,000)
Additional Depreciation
(112,500,000 *40%= 45,000,000 /15 years) (3,000,000)
Investment Income 36,000,000

****END OF DISCUSSION****
***GODBLESS***

4|Page FAR - FOMCPA

5|Page FAR - FOMCPA