Chapter 4 Audit of Investments
Chapter 4 Audit of Investments
CHAPTER 4
AUDIT OF INVESTMENTS
Objective
1. Solving Audit of Inventories Problems
2. Theory of Audit of Inventories
PROBLEM NO. 1
The following transactions of the Angat Company were completed during the
year 2006:
The market values of the stocks and bonds on December 31, 2006, are as
follows:
QUESTIONS:
Based on the above and the result of your audit, determine the following:
Suggested Solution:
Question No. 1
Question No. 2
APPLIED AUDITING
Question No. 3
Question No. 4
Answers: 1) B; 2) B; 3) A; 4) A
PROBLEM NO. 2
You were engaged by Balagtas Company to audit its financial statements for
the year 2006. During the course of your audit, you noted that the following
trading securities were properly reported as current assets at December 31,
2005:
APPLIED AUDITING
Cost Market
France Corporation, 5,000 shares,
convertible preferred shares P 450,000 P 487,500
Ces, Inc., 30,000 shares of common 675,000 742,500
stock
Coo Co., 10,000 shares of common 618,750 450,000
stock
P1,743,750 P1,680,000
12/31/2006 12/31/2005
France Corp., 92.25 97.50
preferred
France Corp., 42.75 38.25
common
Ces, Inc., common 22.50 24.75
Coo Co., common 40.50 45.00
All of the foregoing stocks are listed in the Philippine Stock Exchange.
Declines in market value from cost would not be considered permanent.
APPLIED AUDITING
QUESTIONS:
Based on the above and the result of your audit, you are to provide the
answers to the following:
4. How much is the total dividend income for the year 2006?
a. P 64,375 c. P 51,875
b. P101,375 d. P364,375
Suggested Solution:
Question No. 1
Question No. 2
shares
Question No. 4
Question No. 5
Answers: 1) A; 2) B; 3) C; 4) A; 5) B
PROBLEM NO. 3
You were able to obtain the following ledger details of Trading Securities in
connection with your audit of the Bocaue Corporation for the year ended
December 31, 2006:
From the Philippine Stock Exchange, the GOOD dividends were analyzed as
follows:
At December 31, 2006, GOOD and LUCK shares were selling at P210 and
P240 per share, respectively.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
Suggested Solution:
APPLIED AUDITING
Question No. 1
Question No. 2
Question No. 3
Question No. 4
Question No. 5
Answers: 1) C; 2) A; 3) D; 4) A, 5) B
PROBLEM NO. 4
APPLIED AUDITING
Dividend Income
Date Description Ref. Debit Credit
03/30 Stock dividend SJ-8 500,000
08/30 BUSTOS Company CR-52 100,000
common
Bid Asked
BUSTOS Company common 13-3/4 16-1/2
QUESTIONS:
Based on the above and the result of your audit, answer the following:
3. How much is the total dividend income for the year 2006?
a. P600,000 c. P100,000
b. P800,000 d. P300,000
Suggested Solution:
Question No. 1
Question No. 2
Question No. 3
Question No. 4
Question No. 5
Answers: 1) A; 2) B; 3) D; 4) C, 5) A
PROBLEM NO. 5
The Marilao Company has the following transactions in the stocks of the Sta.
Maria Corp.
b) The Sta. Maria Corp. was expanding and on March 2, 2000, it issued stock
rights to its stockholders. The holder needs four rights to purchase one
share of common stock at par. The market value of the stock on that date
was P140 per share. There was no quoted price for the rights. No journal
entry was made to record the receipt of the rights.
c) On April 2, 2000, Marilao exercised all its stock rights. The Investment in
Stock account was charged for the amount paid.
d) Robinson, Marilao’s accountant, felt that the cash paid for the new shares
was merely an assessment since Marilao’s proportionate share in Sta.
Maria was not changed. Hence, he credited all dividends (5% in December
of each year) to the Investment in Stock account until the debit was fully
offset.
e) Marilao received a 50% stock dividend from Sta. Maria in December 2004.
Because the shares received were expected to be sold, the company’s
president instructed Robinson not to make any entry for this dividend. The
company did sell the dividend shares in January 2005 for P150 per share.
The proceeds from the sale were credited to income.
f) In December 2005, Sta. Maria’ stocks were split on a two-for-one basis and
the new shares were issued as no par shares. Marilao found that each
APPLIED AUDITING
new share was worth P10 more than the P110 per share original
acquisition cost. For this reason, Marilao decided to debit the Investment in
Stock account with the additional shares received at P110 per share and
credited revenue for it.
g) In August 2006, Marilao sold one half (½) of its holdings in Sta. Maria at
P120 per share. The proceeds were credited to the Investment in Stock
account.
Marilao uses the average method in recording the sale of its investment in
stock.
QUESTIONS:
Suggested Solution:
Question No. 1
Since the MV of rights is not available we must compute for the theoretical
value of the stock rights. Since the market value of the stock given is on
the date of issuance of the stock rights, the market value is considered
“ex-rights”.
= (P 140 - P100)/4
= P10*
Question No. 2
Question No. 3
Cost/
Shares share Total cost
Purchase, 1/2/1999 4,000 P110 P440,000
Receipt of stock rights, 3/2/2000 (29,333)
Balance 4,000 103 410,667
Exercise of rights, 4/2/2000 (see 1,000 129 129,333
below)
Balance 5,000 108 540,000
50% stock dividend, 12/2004 2,500
Balance 7,500 72 540,000
Sale of stock dividend, 1/2005 (2,500) 72 (180,000)
Balance 5,000 72 360,000
Stock split, 12/2005 5,000
Balance 10,000 36 360,000
Sale, 8/2006 (5,000) 36 (180,000)
Adjusted balance, 12/31/06 5,000 36 P180,000
Question No. 4
Question No. 5
PROBLEM NO. 6
Meycauayan Inc. acquired 50,000 shares of AAA stock for P5 per share and
125,000 shares of BBB stock for P10 per share on January 2, 2005. Both AAA
Inc. and BBB Corp. have 500,000 shares of no-par common stock outstanding.
Both securities are being held as long term investments. Changes in retained
earnings for AAA and BBB for 2005 and 2006 are as follows:
QUESTIONS:
Based on the above and the result of your audit, answer the following:
5. How much is the unrealized gain or loss that will be included as component
of equity as of December 31, 2006?
a. P75,000 gain c. P25,000 gain
b. P25,000 lossd. P 0
Suggested Solution:
Question No. 1
Question No. 2
Question No. 3
Question No. 4
Question No. 5
Answers: 1) A; 2) B; 3) C; 4) D, 5) A
PROBLEM NO. 7
2004 2005
Imaw dividends (paid Oct. 31) P 40,000 P 48,000
Imaw earnings 140,000 160,000
Imaw stock market price at 32 31
year-end
QUESTIONS:
Based on the above and the result of your audit, determine the following:
Suggested Solution:
Question No. 1
Question No. 2
Question No. 3
Question No. 4
Question No. 5
Answers: 1) C; 2) A; 3) B; 4) A, 5) B
PROBLEM NO. 8
APPLIED AUDITING
You were able to gather the following in connection with your audit of Obando,
Inc. On December 31, 2005, Obando reported the following available for sale
securities:
Unrealize
Cost Market d loss
ERAP Corp., 10,000
shares of common
stock P 250,000 P 220,000 P 30,000
(a 1% interest)
GMA Corp., 20,000
shares of common
stock 320,000 300,000 20,000
(a 2% interest)
FVR Corp., 50,000
shares of common
stock 1,400,000 1,350,000 50,000
(a 10% interest)
Total P1,970,000 P1,870,000 P100,000
Additional information:
On April 1, 2006, ERAP issued 10% stock dividend when the market price
of its stock was P24 per share.
On September 15, 2006, ERAP paid cash dividend of P0.75 per share.
On August 30, 2006, GMA issued to all shareholders, stock rights on the
basis of one right per share. Market prices at date of issue were P13.50
per share of stock and P1.50 per right. Obando sold all rights on
December 1, 2006 for net proceeds of P37,600.
Obando’s initial 10% interest of 50,000 shares of FVR’s common stock was
acquired on January 2, 2005 for P1,400,000. At that date, the net assets of
FVR totaled P11,600,000 and the fair values of FVR‘s identifiable assets
net liabilities were equal to their carrying amount.
Market prices per share of the securities which are all listed in the
Philippine Stock Exchange, are as follows:
12/31/2006 12/31/2005
APPLIED AUDITING
Dividend
Net per share
income
Year ended December 31, 2005 P700,000 None
Six months ended June 30, 2006 400,000 None
Six months ended December 31,
2006 (dividend was paid on 740,000 P1.30
10/1/2006)
QUESTIONS:
Based on the above and the result of your audit, determine the following:
3. Net investment income from FVR Corp. for year ended December 31, 2006
a. P237,500 c. P262,000
b. P225,000 d. P305,000
Suggested Solution:
Question No. 1
1/1/06
Receipt of stock rights from GMA,
8/30 (P300,000 x 1.5/15) (30,000)
Reclassification of Investment in (1,350,000)
FVR
AFS, 12/31/06 before 490,000
mark-to-market
Fair value of AFS, 12/31/06:
GMA [(10,000 x 1.1) x 23] P253,000
ERAP (20,000 x 14) 280,000 533,000
Decrease in unrealized loss on 43,000
AFS
Unrealized loss on AFS, 12/31/05
(P100,000 - P2,000 - P50,000)
(see note below) 48,000
Unrealized loss, 12/31/06 - as P 5,000
adjusted
Questions No. 2 to 4
Note: The excess of cost over the book value of net assets acquired will be
attributed to Goodwill. Therefore, the excess will not affect the investment
income and the carrying value of the investment since Goodwill is not
amortized.
Question No. 5
Answers: 1) C; 2) A; 3) C; 4) C, 5) D
PROBLEM NO. 9
QUESTIONS:
Based on the above and the result of your audit, determine the following:
Suggested Solution:
Question No. 1
Question No. 2
Question No. 3
APPLIED AUDITING
Question No. 4
Question No. 5
Cash P185,000
Realized loss on sale of AFS 4,849
Available for sale securities P186,363
Unrealized loss on AFS 3,486
Answers: 1) C; 2) B; 3) A; 4) B, 5) C
PROBLEM NO. 10
On July 1, 2005, bonds of P640,000 were exchanged for 90,000 shares of J &
B Corporation, common, no par value, quoted on the market on this date at P8
per share. Interest was received on bonds to date of exchange.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Use
the straight line amortization method)
Suggested Solution:
Question No. 1
Question No. 2
Question No. 3
Question No. 4
Question No. 5
Answers: 1) C; 2) A; 3) D; 4) B, 5) A
PROBLEM NO. 11
3. Which of the following controls would an entity most likely use to assist in
satisfying the completeness assertion related to long-term investments?
A. The controller compares the current market prices of recorded
investments with the brokers’ advices on file.
B. Senior management verifies that securities in the bank safe deposit box
are registered in the entity’s name.
C. The internal auditor compares the securities in the bank safe deposit
box with recorded investments.
D. The treasurer vouches the acquisition of securities by comparing
brokers’ advices with canceled checks.
Answers: 1) D; 2) C; 3) C; 4) B, 5) A;
Reference:
Compilation of lecture notes by
Dean Rene Boy R. Bacay , CPA, CrFA, CMC, MBA, FRIAcc