ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4506C

CPA Review Batch 45  May 2023 CPA Licensure Examination

FINANCIAL ACCOUNTING & REPORTING / AUDITING PRACTICE S. IRENEO  G. MACARIOLA  C. ESPENILLA  J. BINALUYO

INVESTMENT PROPERTY & OTHER INVESTMENTS

Investment Property – is defined as
Property (land or building or part of a building or both) held (by the owner or the lessee under a finance
lease) to earn rentals or for capital appreciation or both, rather than for;
a) use in the production or supply of goods or services or administrative purposes (owner occupied); or
b) used by employees whether they pay or not pay rent
c) sale in the ordinary course of business (Inventory)
d) property that is leased to others under finance lease
Examples of investment property
A. Land held for long-term appreciation rather than for short-term sale in the ordinary course of business
B. Land held for currently undetermined future use.
C. A building owned by the entity (or a right-of-use asset relating to a building held by the entity) and lease out
under one or more operating leases
D. A building that is vacant, but held to be leased out under one or more operating leases
E. Property that is being constructed or developed for future use as investment property
Measurement and Recognition
An investment property shall be measured initially at cost. Transaction costs shall be included in the initial
measurement.
a. The cost of a purchased investment property comprises its purchase price and any directly attributable
expenditure. Direct attributable expenditure of investment property includes professional fees for legal
services, property transfer taxes and other transaction costs.
b. The cost of a self-constructed investment property is its cost at the date when the construction is completed.
c. If payment for an investment property is deferred, its cost is the cash price equivalent. The difference
between this amount and the total payment is recognized as interest expense over the period of credit.
d. One or more property may be acquired in exchange for a non-monetary asset or assets, or a combination of
monetary and non-monetary assets. The cost of such an investment property is measured at fair value unless
(a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received
nor the asset given up is reliably measurable, in which case, the acquired asset is measured at the carrying
amount of the asset given up.
The Cost of an Investment Property is not Increased By:
o Start-up costs (unless they are necessary to bring the property to the condition necessary for it to be capable
of operating in the manner intended by management).
o Operating losses incurred before the investment property achieves the planned level of occupancy, or
o Abnormal amounts of wasted material, labor or other resources incurred in constructing or developing the
property.
Measurement at Reporting Date
An entity must choose as its accounting policy either a cost model or fair value model and shall apply this policy
to all of its investment property.
Cost model
After initial recognition, an entity that chooses the cost model shall measure all of its investment property at cost
less accumulated depreciation less any impairment losses. Where the cost model is followed, the fair value of
the property should be disclosed.
Fair value model
Fair value is defined as the amount for which the property could be exchanged between knowledgeable, willing
parties in an arm’s length transaction. Fair value will normally be obtainable by reference to current prices on an
active market for similar properties in the same location and condition as the property under review. In the
absence of such an active market, information from variety of sources may have to be consistent, including: (a)
current prices on an active market for properties of a different nature, condition or location, adjusted to reflect
those differences and (b) discounted cash flow projections based on reliable estimates of future cash flows. If it
becomes impossible to measure fair value reliably, the cost-based-policy should be adopted and retained until
the property is disposed of.
The fair value policy requires the enterprise to revalue its investment properties each year, any gain or loss being
included in the net profit or loss for the period.
If an entity has previously measured an investment property at fair value, it shall continue to measure the
property at fair value until disposal (or until the property becomes owner-occupied property or the entity begins
to develop the property for subsequent sale in the ordinary course of business) even if comparable market
transactions become less frequent or market prices become less readily available.
After initial recognition, an entity that chooses the cost model shall measure all of its investment property in
accordance with PAS 16’s requirements for that model, other than those that meet the criteria to be classified as
held for sale.
Transfer to or from Investment Property Classification - it should only be made when there is a change in
use, evidenced by:
(a) Commencement of owner-occupation [transfer from Investment Property to Property, Plant and
Equipment (PPE)].
(b) Commencement of development with a view to sale (transfer from Investment Property to Inventories).
(c) End of owner-occupation (transfer from PPE to Investment Property).
(d) Commencement of an operating lease to another party (transfer from Inventories to Investment
Property).
(e) End of construction or development (transfer from PPE to Investment Property).

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INVESTMENT PROPERTY AND OTHER INVESTMENTS

Transfer under the fair value model

1. Investment property becomes owner-occupied property – a transfer should be made from investment
property to owner-occupied property at the commencement of owner-occupation. Where the investment
property has been carried at fair value, the fair value at the date of transfer becomes the deemed cost for
subsequent accounting under PAS 16.
2. Investment property is to be developed for sale – a transfer should be made from investment property
to inventory at the date of commencement of development with a view to sale. Where the investment
property has been carried at fair value, the fair value at the date of transfer becomes the deemed cost for
subsequent accounting under PAS 2.
3. Owner-occupied property becomes investment property – a transfer should be made from owner-
occupied property to investment property when owner-occupation ceases. If the investment property is to
be carried at fair value, PAS 16 is applied up to the date of transfer. The excess of the fair value over carrying
shall be taken to Revaluation Surplus, unless there was an impairment loss recognized for the same property
in prior years, thus a portion of the increase is recognized in profit or loss and any excess recognized as
revaluation surplus for that property.
4. Property held as inventory becomes investment property – If the investment property is to be held at
fair value, any difference between the fair value and previous carrying amount at the date of transfer is
recognized in profit or loss.
Transfer under the cost model
Where an entity has a policy of carrying investment property at cost less depreciation (the cost model), properties
are transferred in the same way and under the same circumstances as described on the above transfers.
However, such transfers do not change the carrying amount of the property transferred, that is, no revaluation
gains or losses arise, nor they change the cost of the property for measurement or disclosure purposes.

Two specific situations where transfers do not take place

• Investment property sold without development – where an investment property is to be disposed of without
development, there has been no change in use and the property is not transferred to inventory. Instead it is
retained in investment property until disposal or until it is otherwise derecognized (PAS 40 par. 58).
• Investment property developed for continuing future use as investment property – if an investment property
is to be developed for continued future use as an investment property it is also retained in investment property
and is not transferred to inventory or to owner-occupied property. It is because there has been no change
of use (PAS 40 par 58).
IFRS for SMEs Full IFRS
Investment property whose fair value can be measured Accounting policy choice between fair value and cost is
reliably without undue cost or effort must be measured applied to all investment property.
at fair value through profit or loss. All other investment
property is accounted for as property, plant and
equipment using the cost-depreciation model.
Mixed-used property should be separated between Portions of the property are only accounted separately if
investment property and property, plant and equipment, they could be sold (or leased under a finance lease)
except where to do so would entail undue cost or effort. separately.
When the fair value of investment property is no longer An entity may only account for investment property at
available without undue cost or effort, the investment cost in exceptional cases, where an entity first acquires an
property becomes property, plant and equipment. This investment property (or when an existing property first
is a change in circumstances, hence does not constitute becomes investment property after a change in use), and
a change in accounting policy. the fair value of the property cannot be reliably
determined on continuing basis.

Fund Investment
A. Fund Investment:
When a Fund Investment is created for a specific purpose or purposes, the Investment account is debited
and credited to cash or non-cash asset or any other account being issued. Any income earned and realized
by the fund or investment should be recognized directly as debit to the investment and credit to the
corresponding income from investment account. Any cost or expenses necessary or related to the
investment is a direct charge against the income and investment accounts.
B. Investment in Life Insurance (Cash surrender Value)
Cash surrender value of life insurance – is the amount to be paid by the insurance company upon surrender
and cancellation of the life insurance policy. Insurance companies usually allow a portion of accumulated
premiums to build up as a savings plan, when the policy is cancelled; the savings plan or cash surrender
value is returned to the insured. The cash surrender value of life insurance increases from year to year and
is stated in the policy. Any increase in the cash surrender value account will be debited to this account with
a corresponding credit to the life insurance expense account. Any cash dividend that may be received from
the insurance company should be recognized as a reduction to the life insurance expense account.

FINANCIAL ACCOUNTING & REPORTING - THEORIES

1. Which of the following items is an example of investment property?
A. Property that is leased to another entity under a finance lease.
B. Property held for short-term sale in the ordinary course of business.
C. Property that is being constructed or developed on behalf of third parties.
D. Property that is being constructed or developed for future use as investment property.

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INVESTMENT PROPERTY AND OTHER INVESTMENTS

2. Which statements best describe ‘owner-occupied property’ under PAS 40, Investment Property?
A. Property held to earn rentals.
B. Property held for administrative purposes.
C. Property held for sale in the ordinary course of business.
D. Property held for use in the production and supply of goods and services.
A. A and B. B. A and D C. B and D. D. C and D
3. Which of the following would not be reported as investment property?
A. Real estate held for an undetermined future use.
B. Property held by the entity and leas out under one or more operating leases.
C. Property owned by the entity and leased out under one or more operating leases.
D. Property owned by the entity and leased out to another entity under a finance lease.
4. When an owner-occupied property is transferred to investment property at fair value, a decrease in the
carrying amount of the property to its fair value at the date of transfer
A. is carried directly to equity.
B. is absorbed by retained earnings.
C. is recognized in profit and loss at all times.
D. is recognized in profit and loss, or, for a revalued property, charged against the revaluation surplus
to the extent of its credit balance.
5. In case of property held under an operating lease and classified as investment property, the entity
A. has to use the fair value model only.
B. has the choice between the cost model and the fair value model.
C. has to account for the investment property under the cost model only.
D. needs only to disclose the fair value and can use the cost model under PAS 38.
6. Which of the following generally provides the best evidence of fair value of an investment property?
A. Discounted cash flow projections based on reliable estimates of future cash flows.
B. Current prices for properties of a different nature or subject to different conditions.
C. Current prices in an active market for similar property in the same location and condition.
D. Recent prices on less active markets with adjustments to reflect the changes in economic conditions.
7. Which of the following will not indicate change in use of the property and therefore will trigger transfer to or
from investment property classification?
A. Start of owner occupation
B. End of owner occupation
C. Start of development with a view to sale.
D. Entity decides to sell an investment property without development.
8. A gain arising from a change in the fair value of an investment property for which an entity has opted to use
the fair value model is recognized in
A. net profit or loss for the year.
B. general reserve in the shareholders’ equity.
C. valuation reserve in the stockholders’ equity.
D. none of the above.
9. A gain or loss arising from a change in the fair value of investment property shall
A. not be recognized in the accounts.
B. be recognized directly to equity in the period in which it arises.
C. be recognized in the profit or loss for the period in which it arises.
D. be recognized as an adjustment to retained earnings at the beginning of the year.
10. Transfers from investment property to property, plant and equipment are appropriate
A. when there is change of use.
B. based on the entity’s discretion.
C. only when the entity adopts the fair value model under IAS 38.
D. the entity can never transfer property into another classification on the balance sheet once it is
classified as investment property.

FINANCIAL ACCOUNTING & REPORTING - PROBLEMS

Problem 1: Sydney Company has the following property items on December 31, 2021:
Land held for long-term capital appreciation P3,000,000
Land held for currently undetermined future use 4,000,000
Building owned and leased out under operating lease 2,000,000
Equipment being leased out under operating lease 1,000,000
Building that is being constructed for future use as investment property 3,500,000
Condominium building that is being constructed intended for sale in the
ordinary course of business 4,500,000
Land subdivided into smaller lots intended for sale in the ordinary course
of business 5,000,000
Building that houses materials for use in construction activities 3,800,000
Building being used for administrative purposes 4,300,000
Hotel building for which significant services are provided to the guests 5,200,000
How much should be classified as Investment Properties on December 31, 2021?
a. 12,500,000 b. 13,500,000 c. 18,700,000 d. 17,700,000

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Problem 2: On January 1, 2021, Athens Company purchased an investment property at a total cost of
P2,000,000, including transaction costs of P50,000. On October 1, 2021, the fair value of the property increased
to P2,400,000. On December 31, 2021, the fair value of the property was P2,300,000. Semi-annual rent to be
received from the property is P20,000 starting January 3, 2021. The property has a useful life of 20 years.
Estimated cost to sell on December 31, 2021 was P10,000.

1. If the company uses the cost model, what amount shall be presented in the Statement of Financial Position on
December 31, 2021?
a.2,090,000 b. 1,900,000 c. 2,300,000 d. 1,950,000
2. If the company uses the cost model, what amount (net) shall be presented in the Statement of Comprehensive
Income for the year ended December 31, 2021?
a.100,000 b. 340,000 c. 60,000 d. 360,000
3. If the company uses the fair value model, what amount shall be presented in the Statement of Financial Position
on December 31, 2021?
a.2,090,000 b. 1,900,000 c. 2,300,000 d. 1,950,00
4. If the company uses the fair value model, what amount (net) shall be presented in the Statement of
Comprehensive Income for the year ended December 31, 2021?
a.100,000 b. 340,000 c. 60,000 d. 360,000

Problem 3: On January 1, 2020, Beijing Company, which uses the fair value model, purchased an investment
property at a cost of P50,000,000. On December 31, 2020, the fair value of the property was P60,000,000. The
fair value of the property on December 31, 2021 was P55,000,000. On December 31 2021, the property was
reclassified to property, plant and equipment.
How much is the revaluation surplus that should be recognized upon transfer to PPE?
a. 0 b. 50,000,000 c. 55,000,000 d. 60,000,000

Problem 4: London Company has a building with a carrying value of P2,400,000 as of May 31, 2020. On June
1, 2020, the company decided to convert the plant asset to investment property to be carried at Fair Value.

1. If the fair value of the building on the date of transfer is 2.6M, the transfer would result to a recognition of
a. 200k Gain to P/L b. 200k Revaluation Surplus c. 2.4M Investment Property d. 2.6M Building
2. If the fair value of the building on the date of transfer is 2.2M, the transfer would result to a recognition of
a. 200k Loss taken to P/L b. 200k Loss taken to OCI c. 2.4M Investment Property d. 2.2M Building

Problem 5: On January 2, 2019, Rio Company tested its Building classified as property, plant and equipment for
impairment. The test revealed the following data: Recoverable value wasP5,500,000; Carrying value was
P8,000,000 and the remaining useful life was 10 years.
On January 2, 2021, Rio Company decided to convert this building into an investment property that is to be
carried at fair value. The fair value of the building was P7,000,000 on the date of transfer.
What amount of gain or loss should be recognized in its Profit or Loss on the date of transfer?
a. 0 b. 600,000 c. 2,000,000 d. 2,600,000
Problem 6: The following information relates to non-current investments placed in trust by Tokyo Company as
required by the underwriter of its bonds:
Bond sinking fund, January 1, 2021 P2,250,000
Additional investments to the sinking fund during 2021 450,000
Dividend revenue on equity securities 75,000
Interest revenue on debt securities 150,000
Administration cost 25,000
Carrying value of bonds payable 3,000,000
What amount should be reported as bond sinking fund on its December 31, 2021 Statement of Financial Position?
a. 2,925,000 b. 2,900,000 c. 2,875,000 d. 2,700,000

Problem 7: On January 1, 2016, Paris Company purchased a P4,000,000 ordinary life insurance policy on its
president. Additional data for the year 2019 are: Cash surrender value, January 1, P 200,000; Cash surrender
value, December 31, P220,000; Annual insurance premium paid on January 1, 2019, P80,000; Dividend received
on August 1, P 10,000. Paris Company is the beneficiary under the life insurance policy.
What amount of life insurance expense should be reported for the year ended December 31, 2019?
a. 50,000 b. 60,000 c. 70,000 d. 80,000

Problem 8: In 2018, America Company insured the life of its president for P5,000,000, with America as the
beneficiary. Information regarding this policy for 2021 is as follows:
Cash surrender value, January 1 P100,000
Annual premium paid on January 1 200,000
Dividends earned on the policy 20,000
The dividends were applied to increase the cash surrender value.
If the life insurance expense reported by the company in 2021 was P160,000, how much is the cash surrender
value on December 31?
a. 120,000 b. 140,000 c. 160,000 d. 200,000

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INVESTMENT PROPERTY AND OTHER INVESTMENTS

Problem 9: Brisbane Corporation insured the life of its president for P4,000,000, the corporation being the
beneficiary of an ordinary life policy. The monthly premium is P6,000 payable every first day of the month. The
policy is dated January 1, 2014, and carries the following cash surrender values:
End of Policy Year Cash Surrender Value
2014 -
2015 -
2016 25,200
2017 30,000
2018 39,600
2019 50,400
The corporation follows the calendar year as its fiscal period. The president dies on October 31, 2019 and the
policy is collected on December 1, 2019. How much is the gain on life insurance settlement?
a. 3,913,600 b. 3,939,400 c. 3,951,400 d. 4,000,000

AUDITING PRACTICE
Significant Business Process: Acquire to Retire (Formerly Investing Cycle)
PROBLEM 1: (INVESTMENT CLASSIFICATION – COMPREHENSIVE)
Given below is a list of securities and other assets that may qualify as investment:
Bonds of another company quoted in an active market. Business model of the company is to
hold debt securities for short- term profits. 100,000
Bonds of another company quoted in an active market. Business model of the company has
an objective to hold the financial asset to collect contractual cash-flows which are primarily in
the form of principal and interests. Moreover, the entity has elected to apply the fair value
option to eliminate accounting mismatch 50,000
Bonds of another company quoted in an active market. Business model has an objective to
hold the financial asset to collect contractual cash-flows which are primarily in the form of
principal and interests. It has also an objective to sell financial assets as opportunity arises.
Moreover, the entity has elected to apply the fair value option to eliminate accounting
mismatch 70,000
Bonds of another company quoted in an active market. Business model of the company has
an objective of collecting contractual cash- flows from the bonds which are primarily in the
form of interests and principal. 500,000
Bonds of another company quoted in an active market. Business model has an objective to
collect contractual cash flows which are primarily in the form of principal and interest. It also
has an objective to sell financial assets for financial flexibility purposes. 450,000
Ordinary shares of another company where no control nor significant influence exists. The
company irrevocably elected to report gains or losses in the profits/losses P100,000
Ordinary shares of another company where no control nor significant influence exists. The
company irrevocably elected to report gains or losses in the other comprehensive
income/losses 150,000
20% interest in Ordinary shares of another company quoted in an active market held to
generate short-term profits 500,000
51% interest in Preference shares of another company quoted in an active market held to
generate short-term profits 400,000
50% interest in Ordinary shares of another company quoted in an active market 300,000
51% interest in Ordinary shares of another company quoted in an active market 500,000
Equity securities of the company quoted in an active market reacquired with an intention of
reissuance in latter period for short-term profit 500,000
Real property held for resale in the ordinary course of business 500,000
Real property held for speculation purposes 700,000
Real property held as a current factory site 1,000,000
Real property of a manufacturing business being leased out to another party under operating
lease 900,000
Land held for undetermined future use 800,000
Land held to be used as a future plant site 400,000
Real property being developed as an investment property 300,000
5-storey office building leased out to third parties where the owner provides ancillary services
such as maintenance and security services to lessees. The ancillary services are considered
insignificant in relation to the lease agreement as a whole. 1,500,000
10-storey building (with each floor having equal floor size), 2 floors are used for
administrative offices while the rest are being leased out to third parties 1,600,000
Owner-managed hotel building 1,200,000
Hotel building managed by an independent third-party where significant cash flows from hotel
is essentially through rentals derived from the third party 800,000
1. How much is to be categorized as financial asset at fair value through profits or losses?
2. How much is to be categorized as financial asset at fair value through other comprehensive income?
3. How much is to be categorized as investment at amortized cost?
4. How much is to be categorized as investment in associate?
5. How much is to be categorized as investment in subsidiary?
6. How much is to be categorized as investment property?

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PROBLEM 2: (INVESTMENT IN DEBT SECURITY)

Magtalas Corp. acquired P2,000,000 face value bonds on March 31, 2020, at P2,188,955. The 10 year, 14%
bonds which are dated January 1, 2013 pays annual interest every December 31 and were acquired by the
company with the intention of generating income on a short-term basis from the fluctuations of the value of the
securities. The prevailing rate of interest of similar security on the same date is at 12%. Included in the lump-
sum amount paid were broker’s fees and commissions amounting to P30,000. Interests collected at year-end
were credited to the appropriate interest income account. The prevailing market rate of interest at year-end
was at 10%, thus the market value of the bonds is at ___________.
Requirements:
1. What is the fair market value of the bonds as of December 31, 2020?
2. What is the unrealized holding gain or loss to be recognized in the company’s income statement for the
year?
3. What is the investment account balance as of December 31, 2020?
4. How much is the correct interest income to be recognized for the year 2020?
5. Assuming the investments were sold on July 1, 2021 at P2,050,000 what is the realized gain or loss from
the sale?
PROBLEM 3: (INVESTMENT IN DEBT SECURITY)
David Corp. acquired a three-year, 10% bonds with a face value of P5,000,000 on January 1, 2020. The bonds
which pay annual interest every December 31 had a 12% prevailing interest rate on the date of acquisition. The
company had a business model of holding debt securities for the collection of contractual cash flows and to sell
the securities for financial flexibility purposes. The present value factor of P1 at 10%, ordinary annuity, for 3
periods is at 2.486852 while the present value factor of P1 at 10% for 3 periods is at 0.751315. The present value
factor of 1 at 12%, ordinary annuity, for 3 periods is 2.40183127 while the present value factor of P1 at 12% for
3 periods is at 0.71178. On December 31, 2020, the prevailing interest for similar securities is at 11%, thus the
fair market value of the bonds is at P4,914,374. On March 31, 2021, P2M face value bonds were sold at
P2,250,000. The applicable amortization schedule follows:
Nominal Effective
Date (P*Nom. Rate) (CV*Eff. Rate) Amortization Balance
1/1/2020 4,759,817
12/31/2020 500,000 571,178 71,178 4,830,995
12/31/2021 500,000 579,719 79,719 4,910,714
12/31/2022 500,000 589,286 89,286 5,000,000
Requirements:
1. What is the unrealized holding loss to be recognized in the balance sheet as of December 31, 2020?
2. What is the correct interest income to be reported in the 2020 income statement?
3. Carrying value of the investment as of December 31, 2020?
4. How much is the correct realized gain or loss on sale of the investment in 2021?
PROBLEM 4: (INVESTMENT IN DEBT SECURITY)
Esguerra Corp. reported an investment in financial asset at amortized cost based on the business model with an
objective of collecting contractual cash flows, amounting to P10,507,569 as of December 31, 2020, and an
interest income for the year ended December 31, 2020, at P1,200,000. The three-year, 12% bonds, which
were acquired on January 1, 2020, had a face value of 10M. The bonds were purchased at their prevailing
interest rate of 10% and pays interest semi-annually every June 30 and December 31.
Records reveal that the company accounted for the investment transaction as follows:
1/1/2020 Investment at amortized cost 10,507,569
Cash 10,507,569
To record acquisition of bonds.
6/30/2020 Cash 600,000
Interest income 600,000
To record receipt of interest.
12/31/2020 Cash 600,000
Interest income 600,000
To record receipt of interest.
60% of the investment was sold on December 31, 2020, at 110 prompting the company to shift from a business
model of holding the securities primarily to collect contractual cash flow to a business model with an objective of
holding the securities for short-term profit purposes (financial asset at amortized cost to financial asset at fair
value through profit/losses). The company is yet to record the said disposal and shift of business model. Bonds
were quoted at 115 by the end of 2021.
The applicable amortization schedule of any excess of acquisition cost over the investments’ face value follows:
Nominal Effective
Date (P*Nom. Rate) (CV*Eff. Rate) Amortization Balance
1/1/20 10,507,569
6/30/20 600,000 525,378 74,622 10,432,948
12/31/20 600,000 521,647 78,353 10,354,595
6/30/21 600,000 517,730 82,270 10,272,325
12/31/21 600,000 513,616 86,384 10,185,941
6/30/22 600,000 509,297 90,703 10,095,238
12/31/22 600,000 504,762 95,238 10,000,000

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Requirements:
1. What is the adjusted gain or loss on partial disposal of the investment in 2020?
2. How much is the unrealized holding gain or loss to be reported in the 2020 Statement of Comprehensive
Income?
3. How much is the unrealized holding gain or loss to be reported in the 2021 Statement of Comprehensive
Income?
4. Assuming that the change in business model resulted to transferring investment to financial asset at fair
market value through other comprehensive income/losses instead, what is the unrealized holding gain/loss
to be reported in the statement of financial position (SHE section) as of December 31, 2021?
PROBLEM 5: (INVESTMENT IN EQUITY SECURITY)
JACK CORP. presented the following breakdown of its investment in financial assets at fair value as of December
31, 2021, year-end audit.:
Financial assets at fair value through profit or loss (Trading Securities):
No. of Shares Original Cost FMV as of 12/31/2021
Wan ordinary shares 15,000 P750,000 P825,000
Too preference shares 10,000 600,000 650,000
Poor preference shares 20,000 1,400,000 800,000
Financial assets at fair value through other comprehensive income (Available for Sale):
No. of Shares Original Cost FMV as of 12/31/2021
Five ordinary shares 50,000 P1,250,000 P1,500,000
Seeks ordinary shares 20,000 1,000,000 900,000
Your investigation of the accounts revealed the following information:
Shares
Acquisition Originally Original FMV as of FMV as of
Investee date Acquired designation 12/31/2019 12/31/2020
Wan 06/01/2019 20,000 FVPL P1,050,000 P1,145,000
Too 11/01/2019 10,000 FVPL 750,000 700,000
Tri 02/01/2019 25,000 FVOCI 800,000 700,000
Poor 06/30/2019 20,000 FVOCI 1,300,000 1,200,000
Five 09/20/2019 50,000 FVOCI 1,125,000 1,375,000
Seeks 01/22/2019 20,000 FVOCI 1,040,000 980,000
Additional information:
a. The cost of all the securities included P1/share broker’s fees and commissions.
b. The company sold 5,000 shares of Wan ordinary shares on February 1, 2021 at P60 per share.
c. Tri ordinary shares, which were acquired at P35 per share (including P1 broker’s fees and commissions), were
sold on March 31, 2021 at P30 per share.
d. The company had originally intended of holding the investment in Poor preference shares as financial asset
at fair value through other comprehensive income. However, due to the continuing decrease in the value of
the investment, the company decided to reclassify the same as financial asset trough profit or loss during the
current year 2021. Investment in Poor was deemed impaired at the end of 2021.
Required:
1. What is the realized gain on partial sale of Wan trading securities to be recognized in the profit or loss in
2021?
2. What is the realized loss on sale of Tri ordinary shares to be recognized in the profit or loss in 2021?
3. How much is the impairment loss to be recognized in the profit or loss in 2021?
4. How much is the unrealized holding loss to be reported in the profit or loss in 2021?
5. How much is the unrealized holding gain or (loss) to be reported in the balance sheet as of December 31,
2021?
6. How much is the correct financial asset at fair value through profit or loss to be reported as of
December 31, 2021?
7. How much is the correct financial asset at fair value through other comprehensive income to be
reported as of December 31, 2021?

PROBLEM 6: (INVESTMENT IN EQUITY SECURITY)

Black Corporation purchased on January 2, 2021 for P20 per share, 300,000 White Inc. ordinary shares. On
this date, White Inc.’s shares issued and outstanding totaled 1,000,000 shares and its net assets had a book
value of P16M. The excess of acquisition cost over book value acquired was attributed to the understatement of
White’s identifiable asset without definite useful life of P800,000and White’s depreciable asset with a remaining
useful life of 5 years of P1,200,000. By the end of 2021, White Inc. declared P800,000 cash dividends and
reported a total comprehensive income amounting to P2,000,000, which is net of an unrealized holding loss
amounting to P500,000.
Requirements:
1. How much investment income should be reported in Black Corporation’s profit or loss?
2. What is the carrying value of Black’s investment as of December 31, 2021?
3. Assuming that White Inc. issued additional 200,000 shares at P30 per shares to other stockholders early in
January of 2022, what shall be the total gain or loss on dilution to be recognized in the 2022 profit or loss?
4. Assuming that Black Corporation sold 120,000 of its investment in White Corporation at P30 per share, how
much is the total gain on cessation to be recognized in the 2022 profit or loss?

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4506C
INVESTMENT PROPERTY AND OTHER INVESTMENTS

PROBLEM 7: (INVESTMENT PROPERTY)

Akio Corporation acquired on January 1, 2020 a real property classified as an investment property. The acquisition cost
was P10,000,000 and has an estimated life of 10 years. The company also paid for a finder’s fee and commissions for
P500,000.
The investment property was appraised at P12,500,000 on December 31, 2020 and P11,000,000 on December 31,
2021.
Case 1: Assuming that the company uses the Fair value Method
1. How much should the investment property be presented in the 2020 statement of financial position?
2. How much is the gain/loss to be recognized in the 2020 income statement?
3. How much should the investment property be presented in the 2021 statement of financial position?
4. How much is the gain/loss to be recognized in the 2021 income statement?
5. Assuming that the real property was reclassified as owner-occupied property on June 30, 2022, when the fair
value of the investment was at P10M, how much should the property be initially recognized at date of transfer
and how much is the gain or loss to be recognized?
6. Assuming the real property was sold on June 30, 2022 at P10M, how much is the realized gain/loss on the
disposal?
Case 2: Assuming that the company uses the Cost Method
1. How much should the investment property be presented in the 2020 balance sheet?
2. How much should the investment property be presented in the 2021 balance sheet?
3. Assuming that the real property was reclassified as owner-occupied property on June 30, 2022, when the fair
value of the investment was at P10M, how much should the property be initially recognized upon transfer and
how much gain/loss from reclassification should be recognized?
4. Assuming the real property was disposed on June 30, 2022 at P10M, how much is the realized gain/loss on the
disposal?

PROBLEM 8: (INTERNAL CONTROLS AND SUBSTANTIVE TESTING)

1. A company holds bearer bonds as short-term investments. Responsibility for the custody of these bonds and for the
submission of coupons for periodic interest collections probably should be delegated to the ____________ while the
responsibility for future purchase and sale decisions along with periodic review of the investment activities should
be delegated to ___________.
a. Chief accountant; Investment committee of the board of directors.
b. Internal auditor; Board of Directors
c. Cashier; Corporate controller
d. Treasurer; Investment committee of the board of directors.
2. If an auditor is unable to inspect and count a client’s investment securities until after the balance sheet date, the
bank, where the securities are held in a safe deposit box, should be asked to
a. Verify any differences between the contents of the box and the balances in the client’s
subsidiary ledger.
b. Provide a list of securities added to and removed from the box between the balance
sheet date and the security count date.
c. Confirm that there has been no access to the box between the balances sheet date and
the security count date.
d. Count the securities in the box so the auditor will have an independent direct verification.
3. An auditor who physically examines securities should insist that the client representative be present to
a. Detect fraudulent securities
b. Lend authority to the auditor’s directives.
c. Acknowledge the receipt of securities returned
d. Coordinate the return of securities to the proper location
4. In establishing the existence and ownership of a long-term investment in the form of publicly traded stock (held as
financial asset at fair value through other comprehensive income/losses), an auditor should:
a. Correspond with the investee company to verify the number of shares owned.
b. Inspect unaudited financial statements of the investee company
c. Refer to the market quotations of the investee company’s shares.
d. Inspect the securities either on hand or those with other independent custodians or confirm the number of
shares owned that are held by an independent custodian
5. Which of the following would provide the best form of evidence pertaining to the annual valuation of a long-term
investment in which the independent auditor’s client owns a 30% voting interest?
a. Market quotations of the investee company’s shares
b. Current fair value of the investee company’s assets
c. Historical cost of the investee company’s assets
d. Audited financial statements of the investee company
6. Which of the following would provide the best form of evidence pertaining to the annual valuation of a long-term
investment in which the independent auditor’s client owns a 10% voting interest?
a. Market quotations of the investee company’s shares
b. Current fair value of the investee company’s assets
c. Historical cost of the investee company’s assets
d. Audited financial statements of the investee company
7. In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the
reasonableness of the
a. Completeness of recorded investment income.
b. Classification between current and noncurrent portfolios.
c. Valuation of marketable equity securities.
d. Existence of unrealized gains or losses in the portfolio.

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