AUDIT OF INVESTMENTS

PROBLEM 1

The following information pertains to BAGSAK LIPAT INC.’s portfolio or marketable

investments for the year ended December 31, 2021:

Cost Fair Value 2021 Activities Fair Value

12/31/2020 Purchases Sales 12/31/2021
Held to maturity
Security ABC 100,000 95,000

Trading security
Security DEF 150,000 100,000 155,000

Available for sale

Security GHI 190,000 165,000 175,000
Security JKL 170,000 175,000 160,000

Security ABC was purchased at par. All declines in fair values are considered to be
temporary.

Questions:
1. The carrying value of security ABC at December 31, 2021 is
a. P95,000 c. P100,000
b. P98,000 d. P105,000

2. The carrying value of security DEF at December 31, 2021 is

a. P100,000 c. P150,000
b. P120,000 d. P155,000

3. The carrying value of security JKL at December 31, 2021 is

a. P160,000 c. P170,000
b. P165,000 d. P175,000

4. The recognized gain or loss on sale of security GHI is

a. (P40,000) c. (P15,000)
b. (P25,000) d. (P10,000)

5. The unrealized holding gains or loss to be reported in 2021 profit or loss is

a. P55,000 c. P15,000
b. (P25,000) d. (P5,000)

6. Unrealized gain or loss to be reported at December 31, 2021 as a separate component

of stockholders’ equity entitled “accumulated comprehensive income” is
a. (P20,000) c. (P10,000)
b. P15,000 d. P5,000

PROBLEM 2

SHIFT KA NA CORP. invested its excess cash in equity securities during 2014. The business
model for these investments is to profit form trading on price changes.

a) As of December 31, 2024, the equity investment portfolio consisted of the following:

Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares 45,000 63,000
Polland, Co. 2,000 shares 120,000 126,000
Alabang, Corp. 2,000 shares 216,000 180,000
Total 381,000 369,000

1. In the December 31, 2024 statement of financial position, what should be reported s
carrying amount of the investments?
a. P369,000 c. P381,000
b. P345,000 d. P405,000

2. In the 2014 income statement, what amount should be reported as unrealized gain or
loss?
a. Unrealized gain of P12,000 c. Unrealized loss of P36,000
b. Unrealized loss of P12,000 d. Unrealized gain of P24,000

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b) During the year 2025, SHIFT KA NA sold 2,000 shares of Polland Co. for P114,600 and
purchased 2,000 more shares of LJ, Inc and 1,000 shares of Dwarfy Company. On December
31, 2015, SHIFT KA NA’s equity portfolio consisted of the following:

Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares 45,000 60,000
LJ, Inc. 2,000 shares 99,000 120,000
Dwarfy Company 1,000 shares 48,000 36,000
Alabang, Corp. 2,000 shares 216,000 66,000
Total 408,000 282,000

3. What is the gain or loss on the sale of Poland, Co’s investment?

a. P5,400 gain c. P11,400 gain
b. P5,400 loss d. P11,400 loss

4. What is the carrying amount of the investments on December 31, 2025?

a. P408,000 c. P282,000
b. P444,000 d. P246,000

5. What amount of unrealized gain or loss should be reported in the income statement for
the year ended December 31, 2015?
a. P126,000 unrealized gain c. P108,000 unrealized gain
b. P126,000 unrealized loss d. P108,000 unrealized loss

c) During the year 2026, SHIFT KA NA sold 3,000 shares of LJ, Inc. for P119,700 and 500
shares of Dwarfy Company at a loss of P8,100. On December 31, 2026, SHIFT KA NA’s equity
investment portfolio consisted of the following:

Investment Quantity Cost Fair Value

Dwarfy Company 500 shares 24,000 18,000
Alabang, Corp. 2,000 shares 216,000 246,000
Total 240,000 264,000

6. What should be reported as loss on sale of trading securities in 2026?

a. P60,300 c. P24,300
b. P32,400 d. P68,400

7. What amount of unrealized gain or loss should be reported in the income statement for
the year ended December 31, 2026?
a. P180,000 unrealized gain c. P24,000 unrealized gain
b. P180,000 unrealized loss d. P24,000 unrealized loss

8. In the December 31, 2026 statement of financial position, what should be reported as
carrying amount of trading securities?
a. P240,000 c. P264,000
b. P234,000 d. P270,000

PROBLEM 3

During the course of your audit of the financial statements of LAGAPAK CORPORATION for the
year ended December 31, 2024, you found a new account, “Investment in Equity Securities.”
Your audit revealed that during 2024, LAGAPAK began a program of investments, and all
investment-related transactions were entered in this account. Your analysis of this account
for 2024 follows:

LAGAPAK CORPORATION
Analysis of Investment in Equity Securities
For the year ended December 31, 2024

(a)
Salmon Company Ordinary Shares Debit Credit
Feb 14 Purchased 36,000 shares @ P55 per share 1,980,000
Jul 26 Received P3,600 ordinary shares of Salmon
Company as a share dividend (Memo entry in
general ledger)
Sep 28 Sold the 3,600 ordinary shares of Salmon 252,000
Company received July 26 @ P70 per share

(b)
Tamban, Inc. Ordinary Shares Debit Credit
Apr 30 Purchased 180,000 shares @ P40 per share 7,200,000
Oct 28 Received dividend of P1.20 per share 216,000

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Additional information:

a. The fair value for each security as of the 2024 date of each transaction follow:

Security Feb 14 Apr 30 Jul 26 Sep 28 Dec 31

Salmon Company P55 P62 P70 P74
Tamban Inc. P40 32
LAGAPAK CORP. 25 28 30 33 35

b. All of the investments of LAGAPAK CORPORATION are nominal in respect to percentage of

ownership (5% or less).
c. Each investment is considered by LAGAPAK CORPORATION to be non-trading. LAGAPAK has
made an irrevocable designation to present in other comprehensive income subsequent
changes in fair value of its non-trading securities.

Questions:
1. What amount should be reported as gain on sale of non-trading equity securities in
2024?
a. P72,000 c. P54,000
b. P18,000 d. P -0-

2. The receipt of 3,600 share dividend would cause the investment balance to increase by
a. P223,200 c. P198,000
b. P252,000 d. P -0-

3. What entry is necessary to correct the recording of the cash dividend received from
the cash dividend received from Tamban, Inc.?
a. Cash 216,000
Dividend Income 216,000
b. Cash 216,000
Investment in Equity Securities 216,000
c. Investment in Equity Securities 216,000
Dividend Income 216,000
d. Dividend Income 216,000
Investment in Equity Securities 216,000

4. What amount of unrealized gain or loss should be reported in the 2024 statement of
comprehensive income as component of other comprehensive income?
a. P1,440,000 gain c. P576,000 gain
b. P1,440,000 loss d. P576,000 loss

5. What amount should be reported as Investment in Equity Securities in the statement of

financial position on December 31, 2024?
a. P9,000,000 c. P7,560,000
b. P8,424,000 d. P9,864,000

PROBLEM 4

On January 1, 2024, SINGKO CORP. purchased as a financial asset to held as amortized cost
a debt instrument with a five year term for its fair value of P1,386,275. The instrument
has a principal amount of P1,500,000 and carries a fixed interest of 8% annually. The
effective interest is determined to be 10%.

During 2026, the issuer of the instrument is in financial difficulties and it becomes
probable that the issuer will be put into administration by a receiver. The fair value of
the instrument is estimated to be P750,000 at the end of 2026, calculated by discounting
the expected future cash flows at 10%. No cash flows are received during 2027. At the end
of 2027, the issuer is released from administration and SINGKO received a letter from the
receiver stating that the issuer will be able to meet its remaining obligations, including
interest and repayment of principal.

Questions:
1. What is the book value of the investment at the end of 2025?
a. P1,347,157 c. P1,500,000
b. P1,460,882 d. P1,425,393

2. What amount of impairment loss should be recognized in 2026?

a. P697,932 c. P636,275
b. P750,000 d. P675,393

3. How much interest income should be recognized in 2027?

a. P24,793 b. P -0-
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 c. P75,000 d. P120,000

4. What amount of impairment loss reversal should be recognized in 2027?

a. P697,932 c. P750,000
b. P647,725 d. P -0-

5. How much discount amortization should be recognized in 2028?

a. P27,275 c. P120,000
b. P -0- d. P75,000

PROBLEM 5

KAMOTE CORP. purchased 40% of ITLOG COMPANY’S outstanding ordinary shares on January 2,
2024, for P270,000,000. The book value of ITLOG COMPANY’s net assets at the purchase date
totaled P450,000,000. Book values and fair values were the same for all financial statement
items except for inventory and buildings, for which fair values exceeded book valued by
P12,500,000 and P112,500,000 respectively. All inventory on hand at the purchase date was
sold during 2024. The buildings have average remaining useful life of 15 years.

ITLOG COMPANY reported net income of P110,000,000 for the year ended December 31, 2024, and
paid cash dividends of P40,000,000. The fair value of KAMOTE’s Investment in ITLOG COMPANY
was P300,000,000 at December 31, 2024.

Questions:
1. Of the amount paid for the acquisition of ITLOG COMPANY’S ordinary shares, how much
is attributable to goodwill?
a. P50,000,000
b. P45,000,000
c. P40,000,000
d. P90,000,000

2. What is the investment balance at December 31, 2024?

a. P270,000,000
b. P300,000,000
c. P290,000,000
d. P298,000,000

3. At what amount will KAMOTE CORP. report its investment income in its 2024 income
statement?
a. P44,000,000
b. P36,000,000
c. P20,000,000
d. P16,000,000

-END-