ST.

THOMAS MORE COLLEGE

AUDITING PRACTICE
AUDIT OF INVESTMENTS

Problem 1

The statement of financial position of MADRIGAL CORPORATION on December 31, 2022, reports Trading
Securities at fair value of P670,770. Supporting records of the company show the following debt and
equity securities:

Security Cost Fair Value

600 Condura Co. ordinary shares P 76,350 P 72,900
P 240,000 Sinker Co. 7% bonds 238,950 232,200
P 360,000 Floater Co. 7 ½ % bonds 362,250 365,670
Total P 677,550 P 670,770

Interest on bonds is paid semiannually on January 1 and July 1. Madrigal uses the income approach to
record the acquisition of bonds with accrued interest. The following transactions occurred during 2023.

Jan. 1 Received semiannual interest on bonds.

April 1 Sold P180,000 of the Floater Co. bonds at 102 plus accrued interest. Brokerage fees were P600.

May 21 Received dividend of P0.25 per share on the Condura ordinary shares.

July 1 Received semiannual interest on bonds. Sold the Sinker Co. bonds at 972. Brokerage fees were
P750.

Aug. 15 Purchased 300 Bobber Co. ordinary shares at P116 plus brokerage fees of P150.

Nov. 1 Purchased P150,000 of 8% Leader Co. bonds at 101 plus accrued interest. Brokerage fees were
P375. Interest dates are January 1 and July 1.

Dec. 31 Market prices of securities were: Condura Co. ordinary shares, P110: Floater Co. bonds, 101 ;
Leader Co. bonds, 101: Bobber Co. ordinary shares, P116.75.

Required:
1. What is the gain on the sale of P180,000 Floater Co. bonds on April 1, 2023
2. What is the gain (loss) on the sale of Sinker Co. bonds on July 1, 2023?
3. What is the total interest income on bonds that should be reported in Madrigal's income statement
for the year ended December 31, 2023?
4. What is the unrealized gain (loss) on trading securities that should be reported in Madrigal's income
statement for the year ended December 31, 2023?
5. What is the accrued interest receivable on bonds that should be reported in Madrigal's statement of
financial position at December 31, 2023?

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 Bokidnon currently owns 129% of Noco outstanding ordinary
shares

Cherry Kosme, Bukidnon's assistant controller, has gathered the following information about the
company's investments in equity securities.

1. Bukidnon has trading equity investments in Delta Corp, and Polygon Company. During 2023, Bukidnon
purchased 100,000 shares of Delta Corp. for P4,200,000; these shares have a fair value of P4,800,000 at
December 31, 2023. The investment in Polygon consists of 50,000 shares acquired in March 2023 at P60
per share and currently has a value of P2,160,000.

2. Bukidnon's 12% ownership in Nocon Company has a fair value of P66,675,000 on December 31, 2023.
On initial recognition, Bukidnon made an irrevocable election to present in other comprehensive income
subsequent changes in fair value of this investment in equity securities. The securities were purchased
prior to 2022 for P67,500,000 and was valued at P64,500,000 on December 31, 2022. Bukidnon has not
changed its holdings in the current year.

Questions:
1. What amount of unrealized loss should be reported as component of other comprehensive income on
Bukidnon's December 31, 2022, statement of comprehensive income?

2. What is the cumulative unrealized gain/loss that should be shown on the statement of changes in
equity for the year ended December 31, 2023?

3. What amount of unrealized gain/loss should be reported on Bukidnon’s income statement for the year
ended December 31, 2023?

Problem 3

CHERRY, INC. received dividends from its investments in ordinary shares during the year ended
December 31, 2023, as follows:

(a) A cash dividend of P720,000 is received from JJ Corporation (Cherry, Inc. owns a 2% interest in JJ)

(b) A cash dividend of P3,600,000 is received from VV Corporation(Cherry, Inc. owns a 30% interest in
VV)

(c) A stock dividend of 18,000 shares from YY Company was received on December 15, 2023, on which
date the quoted market value of YY's shares was P20 per share. Cherry, Inc. owns less than 1% of YY's
ordinary shares.

What amount of dividend income should be reported by Cherry, Inc. in its 2023 income statement?

Problem 4

DURIAN CORP. purchased 40% of Associate Company's outstanding ordinary shares on January 2, 2023,
for P270 million. The book value of Associate Company's net assets (shareholders' equity) at the
purchase date totaled P450 million. Book values and fair values were the same for all financial statement
items except for inventory and buildings, for which fair values exceeded book values by P12.5 million and
P112.5 million, respectively. All inventory on hand at the purchase date was sold during 2023. The
buildings have remaining useful lives of 15 years. average

Associate Company reported net income of P110 million for the year ended December 31, 2023, and
paid cash dividends of P40 million. The fair value of Durian's investment in associate was P300 million at
December 31, 2023.

1. Of the amount paid for the acquisition of Associate Company's ordinary shares, how much is
attributable to goodwill?

2. What is the investment balance at December 31, 2023?

3. At what amount will Durian Corp. report its investment income in its 2023 income statement?
Problem 5

1. LITON COMPANY buys and sells securities expecting to earn profits on short-term differences in price.
During 2023, Liton Company purchased the following trading securities:

Security Cost Fair Value

Dec. 31,2023
A 195,000 225,000
B 300,000 162,000
C 660,000 678,000

Before any adjustments related to these trading securities, Liton Company had net income of
P900,000.
1. What is Liton's net income after making any necessary trading security adjustments?
2. What would Liton's net income be if the fair value of security B were P285,000?

2. CANDABA CO.'s portfolio of trading securities includes the following on December 31, 2022:

Security Cost Fair Value

Dec. 31,2023
A 195,000 225,000
B 300,000 162,000
C 660,000 678,000

All of the above securities have been purchased in 2022. In 2023, Candaba Co. completed the following
securities transactions;

Mar. 1 Sold 15,000 shares of Tomas Co. ordinary shares for P460,500.

April 1 Bought 1,800 ordinary shares of Westin, Inc. at P45 plus commission, taxes, and and other
transaction costs of P1,650.

The Candaba Co. portfolio of trading securities appeared follows on December 31, 2023:

Cost Fair Value

30,000 ordinary shares of P 546,000 P 580,000 (Note 1)
Gandara Co.
1,800 orindary shares of Westin, 82,650 75,000 (Note 2)
Inc.
P 628,650 P 655,000

Note 1 - Net of P6,500 estimated transaction costs that would be incurred the sale of the securities.

Note 2 - Net of P1,500 estimated transaction costs that would be incurred on the sale of the securities.

1. What amount of unrealized gain on these securities should be reported in the 2023 income
statement?

2. What is the gain or loss on the sale of Tomas Co. ordinary shares on March 1, 2023?

3. What amount should be reported as trading securities in Candaba's statement of financial position on
December 31, 2023?