AUDIT OF INVESTMENTS (cpar oct 2013 AP-7405)

PROBLEM NO 1
Magnolia corp. invested its excess cash in equity securities during 2012. The business model for
these investments is to profit from trading on price changes
(A.) As of dec 31 2012, the equity investment portfolio consisted of the following:
Investment
quantity
cost
fair value
Lj inc
1,000 shares
90,000
126,000
Polland co.
2,000 shares
240,000
252,000
Alabang corp
2,000 shares
432,000
360,000
Totals
762,000
738,000
1. In the dec 31 2012 statement of financial position, what should be reported as carrying
amount of the investment
a. 738,000
b. 690,000
c. 762,000
d. 810,000
2. In the 2012income statement, what amount should be reported as unrealized gain or loss
a. Unrealized gain of 24,000
b. Unrealized loss of 24,000
c. Unrealized loss of 72,000
d. Unrealized gain of 48,000
(B.) During the year 2013, magnolia corp. sold 2,000 shares of polland co. for 229,200 and
purchased 2,000 more of lj inc and 1,000 shares of dwarfy company. On the dec 31 2013,
magnolias equity securities portfolio consisted of the following
Investment
quantity
cost
fair value
Lj inc
1,000 shares
90,000
120,000
Lj inc
2,000 shares
198,000
240,000
Dwarfy company
1,000 shares
96,000
72,000
Alabang corp 2,000 shares
432,000
132,000
Total
816,000
564,000
3. What is the gain or loss on the sale of polland co. investment
a. 10,800 gain b. 10,800 loss c. 22,800 gain
d. 22,800 loss
4. What is the carrying amount of the investment on dec 31 2013
a. 816,000
b. 888,000
c. 564,000
d. 492,000
5. What is the amount of unrealized gain or loss should be reported in the income statement ofr
the year ended dec 31 2013
a. 252,000 unrealized gain
b. 252,000 unrealized loss
c. 216,000 unrealized gain
d. 216,000 unrealized loss
(C.) During the year 2014, magnolia sold 3,000 shares of lj shares ,inc for 239,400 and 500
shares of dwarfy company at a loss of 15,200. On dec 31 2014, magnolias equity investment
portfolio consisted of the following.
Investment
quantity
cost
fair value
Dwarfy company
500 shares
48,000
36,000
Alabang corp
2,000 shares
432,000
492,000
Totals
480,000
528,000
6. What should be reported as a loss on sale of trading securities in 2014?
a. 120,600
b. 64,800
c. 48,600
d. 136,800
7. What amount of unrealized gain or loss should be reported in the income statement of the
year ended dec 31 2014
a. 360,000 unrealized gain

b. 360,000 unrealized loss

c. 48,000 unrealized gain
d. 48,000 unrealized loss
8. In the dec 31 2014 statement of financial position, what should be reported as carrying
amount of trading securities?
a. 480,000
b. 468,000
c. 528,000
d. 540,000
PROBLEM NO.2
Supporting records of mayon corp. trading securities portfolio show the following debt and equity
securities:
Security
cost
fair value
400 ordinary shares concave co.
254,500
243,000
800,000 Tipo co. 7 1/2 bonds
796,500
774,000
1,200,000 turkey co, 7 1/2% bonds
1,207,500
1,218,900
Totals
2,258,500
2,235,900
interest dates on the bonds are January 1 and july 1. Mayon corporation uses the income approach to
record the purchase of bonds with accrued interest. During 2013 and 2014, mayon completed the
following transactions related to trading securities.
2013
Jan
April
May
July
Aug
Nov
Dec

2014
Jan
Feb

1
received semiannual interest on bonds. Assume that the appropriate adjusting
entry was made on dec 31 2012
1
sold 600,000 of 7 1/2 bonds at 102 plus accrued interest. Brokerage fees were
2,000
21
received dividend of 1.25 per share on the concave ordinary share capital. The
dividend had not been recorded on the date of declaration
1
received semiannual interest on bonds and then sold the 7% tipo bonds at 97
1/2. The brokerage fee were 2,500
15
purchased 200 shares of newman inc ordinary share capital at 580 per share
plus brokerage fee of 500
1
purchased 500,000 of 8% toll co. bonds at 101 plus accrued interest. Brokerage
fees were 1,250. The interest dates are jan 1 and july 1
31
market prices of securities were:
Concave ordinary share
P550
7 1/2% turkey bonds
101 3/4
8% toll bonds
101
Newman ordinary share
P583.75
2
recorded the receipt of semiannual interest on bonds
1
sold the remaining 7 1/2 turkey bonds at 101 plus accrued interest. Brokerage
fees were 3,000

1. What is the total interest and dividend income for 2013

a. 125,166
c. 91,417
b. 164,416
d. 98,804
2. what amount should be reported as gain on sale of trading securities in 2013
a. 4,050
c. 8,550
b. 12,752
d. 9,375
3. what amount of unrealized gain or loss should be recorded in the income statement for the

year ended dec 31 2013

a. 21,200 unrealized gain
b. 21,200 unrealized loss
c. 3,150 unrealized gain
d. 6,150 unrealized loss
4. what is the carrying amount of the remaining trading securities on dec 31 2013
a. 1,481,000
b. 1,450,450
c. 1,473,450
d. 1,452,250
5. What is the loss on sale of the remaining turkey bonds on feb 1 2014?
a. 7,500
b. 10,500
c. 13,500
d. 750
PROBLEM NO.3
During the course or your audit of the financial statements of fishing corporation for the year ended
dec 31 2013, you found a new account, investment in equity securities. Your audit revealed that
during 2013, fishing began a program of investments, and all investment-related transactions were
entered in this account. T=your analysis of this account for 2013 follows:
Fishing corporation
Analysis of investment in equity securities
For the year ended dec 31 2013
Debit
(a)
Salmon company ordinary shares
Feb.14 purchased 24,000 ordinary shares at p55 per share
july.26 received 2,400 ordinary shares of Salmon co. as a
share dividend (memo. Entry in general ledger
sept.28 sold the 2,400 ordinary shares of salmon company
received july 26 @ 70 per share
(b)
Tamban inc ordinary shares
April. 30 purchased 120,000 shares @ 40 per share
Oct. 28 received dividend of 1.20 share

credit

1,320,000

168,000

4,800,000
144,000

Additional information:
a. The fair value for each security as of the 2013 date of each transaction follow
Security
feb.14 april30 july 26 setp 28 dec 31
Salmon co
55
62
70
74
Tamban inc
40
32
Fishing corp
25
28
30
33
35
b. All of the investment of fishing corporation are nominal in respect to percentage of ownership
(5% or less)
c. Each investment is considered by fishing corporation to be non-trading. Fishing corp has made
irrevocable election to present in other comprehensive income. Subsequent changes in the
fair value of its non-trading equity securities.

1. What amount should be reported as gain on sale of non-trading equity securities in 2013
a. 36,000
c. 48,000
b. 12,000
d. -02. The receipt of 2,400 share dividend would cause the investment balance to increase by
a. 148,800
c. 132,000
b. 168,000
d. -03. What entry is necessary to correct the recording of the cash dividend received from tamban
inc?
a. Cash
144,000
Dividend
144,000
b. Cash
144,000
Investment in equity securities
144,000
c. Investment in equity securities
144,000
Dividend income
144,000
d. Dividend income
144,000
Investment in equity securities
144,000
4. What amount of unrealized gain or loss should be recorded in the 2013 statement of
comprehensive income as component of other comprehensive income
a. 384,000 gain
c. 960,000 gain
b. 384,000 loss
d. 960,000 loss
5. What amount should be reported as investment in equity securities in the statement of
financial position on dec 31 2013
a. 5,616,000
c. 5,040,000
b. 6,000,000
d. 6,576,000
PROBLEM NO.4
On june 30 2013, cabbage company purchased 25% of the outstanding ordinary shares of IB co. at a
total cost of 4,200,000. The book value of IBs net asset on acquisition date was 14,400,000. For the
following reasons, cabbage was willing to pay more that the book value for the IB co. shares
IB co has depreciable assets with a current fair value of 360,000 more that their value.
These assets have remaining useful life of 10 years
IB co owns a tract of land with a current fair values that are equal to their carrying amount
All other identifiable tangible assets of IB co. have current fair values that are equal to their
carrying amounts
IB co. reported net income of 3,240,000 earned evenly during the current year ended dec 31 2013.
Also in the current year, it declared and paid cash dividends of 630,000 to its ordinary shareholders.
Market value of IB co. ordinary share at dec 31 2013, is 18m. Cabbage Companys financial year-end
dec 31.
1. What is the total amount of goodwill of IB Co. base on the price paid by cabbage co.
a. 600,000
c. 240,000
b. 2,160,000
d. 60,000
2. What amount of investment income should cabbage report in its income statement for the
year ended dec 31 2013, under the equity method
a. 405,000
c. 157,500
b. 400,500
d. 247,500
3. Under the equity method, the carrying value of the cabbage companys investment in ordinary
shares of IB Co. on dec 31 2013 should be
a. 4,443,000
c. 4,140,000
b. 4,200,000
d. 4,500,000

PROBLEM NO.5
Durian Corp. purchased 40% of associate companys outstanding ordinary shares on jan 2 2013 for
540milion. The book value of associate companys net assets (shareholders equity) at the purchase
date totaled 900million. Book value and fair values were the same for all financial statement items
except for inventory and buildings, for which fair values exceeded book values by 25million and
225million respectively. All inventory on hand at the purchase date was sold during 2013. The
buildings have average useful lives of 15 years. Associate company reported net income of 220million
for the year ended dec 31 2013, and paid cash dividends of 80million. The fair value of durians
investment in associate was 600million at dec 31 2013
1. Of the amount paid for acquisition of associate companys ordinary shares,how much is
attributable to goodwill
a. 100million
b.90million
c.80million
d. 180million
2. What is the investment balance at dec 31 2013
a. 540 million b. 600 million
c. 580 million
d. 596 million
3. At what amount will durian corp report its investment revenue in its 2013 income statement
a. 88 millio
b. 72 million
c. 40 million
d. 32 million
THEORY
1. A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If
the auditor is unable to count the securities at the balance sheet date, the auditor most likely
will
a. Request the bank to confirm to the auditor the content of the safe-deposit box at the
balance sheet date
b. Examine supporting evidence for transaction occurring during the year
c. Count the securities at a subsequent date and confirm with the bank whether securities
were added or removed since the balance sheet date
d. Request the client to have bank seal the safe-deposit box until the auditor can count the
securities at a subsequent date.
2. When an auditor is unable to inspect and count a clients 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 clients
subsidiary ledger
b. Provide a list of securities added and removed from the box between the balance sheet
date and the security count date
c. Count the securities in the box so that the auditor will have an independent direct
verification
d. Confirm that there has been no access to the box between the balance sheet date and
the security count date.
3. Which of the following is not one of the auditors primary objectives in an audit of trading
securities
a. To determine whether the securities are authentic
b. To determine whether the securities are the property of the client
c. To determine whether the securities actually exist
d. To determine whether the securities are properly classified on the balance sheet date
4. Apol boba, CPA, observe the count of securities on dec 31. She records the serial numbers
and reconciles then and the number of shares with company records. Which fraud should be
detected by this procedure
a. An investee company declared and paid a stock dividend on dec 15. The stock cert for the

5.

6.

7.

8.

9.

10.

additional shares was received directly by the treasurer who made no record of the receipt
and embezzled the shares
b. The treasurer embezzled ad sold securities on april 4. She speculated successfully with
the proceeds and replaced the securities on dec 29
c. The treasurer borrowed securities on july 15 to use as collateral for a personal loan. He
repaid the loan and returned the securities on dec 2
d. The treasurer embezzled interest receipts from bonds by having the payments mailed
directly to him
Which of the following is the least effective audit procedure regarding the existence assertion
for the securities held by the auditee
a. Examination of paid check issued in payment of securities purchased
b. Vouching all changes during the year to supporting documents
c. Simultaneous count of liquid asset
d. Confirmation from custodian
An auditee is holding equity securities as collateral for a debt. The auditor should
a. Determine from date published in the financial press that the auditee has recorded
dividend income from collateral
b. Ascertain the value of securities
c. Ascertain that the amount of recorded for the collateral in the investment account equal
to its fair value at the balance sheet date
d. Verify that the client has taken title to the securities
Which of the following is the most effective audit procedure for verification of dividends
earned on investments in equity securities
a. Tracing deposited dividend checks to the cash receipts book
b. Reconciling the amounts received with published dividends record
c. Comparing the amounts received with preceding year dividends
d. Recomputing selected extensions and footings of dividend schedules and comparing
totals to the general ledger
In conforming with an outside agent, such a financial institution, that the agent holding
investment securities in the clients name, an auditor most likely gathers evidence in support
of managements financial statement assertion of existence and
a. Valuation
c.completeness
b. Rights and obligation
d. presentation and disclosure
in establishing the existence and ownership of an investment held by a corporation in the
form of publicly traded stock, an auditor should inspect the securities and
a. obtain written representations from management confirming that the securities are
properly classified as trading securities
b. inspect the audited financial statements of the auditee company
c. confirm the number of shares held by an independent custodian
d. determine that the investment is carried at fair value
an auditor is most likely to verify the interest earned on bond investment by
a. verifying the receipt and deposit of interest checks
b. confirming the bond interest rate with the issuer of the bonds
c. recomputing the interest earned on the basis of the face amount, interest rate, and
period held
d. testing controls relevant to cash receipts