AP 5904 Investments

7/21/2019 AP 5904 Investments

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CPA REVIEW SCHOOL OF THE PHILIPPINESM a n i l a

AUDITING PROBLEMS

AUDIT OF INVESTMENTS

PROBLEM NO. 1You were engaged by MISMO COMPANY to audit its financial statements for the year 2005. During the course of your audit, you noted that the following trading securities wereproperly reported as current assets at December 31, 200!

"ost Mar#et $%uata "orporation, 10,000 shares,

con&ertible preferred shares ' (00,000 ' ()5,000 $ndrina, *nc., +0,000 shares of common stoc# 1,350,000 1,5,000 $ttina "o., 20,000 shares of common stoc# 1,23),500 (00,000

'3,),500 '3,3+0,000

-he following sale and con&ersion transactions transpired during 2005!

Mar. 2) old 25,000 shares of $ndrina for '33.)5 per share.

$pril 15 old 5,000 shares of $ttina for '5 per share.

ept. 21 "on&erted 5,000 shares of $%uata/s preferred stoc# into 15,000 sharesof $%uata/s common stoc#, when the mar#et price was ').)5 per share for the preferred stoc# and ').25 per share for the commonstoc#.

-he following 2005 di&idend information pertains to stoc#s owned by M*M!

an. 12 $ttina issued a 10 stoc# di&idend when the mar#et price of $ttina/scommon stoc# was '(.50 per share.

March 31 andept. 30

$%uata paid di&idends of '2.50 per share on its preferred stoc#, tostoc#holders of record on March 15 and eptember 15, respecti&ely.

$%uata did not pay di&idends on its common stoc# during 2005.

uly 1 $ndrina paid a '2.25 per share di&idend on its common stoc#.

une 30and Dec. 31

$della paid semiannual di&idends of '1.50 on each of these dates. $della/s net income for the year ended December 31, 2005 was'2,00,000.

n anuary 2, 2005, M*M purchased 100,000 shares of $della "orporation commonstoc# for '3,+00,000, representing 20 of $della/s outstanding common stoc# and anunderlying e%uity of '3,150,000 in $della/s net assets on anuary 2, 2005.

M*M intends to hold $della/s stoc# as a longterm in&estment, with the remainingin&estments being considered as held for trading. Mar#et prices per share of the securitieswere as follows!

1243142005 124314200

$%uata "orp., preferred (2.25 ().50 $%uata "orp., common 2.)5 3.25 $ndrina, *nc., common 22.50 2.)5 $ttina "o., common 0.50 5.00 $della "orp., common 0.00 3+.)5

$ll of the foregoing stoc#s are listed in the 'hilippine toc# 6change. Declines in mar#et&alue from cost would not be considered permanent.

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REQUIRED

7ased on the abo&e and the result of your audit, you are to pro&ide the answers to thefollowing!

1. 8ow much is the gain on sale of $ndrina shares9a. '225,000 b. '21,250 c. '5+2,500 d. '0

2. 8ow much is the gain or loss on sale of $ttina shares9a. '20,55 gain b. '5+,250 gain c. '5+,250 loss d. '0

3. 8ow much is the gain or loss on con&ersion of 5,000 $%uata preferred stoc# into15,000 common stoc#9a. '(3,)50 loss b. '25,)50 gain c. '5+,250 loss d. '0

. 8ow much is the total di&idend income for the year 20059a. '12,)50 b. '103,)50 c. '202,)50 d. ')2,)50

5. 8ow much is the net in&estment income on in&estment in $della "orp. in 20059a. '0,000 b. '5),500 c. '5)),500 d. '502,500

+. 8ow much is the carrying amount of M*M/s in&estment in $della "orp. as of December 31, 20059a. '3,)0,000 b. '3,+00,000 c. '3,)5),500 d. ',000,000

). $ssuming M*M has no significant influence on $della "orp., how much is thecarrying amount of M*M/s in&estment in $della "orp. as of December 31, 20059a. ',000,000 b. '3,+00,000 c. '3,)5),500 d. '3,)0,000

. $ssuming M*M has no significant influence on $della "orp. and the stoc# of $dellahas no reliable fair &alue, how much is the carrying amount of M*M/s in&estment in

$della "orp. as of December 31, 20059a. '3,+00,000 b. '3,)0,000 c. '3,)5),500 d. ',000,000

(. :sing the same assumptions in no. and that $della "orp. declared semiannualcash di&idends of '3 per share, how much is the carrying amount of M*M/sin&estment in $della "orp. as of December 31, 20059a. '3,0,000 b. '3,)5),500 c. '3,235,000 d. '3,+00,000

10. -he trading securities should be reported on M*M/s December 31, 2005 balancesheet ata. '2,5),500 b. '2,5),500 c. '5,13,500 d. '2,21,000

11. 8ow much should be reported as unreali;ed gain on trading securities9a. '135,55 b. '(,000 c. '11,500 d. '0

PROBLEM NO. 2

n December 31, 200, La C!" C#$a%&'! balance sheet showed the followingbalances related to its securities accounts!

-rading securities '1,)),500 $&ailableforsale securities <$=> 1,10,000*nterest recei&ableMayniladlad water bonds 12,500:nreali;ed gain $= 100,000

?a "ost/s securities portfolio on December 31, 200, was made up of the followingsecurities!

ecurity "lassification "ost Mar#et10,000 shares Yeye 7onel "orp. stoc# -rading ')50,000 ')+2,500,000 shares -otoy 7ibo *nc. stoc# -rading 550,000 52,25010 Mayniladlad water bonds <interest

payable semiannually on an. 1 and ul. 1> -rading 250,000 1+,)50

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ecurity "lassification "ost Mar#et10,000 shares 7ula#la# *nc. stoc# $&ailable for

sale 5(0,000 +30,000

20,000 shares umbo 8otdog :nlimited *nc.stoc#

$&ailable for sale

(0,000 550,000

During 2005, the following transactions too# place!

an. 3 @ecei&e interest on the Mayniladlad water bonds.

Mar. 1 'urchased 3,000 additional shares of Yeye 7onel "orp. stoc# for '22(,500,classified as a trading security.

$pr. 15 old ,000 shares of the -otoy 7ibo *nc. stoc# for '+( per share.

May old ,000 shares of the 7ula#la# *nc. stoc# for '+2 per share.

uly 1 @ecei&ed interest on the Mayniladlad water bonds.

ct. 30 'urchased 15,000 shares of 'asaway "o. stoc# for '32,500, classified as atrading security.

-he mar#et &alues of the stoc#s and bonds on December 31, 2005, are as follows!

Yeye 7onel "orp. stoc# ')+.+0 per share-otoy 7ibo *nc. stoc# '+.50 per share'asaway "o. stoc# '55.25 per shareMayniladlad water bonds '205,5507ula#la# *nc. stoc# '+1.00 per shareumbo 8otdog :nlimited *nc. stoc# '2).00 per share

QUESTIONS:

7ased on the abo&e and the result of your audit, determine the following!

1. Aain or loss on sale of ,000 -otoy 7ibo *nc. shares on $pril 15, 2005a. '1,000 gain b. '1,000 loss c. '11,)5 gain d. '11,)5 loss

2. Bet reali;ed gain or loss on sale of ,000 7ula#la# *nc. shares on May , 2005a. '12,000 gain b. '12,000 loss c. ',000 gain d. ',000 loss

3. "arrying &alue of -rading ecurities as of December 31, 2005a. '2,33),000 b. '2,2),00 c. '2,30,100 d. '2,2(),00

. "arrying &alue of $&ailable for ale ecurities as of December 31, 2005a. ',000 b. '0+,000 c. '(0+,000 d. '(,000

5. *n 2005, what amount of unreali;ed gain or loss should be shown as component of income and stoc#holders/ e%uity9

*ncome toc#holders/ e%uitya. '2,)25 gain '+2,000 gainb. '2,)25 gain '22,000 lossc. '32,(00 loss '122,000 lossd. '3(,+00 gain '),000 gain

PROBLEM NO. (

GUEST COMPANY has a stoc# in&estment in Marciano "orporation. Described below arethe transactions pertaining to this in&estment!

a> n anuary 2, 1((, A:- purchased 10,000 shares of '100 par &alue commonstoc# at '110 per share. -he company debited *n&estment in toc# account.

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b> -he Marciano "orporation was e6panding and on March 2, 1((( it issued stoc# rightsto its stoc#holders. ach right entitles A:- to purchase one fourth <C> share of common stoc# at par. -he mar#et &alue of the stoc# on that date was '10 per share. -here was no %uoted price for the rights. Bo ournal entry was made to recordthe foregoing.

c> n $pril 2, 1(((, A:- e6ercised all its stoc# rights. -he *n&estment in toc#account was charged for the amount paid.

d> A:-/s accountant felt that the cash paid for the new shares was merely anassessment since A:-/s proportionate share in Marciano was not changed.8ence, he credited all di&idends <5 in December of each year> to the *n&estment intoc# account until the debit was fully offset.

e> A:- recei&ed a 50 stoc# di&idend from Marciano in December 2003. 7ecausethe shares recei&ed were e6pected to be sold, the company/s president instructed the

accountant not to ma#e any entry for this di&idend. -he company did sell thedi&idend shares in anuary 200 for '1+0 per share. -he proceeds from the salewere credited to income.

f> *n December 200, Marciano/s stoc#s were split on a twoforone basis and the newshares were issued as no par shares. A:- found that each new share was worth'10 more than the '110 per share original ac%uisition cost. =or this reason, A:-decided to debit the *n&estment in toc# account with the additional shares recei&edat '120 per share and credited re&enue for it.

g> *n $ugust 2005, A:- sold one half <E> of its holdings in Marciano at '100 per share. -he proceeds were credited to the *n&estment in toc# account.

A:- uses the a&erage method in recording disposals of its in&estment in stoc#.

REQUIRED

1. 'repare the ournal entry to record the receipt of stoc# rights on March 2, 1(((.

2. Fhat is the total cost of the shares ac%uired on $pril 2, 1(((9

3. Fhat was the a&erage cost per share of A:-/s *n&estment in toc# after thee6ercise of the stoc# rights on $pril 2, 1(((9

. "ompute the amount of cash di&idends recei&ed by A:- for the period 1((( to2002.

5. 'repare the ournal entry to record the stoc# di&idend recei&ed.

+. Determine the gain or loss on the sale of di&idend shares recei&ed.

). 8ow many shares were recei&ed by A:- as a result of the twoforone stoc# split9

. Fhat ournal entry should be made to record the stoc# split9

(. 8ow much gain or loss should ha&e been recogni;ed by A:- from the sale of stoc#s in $ugust 20059

10. 8ow much is the unadusted balance of the *n&estment in toc# account onDecember 31, 20059

11. 8ow much is the adusted balance of the *n&estment in toc# account on December 31, 20059

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PROBLEM NO. 4

-he LEE BUYS COMPANY had ac%uired interest in a promising local company, the il&er -ab "ompany. During your audit of the company/s accounts for the year 2005, which wasa first audit, you obtained the following!

*n&estment in il&er -ab "ompany

2003Gan. 2 30,000 sh H35 '1,050,000 2005Gul. 15 50,000 sh H0 '2,000,000200Gul. 2 (0,000 sh H+0 5,00,0002005GMar. 2 30,000 sh H)0 2,100,000

*n&estment in @ed -ab "ompany

2005 $ug. 10 '10,000

Di&idend *ncome

2005 anuary. 2 '120,000 $pril 1 150,000

$ugust 10 10,000December 20 100,000

-he transactions pertaining to the foregoing for 2005 were as follows!

an. 2 @ecei&ed cash di&idend <declared on December 1> of '1 per share.

Mar. 2 7ought 30,000 shares at ')0 per share.

$pr. 1 @ecei&ed cash di&idend <declared on March 1 to stoc#holders of record as of March 10> of '1 per share.

uly 15 old 50,000 shares at '0 per share.

$ug. 10 @ecei&ed an Ie6traJ di&idend in stoc# of one share of @ed -ab "ompany for e&ery ten shares of il&er -ab "ompany. -he stoc# di&idend had a mar#et&alue of '3 per share and its boo# &alue on the ledger of il&er -ab "ompanywas '1 per share.

Dec. 20 @ecei&ed cash di&idend of '1 per share, declared December 1, out of il&er -ab "ompany/s I@eser&e for DepletionJ.

2( old 10,000 il&er -ab "ompany shares at '(0. "ash was recei&ed onanuary 5, 200+.

QUESTIONS:


1. ?oss on sale of 50,000 il&er -ab "ompany shares on uly 15, 2005a. '250,000 b. '1,300,000 c. '50,000 d. '0

2. Aain on sale of 10,000 il&er -ab "ompany shares on December 2(, 2005a. '330,000 b. '310,000 c. '300,000 d. '0

3. $dusted balance of *n&estment in il&er -ab "ompany as of December 31, 2005

a. '5,5)0,000 b. '5,130,000 c. '5,50,000 d. '5,+0,000. $dusted balance of *n&estment in @ed -ab "ompany as of December 31, 2005

a. '10,000 b. '20,000 c. '30,000 d. '0

5. Di&idend income for the year ended December 31, 2005a. '10,000 b. '1+0,000 c. '150,000 d. '20,000

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PROBLEM NO. 5

n uly 1, 2005, P)* Ca*+)%, C#$a%& ac%uired 25 of the outstanding shares of common stoc# of "inderela "orporation at a total cost of '),000,000. -he underlyinge%uity of the stoc# ac%uired by 'ir "arding was only '+,000,000. 'ir "arding is willing topay more than the boo# &alue for the following reasons!

a> "inderela owned depreciable plant assets <10year remaining economic life> with acurrent fair &alue of '+00,000 more than their carrying amount.

b> "inderela owned land with current fair &alue of '3,000,000 more than its carryingamount.

c> -here are no other identifiable tangible or intangible assets with fair &alue in e6cess of boo# &alue. $ccordingly, the remaining e6cess, if any, is to be allocated to goodwill.

"inderela earned net income of '5,00,000 e&enly o&er the year ended December 31,2005. n December 31, "inderela declared and paid a cash di&idend of '1,050,000 tocommon stoc#holders. Mar#et &alue of 'ir "arding/s share of the stoc# at December 31,

2005 is '),500,000. 7oth companies close their accounting records on December 31.

QUESTIONS:


1. -otal amount of goodwill of "inderela "orporation based on the price paid by 'ir "ardinga. ',000,000 b. '00,000 c. '1,000,000 d. '100,000

2. Bet in&estment income from *n&estment in "inderela "orporationa. '+)5,000 b. '++),500 c. '1,335,000 d. '++2,500

3. "arrying &alue of *n&estment in "inderela "orporation as of December 31, 2005a. '),12,500 b. '),++),500 c. '),05,000 d. '),++2,500

PROBLEM NO.

n une 1, 200, Y C*$*a")% purchased as a long term in&estment ,000 of the'1,000 face &alue, bonds of -oo "orporation. You "orporation has the positi&eintention and ability to hold these bonds to maturity. -he bonds were purchased to yield10 interest. *nterest is payable semiannually on December 1 and une 1. -he bondsmature on une 1, 2010. n Bo&ember 1, 2005, You "orporation sold the bonds for a total

consideration of '3,(25,000.

QUESTIONS:

7ased on the abo&e and the result of your audit, determine the following! (Round off preen! "a#ue fa$!or !o four de$%&a# p#a$e'

1. -he purchase price of the bonds on une 1, 200 isa. '3,+5,32 b. '3,+(+,)3+ c. '3,+(1,132 d. '3,+2,5(+

2. -he interest income for the year 200 isa. '215,50 b. '212,30 c. '215,521 d. '211,+12

3. -he carrying &alue of the in&estment in bonds as of December 31, 200 isa. '3,)25,(1( b. '3,)1(,(+ c. '3,+(,51 d. '3,+)1,(1

. -he interest income for the year 2005 isa. '30+,+0) b. '311,21 c. '310,)15 d. '30,)

5. -he gain on sale of in&estment in bonds on Bo&ember 1, 2005 isa. '21,1(+ b. '2),+32 c. '0,235 d. '10,05

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PROBLEM NO. /

elect the best answer for each of the following!

1. $ client has a large and acti&e in&estment portfolio that is #ept in a ban# safedepositbo6. *f the auditor is unable to count the securities at the balance sheet date, the

auditor most li#ely willa. @e%uest the ban# to confirm to the auditor the contents of the safe deposit bo6 at

the balance sheet date.b. 6amine supporting e&idence for transactions occurring during the year.c. "ount the securities at a subse%uent date and confirm with ban# whether securities

were added or remo&ed since the balance sheet date.d. @e%uest the client to ha&e a ban# seal the safedeposit bo6 until the auditor can

count the securities at a subse%uent date.

2. Fhen an auditor is unable to inspect and count a client/s in&estment securities untilafter the balance sheet date, the ban# where the securities are held in a safe deposit

bo6 should be as#ed toa. Kerify any differences between the contents of the bo6 and the balances in the

client/s subsidiary ledger.b. 'ro&ide a list of securities added and remo&ed from the bo6 between the balance

sheet date and the security count date.c. "ount the securities in the bo6 so that the auditor will ha&e an independent direct

&erification.d. "onfirm that there has been no access to the bo6 between the balance sheet date

and the securitycount date.

3. Fhich of the following is not one of the auditor/s primary obecti&es in an audit of

trading securities9a. -o determine whether securities are authentic.b. -o determine whether securities are the property of the client.c. -o determine whether securities actually e6ist.d. -o determine whether securities are properly classified on the balance sheet date.

. $pol 7oba, "'$, obser&es the count of securities on December 31. he records theserial numbers of the securities and reconciles them and the number of shares withcompany records. Fhich fraud should be detected by this procedure9a. $n in&estee company declared and paid a stoc# di&idend on December 15. -he

stoc# certificate for the additional shares was recei&ed directly by the treasurer who

made no record of the receipt and embe;;led the shares.b. -he treasurer embe;;led and sold securities on $pril . he speculatedsuccessfully with the proceeds and replaced the securities on December 2(.

c. -he treasurer borrowed securities on uly 15 to use as collateral for a personalloan. 8e repaid the loan and returned the securities on December 2.

d. -he treasurer embe;;led interest receipts from bonds by ha&ing the paymentsmailed directly to him.

5. Fhich of the following is the least effecti&e audit procedure regarding the e6istenceassertion for the securities held by the auditee9a. 6amination of paid chec#s issued in payment of securities purchased.

b. Kouching all changes during the year to supporting documents.c. imultaneous count of li%uid assets.d. "onfirmation from the custodian.

+. $n auditee is holding e%uity securities as collateral for a debt. -he auditor shoulda. Determine from data published in the financial press that the auditee has recorded

di&idend income from the collateral.b. $scertain the &alue of the securities.

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c. $scertain that the amount recorded for the collateral in the in&estment account ise%ual to its fair &alue at the balance sheet date.

d. Kerify that the client has ta#en title to the securities.

). Fhich of the following is the most effecti&e audit procedure for &erification of di&idendsearned on in&estments in e%uity securities9

a. -racing deposited di&idend chec#s to the cash receipts boo#.b. @econciling amount recei&ed with published di&idend records.c. "omparing the amounts recei&ed with preceding year di&idends recei&ed.d. @ecomputing selected e6tensions and footings of di&idend schedules and

comparing totals to the general ledger.

. *n confirming with an outside agent, such as a financial institution, that the agent isholding in&estment securities in the client/s name an auditor most li#ely gatherse&idence in support of management/s financial statement assertions of e6istence anda. Kaluation c. "ompletenessb. @ights and obligations d. 'resentation and disclosure

(. *n establishing the e6istence and ownership of an in&estment held by a corporation inthe form of publicity traded stoc# and auditor should inspect the securities or a. btain written representations from management confirming that the securities are

properly classified as trading securities.b. *nspect the audited financial statements of the in&estee company.c. "onfirm the number of shares held by an independent custodian.d. Determine that the in&estment is carried at the lower of cost or mar#et.

10.$n auditor most li#ely to &erify the interest earned on bond in&estment bya. Kerifying the receipt and deposit of interest chec#s.b. "onfirming the bond interest rate with the issuer of the bonds.c. @ecomputing the interest earned on the basis of face amount, interest rate, and

period held.d. -esting controls rele&ant to cash receipts.

11. Fhich of the following pro&ides the best form of e&idence pertaining to the annual&aluation of an in&estment in which the independent auditor/s client owns a 30 &otinginterest9a. Mar#et %uotations of the in&estee company/s stoc#.b. "urrent fair &alue of the in&estee company/s assets.c. 8istorical cost of the in&estee company/s assets.d. $udited financial statements of the in&estee company.

12.*n &erifying the amount of goodwill recorded by a client, the most con&incing e&idencean auditor can obtain is by comparing the recorded &alue of assets ac%uired with thea. $ssessed &alue as e&idenced by ta6 bills.b. eller/s boo# &alue as e&idenced by financial statements.c. *nsured &alue as e&idenced by insurance policies.d. $ppraised &alue as e&idenced by independent appraisals.

13.-he auditor can best &erify a client/s bond sin#ingfund transactions and yearendbalance bya. "onfirmation with indi&idual holders of retired bonds.b. "onfirmation with the bond trustee.c. @ecomputation of interest e6pense, interest payable, and amorti;ation of bond

discount or premium.d. 6amination and count of the bonds retired during the year.

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1.$n auditor who physically e6amines securities should insist that a client representati&ebe present in order toa. Detect fraudulent securities.b. ?end authority to the auditor/s directi&es.c. "oordinate the return of securities to the proper locations.

d. $c#nowledge the receipt of securities returned.

15.*n testing longterm in&estments, an auditor ordinarily would use analytical proceduresto ascertain the reasonableness of thea. "lassification between current and noncurrent portfolios.b. Kaluation of mar#etable e%uity securities.c. 6istence of unreali;ed gains or losses in the portfolio.d. "ompleteness of recorded in&estment income.

1+.*n performing tests of the carrying &alue of trading securities, the auditor would usually!a. $s# management to estimate the mar#et &alue of the securities.

b. @efer to the %uoted mar#et prices of the securities.c. Kalue the securities at cost regardless of their mar#et prices.d. "ount the securities.

1).Fhich of the following statements is the least accepted reason4purpose for ac%uiringlongterm in&estments!a. -o create specific funds.b. -o yield a relati&ely permanent other income.c. -o generate cash for operating purposes.d. -o establish business relationships.

1. *n testing longterm in&estments, an auditor would use analytical procedures toascertain the reasonableness of the classification between current and noncurrentportfolios.

*n testing longterm in&estments, an auditor would use analytical procedures toascertain the reasonableness of the &aluation of mar#etable e%uity securities.

*n testing longterm in&estments, an auditor would use analytical procedures toascertain the reasonableness of the e6istence of unreali;ed gains or losses in theportfolio.

a. b. c. d.=irst statement =alse -rue =alse =alse

econd statement -rue -rue =alse =alse-hird statement -rue -rue -rue =alse

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AP 5904 Investments