AP 5904Q Investments

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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
AUDITING PROBLEMS
AUDIT OF INVESTMENTS - QUIZZERS
PROBLEM NO. 1
The following transactions appear on the Trading Securities account of CHICKER
Corporation:
Date
Particulars
03/1/05 Purchased 40,000 shares of PLDT at
P30.75/share and 20,000 shares of Benpres at
P23/share
07/3/05 Purchased PAG-IBIG 15% bonds, face value
P4,000,000. Interest dates July 1 and Jan 1.
Maturity date July 1, 2009
11/5/05 Sold 14,400 shares of PLDT at P30/share and
4,000 shares of Benpres at P25/share
12/31/05 Sold PAG-IBIG bonds at 98 plus accrued interest
Debit
Credit
P1,690,000
4,000,000
P532,000
4,220,000
Your audit revealed the following additional information:

1.
CHICKER received on Oct. 1, 2005, 8,000 shares of PLDT as stock dividend.
2.
Benpres declared a 15% stock dividend to all stockholders of record as of November

15, 2005 payable December 1, 2005.
Note: Disregard brokers commission and stock transfer tax in your solution.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1.
How much is the adjusted balance of CHICKERs trading securities as of December

31, 2005?
a. P935,200
b. P1,155,200
c. P1,158,000
d. P1,229,000
2.
How much is the average cost per share of PLDTs stocks as of December 31, 2005?
a. P23.43
b. P25.63
c. P29.50
d. P30.75
3.
How much is the average cost per share of Benpres stocks as of December 31,
2005?
a. P20.00
b. P22.50
c. P23.00
d. P25.00
4.
How much is the total gain (loss) on sale of trading securities for the year 2005?
a. P291,000
b. P3,000
c. (P82,800)
d. (P9,000)
SUGGESTED ANSWERS: D, B, A, D
PROBLEM NO. 2
In connection with your audit of the financial statements of the Pin Shop Company for the
year 2005, the following Available for Sale Securities and Dividend Income accounts were
presented to you:
Date
01/15/2005
04/30/2005
05/20/2005
12/10/2005
Available for Sale Securities

Description
Ref.
10,000 shares common,
par value P50, SPIKES Co.
VR-18
5,000 shares SPIKES Co.
received as stock dividend
CJ-7
Sold 5,000 shares @ P25
CR-21
Sold 2,000 shares @ P60
CR-S2
Debit
Credit
390,000
250,000
125,000
120,000
AP-5904Q
Page 2 of 4
Dividend Income
Date
Description
Ref.
04/30/2005 Stock dividend
SJ-7
11/30/2005 SPIKES Company common
CR-22
Debit
Credit
`250,000
50,000
The following information was obtained during your examination:

1.
From independent sources, you determine the following dividend information:

Type of Dividend
Stock
Cash
Cash
2.
Date
Declared
03/15/2005
11/01/2005
12/01/2005
Date of
Record
04/01/2005
11/15/2005
12/15/2005
Date of
Payment
04/30/2005
11/28/2005
01/02/2006
Rate
50%
P5/share
20%
Closing market quotation as at December 31, 2005:

Bid
13-3/4
SPIKES Company common
Asked
16-1/2
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1.
2.
3.
How much is the gain (loss) on the May 20, 2005 sale?
a. (P5,000)
b. (P70,000)
c. P5,000
d. P0
How much is the gain on the December 10, 2005 sale?

a. P68,000
b. P42,000
c. P48,000
d. P0
How much is the total dividend income for the year 2005?
a. P300,000
b. P50,000
c. P400,000
d. P150,000
4.
How much is the adjusted balance of Available for Sale Securities as of December
31, 2005?
a. P145,000
b. P110,000
c. P132,000
d. P208,000
5.
How much is the Unrealized Loss on AFS as of December 31, 2005?

a. P98,000
b. P76,000
c. P35,000
d. P0
SUGGESTED ANSWERS: A, C, D, B, A
PROBLEM NO. 3
Your client, UK Company, showed the following details of its Investment in Stock account
for the year 2005:
Investment in Stock
Date
Jan.
Feb.
Mar.
Apr.
Jun.
Dec.
01
14
31
01
30
31
Particulars
Audited balance, 40,000 shares
Cash dividend
Shares purchased
Sale of rights
Sale of shares
Balance
Debit
P800,000
Credit
P20,000
90,000
P890,000
60,000
110,000
700,000
P890,000
The following transactions occurred:

1. A cash dividend of P0.50 per share was received on Feb. 14. The adjusting entry is:
a.
b.
c.
d.
Debit
Investment in Stock
Retained earnings
Dividend income
None
20,000
20,000
20,000
Credit
Dividend income
Dividend income
Investment in Stock
20,000
20,000
20,000
AP-5904Q
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2. On March 15, stock rights were received entitling shareholders to purchase one share
for every five held at P15 per share. Market values on this date were: shares, P20;
rights, P5. The adjusting entry to recognize the cost allocated to the right is:
Debit
a.
b.
c.
d.
Stock rights
Stock rights
Stock rights
None
160,000
200,000
38,000
Credit
Investment in Stock
Investment in Stock
Investment in Stock
160,000
200,000
38,000
3. On March 31, 6,000 shares were purchased with the partial exercise of the rights. The
adjusting entry, after the adjustment in No. 2 above has been effected, is:
a.
b.
c.
d.
Debit
Investment in Stock
Investment in Stock
Investment in Stock
None
Credit
120,000
150,000
28,500
Stock rights
Stock rights
Stock rights
120,000
150,000
28,500
4. On April 1, the remaining rights were sold for P60,000. The adjusting entry, considering
the adjustment in No. 2 above has been effected, is:
a.
b.
c.
Debit
Investment in Stock
Investment in Stock
Investment in Stock
d.
None
60,000
20,000
60,000
Credit
Gain on sale of rights
Stock rights
60,000
20,000
40,000
20,000
5. On June 30, 4,600 shares were sold for P110,000. The adjusting entry is:
Debit
a.
Cash
b.
c.
d.
Investment in Stock
Investment in stock
None
110,000
36,400
25,000
Credit
Investment in Stock
Gain on sale of stock
85,000
25,000
36,400
25,000
6. How much is the adjusted balance of the Investment in Stock account as of December
31, 2005?
a. P765,000
b. P700,000
c. P776,400
d. P801,000
SUGGESTED ANSWERS: A, A, A, C, B, C
PROBLEM NO. 4
The following two subsidiary accounts reflect the trading securities of Jordano Company
for the year 2005:
Date
Jan. 16
31
Mar. 30
June 10
July 29
LOYAL COMPANY
Transactions
Shares Ref.
Purchase
20,000
CD
Raised to market value,
offset credit to retained
GJ
earnings
Sale at P150
10,000
CR
Stock dividend at par
10,000
GJ
Sale at P110
10,000
CR
Totals
Debit
P1,900,000
Credit
100,000
P1,500,000
1,000,000
.
P3,000,000
1,100,000
P 2,600,000
AP-5904Q
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Date
Sep. 05
28
Oct. 01
05
Nov.30
Dec.15
FAITHFUL CORP.
Transactions
Shares Ref.
Purchase
20,000
CD
Cash dividends to
stockholders of record
Sept. 15, declared Aug. 15
CR
Purchase
50,000
CD
Sale at P65
20,000
CR
Cash collected for sale
made on Nov. 10, after a
Nov. 1 declaration of P5
cash dividend per share to
stockholders on record as
of December 1
20,000
CR
Cash dividend received
CR
Totals
Debit
P1,000,000
Credit
P
50,000
2,500,000
1,000,000
3,300,000
150,000
P4,500,000
.
P3,500,000
On January 2, 2005, Jordano Company purchased 39,000 shares of Trustworthy Co.s

200,000 shares of outstanding common stock for P1,170,000. On that date, the carrying
amount of the acquired shares on Trustworthy Co.s books was P810,000. Jordano
attributed the excess of cost over carrying amount to goodwill.
During 2005, Jordanos president gained a seat on Trustworthys board of directors.
Trustworthy reported earnings of P800,000 for the year ended December 31, 2005, and
declared and paid cash dividends of P200,000 during 2005. On December 31, 2005,
Trustworthys common stock was trading at P30 per share.
QUESTIONS:
1.
The gain on sale of 10,000 shares of Loyal Company on March 30 is

a. P500,000
b. P1,500,000
c. P550,000
d. None
2.
The gain on sale of 10,000 shares of Loyal Company on July 29 is

a. P625,000
b. P337,500
c. P525,000
d. P150,000
3.
The correct acquisition cost of 20,000 shares of Faithful Corp. acquired on

September 5 is
a. P3,500,000
b. P950,000
c. P1,000,000
d. P3,450,000
4.
The gain on sale of 20,000 shares of Faithful Corp. October 5 is

a. P350,000
b. P300,000
c. P1,028,500
d. P314,300
5.
The gain on sale of 20,000 shares of Faithful Corp. on November 10 is

a. P1,000,000
b. P2,400,000
c. P2,300,000
d. P2,200,000
6.
The balance of the Companys investment in Loyal Company before mark-to-market

on December 31, 2005 is
a. P475,000
b. P500,000
c. P1,475,000
d. P525,000
7.
The adjusted balance of the Companys investment in Faithful Corp. before mark-tomarket on December 31, 2005 is
a. P1,500,000
b. P1,350,000
c. P1,200,000
d. P1,000,000
8.
The income from investment in common stock of Trustworthy Company to be

reported on the income statement for the year ended December 31, 2005 is
a. P156,000
b. P159,000
c. P120,000
d. P39,000
9.
The adjusted balance of investment in Trustworthy Company at December 31, 2003

is
a. P1,326,000
b. P1,170,000
c. P1,287,000
d. P1,251,000
SUGGESTED ANSWERS: C, A, B, A, D, A, A, A, C
End of AP-5904Q
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Page 1 of 4

CPA REVIEW SCHOOL OF THE PHILIPPINES

Your audit revealed the following additional information:

CHICKER received on Oct. 1, 2005, 8,000 shares of PLDT as stock dividend.

Benpres declared a 15% stock dividend to all stockholders of record as of November

How much is the adjusted balance of CHICKERs trading securities as of December

Available for Sale Securities

The following information was obtained during your examination:

From independent sources, you determine the following dividend information:

Closing market quotation as at December 31, 2005:

SPIKES Company common

How much is the gain on the December 10, 2005 sale?

How much is the Unrealized Loss on AFS as of December 31, 2005?

The following transactions occurred:

On January 2, 2005, Jordano Company purchased 39,000 shares of Trustworthy Co.s

The gain on sale of 10,000 shares of Loyal Company on March 30 is

The gain on sale of 10,000 shares of Loyal Company on July 29 is

The correct acquisition cost of 20,000 shares of Faithful Corp. acquired on

The gain on sale of 20,000 shares of Faithful Corp. October 5 is

The gain on sale of 20,000 shares of Faithful Corp. on November 10 is

The balance of the Companys investment in Loyal Company before mark-to-market

The income from investment in common stock of Trustworthy Company to be

The adjusted balance of investment in Trustworthy Company at December 31, 2003

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