Audit of Investments

AUDIT OF INVESTMENTS AND RELATED ACCOUNTS
CASE 1
On January 1, 2018, Tamaraw Co. purchased 25,000 shares of Artery Inc. for P1,125,000. Commission paid to the broker
is 5% of the total purchase price. The shares were quoted at P55 per share and P54 as of December 31, 2018 and 2019,
respectively. It was estimated that transaction cost of P3 per share will be incurred if the shares were sold on these dates.
On January 5, 2020, all of the 25,000 shares were sold at P57 per share.
CLASSIFICATION FVTPL FVOCI

1. At what amount should the investment be initially recorded at?
2. Unrealized gain (loss) to be recognized in profit or loss on December 31, 2018
3. How much is the realized gain (loss) to be recognized as gain (loss) from sale of investments
on January 5, 2020?
4. How much is the gain (loss) to be recognized in other comprehensive income in 2018?
5. How much is the cumulative balance of unrealized gain (loss) to be recognized in the 2018
financial statement?
CASE 2
On January 1, 2018, Lora Co. purchased 10% P700,000 bonds at 95 when the prevailing market interest rate is at 12%.
The bonds mature after 5 years and pay interest beginning December 31, 2018. Commission paid on the acquisition
amounted to P9,129. The adjusted effective interest after transaction cost is 11%.
On June 30, 2020, the bonds were sold at 105 plus accrued interest. The bonds have the following quoted price at each
year-end
December 31, 2018 102.0
December 31, 2019 98.5
December 31, 2020 101.5
Complete the table below:

CLASSIFICATION FVTPL FVTOCI AC
1. At what amount should the investment be initially recorded at?
3. How much is the gain (loss) to be recognized in other comprehensive income in
2018?
4. How much is the interest income to be recognized in 2018?
5. How much is the balance of cumulative unrealized gain (loss) to be recognized
in the 2018 financial statement?
6. How much should the asset reported in the statement financial position as of
December 31, 2018?
8. How much is the gain (loss) to be recognized in other comprehensive income in
2019?
9. How much is the interest income to be recognized in 2019?
10. How much is the balance of cumulative unrealized gain (loss) to be recognized
in the 2019 financial statement?
11. How much should the asset reported in the statement financial position as of
December 31, 2019?
12. How much is the realized gain (loss) to be recognized on sale of investments on
January 2, 2020?
CASE 3
Tamaraw Corp. had the following portfolio of financial instrument as of December 31, 2018. All securities were acquired
at the beginning of 2018:
Carrying Amount
Security Face value/Denomination (unadjusted)
Basted shares 150,000 shares P9,000,000
Holi Sprite shares 60,000 shares 3,600,000
10% USLE bonds, 3 years P2,000,000 par 1,951,126
Audit notes:
a. Basted shares were acquired and designated as financial asset at fair value through profit or loss. The shares
were acquired at P60 per share which included P3 per share transaction cost. Half of the Basted shares were
sold at P58 per share on July 1, 2019.
b. Holi Sprite shares were acquired and designated as financial asset at fair value through other comprehensive
income. The shares were acquired at P60 per share which included P2 per share transaction cost. 20,000 of
these shares were sold on August 1, 2019 at P59 per share.
c. The USLE bonds were acquired when the prevailing market rate of interest was at 11%. Interests are
collectible every December 31. Half of the USLE bonds were sold on June 30, 2020 at total proceeds of
P1,500,000.
d. Additional information on the securities are as follows:
Security FV 12/31/18 FV 12/31/19
Basted shares P55 per share P62 per share
Holi Sprite shares 57.50 per share 64 per share
10% USLE bonds, 3 years 9% yield 10% yield
Determine the following:

1. What is the realized gain or (loss) on sale of Basted shares?
2. What is the realized gain or loss from sale of Holi Sprite shares in 2019 under IFRS 9, Financial
Instruments?
3. Assuming that the company’s business model has no objective of holding the debt securities to collect
contractual cash flows, what is the realized gain on sale of USLE bonds?
4. Assuming that the company’s business model has an objective of holding the debt securities to collect
contractual cash flows, what is the realized gain on sale of USLE bonds?
5. Assuming that the company’s business model has an objective of holding the debt securities to collect
contractual cash flows and to sell, what is the total carrying value of investments that shall be presented in
the 2019 financial statement as financial asset at fair value through profit or loss?
CASE 4
In line with your audit of Super Junior Corp. investment accounts as of December 31, 2018, you noted and summarized
the following information:
Investment Type CV per books

Investment in bonds P8,000,000
Investment in equity 6,200,000
In the course of your audit, the following were also noted:
NOTE 1:Investment in bonds

The investments in bonds which will mature on December 31, 2020 were acquired January 1, 2016 when the prevailing
market rate of interest was at 12%. Interest of 10% is collectible every December 31. The acquisition was recorded by the
client in the book as debit to investment in bonds as face value and credit to cash. Interest income was recorded at the
amount collected. Further investigation revealed that the company’s business model with regard to the debt security
investment has an objective of collecting contractual cash flows. The prevailing market rate of interest was at 11%, 9%,
9.5% at the end of 2016, 2017 and 2018, respectively.
NOTE 2: Investment in equity

The investment in equity is for 40,000 shares of Shine Corp’s ordinary shares acquired in September 30, 2017. The shares
were originally acquired at P145 per share. The book value of the net asset of Shine Corp on this date was at P20 million
and its total outstanding shares was at 160,000. Shine’s depreciable assets with average remaining useful life of 10 years
were understated on this date.
Further investigation shows that the fair value of Shine’s shares was P155 per share at the end of 2017. The company
recorded the re-measurement (from acquisition cost to fair value) of the investment at the end of 2017 and recognized the
same as unrealized holding gain in the 2017 profit or loss. There is also an entry made for the receipt of P2 per share
dividend by the end of 2017 and P4 per share dividend during 2018 as dividend income.
Further analysis of the account balance was summarized as follows:
2017 2018
Shine's net income P3,800,000 P5,200,000
Forex loss – OCI 400,000
Unrealized holding gain - OCI 300,000
Fair value 155 per share 169 per share
1. What is the correct carrying value of the investment in bonds as of December 31, 2018?
2. How much is the interest income in 2018?
3. What is the correct carrying value of the investment in equity as of December 31, 2018?
4. How much is the total investment income in 2018?
5. Assuming the errors were discovered in 2018, what is your proposed adjusting journal entry related to investments
above?
CASE 5
On January 1, 2018, Everyone Inc acquired 10% of the outstanding voting shares of Together Incorporated for P900,000.
These shares were designated as equity investments at fair value through other comprehensive income.
On July 1, 2019, Artery gained the ability to exercise significant influence over financial and operating policies of
Together by acquiring additional 20% of the outstanding shares for P2,600,000. The two purchases were made at prices
proportionate to the value assigned to Together’s net assets, which is equal to their carrying amounts. For the years ended
December 31, 2018 and 2019, Together reported the following:
2018 2019
Dividends paid P2,000,000 P3,000,000
Profit for the year 6,000,000 6,500,000
The fair values of the investments on December 31, 2018 and 2019 were P1,380,000 and P5,100,000, respectively. All
dividends were declared and paid during December of each year.
1. Amount taken in comprehensive income related to the investment at the end of 2018 is?
2. Total investment income in 2018?
3. The initial cost of the investment in associate upon reclassification in 2019 is?
4. The carrying value of the investment in associate at the end of 2019 is?
5. Total investment income in 2019?

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AUDIT OF INVESTMENTS AND RELATED ACCOUNTS

CLASSIFICATION FVTPL FVOCI

Complete the table below:

Determine the following:

Investment Type CV per books

In the course of your audit, the following were also noted:

NOTE 1:Investment in bonds

NOTE 2: Investment in equity

Further analysis of the account balance was summarized as follows:

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