Investment – Debt Security

Problem 1
The following investment-related transactions were completed by Rey Corp. during 2012:

a. Purchased P3,000,000 of ALLAN LOUISE company 7% bonds, paying 102.5 plus accrued interest of P52,500. In
addition, the company paid brokerage fee of P15,000. Rey classified these bonds as a trading security.

b. Purchased 30,000 of Floremae Company common stock at P125 per share plus brokerage fees of P28,500. Rey
classified this stock as an available for sale security.

c. Received semiannual interest on the ALLAN LOUISE Company bonds.

d. Sold 4,500 shares of FLOREMAE Company at 132 per share.

e. Sold 480,000 of ALLAN LOUISE Company 7% bonds at 102, plus accrued interest of P2,790.

Questions:
1. The ALLAN LOUISE Company bonds should be initially measured and recognized at

2. The realized gain or loss on the sale of ALLAN LOUISE Company bonds is

3. The realized gain or loss on the sale of FLOREMAE Company stock is

Problem 2
Perocho Corporation purchased P200,000 8% bonds for P184,557 on January 1, 2011. Perocho classified the bonds at
FMVTOCI. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1.
The bonds mature on January 1, 2016. Perocho uses the effective interest method to amortize premium or discount.
On January 2, 2013, Perocho sold the bonds for P185,000 after receiving the interest to meet its liquidity needs.

The market values of the bonds are as follows:

December 31, 2011 P190,449

December 31, 2012 P186,363

Questions:
Based on the above and the result of your audit, determine the following:

1. Interest income for the year 2011

2. Unrealized gain on available for sale securities as of December 31,2011

3. Interest income for the year 2012

4. Unrealized gain or loss on investment as of December 31, 2012

5. Realized gain or loss on investment on January 2, 2013

TS/FMTPL FMTOCI

Trading Security 184,557 Investment 184,557

Cash 184,557 Cash 184,557

12/31/2011

Fmv – dec 190,449 fmv – dec 190,449

Fmv- jan 184,557 amortized cost 187,074
UNG 5,892 UHG – OCI 3,375

Trading Security 5,892 Investment 3,375

UHG – PL 5,892 UHG – OCI 3,375
 Investment 2,517
Interest Income 2,517
12/31/2012

Fmv – 2012 186,363 fmv – 2012 186,363

Fmv – 2011 190,449 amortized cost 189,849
UHL 4,086 UHL – OCI 3,486

UHL – PL 4,086 UHG – OCI 3.375

Trading Security 4,086 UHL – OCI 3,486
Investment 6,861

Investment 2,775
Interest income 2,775

1/2/2013
Cash 185,000 Cash 185,000
Loss on sale 1,363 Loss on sale 1,363
Trading Security 186,363 Investment 186,363

Retained earnings 3,486

UHL – OCI 3,486

Amortized Cost

Investment 184,557
Cash 184,557

Investment 2,517
Interest Income 2,517

Investment 2,775
Interest Income 2,775

Cash 185,000
Loss on sale 4,849
Investment 189,849

184,557 1/1/2011

8,000 9,228 1,228 185,785 7/1/2011

8,000 9,289 1,289 187,074 12/31/2011

8,000 9,354 1,354 188,428 7/1/2012

8,000 9,421 1,421 189,849 12/31/2012

8,000 9,492 1,492 191,342 7/1/2013

8,000 9,567 1,567 192,909 12/31/2013

8,000 9,645 1,645 194,554 7/1/2014

8,000 9,728 1,728 196,282 12/31/2014

8,000 9,814 1,814 198,096 7/1/2015

8,000 9,905 1,905 200,001 12/31/2015

Problem 2B
Perocho Corporation purchased P200,000 8% bonds on January 1, 2011. Perocho classified the bonds at FMVTOCI. The
bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds
mature on January 1, 2016. Perocho uses the effective interest method to amortize premium or discount. On January
2, 2013, Perocho sold the bonds for P185,000 after receiving the interest to meet its liquidity needs.

The market rates of the bonds are as follows:

December 31, 2011 9%

December 31, 2012 12%

PV of P – 200,000 x 0.6209 = 124,180

PV of I - 8,000 x 7.7217 = 61,774
PV of Bonds 185,954

1/1/2011

Trading Security/FMTPL FMTOCI

Trading Security 185,954 Investment at FMTOCI 185,954

Cash 185,954 Cash 185,954

12/31/2011

PV of P – 200,000 x 0.7084 = 141,680

PV of I – 8,000 x 6.5959 = 52,767
PV of Bonds 194,447

PV of bonds – 1/2011 185,954 PV of bonds – 12/2011 194,447

PV of bonds – 12/2011 194,447 Amortized cost 188,614
UHG – PL 8,493 UHG – OCI 5,833

Trading Security 8,493 Investment 5,833

UHG – PL 8,493 UHG – OCI 5,833

Investment 2,661
Interest Income 2,661
12/31/2012

PV of P – 200,000 x 0.7118 = 142,360

PV of I – 8,000 x 4.9173 = 39,338
PV of bonds – 2012 181,698

PV of bonds – 2012 181,698 PV of bonds – 2012 181,698

PV of bond – 2011 194,447 Amortized cost 191,547
UHL – PL 12,749 UHL – OCI 9,849

UHL – PL 12,749 UHL – OCI 9,849

Trading Security 12,749 UHG – OCI 5,833
Investment 15,682

Investment 2,933
Interest Income 2,933

Amortized Cost

Investment 185,954
Cash 185,954

Investment 2,661
Interest income 2,661

Investment 2,933
 Interest Income 2,933

185,954 1/1/2011

8,000 9,298 1,298 187,252 7/1/2011

8,000 9,363 1,363 188,614 12/31/2011

8,000 9,431 1,431 190,045 7/1/2012

8,000 9,502 1,502 191,547 12/31/2012

Problem 3
In auditing the books of Evangelista Corporation as of December 31, 2012, you find the following investment in bonds.

Investment in 5-year 10% Fader bonds

Date Particulars Debit Credit Balance
2011
Jan. 2 Acquired P2,000,000 face value
bonds including broker’s fee of
P20,000. The effective interest
rate is 12% 1,855,760 1,855,760
Dec 31 Interest received 200,000 1,655,760

2012
Jul 1 Total proceeds from sale of
P1,000,000 bonds 1,120,000 535,760
Dec 31 Interest received 100,000 435,760

You noted the following in connection with your audit.

 The bonds mature on December 31, 2011. Conception intends to hold the bonds to pay contractual cash flows.

 The prevailing market interest rates of the bonds are 11% and 9%, respectively, as of December 31, 2011 and 2012.

Questions:
Based on the above and the result of your audit, determine the following: (Round off present value factors to four
decimal places)

1. The December 31, 2011 carrying amount of the investment in bonds is understated by

2. The gain on sale of the be investment in bonds on July 1, 2012 is

3. The interest income to be recognized in 2012 is

4. The carrying amount of the investment in bonds on December 31, 2012 should be

5. The unrealized gain to be recognized in equity as of December 31, 2012 is

Problem 3B
In auditing the books of Evangelista Corporation as of December 31, 2012, you find the following investment in bonds.

Investment in 5-year 10% Fader bonds

Date Particulars Debit Credit Balance
2011
Jan. 2 Acquired P2,000,000 face value
bonds including broker’s fee of
P20,000. The effective interest
rate is 12% 1,855,760 1,855,760
Dec 31 Interest received 200,000 1,655,760
 2012
Jul 1 Total proceeds from sale of
P1,000,000 bonds 1,120,000 535,760
Dec 31 Interest received 100,000 435,760

You noted the following in connection with your audit.

 The bonds mature on December 31, 2015. Conception classify the investment at FMVTOCI.

 The prevailing market interest rates of the bonds are 11% and 9%, respectively, as of December 31, 2011 and 2012.

1,855,760 1/1/2011

200,000 222,691 22,691 1,878,451 12/31/2011

100,000 112,707 12,707 1,891,158 7/1/2012

939,226 12/31/2011 remaining bonds

100,000 112,707 12,707 951,933 12/31/2012

PV of P – 2,000,000 x 0.6587 = 1,317,400

PV of I – 200,000 x 3.1024 = 620,480
PV of bonds 1,937,880

PV of bonds (per audit) 1,937,880

Bal. Per Book 1,655,760
Understatement 282,120

Adjusting Entry dated 12/31/2012:

PV of bonds 1,937,880
Amortized cost 1,878,451
UHG – OCI 59,429

Investment 59,429
UHG – OCI 59,429

Investment 200,000
Retained earnings 200,000

Investment 22,691
Retained earnings 22,691

OE: Cash 1,120,000

Investment 1,120,000

CE: Cash 1,120,000

Investment 968,940 - 1,937,880 / 2 = 968,940
Interest Income 50,000
Gain on sale 101,060

UNG – OCI 29,715

Retained earnings 29,715

Adj: Investment 151,060

Interest income 50,000
Gain on sale 101,060

Adj: UHG – OCI 29,715

 Retained earnings 29,715

Adj: Investment 12,707

Interest income 12,707

Adj: Investment 100,000

Interest Income 100,000

PV of P – 1,000,000 x 0.7722 = 772,200

PV of I – 100,000 x 2.5313 = 253,130
PV of bonds 1,025,330
Amortized cost 951,933
UHG – OCI 73,397
UHG – OCI balance 29,715
Adjustment 43,682

Adj: Investment 43,682

UHG – OCI 43,682

Investment in Associates

Problem 1
On January 4, 2012, Devzon Corp. paid P1,296,000 for 40,000 shares of Jessa Company common stock. The investment
represents a 30% interest in the net assets of Jessa and gave Devzon the ability to exercise significant influence over
Jessa’s operating and financial policy decisions. Devzon received dividends of P3 per share on December 4, 2012, and
Jessa reported net income of P640,000 for the year ended December 31, 2012. The market value of Jessa’s common
stock at December 31, 2012, was P32 per share. The book value of Jessa’s net assets was P3,200,000 and:

 the fair market value of Jessa’s depreciable assets, with an average remaining useful life of 8 years, exceeded
their book value by P320,000.

 The remainder of the excess of the cost of the investment over the book value of net asset purchased was
attributable to goodwill.

Questions:
1. What amount of the investment cost is attributable to goodwill?

2. What amount of investment revenue should be reported in Devzon’s income statement for the year ended
December 31, 2012?

3. What is the carrying value of the investment in Jessa common stock on December 31, 2012?

Assume that the 40,000 shares represents 10% interest in the net assets of Jessa rather than 30% interest.

4. What amount of investment revenue should be reported in Devzon’s income statement for the year ended
December 31, 2012?

5. What is the carrying value of the investment in Jessa common stock at December 31, 2012?

Problem 2
Lee Company purchased 250,000 shares of Paclar Corp. common stock on July 1, 2012, at P16.50 per share, which
reflected book value as of that date. At the time of the purchase, Paclar had 1,000,000 common shares outstanding.
Lee had no ownership interest in Paclar prior to this purchase. Paclar reported net income of P840,000 for the six
months ended June 30, 2012. Lee received a dividend of P105,000 from Paclar on August 1, 2012. Paclar reported net
income of P1,800,000 for the year ended December 31, 2012, and again paid Lee Company dividends of P105,000.

On January 1, 2013, Lee sold 100,000 shares of Paclar Corp. common stock for P17 per share and reclassified the
remaining stock as noncurrent. Paclar reported net income of P1,860,000 for the year ended December 31, 2013, and
paid Lee Company dividends of P60,000.

7/1/2012 Investment in Asso. 4,125,000

 Cash 4,125,000

8/1/2012 Cash 105,000

Investment in Asso. 105,000

12/31/2012 Investment in Asso 240,000

Income from Investment 240,000
1,800,000 – 840,000 x 25% = 240,000

Cash 105,000
Investment in Asso 105,000

1/1/2013 Cash 1,700,000

Investment in Asso 1,662,000
(4,155,000 x 100/250)
Gain on sale 38,000

Investment at FMV 2,550,000

Investment in Asso 2,493,000
Gain on remeasurement 57,000

12/31/2013 Cash 60,000

Dividend Income 60,000

FMV – 12/31/2013 2,850,000

FMV – 1/1/2013 2,550,000
UHG – OCI 300,000

1. What is the investment balance on December 31, 2012?

2. What is the gain on sale of P100,000 shares on January 1, 2013?

3. The cumulative effect of the change from equity to cost method of accounting for the investment in common stock
to be reported in the statement of changes in equity should be

4. The share in net income of Paclar to be recognized by Lee in its income statement for 2013 should be

5. What is the investment balance on December 31, 2013?

Problem 3
On January 2, 2011, Pueda Company acquired 20% of the 400,000 shares of outstanding common stock of Angelito
Corporation for P30 per share. The purchase price was equal to Angelito’s underlying book value. Pueda plans to hold
stock to influence the activities of Angelito.

The following data are applicable for 2011 and 2012:

2011 2012
Angelito dividends (paid Oct. 31) P 40,000 P 48,000
Angelito earnings 140,000 160,000
Angelito stock market right at year-end 32 31

On January 2, 2013, Pueda Company sold 20,000 shares of Angelito stock for P31 per share. During 2013, Angelito
reported net income of P120,000, and on October 31, 2013, Angelito paid dividends of 20,000. At December 31, 2013,
after a significant stock decline, which is expected to be temporary, Angelito’s stock was selling for P22 per share. After
selling the 20,000 shares, Pueda does not expect to exercise significant influence over Angelito, and the shares
classified as financial asset at FMV through other comprehensive income.

Questions:
Based on the above and the result of your audit, determine the following:

1. Carrying value of the Investment as of December 31, 2011

2. Carrying value of investment in Angelito as of December 31, 2012

3. Gain or loss on sale of Investment in Angelito on January 2, 2013

4. Unrealized holding loss of investment that will be reported to equity at December 31, 2013 is

5. When negotiable securities are of considerate volume, planning by the auditor is necessary to guard against
a. Unauthorized negotiation of the securities before they are counted.
b. Substitution of securities already counted for other securities which should be on hand but are not.
c. Unrecorded sales of securities after they are counted.
d. Substitution of authentic securities with counterfeit securities.

Problem 5
You were able to gather the following in connection with your audit of Solano, Inc. On December 31,
2014, Solano reported the following at FMVTOCI:

Cost Market
Sepe Corp., 40,000 shares of common stock
(a 1% interest) P1,000,000 P 880,000
Sicada Corp., 80,000 shares of common stock
(a 2% interest) 1,280,000 1,200,000
Serenio Corp., 200,000 shares of common stock
(a 10% interest) 5,600,000 5,400,000
Total P7,880,000 P7,480,000

Additional information:

 On April 1, 2015, Sepe issued 10% stock dividend when the market price of its stock was P24 per
share.

 On September 15, 2015, Sepe paid cash dividend of P0.75 per share.

 On August 30, 2015, Sicada issued to all shareholders, stock rights on the basis of one right per
share. Market prices at date of issue were P13.50 per share of stock and P1.50 per right. Solano sold
all rights on December 1, 2015 for net proceeds of P150,400.

 On July 1, 2015, Solano paid P12,160,000 for 400,000 additional shares of Serenio Corp.’s common
stock which represented a 20% investment in Serenio. The fair value of all Serenio”s identifiable
assets net of liabilities were equal to their carrying amount of P50,800,000. As a result of this
transaction, Solano owns 30% of Serenio and can exercise significant influence over Serenio’s
operating and financial policies.

 Solano’s initial 10% interest of P200,000 shares of Serenio’s common stock was acquired on January
2, 2014 for P5,600,000. At that date, the net assets of Serenio totaled P46,400,000 and the fair value
of Serenio’s identifiable assets net liabilities were equal to their carrying amount.

7/1/2015 Investment in Asso 12,160,000

Cash 12,160,000

Investment in Asso 6,040,000

Investment 5,400,000
Gain on remeasurment 640,000

CV of investment – Equity 5,600,000 acquisition cost

280,000 share of income in 2014
160,000 share of income in 2015 as of June 2015
6,040,000
CV – 5,400,000
Gain on remeasurement 640,000

 Market prices per share of the securities which are all listed in the Philippine Stock Exchange are as
follows:
12/31/2014 12/31/2015
Sepe Corp. – common P22 P23
Sicada Corp. – common 15 14
Serenio Corp. – common 27 31

 Serenio reported net income and paid dividends of:

Dividend
 Net income per share
Year ended December 31, 2014 P2,800,000 None
Six months ended June 30, 2015 1,600,000 None
Six months ended December 31, 2015
(dividend was paid on 10/1/2015) 2,960,000 P1.30

 There were no other intercompany transactions between Solano and Serenio.

Questions:
Based on the above and the result of your audit, determine the following:

1. Net unrealized gain (loss) on securities at FMVTOCI of December 31, 2015

2. Net investment income from Serenio Corp. for year ended December 31, 2015

3. Carrying amount of investment in Serenio Corp. as of December 31, 2015

4. Gain on sale of stock rights on December 1, 2015

5. Which of the following audit procedure is most appropriate to determine whether recoded investments
represent investments actually owned at the balance sheet date?
a. Obtain positive confirmations as of balance sheet date of investments held by independent
custodians.
b. Trace investment transactions to minutes of the board of directors meetings to determine that
transactions were properly authorized.
c. Verify that transfers from the current to the Noncurrent investment portfolio have been properly
recorded.
d. Determine that any impairments in the price of investments have been properly recorded.