SUMMIT PROFESSIONAL REVIEW CENTER

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AUDITING PROBLEMS
Audit of Investment
1. On January 1, 2012, COPRA CORP. purchased debt securities for cash of P765, 540. The securities have
a face value of P600, 000, and they mature in 15 years. The securities carry fixed interest of 10% that is
receivable semiannually, on June 30 and December 31. The prevailing market interest rate on these debt
securities is 7% compounded semiannually. Copra corp. intends and has the financial resources to hold
these securities to maturity.

1.1) The carrying value of the debt securities on December 31, 2013, at amortized cost using
the effective interest rate method is
a. P771,840 c. P759,016
b. P765,540 d. P600,000

1.2) The interest income to be reported for 2012 using the effective interest rate method is
a. P53,476 c. P66,524
b. P60,000 d. P6,524

2. The following investment-related transactions were completed by COCONUT CORP. during 2012:

a. Purchased P3, 000,000 of A Company 7% bonds, paying 102.5 plus accrued interest of P52, 500. In
addition, the company paid the brokerage fee of P15, 000. Coconut Corp. classified these bonds as a
trading security.
b. Purchased P30, 000 shares of B Company ordinary shares at P125 per share plus brokerage fees of
P28, 500. Coconut Corp. classified this stocks as an available-for-sale security.
c. Received semiannual interest on the A Company bonds.
d. Sold 4,500 shares of B Company at P132 per share.
e. Sold P480, 000 of A Company 7% bonds at 102, plus accrued interest of P2, 790.

2.1) The A Company bonds should be initially measured and recognized at

a. P3,075,000 c. P3,090,000
b. P3,142,000 d. P3,000,000

2.2) The realized gain or loss on the sale of A Company bonds is

a. P2,400 loss c. P4,800 loss
b. P2,010 loss d. P390 gain

2.3) The 30, 000 B Company shares acquired should be initially measured and recognized at
a. P3,721,500 c. P3,778,500
b. P3,988,500 d. P3,750,000

2.4) The realized gain or loss on the sale of B Company stock is

a. P27,225 gain c. P27,225 loss
b. P31,500 gain d. P31,500 loss
3. SHEY, INC. received dividends from its investments in ordinary shares during the year ended December 31,
2012, as follows:

a. A cash dividend of P720, 000 is received from AA Corporation. ( SHEY, INC. owns a 2% interest in AA)
b. A cash dividend of P3, 600,000 is received from BB Corporation. ( SHEY, INC. owns a 30% interest in
BB)
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 c. A stock dividend of 18,000 shares from CC Company was received on December 15, 2012, on which
date the quoted market value of CCs shares was P20 per share. Shey Inc. owns less than 1% of CCs
ordinary shares.

What amount of dividend income should be reported by Shey, Inc. in its 2012 income statement?
a. P4, 680,000 c. P720,000
b. P4, 320,000 d. P1,080,000
4. On June 30, 2012, LUMBER COMPANY purchased 25% of the outstanding ordinary shares of ABC Co. at
a total cost of P2, 100,000. The book value of ABC CO.s net asset on acquisition date was P7, 200,000. For
the following reasons, Lumber was willing to pay more than book value for the ABC CO. shares:

ABC CO. has depreciable assets with a current fair value of P180, 000 more than their book value.
These assets have a remaining useful life of 10 years.
ABC CO. owns a tract of land with a current fair value of P900, 000 more than its carrying amount.
All other identifiable tangible and intangible assets of ABC CO. have current fair values that are
equal to their carrying amounts.
ABC Co. reported net income of P1, 620,000, earned evenly during the current year ended December 31, 2012.
Also in the current year, it declared and paid cash dividends of P315, 000 to its ordinary shareholders. Market
value of ABC Co.s ordinary shares at December 31, 2012, is P9 million. Lumber Companys financial year-end
is December 31.

4.1) What is the total amount of goodwill of ABC Co. based on the price paid by Lumber
Company?
a. P300, 000 c. P1, 080,000
b. P30, 000 d. P120, 000

4.2) What amount of investment income should Lumber Company report in its income
statement for the year ended December 31, 2012, under the fair value method?
a. P71, 250 c. P202, 500
b. P 228,750 d. P78, 750

4.3) What amount of investment income should Lumber Company report in its income
statement for the year ended December 31, 2012, under the equity method?
a. P202,500 c. P78, 750
b. P200,250 d. P123, 750
4.4) Under the equity method, the carrying value of the Lumber Companys investment in
ordinary shares of ABC Co. on December 31, 2012, should be
a. P2, 070,000 c. P2, 100,000
b. P2, 221,500 d. P2, 250,000

4.5) What amount should Lumber Company report in its December 31, 2012, statement of
financial position as its investment in ABC Co. under the fair value method?
a. P 2,100,000 c. P 2, 221,500
b. P 2, 070,000 d. P2, 250,000

5. CHAN CO. purchased 40% of PARK Corp. on April 1, 2012, for P500, 000 when PARKs book value was
P1, 260,000. On the date of acquisition, the market value of PARKs net assets equaled their book values
except for the following:

PARKs equipment has affair value of P50, 000 less than its book value. The equipment has a
remaining useful life of 10 years.
PARKs building has a fair value of P40, 000 more than its book value. The building has a remaining
useful life of 20 years.
PARKs results of operations in 2012 and 2013 are as follows:

2012 net income P150, 000

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 2013 net loss P30, 000

PARK paid cash dividends of P20, 000 and P10, 000 in 2012 and 2013, respectively.

5.1) What amount of investment income should be reported on CHAN Companys income
statement for the year ended December 31, 2012?
a. P58, 800 c. P45, 900
b. P61, 200 d. P44, 100

5.2) The investment loss to be reported on CHAN Companys 2013 income statement is
a. P10, 800 c. P13, 200
b. P8, 100 d. P12, 000

5.3) What is the carrying value of the stock investment on December 31, 2012?
a. P536, 100 c. P553, 200
b. P537, 900 d. P500, 000

5.4) What is the carrying value of the stock investment on December 31, 2013?
a. P536, 000 c. P500, 000
b. P523, 100 d. P521, 300
6. JANA COMPANY purchased 250, 000 shares of BETH Co. ordinary shares on July 1, 2012, at P66 per
share, which reflected book value as of that date. At the time of purchase, BETH Co. had 1,000,000 ordinary
shares outstanding. JANA had no ownership interest in BETH prior to this purchase. BETH reported net
income of P3, 360,000 for the six months ended June 30, 2012. JANA received a dividend of P420, 000 from
BETH on August 1, 2012. BETH reported net income of P7, 200,000 for the year ended December 31, 2012,
and again paid JANA dividends of P420, 000.

ON January 1, 2013, Jana sold 100, 000 ordinary shares of Beth for P68 per share and reclassified the
remaining stock as available-for-sale securities. The quoted market price of such investment on January 1,
2013 was P69 per share. Beth reported net income of P7, 440,000 for the year ended December 31, 2013,
and paid Jana dividends of P240, 000. The fair value of Beth ordinary shares at December 31, 2013 was
P70 per share.

6.1) What is the carrying value of the stock investment at December 31, 2012?
a. P16, 380,000 c. P9, 972,000
b. P16, 620,000 d. P16, 500,000

6.2) The total amount of gain to be reported in the 2013 income statement is
a. P152, 000 c. P378, 000
b. P530, 000 d. P680, 000

6.3) What amount of unrealized gain should be reported in the 2013 statement of
comprehensive income as component of other comprehensive income?
a. P0 c. P528, 000
b. P150, 000 d. P378, 000

6.4) The carrying value of the retained investment to be shown in the statement of financial
position on December 31, 2013 is
a. P10, 500,000 c. P10, 848,000
b. P10, 350,000 d. P9, 972,000

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