AUDIT OF CURRENT AND

4 NONCURRENT INVESTMENTS
AUDIT PROGRAM FOR INVESTMENTS
Audit Objectives
To determine that:
a. Investment exist and are owned by the client.
b. Valuation is in conformity with GAAP.
c. All recorded income from investments has accrued to the entity at the end of reporting period.
d. All investments owned by the entity at the end of the reporting period are included in the
statement of financial position.
e. All income accruing from investments at the end of the reporting period has been recorded.
f. Investments are included in the statement of financial position at appropriate amount.
g. All investments are free of liens, pledges, or other security interest, or if not, are adequately
disclosed.
h. Investment and related investment income accounts are properly classified, described,
and disclosed in the financial statements in conformity with GAAP and IFRS.

Audit Procedures
1. Prepare or obtain an analysis of the investment account and:
a. Trace to applicable general ledger balances.
b. Vouch changes during the year by reference to board minutes and brokers' advices.
c. Verify completeness of dividend and interest income accounts and where necessary,
by reference to outside published sources.
d. Check footings and cross-footings.
2. Conduct securities count:
a. Inspect securities as to registered owner.
b. Reconcile and compare details with investment analysis.
3. For securities held by an outside custodian.
a. Arrange a visit to the custodian and conduct a count, or
b. Confirm from custodians the details of securities held for the account of the client.

4. Review minutes, agreements, and confirmation replies for evidence of liens, pledges, or other
security interests in the entity's investments and of commitments to acquire or dispose of
investments.
5. Inspect market quotations, financial statements of investee(s), and other evidence to determine
the current value of investments.

6. Discuss with the entity the process used by management in classifying its investments.

7. Determine whether the client's investment activities are consistent with its stated intent,
8. For investments included in the held-to-maturity category, determine if the client has the
ability to hold them to maturity.
9. Determine whether the decline in fair value of available-for sale or held-to-maturity investments
below amortized cost is other than temporary and is properly recognized.
 4 problems
Problem 4-1
Trading Securities
Lincoln Company buys and sells securities expecting to earn profits on short-term differences
in price. During 2017, Lincoln Company purchased the following trading securities:

Security Cost Dec. 31, 2017

A $ 195,000
B 300,000
C 660,000

Before any adjustments related to these trading securities, Lincoln Company had a net income
of $900,000.

Required:
1. What is Lincoln Company's net income after making any necessary trading security
adjustments?
2. What would Lincoln Company's net income be if the fair value of security B were $285,000?

Problem 4-2
Trading Securities

Marvel Company invested its excess cash in equity securities during 2016. The business
model of these investments is to profit from trading on price changes.

a. As of December 31, 2016, the equity investment portfolio consisted of the following:

Investment Quantity Cost

LJ, Inc. 1,000 shares $ 45,000
Polland Co. 2,000 shares 120,000
Allen Corp. 2,000 shares 216,000
Totals $ 381,000

b. During the year 2017, Marvel Company sold 2,000 shares of Polland Co. for $114,600 and
purchased 2,000 more shares of LJ, Inc. and 1,000 shares of Dwarf Company. On
December 31, 2017, Marvel Company's equity securities portfolio consisted of the following:

Investment Quantity Cost

 LJ, Inc. 1,000 shares $ 45,000
LJ, Inc. 2,000 shares $ 99,000
Dwarf Company 1,000 shares 48,000
Allen Corp. 2,000 shares 216,000
Totals $ 408,000

c. During the year 2018, Marvel Company sold 3,000 shares of LJ, Inc. for $119,700 and 500
shares of Dwarf Company at a loss of $8,100. On December 31, 2018, Marvel Company's
equity investment portfolio consisted of the following:

Investment Quantity Cost

Dwarf Company 500 shares 24,000

Allen Corp. 2,000 shares 216,000
Totals $ 240,000

Required:
1. In the December 31, 2016, statement of financial position, what should be reported as the
carrying amount of the investments?
2. What is the gain or loss on the sale of Polland Co. investment?
3. What amount of unrealized gain or loss should be reported in the income statement for
the year ended December 31, 2017?
4. What should be reported as loss on sale of trading securities in 2018?
5. What amount of unrealized gain or loss should be reported in the income statement for
the year ended December 31, 2018?

Problem 4-3
Non-trading Equity Securities:
Fair Value Changes in Other Comprehensive Income (OCI)

During the course of your audit the financial statements of Fishbowl Corporation for the year
ended December 31, 2016, you found a new account, "Investment in Equity Securities
audit revealed that during 2016, Fishbowl began a program of investments, and all investment
related transactions were entered in this account. Your analysis of this account for 2016
follows:
Fishbowl Corporation
Analysis of Investment in Equity Securities
For the year Ended December 31, 2016
Debit
(a)
Salmon Company Ordinary Shares

Feb. 14. Purchased 36,000 shares @$55 per share $ 1,980,000

July 26. Received 3,600 ordinary shares of Salmon
Company as a stock dividend (Memorandum
 entry in general ledger)
Sept. 28. Sold the 3,600 ordinary shares of Salmon
Company received July 26 @$70 per share

(b)
Tamarind, Inc. Ordinary Shares Debit

Apr. 30. Purchased 180,000 shares @$40 per share $ 7,200,000

Oct. 28. Received dividend of $1.20 per share

Additional information:

a. The fair value for each security as of 2016 date of each transaction follow:

Security Feb. 14. Apr. 30 July 26 Sept. 28

Salmon Company $ 55 $ 62 $ 70
Tamarind, Inc. $ 40
Fishbowl Corporation 25 28 30 33

b. All of the investments of Fishbowl Corporation are normal in respect to percentage of

ownership (5% or less)

c. Each investment is considered by Fishbowl Corporation to be non-trading. Fishbowl

Corporation has made an irrevocable election to present in other comprehensive income
subsequent changes in fair value of its non-trading equity securities.

Required:
1. What amount should be reported as gain or loss on sale of non-trading equity securities
in the income statement of Fishbowl Corporation for the year ended December 31, 2016?

2. What entry is necessary to correct the recording of the cash dividend received from
Tamban, Inc.?

3. What amount of unrealized gain or loss should be reported in the 2016 statement of
comprehensive income as component of other comprehensive income?

4. What amount should be reported as Investment in Equity Securities in the statement of

financial position on December 31, 2016?

Problem 4-4
Investment in Bonds

Shown below is an amortization schedule related to Angel Company's 5-year, $500,000 bond
with 7% interest rate and a 5% yield purchased on December 31, 2016, for $543,300.
 Interest Interest Premium Carrying
Date Received Income Amortization Amount
12/31/16 $ 543,300
12/31/17 $ 35,000 27,165 7,835 535,465
12/31/18 35,000 26,773 8,227 527,238
12/31/19 35,000 26,362 8,638 518,600
12/31/20 35,000 25,930 9,070 509,530
12/31/21 35,000 25,470 9,530 500,000

The following shows a comparison of the amortized cost and fair value of the bonds at year-end:

Amortized
Cost Fair Value
December 31, 2017 $ 535,465 $ 532,500
December 31, 2018 527,238 537,500
December 31, 2019 518,600 528,250
December 31, 2020 509,530 515,000
December 31, 2021 500,000 500,000

Required:
a. Prepare the journal entry to record the purchase of these bonds on December 31, 2016,
assuming the bonds are held as financial assets measured at amortized cost.
b. Prepare journal entry (ies) related to these bonds for 2017.

c. Prepare journal entry (ies) related to these bonds for 2019.

d. What should be reported as the carrying amount of these bonds in the statement of
financial position on December 31, 2020?

Problem 4-5
Investment in Bonds at FVOCI
(Fair Value through Other comprehensive Income)

Ooloong Co. holds debt securities within a business model whose objective is achieved both
by collecting contractual cash flows and selling the debt securities. The contractual cash flows
are solely payments of principal and interest on specified date.

The following amortization schedule relates to its 5-year, $1,000,000, 7% bonds purchased on
December 31, 2014, for $1,086,565. The bonds were purchased to yield 5% interest.

Interest Interest Premium Amortized

Date Received Income Amortization Cost

12/31/14 $ 1,086,565
12/31/15 $ 70,000 54,328 15,672 1,070,893
12/31/16 70,000 53,545 16,455 1,054,438
 12/31/17 70,000 52,722 17,278 1,037,160
12/31/18 70,000 51,858 18,142 1,019,018
12/31/19 70,000 50,982 19,018 1,000,000

The following schedule presents the amortized cost and fair value of the bonds at year-end:

Amortized
Fair Value Cost

December 31, 2015 $ 1,065,000 $ 1,070,893

December 31, 2016 1,075,000 1,054,438
December 31, 2017 1,056,500 1,037,160
December 31, 2018 1,030,000 1,019,018
December 31, 2019 1,000,000 1,000,000

Required:
1. What amount should be reported as investment in bonds in the statement of financial
position of Ooloong Co. on December 31, 2016?
2. What amount of unrealized gain or loss should be shown as component of other
comprehensive income in the 2016 statement of comprehensive income?
3. What amount of unrealized gain or loss should be shown as component of other
comprehensive income in the 2017 statement of comprehensive income?
4. What amount of unrealized gain or loss should be shown as component of other
comprehensive income in the 2018 statement of comprehensive income?
5. What amount of unrealized gain should be shown in the 2018 statement of changes
in equity?

Problem 4-6
Trading Securities

Supporting records of Major Company's trading securities portfolio show the following debt and
equity securities:
Security Cost
200 ordinary shares Concave Co. $ 127,250
$400,000 Tipo Co. 7% bonds 398,250
$600,000 Turkey Co. 7 1/2% bonds 603,750
$ 1,129,250

Interest dates on the bonds are January 1 and July 1. Major Company uses the income approach
to record the purchase of bonds with accrued interest. During 2016 and 2017, Major completed
the following transactions related to trading securities:

2016
Jan. 1. Received semiannual interest on bonds. Assume that the appropriate adjusting
 entry was made on December 31, 2015.

April 1. Sold $300,000 of 7 1/2% Turkey bonds at 102 plus accrued interest. Brokerage
fees were $1,000.

May 21. Received dividend of $1.25 per share on the Concave ordinary share capital. The
dividend had not been recorded on the declaration date.

July 1. Received semiannual interest on bonds and then sold the 7% Tipo bonds at
97 1/2%. Brokerage fees were $1,250.

Aug. 15. Purchased 100 shares of Newman, Inc. ordinary share capital at $580 per share
plus brokerage fees of $250.

Nov. 1. Purchased $250,000 at 8% Toll co. bonds at 101 plus accrued interest. Brokerage
fees were $625. Interest dates are January 1 and July 1.

Dec. 31. Market prices of securities were:

Concave ordinary shares $550

7 1/2% Turkey bonds 101 3/4
8% Toll bonds 101
Newman ordinary shares $583.75
2017
Jan. 2. Recorded the receipt of semiannual interest on bonds.

Feb. 1. Sold the remaining 7 1/2% Turkey bonds at 101 plus accrued interest. Brokerage
fees were $1,500.

Required:
Prepare journal entries for the preceding transactions and to accrue interest on December 31,
2016. Ignore amortization of premium or discount on bonds.

Problem 4-7
Purchase of Debt and Equity Securities

Your audit of Guam Corporation's investments in debt and equity securities reveals the following
information:

a. On January 1, 2016, Xerox company issued $1,000,000 in debt securities. The stated
interest is 9%, with interest payable semiannually, on June 30 and December 31, On
February 1, Guam Corporation purchased these debt securities from an investor who
acquired them when they are originally issued. Guam Corporation paid the investor an
amount equal to the face value of the securities plus accrued interest. The securities were
designated as held-for-trading.
b. On June 1, Guam Corporation purchased 10,000 shares of equity securities for $50 per
share. These non-trading equity securities are to be measured at fair value through other
comprehensive income. Guam Corporation paid $13,000 broker's commission on the
purchase.

Required:
Journal entries to record the acquisition of debt security on February 1 and the purchase of
equity securities on June 1.

Problem 4-8
Financial Assets at Amortized Cost

Sunville Company purchased $160,000,000 of 8% bonds, dated January 1, on January 1, 2016,

to be held as financial assets at amortized cost. On the acquisition date, the market yield of
bonds with similar risk and maturity was 10%. The company paid $132,000,000 for the price
of the bonds. Interest is received semiannually on June 30 and December 31. Due to the
changes in market conditions, the fair value of the bonds at December 31, 2016, was
$140,000,000.

Required:
At what amount will Sunville Company report its investment in the December 31, 2016
statement of financial position?
#REF!

Problem 4-9
Reclassification from Amortized Cost to FVPL

On January 1, 2015, Elle Company purchased $2,000,000 face value bonds at a price of
$1,824,800 which will yield an interest rate of 10%. The nominal interest rate o the bonds is 8%
payable annually every December 31. The company's business model is to collect contractual
cash flows that are solely payments of principal and interest.

On December 31, 2016, Elle Company changed the business model in managing the bonds
from collecting contract cash flows that are solely payments of principal and interest to realizing
short term gains. The market value of the bonds on January 1, 2017 is 105.

Required:
Compute:
a. The amount that should be reported as interest income for 2016.
b. Carrying amount of the bonds on December 31, 2016.
c. On reclassification date, the amount of gain or loss on reclassification of financial asset
that should be recognized.

Problem 4-10
Investment in Equity Securities
On January 4, 2016, Turtle Company paid $1,296,000 for 40,000 ordinary shares of Bambi Corp.
The investment represents a 30% interest in the net assets of Bambi Corp and gave Turtle
Company the ability to exercise significant influence over Bambi Corp's operating and financial
policy decisions. Turtle Company received dividends of $1 per share on December 4, 2016, and
Bambi Corp reported net income of $640 for the year ended December 31, 2016. The market
value of Bambi Corp's ordinary shares at December 31, 2016 was $32 per share. The book
value of Bambi Corp's net assets was $3,200,000 and:

● The fair market value of Bambi Corp's depreciable assets, with an average remaining useful
life of 8 years, exceeded their book value by $320,000.

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

Required:
Compute:
1. Amount of the investment cost attributable to goodwill.
2. Amount of investment income that should be reported in Turtle Company's income statement
for the year ended December 31, 2016.
3. Carrying value of the investment in Bambi Corp ordinary shares on December 31, 2016.
Assume that the 40,000 shares represent a 10% interest in the net assets of Bambi Corp
rather than 30% interest, compute:
4. Amount of investment income that should be reported in Turtle Company's income statement
for the year ended December 31, 2016.
5. Carrying value of the investment in Bambi Corp ordinary shares on December 31, 2016.
Trading Securities
erm differences

Fair Value
Dec. 31, 2017
$ 225,000
162,000
678,000

had a net income

B were $285,000?

Trading Securities

he business

Fair Value
$ 63,000
126,000
180,000
$ 369,000

or $114,600 and

d of the following:

Fair Value
 $ 60,000
$ 120,000
36,000
66,000
$ 282,000

119,700 and 500

arvel Company's

Fair Value

18,000
246,000
$ 264,000

reported as the

statement for

statement for

Equity Securities:
nsive Income (OCI)

on for the year

Securities". Your
nd all investment
nt for 2016

Credit
 $ 252,000

Credit

$ 216,000

Dec. 31
$ 74
32
35

centage of

Fishbowl
ensive income

uity securities
mber 31, 2016?

statement of

vestment in Bonds

$500,000 bond
bonds at year-end:

mber 31, 2016,

n Bonds at FVOCI
mprehensive Income)

achieved both
actual cash flows

ds purchased on
s at year-end:

of financial

Trading Securities

ollowing debt and

Fair Value
$ 121,500
387,000
609,450
$ 1,117,950

he income approach
, Major completed

priate adjusting
est. Brokerage

hare capital. The

po bonds at

$580 per share

terest. Brokerage

erest. Brokerage

n December 31,

d Equity Securities

veals the following

The stated
ber 31, On
vestor who
e investor an
e securities were
es for $50 per
e through other
sion on the

e purchase of

at Amortized Cost

n January 1, 2016,
market yield of
00 for the price
. Due to the

ized Cost to FVPL

t a price of
o the bonds is 8%
ollect contractual

ging the bonds

terest to realizing

nancial asset

n Equity Securities
 res of Bambi Corp.
d gave Turtle
ing and financial
mber 4, 2016, and
16. The market
are. The book

e remaining useful

alue of net assets

income statement

ber 31, 2016.

s of Bambi Corp

income statement

ber 31, 2016.