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Substantive Audit of Investments 2 CHAPTER 17

The document provides information about several problems involving the auditing of investment securities. Problem 1 provides details of investments held by Phillips Marketing and asks questions to determine adjusted balances as of December 31, 2014. Problem 2 provides entries related to investment and dividend accounts for Maryland Corporation and asks questions related to gains/losses and income. Problem 3 provides transactions for non-marketable shares held by Centerpoint Corporation and asks questions about costs, gains and account balances. Problem 4 provides bond investment entries for Bandwagon Corporation and asks questions about gains/losses and interest income. The final question asks how an auditor would most likely establish existence and ownership of publicly traded stock investments.

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18 views4 pages

Substantive Audit of Investments 2 CHAPTER 17

The document provides information about several problems involving the auditing of investment securities. Problem 1 provides details of investments held by Phillips Marketing and asks questions to determine adjusted balances as of December 31, 2014. Problem 2 provides entries related to investment and dividend accounts for Maryland Corporation and asks questions related to gains/losses and income. Problem 3 provides transactions for non-marketable shares held by Centerpoint Corporation and asks questions about costs, gains and account balances. Problem 4 provides bond investment entries for Bandwagon Corporation and asks questions about gains/losses and interest income. The final question asks how an auditor would most likely establish existence and ownership of publicly traded stock investments.

Uploaded by

Nexxus Baladad
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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CSTC COLLEGE OF SCIENCES, TECHNOLOGY, AND

COMMUNICATIONS, INC.

AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1


MA DELGADO, CPA, LPT, MBA

PROBLEM 1

Phillips Marketing made investments in trading securities. An analysis of these


investments on December 31, 2013 showed the following:
Cost Fair Value
A Company shares, 6,000 shares P615,000 P540,000
B Company shares, 2,250 shares 153,000 180,000
C Company, 12% bonds ( face value P600,000 ) 539,000 561,200

On April 1, 2014, the company purchased as a temporary investment, P400,000 face


value, 9% Phil. treasury notes for P397,000, which includes accrued interest. The notes
mature on July 1, 2015 and pay interest semi-annually every January 1 and July 1. The
notes were sold on December 1, 2014 for P413,000, which includes accrued interest.

On July 1, 2014, the B Company shares were sold for P140,000. On December 31, 2014,
the A Company shares were quoted at P88 per share, while the C Company bonds were
quoted at P1,900 per P2,000 bond.

Determine the adjusted balances of the following as of December 31, 2014:

1. The gain on the sale of Phil. treasury notes is


A. 1,000 B. 10,000 C. 16,000 D. 25,000

2. The loss on the sale of B company shares is


A. 0 B. 13,000 C. 37,300 D. 40,000

3. The interest income for the year 2014 is


A. 48,000 B. 72,000 C. 75,000 D. 96,000

4. The carrying amount of the securities on December 31, 2014 is


A. 834,000 B. 1,098,000 C. 1,198,000 D. 1,154,000

5. The net unrealized loss that will be recognized in the 2014 profit or loss statement
is
A. 0 B. 3,200 C. 30,200 D. 266,000

PROBLEM 2

In your audit of the investment securities of Maryland Corporation, accounted for as


financial assets at fair value thru OCI, the following entries were reflected in the
company’s investment and dividend income accounts for the year 2014:

Investment account:
Date Description DR CR
01/10 Purchased 20,000 ordinary shares, par value
P100, of X Company P1,560,000
03/30 Received 10,000 ordinary shares of X Company,
representing share dividends 1,000,000
04/25 Sold 10,000 shares of X Company P500,000
12/10 Sold 4,000 shares of X Company 480,000
Dividend Income account:
Date Description DR CR
03/30 Share dividends P1,000,000
08/30 X Company ordinary 200,000

The following information were disclosed during the examination:


 Dividends information:
Type of Dividend Date Declared Date of Record Date of Payment Rate
Share 02/14/2014 02/28/2014 03/30/2014 50%
Cash 08/01/2014 08/15/2014 08/30/2014 P10/share
Cash 12/01/2014 12/15/2014 01/02/2014 20%

 Market quotations at December 31 of X Company shares – Bid, P27.50; Asked,


P33.00

6. Gain or loss on the April 25 sale


A. 0 B. 20,000 gain C. 20,000 loss D. 280,000
loss
7. Gain on the December 10 sale
A. 0 B. 168,000 C. 192,000 D. 272,000

8. Total dividend income for the year 2012


A. 200,000 B. 600,000 C. 1,200,000 D. 1,600,000

9. Adjusted balance of the investment account as of December 31, 2014


A. 440,000 B. 580,000 C. 528,000 D. 832,000

10. The amount of net unrealized loss to be reported as at December 31, 2014
A. 0 B. 304,000 C. 340,000 D. 392,000

PROBLEM 3

Centerpoint Corporation has the following transactions in its non-marketable shares


of XYZ Corporation:

a. On January 2, 2008, Centerpoint purchased 4,000, P200 par value, ordinary shares
of XYZ at P220 per share. Centerpoint debited this to the Investment in Equity
Securities account.

b. XTZ was expanding and on March 2, 2008, it issued share rights to its
shareholders. The holder needs 4 rights to purchase one ordinary share at par. The
best estimate of the fair value of the ordinary share on that date was P280 per
share. There was no quoted price for the rights. No entry was made by
Centerpoint for this.

c. On April 2, 2008, Centerpoint exercised all its rights. The Investment in Equity
Securities account was charged for the amount paid.
d. Centerpoint’s accountant felt that the cash paid for these new shares was merely
an assessment. Hence, it credited all dividends, 10% in December of each year to
the Investment account until the debit was fully offset.

e. Centerpoint received 50% share dividend from XYZ on December, 2012. No


entry was made for this. Centerpoint sold the dividend shares on January, 2013
for P300 per share. The proceeds from the sale were credited to income account.

f. In December, 2013, XYZ shares were split on a 2 for 1 basis, and the new share
were issued as no par shares. Centerpoint found out that each new share was
worth P20 more than the P220 per share original acquisition cost. The investment
account was debited and a revenue account was credited for this.

g. In August, 2014, Centerpoint sold 1/2 of its XYZ’s holdings at P240 per share.
The proceeds was credited to the investment account.

Centerpoint uses average method in recording the sale of its investments. The fair
value of Centerpoint’s investments cannot be reliably measured since the XYZ’s
shares are not actively traded.

11. The cost to be allocated to share rights received on March 2, 2008 is


A. 0 B. 50,287 C. 58,667 D. 62,858

12. The gain on the sale of dividend shares received in December, 2012 is
A. 160,000 B. 200,000 C. 330,000 D. 390,000

13. The gain on sale of the shares sold in August, 2014 is


A. 240,000 B. 480,000 C. 840,000 D. 1,740,000

14. The unadjusted balance of the Investment account on December 31, 2014 is
A. 780,000 B. 860,000 C. 980,000 D. 1,980,000

15. The adjusted balance of the Investment account on December 31, 2014 is
A. 270,000 B. 360,000 C. 540,000 D. 720,000

PROBLEM 4

In your examination of the Investment in Bonds account of Bandwagon Corporation, you


discovered the following entries in the appropriate ledger account:
DR CR
1/01/2014 Beginning balance P952,494
1/03/2014 Purchased 60 of P5,000, 6%, 2-year
of X Company bonds, net of P10,000
commission, plus accrued interest.
interest payable April 1 & Oct. 1 296,970
4/01/2014 Sold 45 of the 8% Phil. Treasury bonds,
net of commission, but including
interest P459,000
7/01/2014 Received interest from Phil. Treasury
bonds 20,250
12/01/2014 Sold 30 of X Company bonds, net of
commission, but including interest 161,190
The beginning balance consists of the following:
 8% Phil treasury bonds ( 60 of P10,000) at 103, net of interest
and commissions. Interest payable January 1 and July 1.
Acquisition date: October 1, 2013. P633,090
 9.5% Treasury bonds ( 30 of P10,000 ) at 102, net of interest
and commissions. Interest payable January 1 and July 1.
Acquisition date: December 1, 2013. 319,404

Market value of the bonds at December 31, 2013:


8% Phil. Treasury bonds 98
9.5% Phil. Treasury bonds 105
X bonds 95

16. The gain/(loss) on the April 1 sale is:


A. 6,817.50 B. (8,817.50) C. 15,817.50 D.(15,817.50)

17. The gain/(loss) on the December 1 sale is:


A. 11,955 B. (11,955) C. 13,455 D. (13,455)

18. The total interest income to be recognized for 2014 is:


A. 66,750 B. 67,500 C. 93,750 D. 97,500

19. The adjusted balance of the Investment account at December 31, 2014 is:
A. 323,101.50 B. 382,858,50 C. 609,036.50 D. 610,536.50

THEORETICAL QUESTION

20. In establishing the existence and ownership of investments held by the corporation of
publicly traded stocks, the auditor would most likely inspect the securities or:
A. Confirm the number of shares held by an independent custodian.
B. Determine that the investment is carried at the lower of cost or market.
C. Inspect the audited financial statements of the investee company.
D. Obtain written representations from management confirming that the
securities are properly classified.

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