CHAPTER

SUBSTANTIVE TESTS OF
10 INVESTMENTS

10-1. The CPAs would accept a confirmation of the securities on hand from the
custodian in lieu of their personal inspection of the securities after they had
investigated and satisfied themselves as to the standing of the custodian. The
CPAs would probably be satisfied if they found the custodian to be a well-known,
reliable financial institution, completely independent of the client and with
resources substantially larger in amount than the securities of the CPAs client that
are on deposit.
10-2. The auditors can make an independent computations of dividends earned during
the year by reference to dividend record books published by investment advisory
services.
10-3. Securities owned by the client may not be on hand at the balance sheet date
because they are held by others for safekeeping, pledged as collateral for loans,
deposited as assurance of performance under contracts, or in the hands of brokers
or others for transfer.
10-4. When the inspection of securities cannot be made for two weeks after the balance
sheet date, the client at the auditors suggestion may instruct the bank that the safe
deposit box is not to be opened until the time of the auditors inspection. A letter
may be obtained from the bank stating that the box has not been opened between
the balance sheet date and the auditors arrival. If the securities are in the clients
office, it will be necessary to verify any security transactions between the date of
inspection and the balance sheet date and to reconcile the results of the inspection
with the securities owned at the balance sheet date. The count of cash and other
negotiable assets should be coordinated with the inspection of securities.

10-5. Pink Corporation

(a) Instructions to be given to the assistant regarding the examination of the

securities kept in the safe deposit box include the following:
(1) A copy of the clients record of the contents of the box should be
obtained and used in connection with the inspection of the securities.
Comparing the contents of the box and the record will provide assurance
that all securities listed in the record are on hand. (The validity of the
record will be determined by examination of the transactions pertaining
to investments.) The copy of the record, after being verified, should be
added to the auditors working papers as evidence of work performed.
10-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition

(2) The banks record of persons entering the deposit box should be
examined to determine that only authorized persons have had access to
the box and that there was no entry to the box between December 31 and
January 11. Entry to the box between those dates may be an indication
that a security was returned to safekeeping after being borrowed at
year-end. The security may have been borrowed and used as collateral
to obtain cash to cover a shortage at December 31.
(3) The assistant should be instructed to insist that the treasurer be present
while the securities are being examined. Most auditors prefer to obtain a
signed statement that all investments inspected were returned at the
completion of the inspection made in the presence of the custodian. In
any event, the working papers should note the date of the inspection and
the name of the witness to the inspection.
(4) The following details of the securities should be examined:
a) The name of the registered owner appearing on each security other
than bearer bonds should be noted to determine that Pink
Corporation is a registered owner and that securities belonging to
another owner have not been substituted.
b) The name of the corporation issuing the security and the class of the
security (Class A, Par Value, 1st Preference, etc.) should be noted
for assurance that a lower priced security (perhaps somewhat similar
in corporate name or a different security of the issuing corporation)
has not been substituted for a higher priced security.
c) The face value of bonds and the number of shares represented by
each share certificate should be compared with the client record to
determine that the entire amount of the corporations holdings of
each security is on hand.
d) The serial numbers of the securities should be compared with those
on the record and, for those securities carried over from the prior
year, compared with the serial numbers of securities listed in the
prior years working papers. A change in serial numbers that cannot
be properly explained may be an indication of manipulation of the
securities. Verification of serial numbers also helps establish the
cost of securities sold under either the FIFO or specific identification
cost method.
e) The certificates should be read to ascertain the interest rates and
payment dates for bonds and the dividend rates and payment dates, if
given, for preference shares. This information may be used later in
the verification of investment revenue.
f) Bonds should be examined to determine maturity dates. Maturity
dates are needed for verifying the computation of the amortization of
bond premiums or discounts. In addition, the maturity dates will
disclose whether any bonds on hand have matured. The presence of
matured bonds may be a sign of internal control weakness or may
indicate that the bonds are in default.
 Substantive Tests of Investments 10-3
g) Coupon bonds should be inspected to determine that no past-due
interest coupons are unclipped and all future interest coupons are
attached. The presence of past-due coupons may be caused by poor
internal control and may indicate an understatement of interest
revenue. On the other hand, past-due coupons may indicate the
interest is in default and that the principal is uncollectible. Missing
future interest coupons may be an indication of an irregularity.
h) The auditors should be alert for any obvious alterations to securities
or forged certificates. Although auditors usually are not held
responsible for the genuineness of the certificates, any apparent
forgeries (or exceptions noted in the foregoing audit procedures)
may point out the need for obtaining confirmations from the
corporations issuing the certificates.
(b) The treasurers entry into the safe deposit box on January 4 has violated
the auditors control over negotiable assets which must be inspected or
counted simultaneously or kept under control until counted to avoid the
substitution of a counted asset for an uncounted asset in an attempt to
conceal a shortage. The auditors would probably apply the following
additional procedures:
(1) Reconcile bank balances at both year-end and at the date of
inspecting securities.
(2) Obtain a bank confirmation as of the inspection date.
(3) Examine cash journals between year-end and the inspection date for
any unusual entries.
(4) Examine all investment transactions taking place between the
balance sheet date and the inspection date to verify the amount of the
investment at the balance sheet date.
(5) If the client keeps a large fund of cash on hand, make a surprise
count of the cash fund.
(6) Review the transactions since year-end relating to any other
negotiable assets, such as notes receivable, to determine if any
substitutions have been made.

10-6. (a) (4) Having the securities held in safekeeping by a bank provides strong
internal control because the bank has no direct contact with the
employees responsible for maintaining the accounting record of the
securities and that individual has no access to the securities. Thus the
separation of the custody of securities from the accounting function is
complete.
(b) (1) The investment committee of the board of directors is not involved in the
routine of making buy and sell decisions and can therefore review the
transactions objectively. On the other hand, the chief operating officer,
the controller, and the treasurer may be closely associated on a daily
basis with the financial executive responsible for the investment
decisions.
10-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition

10-7. Voltron Company

Voltron Company
Marketable Securities
12.31.06

Balance, 1.1.06 P2,350.00

Lie Company, 25 shares @ P42
Lipay Company, 20 shares @ P65
Add: Purchase of Lambing Co., 5% bonds, 5 shares 4,762.50
Total P7,112.50
Less: Sale of 10 shares of Lipay Co., stocks P 650.00
Sale of 5 shares of Lambing Co., bonds 4,762.50 5,415.50
Balance per ledger, 12.31.06 P1,700.00
Add (Deduct) Adjustment(s)
AJE (1) To correct error in recording purchase
of Lambing Co., bonds ( 62.50)
(2) To correct error in recording sale of
Lipay Co., stocks 130.00
(3) To correct error in recording sale of
Lambing Co., bonds 62.50
Net 130.00
Balance as adjusted P1,830.00
Lie Co., 25 shares @ P42 P1,050.00
Lipay Co., 15 shares @ P52 780.00
P1,830.00

Adjusting Journal Entries:

(1) Interest income 62.50
Marketable securities Trading 62.50
(2) Marketable securities Trading 130.00
Gain on sale of marketable securities 130.00
Proceeds ( 10 x P65 ) P 650.00
Cost: ( 10 x P1,300 )
520.00
25
Gain P 130.00

(3) Marketable securities Trading 62.50

Interest income 62.50
(4) Securities fair valued adjusted Trading 120.00
Unrealized gain on trading securities (P/L) 120.00
Lie Co. (P45 P42) (25 shares) P 75
Lipay Co. (P55 P52) (15 shares) 45
P120
 Substantive Tests of Investments 10-5
10-8. Color Company

Requirement (a)
COLOR COMPANY
Investment
12.31.06

Changes during the year

Balance 1.1.06 No. of Shares Amount Balance 12.31.06 Adjustments Balance
No. of No. of
Description Shares Amount Acquired Sold Acquired Sold Shares Amount Dr (Cr) As Adjusted

Red Company, ordinary

Purchased in June 1993 @ P20 1,000 P 20,000 1,000 P 20,000 P 20,000
Purchased in Aug. 1996 @ P16 2,000 32,000 2,000 32,000 32,000
Purchased in May, 2004 @ P22 1,500 33,000 1,000 P 21,364 500 11,636 (1) ( 636) 11,000
85,000 63,000
White Company, ordinary
Purchased in Jan., 2004 @ P33 2,000 66,000 2,000 66,000 66,000
Purchased in March, 2006 ________ 500 P12,125 500 12,125 12,125
66,000 78,125
Blue Company, ordinary
Purchased in Aug., 1995 @ P13 100 7,300 100 SD 100 10,000 8,750 100 8,550 (2) (10,000)
(3) 5,100 3,650
Green Company, 15% bonds
Purchased in July, 1998 20 20,000 20 22,500 ( 2,500) (4) 2,500 -

Total P178,300 P 22,125 P 52,614 P147,811 P(3,036) P 144,775

10-6 Solutions Manual to Accompany Applied Auditing, 2006 Edition

10-8. Color Company (continued. . . . .)

Requirement (b) Adjusting Journal Entries

AJE (1) Loss on sale of investment 636

Investment 636

(2) Dividend income 10,000

Investment 10,000

(3) Accounts receivable - President 3,750

Investment 5,100
Gain on sale of investment 8,850

(4) Investment 2,500

Gain on sale of investment 2,000
Interest income 500

(5) Securities fair value adjusted Trading 5,225

Unrealized gain in trading securities
(P/L) 5,225
 Substantive Tests of Investments 10-7
10-9. Kalayaan Corporation

The Kalayaan Corporation

Investments
December 31, 2006

I N V E S T M E N T
Per Books Adjustments As Adjusted Adjustments to Other Accounts
Date Transactions Dr Cr Dr Cr Dr (Cr) Name of Account Dr Cr
2006
Jan. 3 Purchased 100 shares, National Motors P 4,500 P 4,500
5 Purchased 100 shares, Major Electronics 500 (13) 500 - Loss on investment on
Major Electronics (13) 500
Mar. 31 Cash dividend, National Motors P 50 (1) 50 - Dividend income (1) 50
Apr. 5 Sold 100 shares, National Motors 4,800 (2) 300 (4,500) Gain on sale of investment (2) 300
6 Purchased 100 shares, Ace Investment 2,300 2,300
6 Purchased 100 shares, General Utility 2,400 (3) 120 2,280 Investment in rights issues (3) 120
May 1 Received 100 rights issues, General Utility 100 (4) 100 - Miscellaneous income (4) 100
July 2 Purchased 10 shares, General Utility 130 (5) 60 190 Investment in rights issues (5) 60
15 Purchased 50 shares, Acme Laboratories 1,900 1,900
18 Purchased 20 shares, The Kalayaan Corp. 3,000 (6) 3,000 - Treasury shares (6) 3,000
Aug. 15 Sold 10 shares, The Kalayaan Corporation 1,550 (7) 1,550 - Treasury shares (7) 1,500
Dec. 8 Received 2 shares, Acme Laboratories 80 (8) 80 - Additional paid on Capital -
TS trans. (7) 50
8 Cash dividend, Acme Laboratories 20 (9) 2 ( 18) Gain on sale of fractional (9) 2
shares
15 Cash dividend, Ace Investment 90 (10) 80 ( 10) Dividend income (10) 80
31 Cash dividend, General Utility 120 (11) 120 - Miscellaneous income (11) 120
Dividends receivable (12) 110
Dividend income (12) 110
Loss on expiration of rights
issues (14) 60
Investment in rights issues (14) 60
_______ _______ ________ ________ ________
15,030 6,510 2,042 3,920 Adjusting Journal Entry
8,520 1,878 Unrealized holding loss on
Balance P 15,030 P 15,030 P 3,920 P 3,920 P 6,642 SAS (Equity) (15) 1,142
Securities Fair Value
Adjustment SAS (15) 1,142
10-8 Solutions Manual to Accompany Applied Auditing, 2006 Edition

10-10. Canada Corporation

Note to Instructor: This problem contains petty cash journal entries and a bank
reconciliation, previously covered in Chapter 7.
Requirement (1)
2005
Jan. 1 Investment in Available-for-Sale Securities
[(150 x P20)] + (200 x P30) + (100 x P25)] 11,500.00
Cash 11,500.00
Feb. 1 Investment in Available-for-Sale Securities
(P20,000 + P12,000) 32,000.00
Interest Revenue [(P20,000 x 0.12 x 5/12)
+ (P12,000 x 0.10 x 4/12)] 1,400.00
Cash 33,400.00
1 Petty Cash 500.00
Cash 500.00
28 Cash 1,200.00
Interest Revenue [P20,000 x 0.12 x 6/12] 1,200.00
28 Postage Expense 110.00
Office Supplies Expense 170.65
Transportation Expense 45.00
Miscellaneous Expense 43.50
Cash 369.15
a
28 Cash Short and Over 5.35
Cash 5.35
a
P125.50 (P500.00 P369.15)
Mar. 31 Cash (P1,500 + P600) 2,100
Interest Receivable (P20,000 x 0.12 x 1/12;
A Co. bonds) 200
Dividend Revenue 1,500
Interest Revenue [(P12,000 x 0.10 x
6/12) + (P20,000 x 0.12 x 1/12)] 800
31 Unrealized Increase/Decrease in Value of
Available-for-Sale Securities 900.00
Allowance for Change in Value of
Investment 900b
b
P42,600 (P11,500 P32,000)
31 Postage Expense 140.00
Office Supplies Expense 75.30
Miscellaneous Expense 54.20
Cash 269.50
 Substantive Tests of Investments 10-9
Requirement (2)
CANADA CORPORATION
Bank Reconciliation
March 31, 2005

Balance per bank statement P13,459.75

Add: Deposits in transit 2,100.00
P15,559.75
Deduct: Outstanding checks (2,365.40)
Adjusted cash balance P13,194.35

Balance per company records P11,689.95

Add: Note collected by bank P1,500.00
Interest on note 100.00 1,600.00
P13,289.95
Deduct: Bank service charge P 20.00
NSF check returned 75.60 (95.60)
Adjusted cash balance P13,194.35

Requirement (3)

2005
Mar. 31 Cash 1,600.00
Notes Receivable 1,500.00
Interest Revenue 100.00

31 Miscellaneous Expense 20.00

Accounts Receivable 75.60
Cash 95.60

10-11. Patrick Company

1.
P10,000 dividend revenue for 2005 (10,000 shares x P1.00)
P30,000 12/31/05 unrealized increase in value of available-for-sale securities
[10,000 x (P63 P60)]
P630,000 12/31/05 carrying value of investment (10,000 shares x P63 market
price)
2.
P40,000 investment income for 2005 (P400,000 net income x 0.10
ownership)
P110,000 investment income for 2006 [(P300,000 x 0.10) + (P200,000 x
0.40)]
P2,626,000 12/31/06 carrying value [P650,000 a + P1,950,000 cost + P80,000
investment income for second half of 2006 P54,000 dividends
(40,000 x P1.35; 10/1/06)]
a
P1,950,000 30,000 shares = P65
P65 x 10,000 = P650,000
10-10 Solutions Manual to Accompany Applied Auditing, 2006 Edition

10-12. Belle Manufacturing Corporation

a. The auditing objectives and procedures relative to the Laribee Investment

account are as follows:
(1) Objective: Ascertain that the shares exist and are owned by Belle.
Procedures: Examine the shares for existence and ownership.
(2) Objective: Establish correctness of beginning balance in investment
account.
Procedures: Examine last years audit work papers.
(3) Objective: Determine proper approval of the 2006 purchase.
Procedures: Examine directors minutes authorizing the transaction.
(4) Objective: Establish the cost of shares purchased in 2006.
Procedures: Examine brokers advice and canceled check.
(5) Objective: Determine that the proper amount of dividends were received,
properly recorded as a decrease in the investment carrying value, and
deposited in the bank.
Procedures: Refer to a dividend reporter (e.g., Standard and Poors),
recalculate Belles share of the dividend, trace to remittance advice and
bank statement, and examine journal entry for proper recording.
(6) Objective: Ascertain in that Belle has properly recorded its shares of
Laribee income as an increase in the investment account.
Procedures: Examine Laribees income statement and Belles journal
entry, if any, to record its share of the income.

b. If this investment is significant in relation to Belles total assets, and/or its

share of Laribee income is significant relative to Belles total income, Flores
must insist that the financial statements of Laribee be audited, either by
Castro & Horario, or by other independent CPAs.

c.
Belle Manufacturing Company
Investment in Laribee Industries
December 31, 2006

No. of Shares
12/31/06: Final balance - 1,000 shares P 50,000 < 1,000
1/2/07: Purchased 1,500 shares 75,000 * @ 1,500
12/31/07: Ledger balance 125,000 2,500
AJE No. 1 210,000 _____
12/31/07: Audited balance P335,000 2,500 &
To WPH
 Substantive Tests of Investments 10-11
AJE 1
Investment in Laribee Ordinary P210,000
Dividend Revenue 40,000
Equity in Income of Unconsolidated
Subsidiary P250,000
To adjust investment account for excess
of Belles share of Laribee income over
Laribee dividends.
Dividends:
4/1/07 (P 12,500) #
7/1/07 (P 12,500) #
10/1/07 (P 15,000) #
(P 40,000)
Income:
25% of P1 million P250,000 X
P210,000

< Compared with 12/31/06 work papers.

* Vouched to brokers advice and canceled check.
& Examined minutes for directors authorization.
Recalculated.
# Traced to remittance advice, cash receipts record, and bank statement.
X Examined audited income statement.

d. Flores should be aware of the possible existence of related party transactions

between Belle and Laribee. In this regard, she should be particularly alert to
possible disparities between the legal form of transactions and their economic
substance. For example, Belle manufactures earth moving equipment and
Laribee is a leasing company. Significant sale and leaseback transactions
may have occurred given the nature and relationship of the respective
companies. If these transactions did take place, Flores must ascertain that any
gains on sale of equipment have been deferred. Also, given the equity
method of accounting, Flores must determine that any intercompany profits
resulting from transactions between Belle and Laribee have been eliminated.

Finally, cases abound in which parent companies have manufactured

earnings by fabricating or misrepresenting transactions with subsidiaries. For
this reason, Flores must be alert to this possibility, and should carefully audit
all significant transactions between the two companies.
10-12 Solutions Manual to Accompany Applied Auditing, 2006 Edition

10-13. Analen, Inc.

Requirement (1)

Analen, Inc.
Income Before Income Taxes from Investment in Bel Company
For the Year Ended December 31, 2006

October 1, 2006: Dividends received from

Bel Company (10,000 shares x P0.90) P 9,000

Requirement (2)

Analen, Inc.
Income Before Income Taxes From Investment in Bel Company
For the Years Ended December 31, 2007, and 2006, Restated

2007 2006 Restated

Equity in earnings of Bel Company (Schedule 1) P110,000 P 40,000

Schedule 1: Equity in Earnings of Bel Company

Year ended December 31, 2006 (P400,000 x 10%) P 40,000

Year ended December 31, 2007

Six months ended June 30, 2007 [P300,000
(P500,000 - P200,000) x 10%] P 30,000
Six months ended December 31, 2007 (P200,000 x 40%) 80,000
Total P110,000

10-14. Elmar Company

Requirement (1)
July 2005: purchase of investment in trading security:
Investment in trading security: Celebrity Corp. bonds
(P1,000 x 8 x 1.02) .................................................. 8,160
Interest receivable (P8,000 x 9% x 2/12;
May 1 July 1)........................................................ 120
Cash.................................................................. 8,280

Requirement (2)
November 2005 - Interest collected:
Cash (P8,000 x 9% x 6/12)........................................... 360
Interest revenue........................................................ 240
Interest receivable.................................................... 120
 Substantive Tests of Investments 10-13
Requirement (3)
Dec. 31, 2005: accrue interest on the Celebrity Corp. bonds held
as a trading securities investment:
Interest receivable (P8,000 x 9% x 2/12, Nov. Dec.). 120
Interest revenue........................................................ 120

Dec. 31, 2005: record fair value:

Unrealized loss on investment in trading securities
(close to Income summary) ....................................... 340
Valuation allowance: Celebrity Corp. bonds* ........ 340

* Investment in Bonds:
Original cost ............................................................. P8,000
Fair value.................................................................. 7,760
Unrealized loss ......................................................... P 240
Previously recorded unrealized loss ......................... 0
DR<CR> to valuation allowance.............................. P 240

Requirement (4)
Income Statement for 2005:
Interest revenue (P200 + P100) .................................... P 300
Unrealized loss on investment in trading securities...... <240>

Balance sheet at Dec. 31, 2005:

Current assets: Interest receivable ............................... P 120
Investments in trading securities................................... P8,000
Less: Allowance to reduce to fair value....................... 240
Investments in trading securities, at fair value.............. P7,760

10-15. Jeng Company

Requirement (1) Equity method

January 1, 2004 Acquisition of long-term investment:
Investment in equity-basis company: Zash Corp......... 153,000
Cash [(30,000 x 0.30 = 9,000 shares) x P17]........... 153,000

During 2004 Dividends declared and paid by Zash Corp.:

Cash (P8,000 x 0.30) .................................................. 2,400
Long-term investment in equity-basis company:
Zash Corp. ............................................................ 2,400
10-14 Solutions Manual to Accompany Applied Auditing, 2006 Edition

December 31, 2004 To recognize proportionate part of Zash Corp.

income:
Long-term investment in equity-basis company:
Zash Corp. ................................................................. 6,600
Investment income: equity in earnings of
associated company (P24,000 x 0.30) .................. 6,600

December 31, 2004 To recognize additional depreciation expense:

Investment income: equity in earnings of
associated company ................................................... 600
Long-term investment in equity-basis company:
Zash Corp. ............................................................ 600

Computation:
(P220,000 P200,000) = P20,000; (P20,000 x 0.30)
10 yrs. = P600

December 31, 2004 To recognize additional cost of goods sold:

Investment income: equity in earnings of
associated company ................................................... 3,000
Long-term investment in equity-basis company:
Zash Corp. ............................................................ 3,000

Computation:
[(P260,000 P250,000) = P10,000] x 0.30 = P3,000

During 2005 Dividends declared and paid by Zash Corp.:

Cash (P5,000 x 0.30) .................................................. 1,500
Long-term investment in equity-basis company:
Zash Corp. ............................................................ 1,500

December 31, 2005 To recognize Zash loss:

Investment income: equity in earnings of
associated company (P10,000 x 0.30) ....................... 3,000
Long-term investment in equity-basis company:
Zash Corp. ............................................................ 3,000

December 31, 2005 To recognize additional depreciation:

Investment income: equity in loss of
associated company ................................................... 600
Long-term investment in equity-basis company:
Zash Corp. ............................................................ 600
 Substantive Tests of Investments 10-15
Requirement (2)
January 1, 2006 To record sale of 500 shares of Zash shares:
Cash [(500 shares x P18), Zash Corp. .......................... 9,000
Long-term investment in equity-basis company:
Zash Corp. ............................................................ 8,250
Gain on disposal of long-term securities ................. 750

Computation:
Balance in investment account (P153,000 + P6,600
P2,400 P600 P3,000 P1,500 P3,000 P600) ...
= P140,500.
P148,500 x 500/9,000 shares = P8,250

Requirement (3)

2004 2005 2006

Income statement:
Investment income (loss)
(P6,600 P600 P3,000)...................... P3,000 (-P3,000 P600) ....................... (3,600) *
Gain (loss) on disposal ............................. 0 0 P750

Balance sheet:
Investment in equity-basis company
(P153,000 + P6,600 P2,400 (P153,600 P1,500 P3,000
- P600 P3,000).................................... P153,600 P600)...............................P148,500

* Investment income for 2006 is not known, as no data are given for this year.

10-16. Del Corporation

Requirement (1)
Assuming other income is zero, then the entire P74 million for 2006 and the
P127 million for 2005 are equity in the income of affiliated companies:

2006 2005
Equity in income of affiliated companies...................................... P 74 P127
Less: Undistributed equity in income of affiliated companies ..... 27 84
Maximum amount of dividends that could be received................. P 47 P 43

If dividends were zero, then all of the equity in income of affiliated companies
would be retained. Since the amount actually retained was P27 million, the
amount of other income is P74 million less P27 million, or P47 million.
10-16 Solutions Manual to Accompany Applied Auditing, 2006 Edition

Requirement (2)
Investment at December 31, 2006.......................................... P1,456
Investment at December 31, 2005.......................................... 1,332
Increase in investment in equity............................................. P 124
Amount of increase resulting from undistributed equity
in income of affiliated companies ................................... 27
Amount of increase (decrease) in investment from other
sources ............................................................................ P 97

It appears Del either increased its equity holdings in its affiliated companies, or
made advances which had been recorded in the Investments account.

Requirement (3)
Rate of return on average investment in equity-basis companies = P74 / ([P1,332
+ P1,456] / 2) = 0.053%

Requirement (4)
If the investment at equity represents a 50% owned joint venture with no goodwill
or adjustment for book value to fair value of net assets, the total shareholders
equity (TSE) can be approximated as:
Investment in Affiliate, at equity = 50% x TSE of Affiliate Joint Venture
TSE of Affiliate = P1,456 / 0.50 = P2,912 million.

Knowing the percentage owned allows estimates of the net assets of the equity-
basis companies to be made, assuming there are no adjustments or goodwill
involved.

10-17. BYDG Company

(a) Securities Fair Value AdjustmentTrading ........ 5,000

Unrealized Holding Gain or Loss
Income....................................................... 5,000

(b) Securities Fair Value Adjustment

Available-for-Sale ............................................ 5,000
Unrealized Holding Gain or Loss
Equity........................................................ 5,000

(c) The Unrealized Holding Gain or LossIncome account is reported in the

income statement under Other Revenues and Gains. The Unrealized Holding
Gain or LossEquity account is reported as a part of other comprehensive
income and as a component of shareholders equity until realized. The
Securities Fair Value Adjustment account is added to the cost of the
Available-for-Sale or Trading Securities account to arrive at fair value.
 Substantive Tests of Investments 10-17
10-18. Troy Company

(a) December 31, 2006

Unrealized Holding Gain or LossIncome......... 1,400
Securities Fair Value Adjustment (Trading) . 1,400

(b) During 2007

Cash...................................................................... 9,400
Loss on Sale of Securities .................................... 600
Trading Securities ......................................... 10,000

(c) December 31, 2007

Unrealized
Securities Cost Fair Value Gain (Loss)
Eric Corp. shares P20,000 P19,100 (P (900)
Brad Co. shares 20,000 20,500 ( 500)
Total of portfolio P40,000 P39,600 ( (400)
Previous securities fair value
adjustment balanceCr. ( (1,400)
Securities fair value
adjustmentDr. (P1,000)

Securities Fair Value Adjustment (Trading) ........ 1,000

Unrealized Holding Gain or Loss
Income....................................................... 1,000

10-19. Francis Corporation

The unrealized gains and losses resulting from changes in the fair value of
available-for-sale securities are recorded in an unrealized holding gain or loss
account that is reported as other comprehensive income and as a separate
component of shareholders equity until realized. Therefore, the following
adjusting entry should be made at the year-end:

Unrealized Holding Gain or LossEquity ................. 8,000

Securities Fair Value Adjustment
(Available-for-Sale) ......................................... 8,000

Unrealized Holding Gain or LossEquity is reported as other comprehensive

income and as a separate component in shareholders equity and not included in
net income. The Securities Fair Value Adjustment (Available-for-Sale) account is
a valuation account to the related investment account.