CHAPTER 6

- Audit of Investments
Problem 1
The following data pertains to Rainbow Corporation‟s investments in marketable securities:
Market Value
Cost 12/31/07 12/31/06
Trading P 150,000 P 155,000 P 100,000
Available-for-sale 150,000 130,000 126,000

Questions
1. What amount should Rainbow Corporation report as unrealized holding gain in its 2007income statement?
a. P 65,000
b. P 60,000
c. P 55,000
d. P 50,0002.
What amount should Rainbow Corporation report as unrealized loss on marketableequity securities at
December 31, 2007, in accumulated other comprehensive income in
stockholders‟ equity?
a. P 20,000
b. P 13,000
c. P 10,000
d. P 0
Solution
1. C
Market value 1/1/07 P 100,000
Market value 12/31/07 155,000
Unrealized holding gain P 55,000

2.A
Cost P 150,000
Market value 12/31/07 130,000
Unrealized holding loss P 20,000

Problem 2
The following information pertains to Every Now and Then, Inc.‟s portfolio of marketable
investments for the year ended December 31, 2007:

Cost Fair Value 2007 activities Fair value

12/31/06 Purc. Sales 12/31/07
Held-to-maturity
Security ABC P 100,000 P 95,000

Trading Security
Security DEFP 150,000 P 100,000 155,000

Available-for-sale
Security GHI 190,000 165,000 P 175,000
Security JKL 170,000 175,000 160,000

Security ABC was purchased at par. All declines in fair values are considered to be temporary.
Questions
1. The carrying value of security ABC at December 31, 2007 is
a. P 95,000
b. P 98,000
c. P 100,000
d. P 105,000

2. The carrying value of security DEF at December 31, 2007 is

a. P 100,000
b. P 120,000
c. P 150,000
d. P 155,000

3. The carrying value of security JKL at December 31, 2007 is

a. P 160,000
b. P 165,000
c. P 170,000
d. P 175,000

4. The recognized gain or loss on sale of security GHI is

a. P (40,000)
b. P (25,000)
c. P (15,000)
d. P )10,000)

5. The unrealized holding gain or loss to be reported in 2007 net income is

a. P 55,000
b. P (25,000)
c. P 15,000
d. P (5,000)

6. Unrealized gain or loss to be reported at December 31, 2007, as a separate component

of stockholders‟ equity entitled “accumulated other comprehensive income” is
a. P (20,000)
b. P 15,000
c. P (10,000)
d. P 5,000

Solution
1.C Cost since the security is considered as held-to-maturity
2. D Market value at year-end
3. A Market value at year-end
4.C
Selling Price P 175,000
Cost 190,000
Loss P( 15,000)
5. A
Market value 1/1/07 P 100,000
Market value 12/31/07 155,000
Unrealized holding gain P 55,000
6. D
Cost P 170,000
Market value 12/31/07 175,000
Holding gain P 5,000

Problem 3
At December 31, 2007, Maria Angela Corporation had the following investments that were purchased during 2005, its first
year of operations:
Cost Fair Value
Trading Securities:
Security A 700,000 725,000
Security B 210,000 200,000
Totals 910,000 925,000
Securities Available for Sale:
Security C 500,000 560,000
Security D 850,000 865,000
Totals 1,350,000 1,425,000
Securities to be Held to Maturity:
Security E 970,000 980,000
Security F 412,000 409,000
Totals 1,382,000 1,389,000

No investments were sold during 2007. All securities except Security D and Security F are considered short-term
investments. None of the market changes is considered permanent.

Questions
1. The amount of investment to be reported as current assets is:
a. P 2,465,000
b. P 2,455,000
c. P 2,380,000
d. P 1,485,0002.

2.The amount of investment to be reported as non-current assets is:

a. P 1,389,000
b. P 1,382,000
c. P 1,277,000
d. P 1,274,000

3.The unrealized gain (or loss) component of income before taxes is:
a. P 15,000
b. P 75,000
c. P 97,000
d. P 100,000

Solution
1. B
Security A P 725,000 at mv
Security B 200,000 at mv
Security C 560,000 at mv
Security E 970,000 at cost
Total P 2,465,000

2. C
Security D P 865,000 at mv
Security F 412,000 at cost
Total P 1,277,000

3. A
Trading security-cost P 910,000
Trading security–mv 925,000
Holding gain P 15,000

4. B
Available-for-sales security–cost P 1,350,000
Available-for-sales security–mv 1,425,000
Holding gain P 75,000

Problem 4
Marc Corporation had investments in marketable debt securities costing P650,000 that were classified
as available-for-sale. On June 30, 2007, Marc Corporation decided to hold the investments to maturity and
accordingly reclassified them from the held-to-maturity category on that date. The investments‟
market value was P575,000 at December 31, 2006; P530,000 at June 30, 2007; and P490,000 at December
31, 2007.

Questions
1. What amount of loss from investments should Marc Corporation report in its 2007 income statement?
a. P 0
b. P 45,000
c. P 85,000
d. P 120,000

2. What amount should Marc Corporation report as net unrealized loss on marketable debt securities in its
2007 statement of stockholders‟ equity?
a. P 160,000
b. P 120,000
c. P 45,000
d. P40,000
Solution

Entry:
Valuation allowance 75,000
Unrealized holding loss (SHE) 75,000
To close the valuation allowance of last year

MES– HTM 530,000

Unrealized holding loss (SHE) 120,000
MES– SAS 650,000

1. a
2. b (Note: the unrealized holding loss should be amortized over the lifeof the security)

Problem 5
Quiters has investments in shares of common stock of Never Win Company, bought as follows:

2003 1,000 shares–P 140,000

2005 500 shares–P 90,000

The following transactions took place in 2007 with respect to these holdings:

April 10 By proper resolution, there was a 3 for 1 stock split and Quiters Company received 3,000 shares in addition to her
original holdings.

July 10 Quiters Company received a P0.60 per share cash dividend and also rights to subscribed to one share at P40 each
for every five shares held. On this date, shares of stock of Never Win Company were selling ex-rights at P55 per share and
rights were selling at P2 each.

July 20 Quiters Company exercised all her rights by buying the new shares and paidP36,000.

Nov. 15 Quiters sold 1,000 shares at P60 each, taken from those acquired in 2003, less
broker‟s commission of P750.

Questions
1. The investment in stock at year-end is:
a.P 222,023
b. P 221,031
c. P 220,971
d. P 219,334

2. The investment in stock at year-end from the 2003 purchase is:

a.P 87,953
b. P 90,059
c. P 93,333
d. P 108,889

3. The investment in stock at year-end from the 2005 purchase is:

a.P 90,000
b. P 88,422
c. P 86,842
d. P 81,931

4. The gain on sale of investment at year-end is:

a.P 14,971
b. P 14,221
c. P 13,333
d. P 12,583
5. How many shares were purchased during the year?
a.900 shares
b. 600 shares
c. 300 shares
d. 150 shares
Solution
April 10 Memo entry

July 10 Cash 2,700

Dividend income 2,700
Investment in Stock Rights 8,070
Investment in stock 8,070
(2/57 x P230,000 = P8,070)

July 20 Investment in stock 44,070

Cash 36,000
Investment in stock rights 8,070

1999 Purchase

Nov 15 Cash (60,000– 750) 59,250 1,000 140,000

Investment in stock 45,029 x3 ______ Split
(1,000 rights/3,000 rights x P135,088) 3,000 140,000
Gain on sale 14,221 _____ (4,912)Stock rights
3,000 135,088