BA 123

Audit of Investment
Exercises
I.

On January 1, 2009, Bamban Corporation purchased P4,000,000 10%

bonds for P3,711,520 and designated as available for sale. The bonds
were purchased to yield 12%. Interest is payable annually every December
31. The bonds mature on December 31, 2013. The bonds were selling at
99 and 98 on December 31, 2009 and 2010, respectively. Because of the
change in intention and ability, Bamban reclassified the investment to
held to maturity on December 31, 2011. On the date of reclassification,
the prevailing market rate is 9%.

Required:
a. Net unrealized gain accumulated in other comprehensive income in equity
as of December 31, 2010 and 2011
b. Profit or loss recognized in 2012
c. Net unrealized gain in accumulated in other comprehensive income in
equity on December 31, 2012
d. Carrying amount of bonds on December 31, 2012

II.

The following asset side of the balance sheet was provided by the MB
Corporation on December 31, 2012.
MB Corporation
December 31, 2012
Assets

Cash
Temporary marketable equity securities trading (market:
P16,000)
Inventory
Current Assets
Noncurrent investment in 8%, 10-year bonds (at face value; cost:
P87,711)
Noncurrent marketable equity securities (at market; cost: P62,000)
Plant Assets
Less: Accumulated Depreciation
Total Assets

P20,000
22,000
30,000
72,000
100,000
75,000
100,000
(25,000)
P322,000

The long-term investment in bonds (held-to-maturity) was purchased on January

1, 2012. The difference between cost and face value was recognized on the 2012
income statement as an unrealized gain on the acquisition date. The interest on
bonds is payable annually on January 1. The noncurrent marketable equity
securities (available-for-sale) include a 30% interest in the Alomar Company. This
investment (with a P45,000 market value on December 31, 2012) was purchased
on January 2, 2012, for P40,000 and represents a significant influence. Alomar
had a net income of P50,000 and dividends of P20,000 in 2012. MB reported

2012 net income of P57,000. The books for MB Corporation have not been closed
for 2012. Assume all items are material.

Required:
a. Provide correcting and adjusting entries for MB Corporation in light of the
information given. Any discount or premium on the bond investment is to
be carried in a separate account from the face value.
b. What is MBs correct net income for 2012? Show your computations.
c. Recast the asset side of the December 31, 2012 balance sheet for MB
Corporation according to generally accepted accounting principles.
III.

The Marilao Company has the following transactions in the non-marketable

shares of the Sta. Maria Corp.
1. On January 2, 2004, Marilao purchased 4,000, P100 par value, ordinary
shares of Sta. Maria Corp. at P110 per share. Marilao debited Investment
in Stock account.
2. The Sta. Maria Corp. was expanding and on March 2, 2004, it issued share
rights to its shareholders. The holder needs four rights to purchase one
ordinary share at par. The best estimate of the fair value of the ordinary
share on that date was P140 per share. There was no quoted price for the
rights. No journal entry was made to record the receipt of the rights.
3. On April 2, 2004, Marilao exercised all its share rights. The Investment in
Stock account ws charged for the amount paid.
4. Robinson, Marilaos accountant, felt that the cash paid for the new shares
was merely an assessment since Marilaos proportionate share in Sta.
Maria was not changed. Hence, he credited all dividends (5% in December
of each year) to the Investment in Stock account until the debit was fully
offset.
5. Marilao received a 50% share dividend from Sta. Maria in December 2008.
Because the shares received were expected to be sold, the companys
president instructed Robinson not to make any entry for this dividend. The
company did sell the dividend shares in January 2009 for P150 per share.
The proceeds from the sale were credited to income.
6. In December 2009, Sta. Marias shares were split on a two-for-one basis
and the new shares were issued as no par shares. Marilao found that each
new share was worth P10 more than the P110 per share original
acquisition cost. For this reason, Marilao decided to debit the Investment
in Stock account with the additional shares received at P110 per share and
credited revenue for it.
7. In August 2010, Marilao sold one half (1/2) of its holdings in Sta. Maria at
P120 per share. The proceeds were credited to the Investment in Stock
account.

Marilao uses the average method in recording the sale of its investment in stock.
The fair value of the investment cannot be reliably measured since the shares of
Sta. Maria are not actively traded. Therefore, Marilao used cost to measure its
investment in Sta. Maria.
Questions: Based on the result of your audit, answer the following:

a. The cost of investment to be allocated to share rights received on March 2,

2004.
b. The unadjusted balance of Investment in Stock on December 31, 2010.
c. The adjusted balance of Investment in Stock on December 31, 2010.
d. The gain on the sale of dividend shares received in December 2008.
e. The gain on the sale of the shares sold in August 2010.

IV.

You were able to obtain the following ledger details of Trading Securities in
connection with your audit of SBS Corporation for the year-ended
December 31, 2010:

Particulars
Purchase of Line Co., - 4,000 shares
Purchase of Wilson Co. 4,800 shares

Date
1-14
2-20

Ref
CV
CV

Sale of Wilson Co. 1,600 shares

Receipt of Line share dividends
offsetting credit to Retained Earnings
Sale of Line shares 3,200 shares
Sale of Line 800 shares

3-01
5-31

CR
JV

8-15
10-1

CR
CR

Dr
960,000
1,200,00
0

Cr

360,000
88,000
784,000
184,000

From the Philippine Stock Exchange, the Line dividends were analyzed as follows:
Kind
Cash
Share
Cash

Declared
1/2/2010
5/2/2010
8/1/2010

Record
1/15/2010
5/15/2010
8/30/2010

Payment
1/31/2010
5/31/2010
9/15/2010

Rate
P 20 per share
10%
P 30 per share

At December 31, 2010, Line and Wilson shares were selling at Php 210 and Php
240 per share, respectively.
Questions: Based on your audit, determine the following:
(1) Gain or loss on sale of 1,600 Wilson shares on March 1, 2010
(2) Gain or loss on sale of 3,200 Line shares on August 15, 2010
(3) Gain or loss on sale of 800 Line shares on October 1, 2010
(4) Dividend income for the year 2010
(5) Carrying amount of Trading securities as of December 31, 2010.