ap investments quizzer q

8/19/2019 AP Investments Quizzer q

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IV – AUDIT OF INVESTMENTS

PROBLEM NO. 1

The following transactions of the Angat Company were completed during

the year 2006:

Jan. 2 Purchased 20,000 shares of Bulacan Auto Co. for P40 pershare plus brokerage costs of P4,500. These shares wereclassified as trading securities.

Feb. 1 Purchased 20,000 shares of Malolos Company common stockat P125 per share plus brokerage fees of P19,000. Angatclassifies this stock as and available-for-sale security.

Apr. 1 Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5

plus accrued interest of P35,000. In addition, the companypaid brokerage fees of P18,000. Angat classified these bondsas a trading security.

Jul. 1 Received semiannual interest on the RP Treasury Bonds.

Aug. 1 Sold P500,000 of RP Treasury 7% bonds at 103 plus accruedinterest.

Oct. 1 Sold 3,000 shares of Malolos at P132 per share.

The market values of the stocks and bonds on December 31, 2006, are asfollows:

Bulacan Auto Co. P45 per shareMalolos Company P130 per shareRP Treasury 7% bonds 102

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Gain or loss on sale of P500,000 RP Treasury Bonds on August 1, 2006a. P15,000 gain c. P2,000 lossb. P 2,500 gain d. P7,500 loss

2. Gain or loss on sale of 3,000 Malolos shares on October 1, 2006a. P18,150 loss c. P 2,000 gainb. P18,150 gain d. P21,000 gain


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3. What amount of unrealized gain should be shown as component ofincome in 2006?a. P92,500 c. P74,500b. P97,000 d. P80,000

4. What amount of unrealized gain should be shown as component ofequity as of December 31, 2006?a. P68,850 c. P66,000b. P85,000 d. P 0

Suggested Solution:

Question No. 1

Sales proceeds (P500,000 x 1.03) P515,000Less cost of RP Treasury bonds sold (P500,000 x 1.025)* 512,500Gain on sale of P500,000 RP Treasury Bonds P 2,500

* PAS 39 par. 43 states that when a financial asset or financial liability isrecognized initially, an entity shall measure it at its fair value plus, in thecase of a financial asset or financial liability not at fair value through profitor loss, transaction costs that are directly attributable to the acquisition orissue of financial asset or financial liability. Therefore, the transaction costs(e.g. brokerage fees) should be expensed for trading securities.

Question No. 2

Sales proceeds (3,000 shares x P132) P396,000

Less cost of shares sold{[(20,000 x P125) + P19,000] x 3/20} 377,850Gain on sale of 3,000 Malolos shares P 18,150

Question No. 3

Cost of Bulacan Auto Co. shares (20,000 x P40) P 800,000Cost of RP Treasury 7% bonds (P2,000,000 x 1.025) 2,050,000Cost of P500,000 RP Treasury bonds sold (see no. 1) ( 512,500) Trading securities, 12/31/06 before mark-to-market 2,337,500Fair value of trading securities, 12/31/06 (see below) 2,430,000Unrealized gain on TS to be reported on the IS P 92,500

Bulacan Auto Co. (20,000 x P45) P 900,000RP Treasury 7% bonds (P1,500,000 x 1.02) 1,530,200Fair value of trading securities, 12/31/06 P2,430,000


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Question No. 4

Cost of Malolos Company shares[(20,000 x P125) + P19,000] P2,519,000

Cost of 3,000 shares sold (see no. 2) (377,850)AFS, 12/31/06 before mark-to-market 2,141,150Fair value of AFS, 12/31/06 [(20,000 - 3,000) x P130] 2,210,000Unrealized gain-AFS, 12/31/06 to be reported under SHE P 68,850

Answers: 1) B; 2) B; 3) A; 4) A

PROBLEM NO. 2

You were engaged by Balagtas Company to audit its financial statementsfor the year 2006. During the course of your audit, you noted that the

following trading securities were properly reported as current assets atDecember 31, 2005:

Cost MarketFrance Corporation, 5,000 shares,

convertible preferred shares P 450,000 P 487,500Ces, Inc., 30,000 shares of common stock 675,000 742,500Coo Co., 10,000 shares of common stock 618,750 450,000

P1,743,750 P1,680,000

The following sale and conversion transactions transpired during 2006:

Mar. 1 Sold 12,500 shares of Ces for P33.75 per share.

April 1 Sold 2,500 shares of Coo for P45 per share.

Sept. 21 Converted 2,500 shares of France’s preferred stock into7,500 shares of France’s common stock, when themarket price was P78.75 per share for the preferredstock and P47.25 per share for the common stock.

The following 2006 dividend information pertains to stocks owned by

Balagtas: Jan. 2 Coo issued a 10% stock dividend when the market price

of Coo’s common stock was P49.50 per share.

March 31and Sept. 30

France paid dividends of P2.50 per share on its preferredstock, to stockholders of record on March 15 andSeptember 15, respectively. France did not paydividends on its common stock during 2006.


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July 1 Ces paid a P2.25 per share dividend on its commonstock.

Market prices per share of the securities were as follows:

12/31/2006 12/31/2005France Corp., preferred 92.25 97.50France Corp., common 42.75 38.25Ces, Inc., common 22.50 24.75Coo Co., common 40.50 45.00

All of the foregoing stocks are listed in the Philippine Stock Exchange.Declines in market value from cost would not be considered permanent.

QUESTIONS:

Based on the above and the result of your audit, you are to provide theanswers to the following:

1. How much is the gain on sale of 12,500 Ces shares?a. P112,500 c. P140,625b. P281,250 d. P 0

2. How much is the gain or loss on sale of 2,500 Coo shares?a. P28,125 gain c. P28,125 lossb. P10,227 gain d. P 0

3. How much is the gain or loss on conversion of 2,500 France preferredstock into 15,000 common stock?a. P 28,125 loss c. P46,875 loss b. P129,375 gain d. P 0

4. How much is the total dividend income for the year 2006?a. P 64,375 c. P 51,875b. P101,375 d. P364,375

5. How much should be reported as unrealized gain on trading securitiesin the company’s income statement for the year 2006?a. P 4,500 c. P59,250

b. P67,773 d. P 0

Suggested Solution:

Question No. 1

Sales proceeds (12,500 shares x P33.75) P421,875Less CV of Ces shares sold (12.5/30 x P742,500) 309,375Gain on sale of 12,500 Ces shares P112,500


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Question No. 2

Sales proceeds (2,500 shares x P45) P112,500Less CV of Coo shares sold (P450,000 x 2,500/11,000*) 102,273Gain on sale of 2,500 Coo shares P 10,227

* total number of shares after 10% stock dividends (10,000 x 1.1)

Question No. 3

Fair value of preferred stock (2,500 shares x P78.75) P196,875Less CV of shares converted (P487,500 x 2.5/5) 243,750Loss on conversion of 2,500 France preferred shares P 46,875

Question No. 4

From France (5,000 shares x P2.50 x 2) P25,000

From Ces [(30,000 - 12,500) x P2.25) 39,375 Total dividend income in 2006 P64,375

Question No. 5

Trading securities, 1/1/06 P1,680,000CV of Ces shares sold (see no. 1) (309,375)CV of Coo shares sold (see no. 2) (102,273)CV of France preferred shares converted (see no. 3) (243,750)Cost of 7,500 France common shares received (see no. 3) 196,875 Trading securities, 12/31/06 before mark-to-market 1,221,477

Fair value of trading securities, 12/31/06 (see below) 1,289,250Unrealized gain on trading securities P 67,773

France Corp., preferred [(5,000 - 2,500) x P92.25] P 230,625France Corp. – Common (7,500 x P42.75) 320,625Ces, Inc., common [(30,000 - 12,500) x P22.50] 393,750Coo Co., common {[(10,000 x 1.1) - 2,500] x P40.50} 344,250Fair value of trading securities, 12/31/06 P1,289,250

Answers: 1) A; 2) B; 3) C; 4) A; 5) B

PROBLEM NO. 3

You were able to obtain the following ledger details of Trading Securities inconnection with your audit of the Bocaue Corporation for the year endedDecember 31, 2006:


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5. Carrying value of Trading Securities as of December 31, 2006a. P768,000 c. P880,000b. P852,000 d. P768,000

Suggested Solution:

Question No. 1

Sales proceeds P360,000Less CV of shares sold (P1,200,000 x 1,600/4,800) 400,000Loss on sale of 1,600 Luck shares on 3/1/06 P 40,000

Question No. 2

Total proceeds P784,000Less dividends sold (3,200 shares x P30) 96,000Sales proceeds 688,000

Less CV of investment sold(P880,000* x 3,200/4,400**) 640,000

Gain on sale of 3,200 Good shares on 9/15/06 P 48,000

Computation of adjusted cost of Good Co. shares

Total cash paid P960,000Less purchased dividend (4,000 x P20) 80,000Adjusted cost P880,000 *

**After 10% stock dividend

Question No. 3Sales proceeds P184,000Less CV of investment sold (P880,000 x 800/4,400) 160,000Gain on sale of 800 Good shares on 10/1/06 P 24,000

Question No. 4

Dividend income - Declared Aug. 1 (4,400 shares x P30) P132,000

Question No. 5

Good Co. [(4,000 x 1.1) - 3,200 - 800] = 400 x P210 P 84,000

Luck Co. (4,800 - 1,600) = 3,200 x P240 768,000Carrying value of trading securities, 12/31/06 P852,000

Answers: 1) C; 2) A; 3) D; 4) A, 5) B


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PROBLEM NO. 4

In connection with your audit of the financial statements of the GuiguintoCompany for the year 2006, the following Available for Sale Securities andDividend Income accounts were presented to you:

Available for Sale SecuritiesDate Description Ref. Debit Credit

01/08

03/30

04/0312/02

Purchased 20,000 sharescommon, par value P50,BUSTOS Co.

10,000 shares BUSTOS Co.received as stock dividend

Sold 10,000 shares @ P25Sold 4,000 shares @ P60

VR-69

CJ-30CR-44CR-65

780,000

500,000250,000240,000

Dividend IncomeDate Description Ref. Debit Credit

03/3008/30

Stock dividendBUSTOS Company common

SJ-8CR-52

500,000100,000

The following information was obtained during your examination:

1. From independent sources, you determine the following dividendinformation:

Type ofDividend

DateDeclared

Date ofRecord

Date ofPayment Rate

StockCashCash

02/14/200608/01/200612/01/2006

02/28/200608/15/200612/15/2006

03/30/200608/30/200601/02/2007

50%P5/share

20%

2. Closing market quotation as at December 31, 2006:

Bid AskedBUSTOS Company common 13-3/4 16-1/2

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. How much is the gain or loss on the April 3, 2006 sale?a. P10,000 loss c. P140,000 lossb. P10,000 gain d. P 0

2. How much is the gain on the December 2, 2006 sale?a. P136,000 c. P84,000b. P 96,000 d. P 0


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3. How much is the total dividend income for the year 2006?a. P600,000 c. P100,000b. P800,000 d. P300,000

4. How much is the adjusted balance of Available for Sale Securities as of

December 31, 2006?a. P290,000 c. P220,000b. P264,000 d. P416,000

5. How much is the Unrealized Loss on AFS as of December 31, 2006?a. P196,000 c. P152,000b. P 70,000 d. P 0

Suggested Solution:

Question No. 1

Sales proceeds (10,000 shares x P25) P250,000Less CV of investment sold (P780,000 x 10/30*) 260,000Loss on sale of AFS on 4/3/06 P 10,000

*After 50% stock dividend

Question No. 2

Total proceeds (4,000 shares x P60) P240,000Less dividends sold (4,000 shares x P50 x 20%) 40,000Net sales proceeds 200,000

Less CV of investment sold (P780,000 x 4/30) 104,000Gain on sale of AFS on 12/2/06 P 96,000

Question No. 3

Cash dividends declared, 8/1/2006(20,000 shares x P5)

P100,000

Cash dividends declared, 12/1/2006(20,000 shares x P50 x 20%) 200,000

Total dividend income P300,000

Question No. 4

Shares purchased, 1/08 20,000Shares received as stock dividend 10,000Sold, 4/3 (10,000)Sold, 12/2 (4,000)Balance, 12/31/06 16,000Multiply by market value/share, 12/31/06 13.75Carrying value of AFS, 12/31/06 P220,000


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During 2006, the following transactions occurred:

Jan. 1 Receive interest on the Vanguard bonds.

Mar. 1 Sold 4,000 shares of Explorer Inc. stock for P76,000.

May 15 Sold 1,600 shares of Midas, Inc. for P15 per share. July 1 Received interest on the Vanguard bonds.

Dec. 31 Received interest on the Discoverer bonds.

31 Transferred the Discoverer bonds to the available-for-saleportfolio. The bonds were selling at 101 on this date. Thebonds were purchased on January 2, 2005. The discount wasamortized using the effective interest method.

The market values of the stocks and bonds on December 31, 2006, are as

follows:Sputnik, Inc. P22 per shareExplorer, Inc. P15 per share10% Vanguard bonds P75,600Score Products P42 per share Tiros, Inc. P28 per shareMidas, Inc. P18 per share

QUESTIONS:


1. Gain or loss on sale of 4,000 Explorer, Inc. shares on March 1, 2006a. P4,000 loss c. P32,000 lossb. P4,000 gain d. P32,000 gain

2. Realized gain or loss on sale of 1,600 Midas, Inc. shares on May 15,2006a. P4,800 loss c. P1,600 lossb. P4,800 gain d. P1,600 gain

3. Total interest income for the year 2006?a. P130,000 c. P144,820b. P125,560 d. P143,000

4. The amount that should be reported as unrealized gain in thestatement of changes in equity regarding transfer of Discoverer bondsto AFS?a. P47,000 c. P61,820b. P32,180 d. P 0


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5. Carrying value of Trading Securities and Available-for-sale securities asof December 31, 2006 should be

Trading securities Available-for-sale securitiesa. P241,200 P5,733,200b. P301,200 P4,723,200

c. P241,200 P5,762,000d. P301,200 P5,720,800

Suggested Solution:

Question No. 1

Sales proceeds P76,000Less CV of shares sold (P144,000 x 4/8) 72,000Loss on sale of 4,000 Explorer, Inc. shares P 4,000

Question No. 2

Sales proceeds (1,600 shares x P15) P24,000Unrealized gain on the shares sold(P160,000 x 1.6/40) 6,400 Total 30,400Less CV of shares sold (P640,000 x 1.6/40) 25,600Realized gain on sale of 1,600 Midas, Inc. shares P 4,800

Alternative computation:

Sales proceeds (1,600 shares x P15) P24,000Cost of shares sold (P480,000 x 1.6/40) 19,200

Realized gain on sale of 1,600 Midas, Inc. shares P 4,800

Question No. 3

Vanguard bonds (P100,000 x 10%) P 10,000Discoverer bonds (P963,000 x 14%*) 134,820 Total interest income for 2006 P144,820

*Computation of effective interest rate:

Carrying value, 12/31/05 P963,000Less carrying value, 1/2/05 (Cost) 950,000

Discount amortization for 2005 13,000Add nominal interest (P1,000,000 x 12%) 120,000Effective interest 133,000Divide by carrying value, 1/2/05 950,000Effective interest rate 14%


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Question No. 4

Carrying value, 12/31/05 P 963,000Add discount amortization in 2006:

Effective interest (P963,000 x 14%) P134,820

Nominal interest (P1,000,000 x 12%) (120,000) 14, 820Carrying value, 12/31/06 977,820Fair value of Discoverer bonds on

12/31/06 (P1,000,000 x 1.01) 1,010,000Unrealized gain on transfer of securities

to be reported under SHE P 32,180

Question No. 5

Trading securitiesSputnik, Inc. (4,800 x P22) P105,600

Explorer, Inc. [(8,000 - 4,000) x P15] 60,00010% , P100,000 face value , Vanguard bonds 75,600 Total market value P241,200

Available-for-sale securitiesScore Products (16,000 x P42) P 672,000 Tiros, Inc. (120,000 x P28) 3,360,000Midas, Inc. [(40,000 - 1,600) x P18] 691,200Discoverer bonds (P1,000,000 x 1.01) 1,010,000 Total market value P5,733,200

Answers: 1) B; 2) B; 3) C; 4) B, 5) A

PROBLEM NO. 6

In connection with your audit of Hogonoy Company’s financial statements, you were able to gather the following subsidiary account which reflect themarketable securities of the company for the year 2006:

Hugo Corp..Date Transactions Shares Debit Credit

9/01 Purchase 40,000 P2,000,0009/30 Cash dividends to

stockholders of record9/15, declared 8/15 P 100,000

10/01 Purchase 100,000 5,000,000

10/15 Sale at P65 40,000 2,000,000


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Hugo Corp..Date Transactions Shares Debit Credit

11/30 Cash collected for salemade on 11/10, after a11/1 declaration of P5

cash dividend per shareto stockholders on recordas of 12/1 40,000 6,600,000

12/15 Cash dividend received . 300,000 Totals P7,000,000 P9,000,000

Hogonoy, Inc. acquired 30% of Pugo Corporation’s voting stock on January1, 2005 for P5,000,000. During 2005, Pugo earned P2,000,000 and paiddividends of P1,250,000. Hogonoy ’s 30% interest in Pugo gives Hogonoythe ability to exercise significant influence over Pugo’s operating and

financial policies. During 2006, Pugo earned P2,500,000 and paiddividends of P750,000 on April 1 and P750,000 on October 1. On July 1,2006, Hogonoy sold half of its investment in Pugo for P3,300,000 cash.

QUESTIONS:


1. The gain on sale of 40,000 shares of Hugo Corp. on October 15 isa. P628,600 c. P 600,000b. P700,000 d. P2,057,000

2. The gain on sale of 40,000 shares of Hugo Corp. on November 10 isa. P4,400,000 c. P2,000,000b. P4,800,000 d. P4,600,000

3. The carrying value of the Company’s investment in Hugo Corp. onDecember 31, 2006 isa. P2,700,000 c. P2,400,000b. P2,000,000 d. P3,000,000

4. The gain on sale of investment in Pugo Corp. isa. P1,312,500 c. P687,500b. P 537,500 d. P612,500

5. The carrying value of the Company’s investment in Pugo Corp. onDecember 31, 2006 isa. P2,612,500 c. P2,687,500b. P2,762,500 d. P1,987,500


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Suggested Solution:

Question No. 1

Sales proceeds (40,000 shares x P65) P2,600,000

Less cost of investment sold:Cash paid P2,000,000Less purchased dividend 100,000 1,900,000

Gain on sale P 700,000

Question No. 2

Total proceeds P6,600,000Less dividends sold (40,000 shares x P5) 200,000Sales proceeds 6,400,000Less cost of investment sold (P5,000,000 x 40/100) 2,000,000

Gain on sale of 40,000 shares of Hugo Corp., 11/10 P4,400,000

Question No. 3

Acquisition cost, 10/1 purchase P5,000,000Less cost of investment sold on 11/10 (see no. 2) 2,000,000Gain on sale of 3,200 Good shares on 9/15/06 P3,000,000

Question No. 4

Proceeds on sale of investment P3,300,000Less carrying amount of investment sold:

Acquisition cost, 1/1/05 P5,000,000Share in net income for 2005

(P2,000,000 x 30%) 600,000Dividends received in 2005

(P1,250,000 x 30%) (375,000)Carrying value, 12/31/05 5,225,000Share in net income up to 7/1/06

(P2,500,000 x 6/12 x 30%) 375,000Dividends received up to 7/1/06

(P750,000 x 30%) (225,000)

Carrying value, 7/1/06 5,375,000Multiply by 1/2 2,687,500Gain on sale P 612,500

Question No. 5

Carrying value, 7/1/06 P5,375,000Less carrying amount of investment sold (see no. 4) 2,687,500Gain on sale of 3,200 Good shares on 9/15/06 P2,687,500


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Note: Since the client's equity was reduced to 15%, it was assumed that theclient lost its ability to exercise significant influence. Thus, the investmentwill be accounted for using cost method from 7/1/06. Change from equity tocost method is accounted for currently and prospectively.

Answers: 1) B; 2) A; 3) D; 4) D, 5) C

PROBLEM NO. 7

The Marilao Company has the following transactions in the stocks of theSta. Maria Corp.

a) On January 2, 1999, Marilao purchased 4,000 shares of P100 parvalue common stock at P110 per share.

b)

The Sta. Maria Corp. was expanding and on March 2, 2000, it issuedstock rights to its stockholders. The holder needs four rights topurchase one share of common stock at par. The market value of thestock on that date was P140 per share. There was no quoted price forthe rights. No journal entry was made to record the receipt of therights.

c)

On April 2, 2000, Marilao exercised all its stock rights. The Investmentin Stock account was charged for the amount paid.

d) Robinson, Marilao’s accountant, felt that the cash paid for the newshares was merely an assessment since Marilao’s proportionate share

in Sta. Maria was not changed. Hence, he credited all dividends (5% inDecember of each year) to the Investment in Stock account until thedebit was fully offset.

e) Marilao received a 50% stock dividend from Sta. Maria in December2004. Because the shares received were expected to be sold, thecompany’s president instructed Robinson not to make any entry forthis dividend. The company did sell the dividend shares in January2005 for P150 per share. The proceeds from the sale were credited toincome.

f)

In December 2005, Sta. Maria’ stocks were split on a two-for-one basisand the new shares were issued as no par shares. Marilao found thateach new share was worth P10 more than the P110 per share originalacquisition cost. For this reason, Marilao decided to debit theInvestment in Stock account with the additional shares received atP110 per share and credited revenue for it.


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g) In August 2006, Marilao sold one half (½) of its holdings in Sta. Mariaat P120 per share. The proceeds were credited to the Investment inStock account.

Marilao uses the average method in recording the sale of its investment in

stock.

QUESTIONS:

1. The cost of investment to be allocated to stock rights received on March2, 2000 isa. P 0 c. P31,429b. P29,333 d. P25,143

2. The unadjusted balance of Investment in Sta. Maria stock on December31, 2006 is

a. P940,000 c. P390,000b. P490,000 d. P430,000

3. The adjusted balance of Investment in Sta. Maria stock on December31, 2006 isa. P135,000 c. P180,000b. P360,000 d. P270,000

4. The gain on the sale of stock dividend received in December 2004 isa. P100,000 c. P 80,000b. P105,000 d. P195,000

5. The gain on sale of the shares sold in August 2006 isa. P240,000 c. P120,000b. P420,000 d. P870,000

Suggested Solution:

Question No. 1

Cost allocated to stock rights (P10*/P150 x P440,000) P29,333

Since the MV of rights is not available we must compute for the

theoretical value of the stock rights. Since the market value of the stockgiven is on the date of issuance of the stock rights, the market value isconsidered “ex - rights”.

Theoretical value of stock rights = MV of stock ex-rights – subs. priceNumber of rights to purchase 1 share

= (P 140 - P100)/4

= P10*


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Question No. 2

Debits to Investment account:Purchase, 1/2/99 (4,000 shares x P110) P440,000

Exercise of rights, 4/2/00 (4,000/4 x P100) 100,000Stock split, 12/2005 (5,000 x P110) 550,000 P1,090,000Less credits to Investment account:

Dividends received, 2000-2003(5,000 x P100 x 5% x 4) 100,000

Sale, 8/2006 (5,000 shares x P120) 600,000 700,000Balance, 12/31/06 per books P 390,000

Question No. 3

Shares

Cost/

share Total costPurchase, 1/2/1999 4,000 P110 P440,000Receipt of stock rights, 3/2/2000 (29,333)Balance 4,000 103 410,667Exercise of rights, 4/2/2000 (see below) 1,000 129 129,333Balance 5,000 108 540,00050% stock dividend, 12/2004 2,500Balance 7,500 72 540,000Sale of stock dividend, 1/2005 (2,500) 72 (180,000)Balance 5,000 72 360,000Stock split, 12/2005 5,000

Balance 10,000 36 360,000Sale, 8/2006 (5,000) 36 (180,000)Adjusted balance, 12/31/06 5,000 36 P180,000

Cash paid (4,000/5 x P100) P 80,000Cost of stock rights 29,333 Total cost P129,333

Question No. 4

Sales proceeds (2,500 shares x P150) P375,000

Less cost of investment sold (see no. 3) 180,000Gain on sale of stock dividend received P195,000

Question No. 5

Sales proceeds (5,000 shares x P120) P600,000Less cost of investment sold (see no. 3) 180,000Gain on sale of investment in 8/2006 P420,000


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Answers: 1) B; 2) C; 3) C; 4) D, 5) B

PROBLEM NO. 8

Meycauayan Inc. acquired 50,000 shares of AAA stock for P5 per share and125,000 shares of BBB stock for P10 per share on January 2, 2005. BothAAA Inc. and BBB Corp. have 500,000 shares of no-par common stockoutstanding. Both securities are being held as long term investments.Changes in retained earnings for AAA and BBB for 2005 and 2006 are asfollows:

AAA, Inc. BBB Corp.Retained earnings (deficit), 1/1/05 P1,000,000 (P175,000)Cash dividends, 2005 (125,000) -Net income, 2005 200,000 325,000

Retained earnings, December 31, 2005 1,075,000 150,000Cash dividends, 2006 (150,000) (50,000)Net income, 2006 300,000 125,000Retained earnings, December 31, 2006 P1,225,000 P 225,000

Market value of stock: 12/31/05 P7.00 P12.0012/31/06 6.50 15.00

QUESTIONS:


1. The income from investment in AAA, Inc. in 2006 isa. P15,000 c. P12,500b. P 1,000 d. P 0

2. The income from investment in BBB, Inc. in 2005 isa. P31,250 c. P2,500b. P81,250 d. P 0

3. The carrying value of Investment in AAA, Inc. as December 31, 2006 isa. P250,000 c. P325,000b. P350,000 d. P252,500

4. The carrying value of Investment in BBB, Inc. as December 31, 2006 isa. P1,250,000 c. P1,875,000b. P1,268,750 d. P1,350,000

5. How much is the unrealized gain or loss that will be included ascomponent of equity as of December 31, 2006?a. P75,000 gain c. P25,000 gainb. P25,000 loss d. P 0


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Suggested Solution:

Question No. 1

Meycauayan, Inc. owns 10% (50,000/500,000) of AAA, Inc. stock; therefore,

the cost method is used and the dividend is computed as follows:

Dividends paid by AAA, Inc. in 2006 P150,000Multiply by % ownership 10%Income from investment in AAA, Inc. in 2006 P 15,000

Question No. 2

Meycauayan, Inc. owns 25% (125,000/500,000) of BBB Corp. stock;therefore, the equity method is used to record the income earned.

AAA, Inc. net income in 2005 P325,000

Multiply by % ownership 25%Income from investment in BBB Corp. in 2005 P 81,250

Question No. 3

Investment in AAA, Inc. stock will be classified as available-for-sale securitiessince the shares are held as long term investment and there is reliable fairvalue. Therefore, the carrying value as of 12/31/06 is P325,000 (50,000shares x P6.50).

Question No. 4

Acquisition cost (125,000 shares x P10) P1,250,000Share in net income for 2005 (P325,000 x 25%) 81,250Carrying value, 12/31/05 1,331,250Dividends received in 2006 (P50,000 x 25%) (12,500)Share in net income for 2006 (P125,000 x 25%) 31,250Carrying value, 12/31/06 P1,350,000

Question No. 5

Fair value, 12/31/06 (50,000 shares x P6.50) P 325,000Acquisition cost (50,000 shares x P5) 250,000

Unrealized gain, 12/31/06 P 75,000

Answers: 1) A; 2) B; 3) C; 4) D, 5) A


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PROBLEM NO. 9

On January 2, 2004, Norzagaray Company acquired 20% of the 400,000shares of outstanding common stock of Imaw Corporation for P30 pershare. The purchase price was equal to Imaw’s underlying book value.

Norzagaray plans to hold this stock to influence the activities of Imaw.

The following data are applicable for 2004 and 2005:

2004 2005Imaw dividends (paid Oct. 31) P 40,000 P 48,000Imaw earnings 140,000 160,000Imaw stock market price at year-end 32 31

On January 2, 2006, Norzagaray Company sold 20,000 shares of Imaw

stock for P31 per share. During 2006, Imaw reported net income ofP120,000, and on October 31, 2006, Imaw paid dividends of P20,000. AtDecember 31, 2006, after a significant stock decline, which is expected tobe temporary, Imaw’s stock was selling for P22 per share. After selling the20,000 shares, Norzagaray does not expect to exercise significant influenceover Imaw, and the shares are classified as available for sale.

QUESTIONS:


1. Carrying value of Investment in Imaw as of December 31, 2004a. P12,020,000 c. P2,420,000b. P 2,500,000 d. P2,388,000

2. Carrying value of Investment in Imaw as of December 31, 2005a. P2,442,400 c. P12,042,400b. P2,612,000 d. P 2,372,000

3. Gain or loss on sale of Investment in Imaw on January 2, 2006a. P2,390,600 loss c. P33,000 lossb. P 9,400 gain d. P27,000 gain

4. The income from investment in BBB, Inc. in 2005 isa. P 3,000 c. P4,000b. P24,000 d. P 0

5. Net unrealized loss on available for sale securities as of December 31,2006a. P671,800 c. P639,000b. P511,800 d. P459,000


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Suggested Solution:

Question No. 1

Acquisition cost (400,000 x 20% x P30) P2,400,000Dividends received(P40,000 x 20%) (8,000)Investment income (P140,000 x 20%) 28,000Carrying value, 12/31/04 P2,420,000

Question No. 2

Carrying value, 12/31/04 (see no. 1) P2,420,000Dividends received (P48,000 x 20%) (9,600)Investment income (P160,000 x 20%) 32,000Carrying value, 12/31/05 P2,442,400

Question No. 3

Sales proceeds (20,000 x P31) P620,000Less carrying value of investment sold

(P2,442,400 x 20/80) 610,600Gain on sale of investment P 9,400

Question No. 4

Dividend income (P20,000 x 15%*) P3,000

* [20% - (20,000/400,000 x 100%)]

Question No. 5

Carrying value, 12/31/05 P2,442,400Less carrying value of investment sold 610,600Carrying value, 12/31/06 - before reclassification 1,831,800Fair value of AFS, 12/31/06 [(80,000 - 20,000) x P22] 1,320,000Unrealized loss on AFS P 511,800

Answers: 1) C; 2) A; 3) B; 4) A, 5) B

PROBLEM NO. 10

You were able to gather the following in connection with your audit ofObando, Inc. On December 31, 2005, Obando reported the followingavailable for sale securities:


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Cost MarketUnrealized

lossERAP Corp., 10,000 shares

of common stock(a 1% interest) P 250,000 P 220,000 P 30,000

GMA Corp., 20,000 sharesof common stock(a 2% interest) 320,000 300,000 20,000

FVR Corp., 50,000 shares ofcommon stock(a 10% interest) 1,400,000 1,350,000 50,000

Total P1,970,000 P1,870,000 P100,000

Additional information:

On April 1, 2006, ERAP issued 10% stock dividend when the market

price of its stock was P24 per share.

On September 15, 2006, ERAP paid cash dividend of P0.75 per share.

On August 30, 2006, GMA issued to all shareholders, stock rights onthe basis of one right per share. Market prices at date of issue wereP13.50 per share of stock and P1.50 per right. Obando sold all rightson December 1, 2006 for net proceeds of P37,600.

On July 1, 2006, Obando paid P3,040,000 for 100,000 additionalshares of FVR Corp.’s common stock which represented a 20%

investment in FVR. The fair value of all of FVR’s identifiable assets netof liabilities was equal to their carrying amount of P12,700,000. As aresult of this transaction, Obando owns 30% of FVR and can exercisesignificant influence over FVR’s operating and financial policies.

Obando’ s initial 10% interest of 50,000 shares of FVR’s common stock was acquired on January 2, 2005 for P1,400,000. At that date, the netassets of FVR totaled P11,600,000 and the fair values of FVR‘sidentifiable assets net liabilities were equal to their carrying amount.

Market prices per share of the securities which are all listed in the

Philippine Stock Exchange, are as follows:

12/31/2006 12/31/2005ERAP Corp. – common P23 P22GMA Corp. – common 14 15FVR Corp. – common 31 27


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FVR reported net income and paid dividends of:

Net incomeDividendper share

Year ended December 31, 2005 P700,000 None

Six months ended June 30, 2006 400,000 NoneSix months ended December 31, 2006

(dividend was paid on 10/1/2006) 740,000 P1.30

There were no other intercompany transactions between Obando andFVR.

QUESTIONS:


1. Net unrealized gain or loss on available for sale securities as of

December 31, 2006a. P95,000 gain c. P 5,000 loss b. P37,000 loss d. P55,000 loss

2. Net adjustment to Retained Earnings as of January 1, 2006 as a resultof the purchase of additional shares of stock of FVR Corp.a. P 70,000 c. P58,000b. P210,000 d. P 0

3. Net investment income from FVR Corp. for year ended December 31,2006

a. P237,500 c. P262,000b. P225,000 d. P305,000

4. Carrying amount of Investment in FVR Corp. as of December 31, 2006a. P4,674,500 c. P4,577,000b. P4,677,000 d. P4,540,500

5. Gain on sale of stock rights on December 1, 2006a. P 0 c. P7,600b. P2,050 d. P5,600

Suggested Solution:

Question No. 1

Available-for-sale securities, 1/1/06 P 1,870,000Receipt of stock rights from GMA, 8/30

(P300,000 x 1.5/15) (30,000)Reclassification of Investment in FVR (1,350,000)AFS, 12/31/06 before mark-to-market 490,000


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Fair value of AFS, 12/31/06:GMA [(10,000 x 1.1) x 23] P253,000ERAP (20,000 x 14) 280,000 533,000

Decrease in unrealized loss on AFS 43,000Unrealized loss on AFS, 12/31/05

(P100,000 - P2,000 - P50,000)(see note below) 48,000

Unrealized loss, 12/31/06 - as adjusted P 5,000

Note: Alternatively, the unrealized loss on AFS can be computed bycomparing the total fair value and total cost of AFS as of December 31,2006. Incidentally, the journal entries to record the receipt of stock rightsand reclassification of the investment in FVR follow:

Stock rights P 32,000Available for sale securities (P300,000 x 1.5/15) P30,000

Unrealized loss on AFS (P20,000 x 1.5/15) 2,000

Investment in associate P1,400,000Available for sale securities P1,350,000Unrealized loss on AFS 50,000

Questions No. 2 to 4

Reclassification of investment in FVR (see no. 1) P1,400,000Retroactive adjustment

(cost to equity method):

Share in NI for 2005 (P700,000 x 10%) 70,000 (2)Adjusted balance, 1/1/06 1,470,000Cost of additional 100,000 shares 3,040,000Net investment income for 2006:

Share in NI for six months ended 6/30(P400,000 x 10%) P40,000

Share in NI for six months ended12/31 [P740,000 x (10%+20%)] 222,000 262,000 (3)

Dividends received[(50,000 shares + 100,000 shares) x 1.3] (195,000)

Carrying value of investment in FVR, 12/31/06 P 4,577,000 (4)

Note: The excess of cost over the book value of net assets acquired willbe attributed to Goodwill. Therefore, the excess will not affect theinvestment income and the carrying value of the investment sinceGoodwill is not amortized.


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Suggested Solution:

Question No. 1

The following amortization schedule will be useful in computing for the

requirements:

DateEffectiveinterest

Nominalinterest

Discountamortization

Carryingvalue

01/01/04 P184,55707/01/04 P9,228 P8,000 P1,228 185,78512/31/04 9,289 8,000 1,289 187,07407/01/05 9,354 8,000 1,354 188,42812/31/05 9,421 8,000 1,421 189,84907/01/06 9,492 8,000 1,492 191,34112/31/06 9,567 8,000 1,567 192,908

07/01/07 9,645 8,000 1,645 194,55312/31/07 9,728 8,000 1,728 196,28107/01/08 9,814 8,000 1,814 198,09512/31/08 9,905 8,000 1,905 200,000

1/1/04 to 6/30/04 (see amortization schedule) P 9,2287/1/04 to 12/31/04 (see amortization schedule) 9,289 Total interest income for 2004 P18,517

Note: PAS 39 par. 55(b) states that a gain or loss on an available-for-sale financial asset shall be recognized directly in equity, through the

statement of changes in equity, except for impairment losses and foreignexchange gains and losses, until the financial asset is derecognized, atwhich time the cumulative gain or loss previously recognized in equityshall be recognized in profit or loss. However, interest calculatedusing effective interest method shall be recognized in profit or

loss .

Question No. 2

Fair value the bonds, 12/31/04 P190,449Carrying value, 12/31/04 (see amortization schedule) 187,074

Unrealized gain on AFS, 12/31/04 P 3,375

Question No. 3

1/1/05 to 6/30/05 (see amortization schedule) P 9,3547/1/05 to 12/31/0 (see amortization schedule) 9,421 Total interest income for 2005 P18,775


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Question No. 4

Fair value the bonds, 12/31/05 P186,363Carrying value, 12/31/05 (see amortization schedule) 189,849Unrealized loss on AFS, 12/31/05 (P 3,486)

Incidentally, the adjusting entry on 12/31/05 follows:

Unrealized gain on AFS P 3,375Unrealized loss on AFS 3,486

Available for sale securities P6,861

Question No. 5

Sales proceeds P185,000Unrealized loss on AFS ( 3,486)Net 181,514

Carrying value, 12/31/05 (fair value) 186,363Realized loss on sale of AFS (P 4,849)

Note: PAS 39 par. 26 states that on derecognition of a financial asset inits entirety, the difference between (a) the carrying amount and (b) thesum of the consideration received and any cumulative gain or lossrecognized directly in equity, shall be recognized in profit or loss.Incidentally, the journal entry to record the sale is:

Cash P185,000Realized loss on sale of AFS 4,849

Available for sale securities P186,363Unrealized loss on AFS 3,486

Answers: 1) C; 2) B; 3) A; 4) B, 5) C

PROBLEM NO. 12

On June 1, 2005, Pandi Corporation purchased as a long term investment4,000 of the P1,000 face value, 8% bonds of Violet Corporation. The bondswere purchased to yield 10% interest. Interest is payable semi-annually onDecember 1 and June 1. The bonds mature on June 1, 2011. Pandi usesthe effective interest method of amortization. On November 1, 2006, Pandisold the bonds for a total consideration of P3,925,000. Pandi intended tohold these bonds until they matured, so year-to-year market fluctuationswere ignored in accounting for bonds.


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QUESTIONS:


(Round off present value factors to four decimal places)

1. The purchase price of the bonds on June 1, 2005 is

a. P3,645,328 c. P3,696,736b. P3,691,132 d. P3,624,596

2. The interest income for the year 2005 isa. P215,850 c. P212,829b. P215,521 d. P211,612

3. The carrying value of the investment in bonds as of December 31, 2005isa. P3,725,919 c. P3,719,986b. P3,649,541 d. P3,671,490

4. The interest income for the year 2006 isa. P306,607 c. P311,218b. P310,715 d. P304,748

5. The gain on sale of investment in bonds on November 1, 2006 isa. P21,196 c. P 27,632b. P80,235 d. P104,045

Suggested Solution:

Question No. 1

PV of principal (P4,000,000 x 0.5568) P2,227,200PV of interest [(P4,000,000 x 4%) x 8.8633] 1,418,128Purchase price P3,645,328

Question No. 2

June 1 to Nov. 30 (P3,645,328 x 10% x 6/12) P182,266Dec. 1 to Dec. 31 (P3,667,594a x 10% x 1/12) 30,563 Total interest income for 2005 P212,829

a Computation of carrying value,12/1/05:

Carrying value, 6/1/05 P3,645,328Add discount amortization,

6/1/05 to 11/30/05:Effective interest (P3,645,468 x 10% x 6/12) P182,266Nominal interest (P4,000,000 x 8% x 6/12) 160,000 22,266

Carrying value, 12/1/05 P3,667,594


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Question No. 3

Carrying value, 12/1/05 (see no. 2) P3,667,594Add discount amortization,

12/1/05 to 12/31/05:

Effective interest (P3,667,594 x 10% x 1/12) P30,563Nominal interest (P4,000,000 x 8% x 1/12) 26,667 3,896Carrying value, 12/31/05 P3,671,490

Question No. 4

Jan. 1 to May 31 (P3,667,594 x 10% x 5/12) P152,816 June 1 to Nov. 1 (P3,690,974b x 10% x 5/12) 153,791 Total interest income for 2006 P306,620

b Computation of carrying value,6/1/06:

Carrying value, 12/1/05 P3,667,594Add discount amortization,

12/1/05 to 5/31/06Effective interest (P3,667,594 x 10% x 6/12) P183,380Nominal interest (P4,000,000 x 8% x 6/12) 160,000 23,380


Question No. 5

Total proceeds P3,925,000Less accrued interest (P4,000,000 x 8% x 5/12) 133,333Sales proceeds 3,791,667

Less carrying value, 11/1/06 (see below) 3,711,432Gain on sale on investment in bonds P 80,235

Computation of carrying value,11/1/06:

Carrying value, 6/1/06 (see no. 4) P3,690,974Add discount amortization,

6/1/06 to 11/1/06Effective interest (P3,690,974 x 10% x 5/12) P153,791Nominal interest (P4,000,000 x 8% x 5/12) 133,333 20,468


Answers: 1) A; 2) C; 3) D; 4) A, 5) B


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PROBLEM NO. 13

On May 1, 2003, Plaridel Corporation acquired P1,600,000 of J & BCorporation 9% bonds at 97 plus accrued interest. Interest on bonds ispayable semiannually on March 1 and September 1, and bonds mature on

September 1, 2006. Plaridel intends to hold these bonds until theymatured.

Due to an isolated event that is beyond Plaridel’s control, is non-recurringand could not have been reasonably anticipated by Plaridel, the companysold bonds of P480,000 for 103 plus accrued interest on May 1, 2004.

On July 1, 2005, bonds of P640,000 were exchanged for 90,000 shares of J& B Corporation, common, no par value, quoted on the market on this dateat P8 per share. Interest was received on bonds to date of exchange.

On September 1, 2006, remaining bonds were redeemed and accruedinterest was received.

QUESTIONS:

Based on the above and the result of your audit, determine the following:(Use the straight line amortization method)

1. Total interest income for 2003 isa. P96,000 c. P105,600b. P86,400 d. P106,800

2. The carrying value of the investment in bonds as of December 31, 2003isa. P1,561,600 c. P1,562,800b. P1,540,000 d. P1,564,000

3. The gain on sale of the bonds on May 1, 2004 isa. P 0 c. P 2,880b. P4,320 d. P24,480

4. The gain on exchange the bonds on July 1, 2005 isa. P 0 c. P57,920

b. P86,720 d. P73,280

5. Total cash received by the company on September 1, 2006 isa. P501,600 c. P480,000b. P523,200 d. P508,800


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Suggested Solution:

Question No. 1

Nominal interest (P1,600,000 x 9% x 8/12) P 96,000

Discount amortization for 2003 (P48,000 x 8/40) 9,600 Total interest income for 2003 P105,600

Question No. 2

Carrying value, 5/1/03 (P1,600,000 x 97%) P1,552,000Add discount amortization for 2003 (see no. 1) 9,600Carrying value, 12/31/03 P1,561,600

Question No. 3

Selling price (P480,000 x 1.03) P494,400

Less carrying value of bonds sold:Face value P480,000Less unamortized bond discount, 5/1/04

to 9/1/06 (P48,000 x 480/1,600 x 28/40) 10,080 469,920Gain on sale of investment in bonds P 24,480

PAS 39 par. 52 states that whenever sales or reclassifications of more than aninsignificant amount of held-to-maturity investments do not meet any of theconditions in par. 9, any remaining held-to-maturity investments shall bereclassified as available for sale. Since the sale of the bonds on May 1, 2004 isd ue to an isolated event that is beyond Plaridel’s control, is non -recurring and

could not have been reasonably anticipated by Plaridel, the investment is notrequired to be reclassified as available for sale.

Question No. 4

Fair value of stocks received (P90,000 x P8) P720,000Less carrying value of bonds exchanged:

Face value P640,000Less unamortized bond discount, 7/1/05

to 9/1/06 (P48,000 x 640/1,600 x 14/40) 6,720 633,280Gain on exchange of bonds P 86,720

Question No. 5

Face value of remaining bonds(P1,600,000 - P480,000 - P640,000) P480,000

Interest, 3/1/06 to 9/1/06 (P480,000 x 9% x 6/12) 21,600 Total cash received, 9/1/06 P501,600

Answers: 1) C; 2) A; 3) D; 4) B, 5) A


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PROBLEM NO. 14

Pulilan Company’s accounting records showed the following investments at January 1, 2006:

Common stock: Jang Company (1,000 shares) P 500,000Geum Company (5,000 shares) 5,000,000

Parking lot (leased to Jewel Company) 2,500,000 Trademark 2,000,000 Total investments P10,000,000

Additional information:

Pulilan owns 1% of Jang and 30% of Geum. During the year endedDecember 31, 2006, Pulilan received cash dividends of P350,000 from

Jang and P750,000 from Geum, whose 2006 net earnings wereP4,000,000 and P10,000,000 respectively.

The Jewel lease which commenced on January 1, 2005 is for 5 years atan annual rental of P1,250,000. In addition, on January 1, 2005, Jewel paid a nonrefundable deposit of P400,000 as well as a securitydeposit of P250,000, to be refunded upon expiration of lease. Pulilanreceived P1,250,000 rent from Jewel in 2006.

The trademark was licensed to Palace Company for royalties of 10% ofsales of the trademark items. Royalties are payable semiannually onMarch 1, for sales in July through December of the prior year, and onSeptember 1, for sales in January through June of same year. OnMarch 1, 2005 and 2006, Pulilan received royalties of P500,000 andP750,000, respectively. On September 1, 2005 and 2006, Pulilanreceived royalties of P1,000,000 and P1,500,000 respectively. PalaceCompany’s sales of the trademarked items totaled P4,000,000 for thelast half of 2006.

QUESTIONS:


1. Total income from investments in equity securitiesa. P3,350,000 c. P4,100,000b. P1,100,000 d. P3,000,000

2. Rent income for 2006a. P1,250,000 c. P1,650,000b. P1,330,000 d. P1,380,000


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3. Royalty income for 2006a. P1,500,000 c. P2,500,000b. P2,000,000 d. P1,900,000

Suggested Solution:

Question No. 1

Dividend income from Jang P 350,000Investment income from Geum (P10,000,000 x 30%) 3,000,000 Total income from investments in equity securities P3,350,000

Question No. 2

Annual rental P1,250,000Amortization of lease bonus (P400,000/5) 80,000

Rent income for 2006 P1,330,000

Question No. 3

January to June 2006 P1,500,000 July to December 2006 (P4,000,000 x 10%) 400,000Royalty income for 2006 P1,900,000

Answers: 1) A; 2) B; 3) D

PROBLEM NO. 15

Select the best answer for each of the following:

1. Which of the following is not a control that is designed to protectinvestment securities?a. Access to securities should be vested in more than one individual.b. Securities should be properly controlled physically in order to

prevent unauthorized usage.c. Securities should be registered in the name of the owner.d.

Custody over securities should be limited to individuals who haverecordkeeping responsibility over the securities.

2. Which of the following controls would a company most likely use tosafeguard investment securities when an independent trust agent is notemployed?a. The chairman of the board verifies the investment securities, which

are kept in a bank safe deposit box, each year on the balance sheetdate.


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b. The investment committee of the board of directors periodicallyreviews the investment decisions delegated to the treasurer.

c. Two company officials have joint control of investment securities,which are kept in a bank safe deposit box.

d. The internal auditor and the controller independently trace all

purchases and sales of investment securities from the subsidiaryledgers to the general ledger.

3. Which of the following controls would an entity most likely use to assistin satisfying the completeness assertion related to long-terminvestments?a. The controller compares the current market prices of recorded

investments with the brokers’ advices on file. b. Senior management verifies that securities in the bank safe deposit

box are registered in the entity’s name.

c.

The internal auditor compares the securities in the bank safedeposit box with recorded investments.d. The treasurer vouches the acquisition of securities by comparing

brokers’ advices with canceled checks.

4. Which of the following controls would an entity most likely use insafeguarding against the loss of investment securities?a. A designated member of the board of directors controls the

securities in a bank safe deposit box.b. An independent trust company that has no direct contact with the

employees who have record-keeping responsibilities has possession

of securities.c. The internal auditor verifies the investment securities in the entity’s

safe each year on the balance sheet date.d. The independent auditor traces all purchases and sales of

investment securities through the subsidiary ledgers to the generalledger.

5. When negotiable securities are of considerable volume, planning by theauditor is necessary to guard againsta. Substitution of securities already counted for other securities which

should be on hand but are not.b. Substitution of authentic securities with counterfeit securities.c. Unauthorized negotiation of the securities before they are counted.d. Unrecorded sales of securities after they are counted.

6. In auditing investments for proper valuation, the auditor should do allbut the following:


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a. Vouch purchases and sales of securities by tracing to brokers'advices and canceled checks.

b. Compare cost and market by reference to year end market valuesfor selected securities.

c. Confirm securities held in safekeeping off the client's premises.

d.

Recalculate gain or loss on disposals.

7. An audit procedure that provides evidence about proper valuation oftrading securities arising from a short-term investment of excess cashisa. Recalculation of investment carrying value by applying the equity

method.b. Comparison of carrying value with current market quotations.c. Confirmation of securities held by broker.d. Calculation of premium or discount amortization.

8.

The auditee has acquired another company by purchase. Which of thefollowing would be the best audit procedure to test the appropriatenessof the allocation of cost to tangible assets?a. Evaluate procedures used to estimate and record fair market values

for purchased assets.b. Determine whether assets have been recorded at their book value at

the date of purchase.c. Evaluate the reasonableness of recorded values by discussion with

operating personnel.d. Evaluate the reasonableness of recorded values by use of

replacement cost data.

9.

The auditee has just acquired another company by purchasing all itsassets. As a result of the purchase, "goodwill" has been recorded onthe auditee's books. Which of the following comparisons would be themost appropriate audit test for the amount of recorded goodwill?a. The purchase price and the fair market value of assets purchased.b. The purchase price and the book value of assets purchased.c. The figure for goodwill specified in the contract for purchase.d. Earnings in excess of 15% of net assets for the past five years.

10.

Of the following, which is the most efficient audit procedure for testingaccrued interest earned on bond investments?a. Vouching the receipt and deposit of interest checks.b. Tracing interest declarations to an independent record book.c. Recomputing interest earned.d. Confirming interest rate with the issuer of the bonds.

A 1) D 2) C 3) C 4) B 5) A 6) C 7) B 8) A 9) A 10) C

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