Chapter10 - answer

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 client’s 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 client’s 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.

CHAPTER

10 SUBSTANTIVE TESTS OF INVESTMENTS

10-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition

(2) The bank’s 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 corporation’s 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 year’s 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 treasurer’s 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.


10-7. Voltron Company

Voltron CompanyMarketable Securities

12.31.06

Balance, 1.1.06 P2,350.00Lie Company, 25 shares @ P42Lipay Company, 20 shares @ P65

Add: Purchase of Lambing Co., 5% bonds, 5 shares 4,762.50 Total P7,112.50Less: Sale of 10 shares of Lipay Co., stocks P 650.00

Sale of 5 shares of Lambing Co., bonds 4,762.50 5,415.50Balance per ledger, 12.31.06 P1,700.00Add (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 130.00Balance as adjusted P1,830.00

Lie Co., 25 shares @ P42 P1,050.00Lipay Co., 15 shares @ P52 780.00

P1,830.00

Adjusting Journal Entries:

(1) Interest income 62.50Marketable securities – Trading 62.50

(2) Marketable securities – Trading 130.00Gain on sale of marketable securities 130.00

Proceeds ( 10 x P65 ) P 650.00Cost: ( 10 x P1,300 )

25Gain

520.00

P 130.00

(3) Marketable securities – Trading 62.50Interest income 62.50

(4) Securities fair valued adjusted – Trading 120.00Unrealized gain on trading securities (P/L) 120.00

Lie Co. (P45 – P42) (25 shares) P 75Lipay Co. (P55 – P52) (15 shares) 45

P120



10-8. Color Company

Requirement (a)COLOR COMPANY

Investment12.31.06

Changes during the yearBalance 1.1.06 No. of Shares Amount Balance 12.31.06 Adjustments Balance

DescriptionNo. of Shares Amount Acquired Sold Acquired Sold

No. of Shares Amount

Dr (Cr) As Adjusted

Red Company, ordinaryPurchased in June 1993 @ P20 1,000 P 20,000 1,000 P 20,000 P 20,000Purchased in Aug. 1996 @ P16 2,000 32,000 2,000 32,000 32,000Purchased 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 66,000Purchased 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% bondsPurchased 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


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

Requirement (b) Adjusting Journal Entries

AJE (1) Loss on sale of investment 636Investment 636

(2) Dividend income 10,000Investment 10,000

(3) Accounts receivable - President 3,750Investment 5,100

Gain on sale of investment 8,850

(4) Investment 2,500Gain on sale of investment 2,000Interest income 500

(5) Securities fair value adjusted – Trading 5,225Unrealized gain in trading securities – (P/L) 5,225


10-9. Kalayaan Corporation

The Kalayaan CorporationInvestments

December 31, 2006

I N V E S T M E N TPer Books Adjustments As Adjusted Adjustments to Other Accounts

Date Transactions Dr Cr Dr Cr Dr (Cr) Name of Account Dr Cr2 0 0 6Jan. 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) 500Mar. 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 shares

(9) 2

15 Cash dividend, Ace Investment 90 (10) 80 ( 10) Dividend income (10) 8031 Cash dividend, General Utility 120 (11) 120 - Miscellaneous income (11) 120

Dividends receivable (12) 110Dividend income (12) 110Loss on expiration of rights

issues (14) 60Investment in rights issues (14) 60

_______ _______ ________ ________ ________ 15,030 6,510 2,04

23,920 Adjusting Journal Entry

8,520 1,87 8 Unrealized holding loss on

Balance P 15,030 P 15,030 P 3,920 P 3,920 P 6,642 SAS (Equity) (15) 1,142Securities Fair Value

Adjustment – SAS (15) 1,142


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)

2005Jan. 1 Investment in Available-for-Sale Securities

[(150 x P20)] + (200 x P30) + (100 x P25)] 11,500.00Cash 11,500.00

Feb. 1 Investment in Available-for-Sale Securities (P20,000 + P12,000) 32,000.00Interest 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 500.00Cash 500.00

28 Cash 1,200.00Interest Revenue [P20,000 x 0.12 x 6/12] 1,200.00

28 Postage Expense 110.00Office Supplies Expense 170.65Transportation Expense 45.00Miscellaneous Expense 43.50

Cash 369.15

28 Cash Short and Over 5.35a

Cash 5.35

a P125.50 – (P500.00 – P369.15)

Mar. 31 Cash (P1,500 + P600) 2,100Interest Receivable (P20,000 x 0.12 x 1/12; A Co. bonds) 200

Dividend Revenue 1,500Interest 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 140.00Office Supplies Expense 75.30Miscellaneous Expense 54.20

Cash 269.50


Requirement (2)CANADA CORPORATION

Bank ReconciliationMarch 31, 2005

Balance per bank statement P13,459.75Add: Deposits in transit 2,100.00

P15,559.75Deduct: Outstanding checks (2,365.40)Adjusted cash balance P13,194.35

Balance per company records P11,689.95Add: Note collected by bank P1,500.00

Interest on note 100.00 1,600.00P13,289.95

Deduct: Bank service charge P 20.00NSF check returned 75.60 (95.60)

Adjusted cash balance P13,194.35

Requirement (3)

2005Mar. 31 Cash 1,600.00

Notes Receivable 1,500.00Interest Revenue 100.00

31 Miscellaneous Expense 20.00Accounts 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 = P650,00010-12. 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 year’s 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 Belle’s 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 Laribee’s income statement and Belle’s journal entry, if any, to record its share of the income.

b. If this investment is significant in relation to Belle’s total assets, and/or its share of Laribee income is significant relative to Belle’s 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 IndustriesDecember 31, 2006

No. of Shares

12/31/06: Final balance - 1,000 shares P 50,000 < 1,0001/2/07: Purchased 1,500 shares 75,000 * @ 1,500

12/31/07: Ledger balance 125,000 2,500AJE No. 1 210,000 _____

12/31/07: Audited balance P335,000 2,500 &

To WP–H


AJE 1Investment in Laribee Ordinary P210,000Dividend Revenue 40,000

Equity in Income of Unconsolidated Subsidiary P250,000

To adjust investment account for excess of Belle’s 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 broker’s 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.


10-13. 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

2 0 0 7 2006 RestatedEquity in earnings of Bel Company (Schedule 1) P110,000 P 40,000

Schedule 1: Equity in Earnings of Bel CompanyYear 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%) 80,000Total 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)................................................... 8,160Interest receivable (P8,000 x 9% x 2/12;

May 1 – July 1)......................................................... 120Cash................................................................... 8,280

Requirement (2)

November 2005 - Interest collected:Cash (P8,000 x 9% x 6/12)............................................ 360

Interest revenue......................................................... 240


Interest receivable..................................................... 120

Requirement (3)

Dec. 31, 2005: accrue interest on the Celebrity Corp. bonds heldas a trading securities investment:

Interest receivable (P8,000 x 9% x 2/12, Nov. – Dec.). 120Interest 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.............................................................. P8,000Fair value................................................................... 7,760Unrealized loss.......................................................... P 240Previously recorded unrealized loss.......................... 0 DR<CR> to valuation allowance.............................. P 240

Requirement (4)

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

Balance sheet at Dec. 31, 2005:Current assets: Interest receivable................................ P 120Investments in trading securities................................... P8,000Less: Allowance to reduce to fair value....................... 240Investments 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


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


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


December 31, 2005 – To recognize Zash loss:Investment income: equity in earnings of associated company (P10,000 x 0.30)....................... 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


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............................................................... 8,250Gain 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 2006Income 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 - P600 – P3,000)....................................P153,600

(P153,600 – P1,500 – P3,000– 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 2005Equity in income of affiliated companies...................................... P 74 P127Less: Undistributed equity in income of affiliated companies...... 27 84Maximum 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.


Requirement (2)

Investment at December 31, 2006........................................... P1,456Investment at December 31, 2005........................................... 1,332Increase in investment in equity.............................................. P 124Amount 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 VentureTSE 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 Adjustment—Trading......... 5,000Unrealized 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 Loss—Income account is reported in the income statement under Other Revenues and Gains. The Unrealized Holding Gain or Loss—Equity 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.

10-18. Troy Company

(a) December 31, 2006

Unrealized Holding Gain or Loss—Income......... 1,400Securities Fair Value Adjustment (Trading).. 1,400

(b) During 2007

Cash....................................................................... 9,400Loss on Sale of Securities..................................... 600

Trading Securities.......................................... 10,000

(c) December 31, 2007

Securities Cost Fair ValueUnrealized 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 balance—Cr. ( (1,400)Securities fair value

adjustment—Dr. (P1,000)

Securities Fair Value Adjustment (Trading)......... 1,000Unrealized 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 Loss—Equity.................. 8,000Securities Fair Value Adjustment (Available-for-Sale).......................................... 8,000


Unrealized Holding Gain or Loss—Equity 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.

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Chapter10 - answer