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Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter2: Asset And Liability Valuation And Income Recognition

Section: Chapter Questions

Problem 21PC

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Question

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You are in charge of auditing PLM (PopoyLangMalakas) Company's investment
accounts for the year ended December 31, 2021, which was incorporated last March
3, 2020. During the course of the audit, you have obtained the balances and the
related journal entries of its investment related transactions and have revealed the
following information:
Investment in Bonds P101,258
Investment in Stocks 62,400
Total P163,658

see 1st image

Audit Notes:

The market rate for similar bonds at date of acquisition is 8%.
The bonds will mature on July 1, 2023.
The journal entries pertaining to the market value adjustments was prepared by

the accountant in accordance with the following information:

see image 2

Question 1: The adjustment to correct the interest income for 2021 includes a

debit/(credit) to the interest revenue account amounting to? (Put a negative

sign if credit)

Question 2: How much is the retroactive adjustment to the beginning balance of

retained earnings for the year 2021, pertaining to the investment in BSP bonds?

(Please indicate debit or (credit), use negative sign if credit).

Question 3: The correct amount of investment in BSP bonds that should be

presented in the statement of financial position as of December 31, 2021 is?

Date
Account
Debit Credit
July 1,
2020
105,
Investment in BSP bonds
242
105,
Cash
242
To record the acquisition of
P100,000 face value BSP
bonds
December Unrealized Gain / (Loss) on
31, 2020
2,242
market changes
Investment in BSP bonds
2,242
To record the market value
adjustment for 2020
January 1,
2021
Cash
5,000
Interest revenue
5,000
To record interest for 6
months
July 1,
Cash
5,000
instructure.com/courses/5443/quizzesi46146take
PM
Quiz: FA2 - Audit of Investmer
|2021
Interest revenue
5,000
To record interest for 6
months
December Unrealized Gain / (Loss) on
31, 2021
1,742
market changes
Investment in BSP bonds
1,742
To record the market value
adjustment for 2021

Market Unrealized
Value Gain / (Loss)
Year
Cost
2020
105,242 103,000
(2,242)
2021
105,242 103,500
(1,742)

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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