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What is the retroactive adjustment to the retained earnings

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Reference no: EM132797455

Problem - In line with your audit of Tokio Corp.'s investment accounts as of December 31, 2019, you ascertained the following information:

Investment type CV Per books

Investment in bonds P8,000,000

Investment in stocks 6,200,000

Audit notes:

a. The investment in bonds which shall mature on December 31, 2021 were acquired in January 1, 2017 when the prevailing market rate of interest was at 12% Interest at 10% is collectible from the bonds every December 31. The acquisition was recorded by the client as a debit to Investment in bonds at face value with the difference between the face value and the total consideration given up to interest income. Interest collected from 2017 to 2019 were appropriately recorded. No other entry relating to the investment was made by the client. Further investigation revealed that the company business model with regard to debt security investment has an objective of collecting contractual cash flows. The prevailing market rate of interest was at 11%, 9% and 9.5% at the end of 2017, 2018, and 2019, respectively.

b. The investment in stocks is for 40,000 shares of Telecom Corp.'s ordinary shares acquired on September 30, 2018. The shares were originally acquired at P145 per share. The book value of the net assets of Telecom Corp. on this date was at P2OM and its total outstanding shares was at 160,000. Telecom's depreciable assets with average remaining life of 10 years were understated on this date. The fair value of Telecom Corp.'s shares were at P155 per share at the end of 2018. The company recorded the remeasurement (from the acquisition cost to fair value) of the investment at the end of 2018 and recognized the same as unrealized holding gain in the 2018 profit/loss. The only other entry made by the client related to the investment was the receipt of P2 per share dividend by the end of 2018 and P4 per share dividend in 2019 as dividend income.

c. Further investigation revealed the following relevant information:

Telecom Corp.

2018

2019

Net income for the year

P3,800,000

P5,200,000

Foreign exchange loss - OCL

-

400,000

Unrealized holding gain - OCI

 

300,000

Fair value

155 per share

189 per share

Cost to sell

5 per share

4 per share

Required -

Q1. What is the correct carrying value of the investment in bonds as of December 31, 2019?

A. 7,615,707

B. 8,277,685

C. 7,729,592

D. 8,145,145

Q2. What is the retroactive adjustment to the retained earnings, beginning as a result of your audit of the investment in the debt security?

A. 485,976

B. 192,471

C. 384,293

D. 415,707

Reference no: EM132797455

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