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ASIA PACIFIC COLLEGE

Makati City
Practical Accounting Problems 1 Investments and Other Funds (Debt Securities) M.F. TIU

1. On January 1, 2005, Kim Company acquired a debt instrument and classified them as available securities. The face amount of the 5-year debt instrument was P1,000,000 with a stated rate of 8%. Kim Company paid P900,000 for the debt instrument and P24,000 as brokers fees. Fair values of these debt instruments at December 31, 2005 and December 31, 2006 were P930,620 and P904,160.. Prepare all the journal entries to account for the investment by Kim Company in 2005 - 2007 2. On January 1, 2006, Lyka Company purchased marketable debt securities in the form of bonds with face value of 2,000,000, maturing on December 31, 2011 having a stated rate of 9%. Lyka Company paid a total of P2,079,854 to yield 8% On December 31, 2006, the fair value of the debt instruments was P2,036,243. On December 31, 2007, when the securities have a market value of P97,513, the entity decided to hold the investment to maturity. Prepare all the journal entries to account for the investment by Lyka Company in 2006 - 2008 3. On January 1, 2006, Marty Company purchased 9% P5,000,000 face value bonds for P4,695,000 and classified these debt instrument as held-to-maturity. The effective rate of the bond investment was 10%. The bonds pay interest annually on December 31 and will mature on December 31, 2015. The market values of the bonds at the end of 2006 and 2007 were P 4,500,000 and 4,800,000 respectively. On December 31, 2008, Marty Company changes its intention and decided to reclassifies the bond investment as available-for-sale. The fair values at December 31, 2008 and 2009 are P4,760,000 and P4,780,000. Prepare all the journal entries to account for the investment by Marty Company in 2006 - 2009 4. On January 3, 2004, Sally Company made an investment in a quoted 10-year bond whose face amount was P1,000,000, and a coupon rate of 10% by paying P870,000 for the bonds and transaction costs of P16,995. It was determined that Sally Company will effectively earn 12% from this investment. Sally Company classified the bond investment as an available-for-sale security. The bond instruments quoted market value at December 31, 2004, 2005 and 2006 were P875,434; P904,647 and P911,724 By the end of 2007, it was expected that the net future cash flows of the available-for-sale securities would be P820,000 as the bond issuer was under financial difficulty and was contemplating of having a restructuring of its loans. The market values at December 31, 2008 and 2009 of the bond instrument were P835,491 and P850,125 respectively Prepare all the journal entries to account for the investment by Sally Company in 2004 - 2009

5. On January 1, 2006, Waffles Company acquires P2,000,000 of Crepe Companys bond offering which carries a stated rate of 9% maturing on January 1, 2011. Waffles Companys purchase price including transfer taxes would give it an effective yield of 11%. Determine the purchase price of the bond investment. 6. On January 1, 2006, Sundae Company acquires Malt Companys 10%, 5 year, P1,000,000 face value bonds. The bonds nominal rate was 12% and pays interest every June 30 and December 31. Sundae Companys purchase price was based on an yield of 10%. Determine the purchase price of the bond investment 7. On January 1, 2005, Plains Company acquired P5,000,000 face value bonds of Prints Company. The bonds mature in January 1, 2015 and carry a coupon rate of 6%. The yield rate of the bond investment was 8%. Due to an impending shortage of funds in 2007, Plains Company sold of its bond investment for P1,100,000. Prepare all the journal entries to account for the investment by Plain Company in 2005 - 2007 8. On January 1, 2005, KMST Company acquired Bayo Companys 10%, P200,000 par value bonds for P183,238. The bonds were classified as held-to-maturity and pay interest on June 30 and December 31 and will mature on January 1, 2010 and were purchased to yield 12%. Prepare all the journal entries to account for the investment by Plain Company in 2005 - 2007 9. On July 1, 2005, JD Co acquired for P343,714, JM Co.s 15% , P300,000 par value bonds. The bonds pay interest on June 30 and December 31, and mature on January 1, 2005 and were purchased to yield 12%. JD Co intends to hold on to these investments till its scheduled maturity. Prepare all the journal entries to account for the investment by Plain Company in 2005 - 2007 10. On January 3, 2004, Patty Company made an investment in a quoted 10-year bond whose face amount was P1,000,000, and a coupon rate of 10% by paying P870,000 for the bonds and transaction costs of P16,995. It was determined that Patty Company will effectively earn 12% from this investment. Sally Company classified the bond investment as held-to-maturity By the end of 2007, as the bond issuer was under financial difficulty, it applied for a restructuring of the loan which will require him to pay a principal amount of P600,000 and a reduced interest rate of 6% over the remaining term of the instrument. Prepare all the journal entries to account for the investment by Patty Company in 2004 - 2008