Problem 1.

On January 2019, Royalty Company purchased 9% bonds in the face amount of

P6,000,000. The bonds mature on January 1, 2025 and were purchased for P5,555,000 to yield
11%. The entity classified the bonds as held to maturity and interest is payable annually every
December 31. The entity provided the following information about fair value of the bonds and
effective rate:
Fair Value Effective Rate
December 31, 2019 5,450,000 12%
December 31, 2020 6,155,000 8%

On December 31, 2020, the entity changed the business model for this investment to collect
contractual cash flows composed of principal and interest and to sell the financial asset in the
open market.
On January 1, 2021, the fair value of the bonds did not change.
1. What is the interest income for 2019?
2. What amount of unrealized loss should be recognized in profit or loss for 2019?
3. What amount of unrealized gain should be recognized in profit or loss for 2020?
4. What is the interest income for 2021?

Problem 2. On January 1, 2020, Soledad Company purchased 10% bonds in the face amount of
P3,000,000. The bonds mature on January 1, 2030 and were purchased for P3,405,000 to yield
8%.
The entity used the effective interest method of amortization and interest is payable annually
every December 31.
The business model for this investment is to collect contractual cash flows composed of interest
and principal and to sell the financial asset in the open market.
On December 31, 2020, the entity changed the business model for this investment to realize fair
value changes.
On January 2, 2021, the fair value of the bond was P2,845,000 at an effective rate of 11%.
1. What is the interest income for 2020?
2. What amount in profit or loss should be recognized in 2021 as a result of
reclassification?
3. What is the interest income for 2021?