CLASSROOM EXERCISES ON INVESTMENT IN DEBT SECURITIES

Problem 1

On January 1, 2016, Aldridge Co. purchased P2,000,000 face value 9% bonds for P1,924,184.26, to yield 10%. The
bonds mature on December 31, 2020, and pay interest annually every December 31.

On December 31, 2016, the bonds have a fair value of 99. On December 31, 2017, the bonds have a yield of 12%.
On July 1, 2018, the bonds were sold at 104 plus accrued interest.

Prepare the necessary journal entries from 2016 to 2018, assuming the bonds were classified as follows:

1. Financial asset at fair value through profit or loss

2. Financial asset at fair value through other comprehensive income

Problem 2

Banks Corp. acquired P3,000,000, 12% bonds at face value on January 1, 2016, and classified them as trading
securities. The bond mature on December 31, 2020, and pay interest every December 31. At the end of the year, the
bonds have a fair value of P3,100,000. On December 31, 2017, due to a change in the entity’s business model, the
bonds were reclassified to financial asset at amortized cost. On this date, the bonds have a fair value of
P3,190,191.93. Effective interest rate on this date was 10%.

1. Prepare the journal entries from 2016 to 2018.

2. Assume that instead of initially recognizing the financial assets as FAFVOCI, Banks recognized them as
financial assets at fair value through other comprehensive income. Prepare the necessary journal entries from
2016 to 2018.

Problem 3

On June 30, 2016, Christensen Inc. purchased 5-year, 12% bonds with a face value of P1,000,000 to yield 10%.
The bonds pay interest every July 1 and January 1, and was dated January 1. Broker’s fee paid by Christensen on
the bonds amounted to P37,953.64. This adjusted the effective rate of the bonds to 9%. The bonds were classified
as financial assets at amortized cost.

1. Compute for the total cash payment made by Christensen on June 30, 2016.
2. How much should Christensen initially recognize the investment?
3. How much should be recognized by Christensen as interest receivable on December 31, 2016?
4. Determine the investment’s carrying amount at the end of 2017.
5. Determine the interest income recognized by Christensen in 2017.
Problem 4

On January 1, 2016, Daniela Co. purchased a bond investment with a face value of P4,000,000 and a stated rate of
10% payable annually every December 31. The bonds were to be held to maturity with a 12% effective yield. The
bonds mature at an annual instalment of P1,000,000 every December 31.

Prepare the journal entries in 2016 as well as the amortization table for the whole duration of the bonds.

HOMEWORK ON DEBT SECURITIES

Problem 1

Cameroon Co. designates purchased debt securities as FAFVOCI. On December 31, 2015, the entity purchased 5-
year, 7% bonds at a yield of 5%. The following schedule presents the fair value of the bonds at yearend:

December 31, 2016 P1,065,000

December 31, 2017 1,075,000

December 31, 2018 1,056,500

December 31, 2019 1,030,000

December 31, 2020 1,000,000

1. What amount should be reported as FAFVOCI in the statement of financial position of Cameroon on December
31, 2017?
2. What amount of unrealized gain should be shown as component of other comprehensive income in the 2017
statement of comprehensive income?
3. What amount of unrealized loss should be shown as component of other comprehensive income in the 2018
statement of comprehensive income?
4. What amount of unrealized loss should be shown as component of other comprehensive income in the 2019
statement of comprehensive income?
5. What amount of unrealized gain should be shown in the 2019 statement of changes in equity?

Problem 2

On January 1, 2016, Cambodia Corp. purchased bonds with a face value of P5,000,000 and a stated interest rate of
12% per year payable semi-annually every June 30 and December 31. The bonds were acquired to yield 16%.
These were recorded as financial assets at amortized cost. On June 30, 2019, the bonds were sold at par.

1. How much is the purchase price of the bonds?

2. How much in the interest recognized by Cambodia in 2017?
3. How much is the carrying amount of the asset at the end of 2018?
4. How much was the gain or loss recognized by Cambodia when the bonds were sold?

Problem 3

On January 1, 2016, Grenada Inc. purchased 15%, P1,500,000 face value bonds of Maldives Inc. at a price to yield
12%. The bonds mature on December 31, 2020. It pays interest semi-annually every June 30 and December 31. The
securities at the date of acquisition were designated by Grenada as FAFVOCI. On December 31, 2016, the bonds
are quoted in the market at 110, while on December 31, 2017, the bonds are quoted at 109.

1. How much is the balance of Unrealized Gain or Loss – OCI as of December 31, 2016?
2. How much is the balance of Unrealized Gain or Loss – OCI as of December 31,2017?

Problem 4

On January 1, 2016, Jamaica Co. purchased a bond investment with a face value of P3,000,000 and stated 12%
interest payable annually every December 31. The bonds are classified as FAFVOCI with a 10% effective yield.
The bonds mature at an annual instalment of P1,000,000 every December 31. At the end of 2016 and 2017, the
bonds were quoted in the market at 104 and 105, respectively.

1. How much is the purchase price of the bonds?

2. How much is the interest income recognized by Jamaica in 2016?
3. Determine the balance of Unrealized Gain or Loss – OCI as of December 31, 2016.
4. Determine the balance of Unrealized Gain or Loss – OCI as of December 31, 2017.

Problem 5

On January 1, 2016, Cayman Corp. purchased P1,000,000, 10%, 5-year bonds which it classified as trading
securities. The bonds were purchased to yield 12%. Interest is payable every December 31. The bonds were quoted
at 99 at the end of 2017.

At the end of 2018, Cayman decided to hold the investments to maturity. On this date, the effective rate applicable
on the bonds was 11%.

1. How much is the total income recognized by Cayman on its investment in 2016?
2. How much is the gain or loss on reclassification on the bonds?
3. How much is the interest recognized by Cayman in 2019?