CLASSROOM EXERCISES ON INVESTMENT IN DEBT SECURITIES

Problem 1 (FA-FVPL, FA-AC, FA-FVOCI, Discount, Annual Interest, Journal entries)

On January 1, 2019, Aldridge Co. purchased P2,000,000 face value 9% bonds for P1,924,184.26, to
yield 10%. The bonds mature on December 31, 2023 and pay interest annually every December 31.
On December 31, 2019, the bonds have a fair value of 99. On December 31, 2020, the bonds have a
yield of 12%. On July 1, 2021, the bonds were sold at 104 plus accrued interest.
Prepare the necessary journal entries from 2019 to 2021, assuming the bonds were classified as follows:
1. Financial asset at fair value through profit or loss
2. Financial asset at amortized cost
3. Financial asset at fair value through other comprehensive income

Problem 2 (FA-AC, Premium, Transaction Cost, Purchased in between interest payment dates,
semi-annual interest, Journal Entries)
On June 30, 2019, 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, 2019.
2. How much should Christensen initially recognize the investment?
3. How much should be recognized by Christensen as interest receivable on December 31, 2019?
4. Determine the investment’s carrying amount at the end of 2020.
5. Determine the interest income recognized by Christensen in 2020.

Problem 3 (FA-AC, Discount, Annual Interest, Serial Bonds, Journal Entries)

On January 1, 2019, 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 classified as financial assets
at amortized cost with a 12% effective yield. The bonds mature at an annual instalment of P1,000,000
every December 31.
Prepare the journal entries in 2019 as well as the amortization table for the whole duration of the bonds.

Problem 4 (FA-AC, Discount, Semi-annual Interest)

On January 1, 2019, Cambodia Corp. purchased 3-year 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,
2021, 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 2020?
3. How much is the carrying amount of the asset at the end of 2020?
4. How much was the gain or loss recognized by Cambodia when the bonds were sold?

Problem 5 (FA-FVOCI, Premium, Annual Interest)

Cameroon Co. designates purchased debt securities as FAFVOCI. On December 31, 2018, 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, 2019 P1,065,000
December 31, 2020 1,075,000
December 31, 2021 1,056,500
December 31, 2022 1,030,000
December 31, 2023 1,000,000
1. How much should be reported as FAFVOCI in the statement of financial position of Cameroon on
December 31, 2020?
2. How much unrealized gain (loss) should be shown in the 2020 statement of comprehensive income?
3. How much unrealized gain (loss) should be shown in the 2020 statement of financial position?
4. How much unrealized gain (loss) should be shown in the 2021 statement of comprehensive income?
5. How much unrealized gain (loss) should be shown in the 2021 statement of financial position?
6. How much unrealized gain (loss) should be shown in the 2022 statement of comprehensive income?
7. How much unrealized gain (loss) should be shown in the 2022 statement of financial position?

Problem 6 (FA-FVOCI, Premium, Semi-annual Interest)

On January 1, 2019, 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, 2023. It pays interest semi-annually every June
30 and December 31. The securities at the date of acquisition were designated by Grenada as FA-
FVOCI. On December 31, 2019, the bonds are quoted in the market at 110, while on December 31,
2020, the bonds are quoted at 109.
1. How much is the purchase price of the bonds?
2. How much is the balance of Unrealized Gain (Loss) – OCI as of December 31, 2019?
3. How much is the balance of Unrealized Gain (Loss) – OCI as of December 31, 2020?

Problem 7 (FA-FVOCI, Premium, Annual Interest, Serial Bonds)

On January 1, 2019, 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 2019 and 2020, 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 2019?
3. Determine the balance of Unrealized Gain (Loss) – OCI as of December 31, 2019.
4. Determine the balance of Unrealized Gain (Loss) – OCI as of December 31, 2020.

Problem 8 (FA-FVPL, FA-FVOCI, Face Value, Annual Interest, Reclassification to FA-AC, Journal
Entries)
Banks Corp. acquired P3,000,000, 12% bonds at face value on January 1, 2019, and classified them as
FA-FVPL. The bond mature on December 31, 2024, 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, 2020, 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 (interpolated at an effective interest rate of 10%)
1. Prepare the journal entries from 2019 to 2021.
2. Assume that instead of initially recognizing the financial assets at FVPL, Banks recognized them as
financial assets at fair value through other comprehensive income. Prepare the necessary journal
entries from 2019 to 2021.

Problem 9 (FA-AC, Discount, Annual Interest, Reclassification to FA-FVOCI, FA-FVPL)

On January 1, 2019, Cayman Corp. purchased P1,000,000, 10%, 5-year bonds which it classified as FA-
AC. The bonds were purchased to yield 12%. Interest is payable every December 31. The bonds were
quoted at 99 at the end of 2019.
At the end of 2020, Cayman Corp. decided to change its business model and reclassified the instrument
as FA-FVOCI. On this date, the effective rate applicable on the bonds was 11%. The bonds were quoted
at 101 at the end of 2021.
1. Prepare the journal entries from 2019 to 2021.
2. Assuming that the instrument was reclassified to FA-FVOCI (instead of FA-FVPL), prepare the
necessary journal entries from 2019 to 2021.
Problem 10 (FA-FVPL, FA-FVOCI, Discount, Annual Interest, Reclassification)
On January 1, 2019, Joy Corp. purchased P2,000,000, 8%, 5-year bonds which it classified as FA-FVPL.
The bonds were purchased to yield 10%. Interest is payable every December 31. The bonds were
quoted at 101 at the end of 2019.
At the end of 2020, Joy Corp. changed its business model and reclassified the instrument as FA-FVOCI.
On this date, the bonds have a fair value of P 1,807,853.50 (interpolated at an effective interest rate of
12%). The bonds were quoted at 99 at the end of 2021.
1. Prepare the journal entries from 2019 to 2021.
2. Assuming that the instrument was initially classified at FA-FVOCI and it was reclassified to FA-FVPL,
prepare the necessary journal entries from 2019 to 2021.