Analysis of investments in debts instruments (comprehensive)

On January 1, 2015, Isabela Corporation purchase P1,000,000 8% bonds for P924,164 (including
broker’s commission of P50,000). The bonds were purchased to yield 10%. Interest is payable
annually every January 1. The bonds mature on January 1, 2020.
Quoted price of the bonds as of the dates indicated follows:

December 31, 2015 98.0

December 31, 2016 99.0

REQUIRED:

A. Prepare the journal entries on the books of Isabela Corporation to record the following:
(Round off present value factors to four decimal places)
a) Purchase of the investment on January 1, 2015;
b) Accrual of interest income on December 31, 2015;
c) Amortization of premium or discount on December 31, 2015; and
d) Fair value adjustment as of December 31, 2015
Under the following assumptions:

a) The investment is designated as FA@FVTPL;

b) The investment is available-for-sale; and
c) The investment is held-to-maturity

B. Compute for the carrying amount of the investment in bonds at December 31, 2015 if:
a. The investment is designated as FA@FVTPL;
b. The investment is available-for-sale; and
c. The investment is held-to-maturity

C. Assuming the bonds were sold on December 31, 2016 at 99, prepare the journal entry to
record the sale under the following assumptions:
a) The investment is designated as FA@FVTPL;
b) The investment is available-for-sale; and
c) The investment is held-to-maturity

SOLUTION:

Requirement A
 a. FA@FVTPL b. Available for Sale (AFS)

1) Purchase of investment:

FA@FVTPL P874,164 AFS securities P924,164

Commission exp. 50,000 Cash P924,164
Cash P924,164

2) Accrual of interest:

Interest receivable P80,000 Interest receivable P80,000

Interest income P80,000 Interest income P80,000

3) Amortization of discount:

No entry AFS securities P12,416

Interest income P12,416
4) FV adjustment:

FA@FVTPL P105,836* AFS securities P43,420**

FV adj. gain (P/L) P105,836 FV adj. G/L (OCI) P43,420

* (P980,000 - P874,164) ** (P980,000 - P936,580)

Held to Maturity (HTM)

Purchase of investment:

HTM securities P924,164

Cash P924,164

Accrual of interest:

Interest receivable P80,000

Interest income P80,000
Amortization of discount:
HTM securities P12,416
Interest income P12,416

FV adjustment:

No entry

Amortization schedule:
Date EI (10%) NI (8%) Disc. Amort. Amortized cost
1/1/2012 P 924,164
12/31/2012 P92,416 P80,000 P12,416 936,580
12/31/2013 93,658 80,000 13,658 950,238
12/31/2014 95,024 80,000 15,024 965,262
12/31/2015 96,526 80,000 16,526 981,788
12/31/2016 98,212 80,000 18,212 1,000,000

Requirement B

Carrying amount, 12/31/12

FA@FVTPL 980,000 Fair value
Available for Sale (AFS) 980,000 Fair value
Held to Maturity (HTM) 936,580 Amortized cost

Requirement C

FA@FVTPL Available for Sale (AFS)

To update amortization To update amortization

No entry AFS securities P13,658
Interest income P13,658

FV adjustment before sale FV adjustment before sale

No entry FV adj. G/L (OCI) P3,658*
AFS securities P3,658
* (P990,000 - P993,658)

Disposal entry Disposal entry

Cash P1,070,000 Cash P1,070,000
FA@FVTPL P980,000 FV adj. G/L (OCI) 39,762
Interest income 80,000 AFS securities P990,000
Gain on sale of TS 10,000 Interest income 80,000
Gain on sale of AFS (P/L) 39,762

Held to Maturity (HTM)

To update amortization

HTM securities P13,658

Interest income P13,658

FV adjustment before sale

No entry

Disposal entry

Cash P1,070,000
HTM securities P950,238
Interest income 80,000
Gain on sale of HTMS 39,762