BSA 2

1. On January 1, 2014, Mare Corporation purchased 2,000 of the P1,000 face

value, 9%, 10-year bonds of Pare, Inc. The bonds mature on January 1, 2024,
and pay interest annually beginning January 1, 2015. At the time of acquisition
the market rate of interest for similar debt instrument is 11%.

PV factor of 11% after 10 years 0.3522

PV factor of 9% after 10 years 0.4224

PV factor of annuity of 11% after 10 years 5.8890

PV factor of annuity of 9% after 10 years 6.4180

What is the fair value of the debt instrument at the time of acquisition?

a. P1,411,960
b. P1,764,420
c. P1,904,820
d. P2,256,760

ANSWER: B

Expected cash flows discounted at the prevailing market rate of interest:

Future interest (P2,000,000 x 9% x 5.8890) P1,060,000
Face (2,000,000 x .3522) 704,400
Fair value (Purchase price/acquisition cost) P1,764,420

2. On January 1, 2014, Sun Company purchased the debt instrument of Silk

Company with a face value of P5,000,000 bearing interest rate of 8% for
P4,621,006 to yield 10% interest per year. The bonds mature on January 1,
2019 and pay interest annually on December 30.

On December 31, 2014 the fair value of the investment is P4,838,014 which is
based on the prevailing market rate of 9%.

If the company’s business model has the objective of trading and making a profit
from a change in the fair value of the securities, what amount of unrealized gain
or loss should the company disclose in their December 31, 2014 profit or loss?

a. None
b. P26,559 unrealized gain
c. P154,907 unrealized gain
d. P217,008 unrealized gain

ANSWER: D
 Current fair value P4,838,014
Less: Fair value on initial recognition 4,621,006
Unrealized gain to profit or loss P 217,008

3. In relation to no. 7, If the company’s business model has the objective of

collecting all the contractual cash flows including interest and principal, at what
amount should the investment be reported in the company’s statement of
financial position for the year ended December 31, 2014?

a. P4,621,006
b. P4,683,107
c. P4,751,418
d. P4,838,014

ANSWER: B
Acquisition & Interest Interest Discount Book Value
Interest date Earned Income Amortization
01/01/14 0 O 0 4,621006
12/31/14 400,000 462,101 62,101 4,683,107
12/31/15 400,000 468,311 68,311 4,751,418

Data for no. 9 and 10

On January 1, 2010, Gadgets Company purchased 10% P10,000,000 10-year with

interest payable on December 31 each year. The purchase price of the bonds is
P10,811,100. The bonds effective interest rate was 8.75%. The company has a
business model of collecting all contractual cash flows on all its debt securities. On
December 31, 2015, when the bonds amortized cost was P10,4907,192 and a fair value
at a market rate of 7.75% was P10,749,340, the company sells P1,000,000 bonds.

Since the company sold more than an insignificant amount of its debt security
investment the management would like to reclassify the debt security to investment
measured at fair value to profit or loss.

4. What amount of debt investment should the company report in its December 31,
2015 statement of financial position?

a. P9,366,473
b. P9,674,406
c. P10,407,192
d. P10,749,340

ANSWER: A

Amortized cost of P10,000,000 bonds P10,407,192

 Less: Amortized cost of P1,000,000 bonds (P10,407,192 x 10%)
1,040,719
Amortized cost of remaining bonds P
9,366,473

5. What amount of interest income should the company report in its December 31,
2017 profit or loss?

a. P804,875
b. P812,528
c. P819,566
d. P900,000

ANSWER: B

Interest Date Interest Interest Amortization Book Value

Earned Income at
7.75%
12/31/15 9,366,473
12/31/16 900,000 819,566 80,434 9,286,039
12/31/17 900,000 812528 87,471 9,198,568
12/31/18 900,000 804,875 95,125 9,103,443
12/31/19 900,000 796,557 103,443 9,000,000