BSA 9

1. On January 2, 2012, Super Company invested in a 10-year 10% debt instrument with a
face value of P3,000,000 in which interest is to be received every December 31. The
debt instrument ha an effective interest rate of 8% and was acquired for P3,402,000.
Super Company has a business model of collecting all the contractual cash flows related
to the instrument.

On December 31, 2015, the debt instrument has a prevailing market rate of 9%.
The following are relevant present value factors:
PV factor of 8% after 6 years 0.630
PV factor of annuity of 8% after 6 years 4.623
PV factor of 9% after 6 years 0.596
PV factor of annuity of 9% after 6 years 4.486

What amount should the debt investment be reported in the December 31, 2015
statement of financial position?
a. P3,133,800
b. P3,276,900
c. P3,344,093
d. P3,374,160

ANSWER: B
Amortized cost after 4 years:
PV of future interest (P300,000 x 4.623) P1,386,900
PV of future amount (P3,000,000 x .630) 1,890,000
Amortized cost on December 31, 2015 P3,276,900

Data for no. 42 and 43

On January 2, 2013, Saint Company invested in a 4-year 10% bonds with a face value of
P6,000,000 in which interest is to be paid every December 31. The bonds has an effective
interest rate of 9% and was acquired for P6,194,220.

During December 2014, the management of Saint Company decided to dispose P4,000,000 face
value debt instrument which will be used to settle an obligation and to finance some of its
operating costs.
The Company has a business model of collecting the contractual cash flows for all their debt
security investments, however due to frequent sale and disposal of investments the
management has decided that the business model is no longer appropriate.

On December 31, 2014, the four million face value debt instrument was disposed of when the
market rate of similar instrument was 11%.
PV factor of 11% after 2 years 0.8116
PV factor of annuity of 11% after 2 years 1.7125

2. What is the amortized cost of the debt instrument on December 31, 2014?
a. P6,000,000
b. P6,105,353
c. P6,151,700
d. P6,194,220

ANSWER: B
Acquisition & Interest Earned Interest Income Premium Book Value
Interest Date Amortization
01/01/13 6,194,220
12/31/13 600,000 557,480 42,520 6,151,700
12/31/14 600,000 553,653 46,347 6,105,353

3. What is the amount of gain or loss should the company recognize in its 2014 profit or
loss as a result of the transfer?
a. None
b. P69,418
c. P78,134
d. P96,330

ANSWER: B
Fair value, December 31, 2014: (based on 11% market rate)
Face (P2,000,000 x .8116) P1,623,200
Interest (P200,000 x 1. 7125) 342,500 P1,965,700
Amortized cost, Dec. 31, 2014 (P6,105,353 x 2/6) 2,035,118
Loss to profit or loss P 69,418

4. On July 1, 2011, Parry Company purchased an 8%, 4-year, P8,000,000 face value bonds
for P7,492,800. The bonds are dated July 1, 2011 and pays interest every June 30.
 Effective rate of the bonds is 10%. The company has a business model of collecting all
the contractual cash flows and has no intention of trading and making profits.

The company did not receive the interest due on June 30, 2012 and it soon became
clear that the issuer was in financial difficulties. On June 30, 2012 the company reviews
the issuer’s financial condition and a prospect for repayment of the loan determines
that the bond is impaired. On the basis of the information available at the time, the
company’s best estimate of future cash flows is a total receipt of P5,000,000 on
maturity. The fair value of the estimated cash flow as of June 30, 2012 is P3,756,600.

On June 30, 2013, on the basis of new information the issuer entity has improved its
credit rating and the basis of the new information, the company’s estimate of future
cash flow is a total receipt of P7,000,000 on maturity. The fair value of the new cash
flow as of June 30, 2013 is P5,785,100.

What is the amount of impairment reversal should Parry report in its profit or loss for
the year-ended June 30, 2013?
a. None
b. P1,214,900
c. P1,652,840
d. P2,028,500

ANSWER: C
Carrying value - June 30, 2012 P3,756,600
Interest rate from June 30, 2012 to June 30, 2012
(P3,756,600 x 10%) 375,660
Amortized cost on June 30, 2013 P4,132,260
Fair Value on June 30, 2013 5, 785,100
Impairment recovery to profit or loss P1,652,840

5. On July 1, 2014, Taker Company purchased P3,000,000 face, 8%, 5-year bonds for
P3,251,880. The effective rate of the bonds is 6%. The bonds are dated July 1, 2014and
pays interest every June 30. The company has a business model of collecting all
contractual cash flows for all debt securities.

What is the total interest income to be recognized by Taker in its December 31, 2014
profit or loss?
a. P35,000
b. P97,556
c. P192,000
 d. P256,000

ANSWER: B
Carrying value at acquisition P3,251,880
X Effective rate (semi-annual 6% x ½) 3%
Total interest income – 2014 for 6 months P 97,556