EXAMINATION about INVESTMENT 13

General Rule: Read the following carefully and answer it wisely. All solutions are needed, so put it in the last
page. (10 Points)

1. On May 1, 2011, Parrot Company purchased a debt security having a face value of
P2,000,000 with an interest rate of 9% for P2,100,000 including the accrued interest. Parrot.
Company intends to hold the instrument for an indefinite period but not until maturity. The
bonds mature on January 1, 2016, and pay interest semi-annually on January 1 and July 1. On
December 31, 2011, the bonds had a market value of P2,205,000. What amount should
Parrot report for short-term investment in debt securities?
a. P2,000,000 c. P2,040,000
b. P2,100,000 d. P2,205,000
Answer: C
Amt paid P2,100,000
Less: Accrued interest (Jan 1 – May 1)
(P2,000,000 x 9% x 4/12) P 60,000
Acquisition cost P2,040,000

2. On October 1, 2011, Nile Company purchased a debt security having a face value of
P3,000,000 with an interest rate of 10% for P3,200,000 including the accrued interest. A total
of P50,000 was incurred and paid by Nile Company which is in relation to the acquisition of
the debt instrument. Nile Company intends to hold the instrument for an indefinite period but
until maturity. The bonds mature on January 1, 2016, and pay interest semi-annually on value
January 1 and July 1. On December 31, 2011, bonds had a market value of P3,400,000.
What amount should Parrot report for short-term investment in debt securities?
a. P3,125,000 c. P3,175,000
b. P3,200,000 d. P3,250,000
Answer: C
Total cash paid P3,200,000
Less: Accrued interest for 3 mos.
(3,000,000 x 10% x 3/12) P 75,000
Cash paid to the debt instruments P3,125,000
Add: Transaction cost P 50,000
Total Investment P3,175,000

3. On January 1, 2011, Orbit Company purchase a 10-year, 10%, P3,000,000 face value bonds
for 110 including incidental transaction cost at P36,000. Interests are received semi-annual
on January 1 and July 1. Orbit Company intends to hold the instruments until maturity. What
is the total carrying value of the bonds on January 1, 2011?
a. P3,000,000 c. P3,264,000
b. P3,300,000 d. P3,336,000
Answer: D
Purchase price (3,000,000 x 110%) P3,300,000
Add: Transaction costs P 36,000
Total carrying value P3,336,000

4. Maker Company purchased a held to maturity instrument with a face value of P5,000,000 on
January 2, 2011. The bonds will on January 2 2016 and the nominal rate of interest is 12%.
Interest is payable annually every December 30. The maker rate of interest on this date is
10%.

PV factor of 12% after 5 years 0.567

PV factor of 10% after 5 years 0.621
PV factor of annuity of 12% after 5 years 3.605
PV factor of annuity of 10% after 5 years 3.791

How much did Maker pay in acquiring the instruments?

a. P5,247,610 c. P5,326,006
b. P5,348,580 d. P5,379,600
Answer: D
Future interest (P5,000,000 x 12% x3.791) P2,274,600
Face Value (5,000,000 x .621) P3,105,000
Purchase price or amt paid P5,379,600

5. Market Company purchased a held to maturity instrument with a face value of P5,000,000 on
July 1, 2011. The 5year 12% bonds were issued on January 2, 2011 and will mature on
January 2, 2016. Interest is payable annually every December 30. Market rate of interest for a
similar debt instrument at the time of acquisition is 10% that is also the market rate of
interest for a similar debt instrument at the time the instrument was issued.
PV factor of 12% after 5 years 0.567
PV factor of 10% after 5 years 0.621
PV factor of annuity of 12% after 5 years 3.605
PV factor of annuity of 10% after 5 years 3.791

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

a. P5,348,580 c. P5,626,000
b. P5,648,580 d. P5,679,600
Answer: A
Future interest (P5,000,000 x 12% x3.791) P2,274,600
Face Value (5,000,000 x .621) P3,105,000
Purchase price or amt paid P5,379,600
Less: Amortization of premium – 6 mos
Int earned (P5,000,000 x 6%) P300,000
Int income (P5,379,600 x 5%) P268,980 P 31,020
Fair value P5,348,580