CHAPTER 20- EFFECTIVE INTEREST RATE

PROBLEM 20-1
Requirement 1

Date Interest received Interest income Amortization discount Carrying amount

1/1/2019 1,900,500.00
12/31/2019 160,000.00 190,050.00 30,050.00 1,930,550.00
12/31/2020 160,000.00 193,055.00 33,055.00 1,963,605.00
12/31/2021 160,000.00 196,361 36,361 1,999,966
34 34 2000000
Requirement 2
2019
1-Jan Investment in bonds 1,900,500.00
Cash 1,900,500.00

31-Dec Cash 160,000.00

Interets income 160,000.00

Investment in bonds 30,050.00

Interest income 30,050.00

2020

31-Dec Cash 160,000.00

Interest income 160,000.00

Investment in bonds 33,055.00

Interest incomem 33,055.00
 2021

31-Dec Cash 160,000.00

Interest income 160,000.00

Investment in bonds 36,395

Interest income 36,395

Cash 2,000,000.00
Investment in bonds 2,000,000.00

ROBLEM 20-2
Requirement 1

Date Interest received Interest income Amortization discount Carrying amount

1/1/2019 4,742,000
12/31/2019 300,000 379,360 79,360 4,821,360
12/31/2020 300,000 385,709 85,709 4,907,069
12/31/2021 300,000 392,566 92,566 4,999,634
366.00 366.00 5,000,000.00
Requirement 2
2019
1-Jan Investment in bonds 4,742,000.00
Cash 4,742,000.00

31-Dec Cash 300,000.00

Interets income 300,000.00
 Investment in bonds 79,360.00
Interest income 79,360.00

2020

31-Dec Cash 300,000.00

Interest income 300,000.00

Investment in bonds 85,709

Interest income 85,709

Cash 5,500,000.00
Investment in bonds 4,907,068.80
Gain on sale of equipment 592,931

Computation:
Sales price 5,500,000.00
Carrying amount 4,907,068.80
Gain on sale of bond investment 592,931

PROBLEM 20-3
Date Interest received Interest income Discount amortization Carrying amount
5,486,000.00
2/1/2019 720,000.00 822,900.00 102,900.00 5,588,900.00
2/1/2019 720,000.00 838,335.00 118,335.00 5,707,235.00
2/1/2020 720,000.00 856,085 136,085 5,843,320
2/1/2021 720,000.00 876,498 156,498 5,999,818
2/1/2022 182 182 6,000,000.00

Requirement 1
 2019
1-Jan Investment in bonds 5,486,000.00
Cash 5,486,000.00

31-Dec Accrued interest receivable 660,000.00

Interest income 660,000.00

Investment in bonds 94,325.00

Interest income 94,325.00

Computation
6,000,000.00
0.12 102,900.00
720,000.00 0.92
0.916666667 94,325.00
660,000.00

Requirement 2
2020
1-May Investment in bonds 28,584
Interest income 28,584

Cash 6,480,000
Investment in bonds 5,618,484
Interest income 180,000
Gain on sale of bond 681,516
 Computation
6,000,000.00 6,300,000.00 720,000.00 118,335.00 5,588,900.00
1.05 5,618,484 0.25 0.25 29,584
6,300,000.00 681,516 180,000.00 29,583.75 5,618,484
180,000.00
6,480,000.00
PROBLEM 20-4

Date Interest received Interest income Amortization discount Carrying amount

1/1/2019 8,598,400.00
12/31/2019 960000 859840 (100,160.00) 8,498,240.00

Requirement
2019

1-Jan Investment in Bonds 8,598,400

Cash 8,598,400

31-Dec Cash 960,000

Interest Income 960,000

Interest Income 100,160

Investment in Bonds 100,160

PROBLEM 20-5
Requirement

Date Interest Received Interest Income Amortization Carrying Amount

1/1/2019 5,241,500.00
12/31/2019 600,000 524,150.00 (75,850.00) 5,165,650.00
 2019

1-Jan Investment in Bonds 5,241,500.00

Cash 5,241,500.00

31-Dec Cash 600,000.00

Interest Income 600,000.00

Interest Income 75,850.00

Investment in Bonds 75,850.00

Cash 1,000,000.00
Investment in bonds 1,000,000.00

2020
Date Interest Received Interest Income Amortization Carrying Amount
1/1/2020 4,165,650.00
12/31/2020 480,000.00 416,565.00 (63,435.00) 4,102,215.00

Dec. 31 Cash 480,000.00

Interest Income 480,000.00

Interest Income 63,435.00

Investment in Bonds 63,435.00

PROBLEM 20-6
Date Interest Received Interest Income Amortization Carrying Amount
 1/1/2019 7,679,000.00
12/31/2019 800,000.00 921,480.00 121,480.00 7,800,480.00

Requirement 1
2019

1-Jan Investment in Bonds 7,679,000.00

Cash 7,679,000.00

31-Dec Cash 800,000.00

Interest Income 800,000.00

Investment in Bonds 121,480.00

Interest Income 121,480.00

Cash 2,000,000.00
Investment in bonds 2,000,000.00

Requirement 2

Cost 7,679,000.00
Discount amortization 121,480.00
Annual installment (2,000,000.00)
Carrying amount- Dec. 31, 2019 5,800,480.00

PROBLEM 20-7
Requirement 1
Date Interest Received Interest Income Amortization Carrying Amount
1/1/2019 4,742,000.00
12/31/2019 300,000.00 379,360.00 79,360.00 4,821,360.00
12/31/2020 300,000.00 385,709 85,709 4,907,069
12/31/2021 300,000.00 392,566 92,566 4,999,634
366.00 366.00 5,000,000.00

Requirement 2
2019

1-Jan Investment in Bonds 4,742,000.00

Cash 4,742,000.00

31-Dec Cash 300,000.00

Interest Income 300,000.00

Investment in Bonds 79,360.00

Interest Income 79,360.00

Financial Assets – FVOCI 428,640.00

Unrealized Gain 428,640.00

Computation
Market Value (5,000,000 x 105) 5,250,000.00
CA - Dec 31,2019 4,821,360.00
Unrealized gain- 2019 428,640.00

2020
31-Dec Cash 300,000.00
Interest Income 300,000.00

Investment in Bonds 85,709.00

 Interest Income 85,709.00

Financial Assets – FVOCI 164,291.00

Unrealized Gain 164,291.00
Computation:
Market Value (5,000,000 x 110) 5,500,000.00
CA - Dec 31,2019 (4,907,068.80)
Cumulative unrealized gain 592,931
Unrealized gain- 2019 428,640.00
Unrealized gain- 2020 164,291

2021
31-Dec Cash 300,000.00
Interest Income 300,000.00

Investment in Bonds 92,932.00

Interest Income 92,932.00

Cash 5,000,000.00
Unrealized gain 592,931
Financial asset- FVOCI 5,592,931

PROBLEM 20-8
Requirement 1
2019
1-Jan Investment in Bonds 5,380,000.00
Cash 5,380,000.00

31-Dec Cash 600,000.00

 Interest Income 600,000.00

Interest Income 62,000.00

Investment in Bonds 62,000.00

Financial Assets – FVPL 682,000.00

Gain from change in FV 682,000.00

Computation
Market Value (5,000,000 x 120) 6,000,000.00
CA - Dec 31,2019 5,318,000.00
(5,380,000 - 62,000) 682,000.00

Market Value (5,000,000 x 120) 6,000,000

CA - Dec 31,2019 5,380,000
(5,380,000 - 62,000) 620,000

2020
31-Dec Cash 600,000
Interest Income 600,000

Interest Income 68,200

Investment in Bonds 68,200

Loss in Exchange in FV 250,000

Financial Asset 250,000
 Computation
Market Value (5,000,000 x 120) 6,000,000.00
CA - Dec 31,2019 5,750,000.00
(5000000 x 115%) 250,000.00
PROBLEM 20-9
Requirement 1

Semiannual nominal interest payment (5,000,000 x 4%) 250,000.00

Semiannual effective interest (5,000,000 x 5%) (200,000.00)
50,000.00
PVOA of 1 for 20 periods 12.46
Discount 623,100.00
Face value 5,000,000.00
Purchase price 4,376,900.00

Requirement 1
Date Interest Received Interest Income Amortization Carrying Amount
1/112019 4,376,900
6/30/2019 200,000 218,845 18,845 4,395,745
12/31/2019 200,000 219,787 19,787 4,415,532

2019
1-Jan Investment in Bonds 4,376,400.00
Cash 4,376,400.00

30-Jun Cash 200,000.00

Interest Income 200,000.00
 Investment in Bonds 18,845.00
Interest Income 18,845.00

31-Dec Cash 200,000.00

Interest Income 200,000.00

Investment in Bonds 19,787.25

Interest Income 19,787.25

PROBLEM 20-10
Requirement 1
nominal interest (4,000,000 x 16%) 640,000.00
effective interest (4,000,000 x 12% 480,000.00
160,000.00
PVOA 1 for 5 periods 3.605
Premium 576,800.00
Face value of bonds 4,000,000.00
Purchase price of bonds 4,576,800.00

Requirement 2
Date Interest Received Interest Income Amortization Carrying Amount
1/1/2019 4,576,800
12/31/2019 640,000 549,216 -90,784 4,486,016
12/31/2020 640,000 538,322 -101,678 4,384,338
12/31/2021 640,000 526,121 -113,879 4,270,458

2019

1-Jan Investment in Bonds 4,575,200.00

Cash 4,575,200.00
 31-Dec Cash 200,000.00
Interest Income 200,000.00

Interest Income 90,784.00

Investment in Bonds 90,784.00

PROBLEM 20-11
Requirement 1

Semiannual nominal interest payment (8,000,000 x 5%) 400,000.00

Semiannual effective interest (8,000,000 x 4%) 320,000.00
80,000.00
PVOA of 1 for 10 periods 8.11
Premium 648,800.00
Face value 8,000,000.00
Purchase price 8,648,800.00

Requirement 2
Date Interest Received Interest Income Amortization Carrying Amount
1/112019 8,648,800.00
6/30/2019 400,000.00 345,952.00 (54,048.00) 8,594,752.00
12/31/2019 400,000.00 343,790 (56,210) 8,538,542

2019
1-Jan Investment in Bonds 8,648,800.00
Cash 8,648,800.00

30-Jun Cash 400,000.00

Interest Income 400,000.00
 Interest Income 54,048.00
Investment in Bonds 54,048.00

31-Dec Cash 400,000.00

Interest Income 400,000.00

Interest Income 56,210.00

Investment in Bonds 56,210.00

Requirement 3

Cost 8,648,800.00
Premium/ Jan- June (54,048.00)
CA 8,594,752.00
Premium/July- Dec (56,210)
CA-2019 8,538,542

PROBLEM 20-12
Requirement 1

1st payment
Interest payment
(3,000,000 x 12%) 360,000.00
Principal payment 1,000,000.00
Dec. 31, 2019 1,360,000.00

2nd payment
Interest payment 240,000.00
 (2,000,000 x 12%)
Principal payment 1,000,000.00
Dec. 31, 2019 1,240,000.00

3rd payment
Interest payment
(1,000,000 x 12%) 120,000.00
Principal payment 1,000,000.00
Dec. 31, 2019 1,120,000.00

Dec. 31, 2019 1,360,000.00 0.91 1,237,600.00

Dec. 31, 2020 1,240,000.00 0.83 1,029,200.00
Dec. 31, 2021 1,120,000.00 0.75 840,000.00
Market price of the bonds 3,106,800.00

Requirement 2

Date Interest Received Interest Income Amortization Carrying Amount

1/1/2019 3,106,800.00
12/31/2019 360,000.00 310,680.00 (49,320.00) 3,057,480.00
12/31/2020 360,000.00 305,748.00 (54,252.00) 3,003,228.00

2019
1-Jan Investment in Bonds 3,146,400.00
Cash 3,146,400.00

31-Dec Cash 360,000.00

Interest Income 360,000.00
 Interest Income 49,320.00
Investment in Bonds 49,320.00

Requirement 3

Cost 3,106,800.00
Premium amort (49,320.00)
Principal payment (1,000,000.00)
CA- Dec. 2019 2,057,480.00

PROBLEM 20-13
ANSWER:
1. C

Carrying Amount 1/1/2019 7,800,000.00

Premium Amortization 10,000.00
Carrying Amount 12/31/2019 7,810,000.00

Sale of the Bonds 3,920,000.00

Market Price of 4000 bonds
(7,810,000 x 1/2 ) 3,905,000.00
Gain on Sale of Bonds 15,000.00

Computation:
Interest Income 7,800,000 x 2/12 x 9% 130,000.00
Interest Received 8,000,000 x 2/12 x 10% 120,000.00
Premium Amortization 10,000.00
PROBLEM 20-14
ANSWER:
1. B

Premium of Bonds 140,000.00

Unamortized (100,000 - 20,000) 80,000.00
Gain on Sale of Bonds 220,000.00

PROBLEM 20-15
ANSWER:
1. A
Date Interest Received Interest Income Amortization Carrying Amount
1/1/2019 3,767,000.00
12/31/2019 480,000.00 527,380.00 47,380.00 3,814,380.00

Carrying amount- December 2019 3,814,380.00

PROBLEM 20-16
ANSWER:
1. D

Date Interest Received Interest Income Amortization Carrying Amount

 1/112019 3,756,000.00
12/31/2019 360,000.00 375,600.00 15,600.00 3,771,600.00

Interest revenue - 2019 375,600

PROBLEM 20-17
ANSWER:
1. D

Date Interest Received Interest Income Amortization Carrying Amount

1/1/2019 4,615,000.00
12/31/2019 200,000.00 230,750.00 30,750.00 4,645,750.00

Interest receivable- 2019 200,000.00

PROBLEM 20-18
ANSWER:
1. D

Date Interest Received Interest Income Amortization Carrying Amount

1/112019 1,198,000.00
12/31/2019 50,000.00 47,920.00 (2,080.00) 1,195,920.00

Carrying amount of bonds- December 2019 1,195,920.00

PROBLEM 20-19
 ANSWER:
1. A

Date Interest Received Interest Income Amortization Carrying Amount

1/1/2019 906,000.00
12/31/2019 40,000.00 45,300.00 5,300.00 911,300.00

Carrying amount of bonds- December 2019 911,300.00

PROBLEM 20-20
ANSWER:
1. C

Date Interest Received Interest Income Amortization Carrying Amount

1/1/2019 4,562,000.00
12/31/2019 400,000.00 456,200.00 56,200.00 4,618,200.00

Carrying amount of bonds- December 2019 4,618,200.00

PROBLEM 20-21
ANSWER:
1. A

Interest received 5,000,000 x 8% x 6/12 200,000.00

Bond Discount 18,000.00
Interest Income 218,000.00
PROBLEM 20-22
ANSWER:
1. A
2. B
3. A
4. B

Date Interest Received Interest Income Amortization Carrying Amount

1/1/2019 4,206,000.00
12/31/2019 400,000.00 336,480.00 (63,520.00) 4,142,480.00
12/31/2020 400,000.00 331,398.00 (68,602.00) 4,073,878.00
400,000.00 325,910.00 (74,090.00) 4,000,000.00

1. Market value- Dec 2019 3,800,000.00

Carrying amount- Dec 2019 4,142,480.00
Unrealized gain/loss- Dec 2019 (342,480.00)

2. Market value- Dec 2020 3,600,000.00

Carrying amount- Dec 2020 4,073,878.00
Cumulative gain/loss- Dec 2020 (473,878.00)
Unrealized gain/loss- Dec 2019 (342,480.00)
Unrealized gain/loss- Dec 2020 (131,398.00)

3. Market value- Dec 2020 3,600,000.00

Carrying amount- Dec 2020 4,073,878.00
Cumulative gain/loss- Dec 2020 (473,878.00)
 4. Carrying amount- Dec2020
(4,000,000 x 90%) 3,600,000.00

PROBLEM 20-23
ANSWER:
1. C
2. A
3. A
4. B

1. Market value- Dec 2019

(5,000,000 x 115%) 5,750,000.00
Carrying amount- Dec 2019 5,400,000.00
Gain from change in FV 350,000.00

2. Face amount of bonds 5,000,000.00

Interest rate 12%
Interest income- 2019 600000

3. Carrying amount of bond- Dec 2019

(5,000,000 x 115%) 5,750,000.00

4. Interest income 600,000.00

Gain from change in FV 350,000.00
Total income 950,000.00
 CHAPTER 21- RECLASSIFICATION OF FINANCIAL ASSET
PROBLEM 21-1
Requirement 1
Date Interest Received Interest Income Amortization Carrying Amount
1/1/2019 4,668,600
12/31/2019 300,000 373,488 73,488 4,742,088
12/31/2020 300,000 379,367 79,367 4,821,455
12/31/2021 300,000 385,716 85,716 4,907,171
12/31/2022 300,000 392,829 92,829 5,000,000

Requirement 2
Fair value - Dec 2019 5,000,000 x 105 5,250,000
Carrying amount - Dec 2019 -4,742,088
Unrealized Gain for 2019 507,912

Requirement 3
Fair value - Dec 2020 5,500,000
Carrying Amount - Dec 2020 -4,821,455
Cumulative Gain for 2020 678,545
Unrealized Gain for 2019 -507,912
Unrealized Gain for 2020 170,633

Requirement 4
2019
1-Jan Investment in Bonds 4,668,500.00
Cash 4,668,500.00

31-Dec Cash 300,000.00

Interest Income 300,000.00
 Investment in Bonds 373,488.00
Interest Income 373,488.00

Financial Assets - FVOCI 507,912.00

Unrealized Gain 507,912.00

2020
31-Dec Cash 300,000.00
Interest Income 300,000.00

Investment in Bonds 379,367.00

Interest Income 379,367.00

Financial Assets - FVOCI 170,633.00

Unrealized Gain 170,633.00

2021
31-Dec Cash 300,000.00
Interest Income 300,000.00

Investment in Bonds 385,716.00

Interest Income 385,716.00

Cash 2,000,000.00
Interest Income 2,000,000.00

PROBLEM 21-2
Requirement 1
Date Interest Received Interest Income Amortization Carrying Amount
1/1/2019 1,900,500.00
12/31/2019 160,000.00 190,050.00 30,050.00 1,930,550.00
12/31/2020 160,000.00 193,055.00 33,055.00 1,963,605.00
12/31/2021 160,000.00 196,360.50 36,360.50 1,999,965.50

Requirement 2

Fair value - Dec 2020 2,200,000.00

Carrying Amount - Dec 2020 1,930,550.00
Unrealized Gain for 2020 269,450.00

Requirement 3
2019

1-Jan Investment in Bonds 1,900,000.00

Cash 1,900,000.00

31-Dec Cash 160,000.00

Interest Income 160,000.00

Investment in Bonds 30,000.00

Interest Income 30,000.00

Financial Assets - FVOCI 270,000.00

Unrealized Gain 270,000.00

2020
31-Dec Cash 160,000.00
Interest Income 160,000.00

Investment in Bonds 33,000.00

Interest Income 33,000.00

Financial Assets - FVOCI 167,000.00

 Unrealized Gain 167,000.00

2021
31-Dec Cash 160,000.00
Interest Income 160,000.00

Investment in Bonds 36,300.00

Interest Income 36,300.00

PROBLEM 21-3
Requirement 1

Date Interest Received Interest Income Amortization Carrying Amount

1/1/2019 3,405,000.00
12/31/2019 300,000.00 272,400.00 (27,600.00) 3,377,400.00
12/31/2020 300,000.00 270,192.00 (29,808.00) 3,347,592.00
12/31/2021 300,000.00 267,807.00 (32,193.00) 3,315,399.00
12/31/2022 300,000.00 265,232.00 (34,768.00) 3,280,631.00
12/31/2023 300,000.00 262,451.00 (37,549.00) 3,243,082.00

Requirement 2
Fair Value - Jan 2020 2,000,000 x 110 % 2,845,000.00
Carrying Amount - Jan 2020 (3,347,592.00)
Loss on Reclassification (502,592.00)

Requirement 3
2019
1-Jan Investment in Bonds 3,405,000.00
Cash 3,405,000.00

31-Dec Cash 300,000.00

 Interest Income 300,000.00

Interest Income 27,600.00

Investment in Bonds 27,600.00

2020
31-Dec Cash 300,000.00
Interest Income 300,000.00

Interest Income 29,808.00

Investment in Bonds 29,808.00

Loss on reclassification 502,592.00

Financial Asset - FVPL 502,592.00

2021
31-Dec Cash 300,000.00
Interest Income 300,000.00

Interest Income 32,193.00

Investment in Bonds 32,193.00

PROBLEM 21-4
Required:

1. Interest Income for 2019

(6,000,000 x 9%) 540,000.00

2. Unrealized Loss for 2019

Fair Value - Dec 2019 5,450,000.00
Carrying Amount - Dec 2019 (5,555,000.00)
Unrealized Loss for 2019 (105,000.00)
3. Unrealized Gain for 2020
Fair Value - Dec 2020 6,155,000.00
Carrying Amount - Dec 2020 (5,450,000.00)
Unrealized Gain for 2020 705,000.00
4. Interest Income 2021
(6,155,000 x 8%) 492,400.00

5. Journal Entries
2019
1-Jan Financial Asset - FVPL 5,550,000.00
Cash 5,550,000.00

31-Dec Cash 540,000.00

Interest Income 540,000.00

Unrealized Loss 100,000.00

Fianacial Asset - FVPL 100,000.00

2020
31-Dec Cash 540,000
Interest Income 540,000

Financial Asset - FVPL 700,000

Unrealized Gain 700,00

2021
1-Jan Financial Asset - FVPL 6,150,000.00
Cash 5,550,000.00
 31-Dec Cash 540,000.00
Interest Income 540,000.00

Interest Income 48,000.00

Investment in bonds 48,000.00

PROBLEM 21-5
Required:

1. Interest Income for 2019

4,355,000 x 6% 260,100.00

2. Unrealized Loss OCI for 2019

CA- Jan1, 2019 4,335,000.00
Amortization:
Interest Income 260,100.00
Interest received
(4,000,000 x 8%) 320,000.00 (59,900.00)
CA- Dec 31, 2019 4,275,100.00

Fair Value - Dec 2019 3,870,000.00

Carrying Amount - Dec 2019 4,275,100.00
Unrealized Loss in 2019 (405,100.00)

3. Interest Income for 2020

4,000,000 x 8% 320,000.00
4. Included in P/L Reclassfication 2020
Fair Value - Dec 2020 3,615,000.00
Carrying Amount - Dec 2019 3,870,000.00
Unrealized Loss for 2019 (255,000.00)
Reclasssified from OCI to P/L (405,100.00)
Included in P/L for 2020 (660,100.00)

5. Journal Entries
2019
1-Jan Financial Assets -FVOCI 4,335,000.00
Cash 4,335,000.00

31-Dec Cash 320,000.00

Interest Income 320,000.00

Interets Income 59,900.00

Financial Assets -FVOCI 59,900.00

Unrealized Loss OCI 405,100.00

Financial Assets -FVOCI 405,100.00

2020
1-Jan Financial asset - FVPL 3,870,000.00
Financial asset - FVOCI 3,870,000.00

31-Dec Unrealized Loss - PL 255,000.00

Financial asset - FVPL 255,000.00

Unrealized Loss - PL 405,100.00

Unrealized Loss OCI 405,100.00
 Cash 120,000.00
Interest Income 120,000.00

PROBLEM 21-6
Required:

1. Interest Income for 2019

4,000,000 x 6% 240,000

2. Unrealized Loss P/L for 2019

Fair Value - Dec 2019 3,490,000
Carrying Amount - Dec 2019 -3,530,000
Unrealized Loss in 2019 -40,000

3. Interest Income for 2020

3,490,000 x 10% 349,000

4. Unrealized Loss OCI for 2020

Carrying Amount- Jan 2020 3,490,000
Amortization:
Interest Income
(3,490,000 x 10%) 349,000
Interest received
(4,000,000 x 6%) 240,000 109,000
Carrying Amount- Dec 31, 2020 3,599,000

Fair Value - Dec 2020 3,425,000

Carrying Amount - Dec 2020 -3,599,000
Unrealized Loss in 2020 -174,000
5. Journal Entries
2019
1-Jan Financial Assets -FVPL 3,530,000.00
Cash 3,530,000.00
31-Dec
Cash 240,000.00
Interest Income 240,000.00

Unrealized Loss - PL 40,000.00

Financial Assets -FVPL 40,000.00

2020
1-Jan Financial Asset - FVOCI 3,490,000.00
Financial Asset - FVPL 3,490,000.00
31-Dec
Cash 240,000.00
Interest Income 240,000.00

Financial Asset - FVOCI 109,000.00

Interest Income 109,000.00

Unrealized Loss - OCI 174,000.00

Financial Asset - FVOCI 174,000.00