ACAE 15 Activity – Investment in bonds

Problem 1
On January 1, 2019, ABC Co. purchased 10%, P3,000,000 bonds at 96. Transaction costs amounted to
P35,890. The principal is due on January 1, 2022 but interest is due annually every January 1. The yield
rate on the bonds is 11%. The bonds are classified as investment measured at amortized cost.

1. Interest income for 2019 is:

2. Interest income for 2020 is:
3. Interest income for 2021 is:

2,880,000 + 46,689 = 2,926,689

Note: There is a mistake in the effective interest rate or in the transaction costs.

Problem 2
On January 1, 2019, ABC Co. acquired 12%, 3,000,000 bonds at 103. Transaction costs amounted to
P59,211 The principal is due on December 31, 2021 but interest is due annually starting December 31,
2019. The effective interest rate is 10%. The bonds are classified as investment measured at amortized
cost.

On January 1, 2021, the entire bonds were sold at 105. Commission paid to broker amounted to 10,000.

1. Compute for the gain or (loss) on the sale:

2. Prepare journal entry on sale of investment.

(3,000,000 x 103%) + 59,211 = 3,149,211

Date Interest received Interest income Amortization Present value

January 1, 2019 3,149,211
December 31, 2019 360,000 314,921 (45,079) 3,104,132
December 31, 2020 360,000 310,413 (49,587) 3,054,545
December 31, 2021 360,000 305,455 (54,545) 3,000,000

Proceeds (3,000,000 x 105%) 3,150,000

Less (10,000)
Net Proceeds 3,140,000
Carrying amount (3,054,545)
Gain or (Loss) 85,455

Cash 3,140,000
Investment in bonds 3,054,545
Gain on sale 85,455
Problem 3
On January 1, 2019, ABC Co. acquired 12%, 1,000,000 bonds at 98. Commission paid to brokers
amounted to P83,380. Principal is due on December 31, 2022 but interest payments are due annually
starting December 31, 2019. The bonds are classified as investment measured at amortized cost.

1. What is the effective interest rate?

2. Prepare amortization table.

(1,000,000 x 98%) + 83,380 = 1,063,380

Cash flow
Principal (1,000,000 x PV1 @ 10% 4) 683,013
Interest (120,000 x PVoa @ 10% 4) 380,384
Total 1,063,397

Date Interest received Interest income Amortization Present value

January 1, 2019 1,063,380
December 31, 2019 120,000 106,338 (13,662) 1,049,718
December 31, 2020 120,000 104,972 (15,028) 1,034,690
December 31, 2021 120,000 103,469 (16,531) 1,018,159
December 31, 2022 120,000 101,816 (18,184) 999,975

Problem 4
On January 1, 2019, ABC Co. acquired 12%, 3,000,000 bonds at 103. Transaction costs amounted to
P59,211 The principal is due on December 31, 2021 but interest is due annually starting December 31,
2019. The effective interest rate is 10%. The bonds are classified as investment measured at amortized
cost.

On July 1, 2021, the entire bonds were sold at 106 (payment for the interest is including). Commission
paid to broker amounted to 10,000.

1. Compute for the gain or (loss) on the sale:

2. Prepare journal entry on sale of investment.

Date Interest received Interest income Amortization Present value

January 1, 2019 3,149,211
December 31, 2019 360,000 314,921 (45,079) 3,104,132
December 31, 2020 360,000 310,413 (49,587) 3,054,545
July 1, 2021 180,000 152,728 (27,272) 3,027,273

Proceeds (3,000,000 x 106%) 3,180,000

Interest (180,000)
Less (10,000)
Net Proceeds 2,990,000
Carrying amount (3,027,273)
Gain or (Loss) (37,273)

Interest receivable 180,000

Interest income 152,728
Investment in bonds 27,272
Cash 3,170,000
Loss on sale 37,273
Investment in bonds 3,027,273
Interest receivable 180,000

Problem 5
ABC Co. is contemplating on investing on 12%, 3 year, P1,000,000 bonds to be classified as investment
measured at amortized cost. Principal is due at maturity but interest is due annually at each year end.
ABC Co. determines that the current market rate on January 1, 2019 is 11%.

1. Compute for the estimated purchase price of the bonds on January 1, 2019.
2. Prepare journal entry.

Cash flow
Principal (1,000,000 x PV1 @ 11% 3) 731,191
Interest (120,000 x PVoa @ 11% 3) 293,246
Total 1,024,437

Investment in bonds 1,024,437

Cash 1,024,437

Problem 6
On January 1, 2019, ABC Co. purchased 10%, P3,000,000 bonds for P2,949,428 . The bonds are
measured at amortized cost. Principal on the bonds matures as follows:
December 31, 2019 1,000,000
December 31, 2020 1,000,000
December 31, 2021 1,000,000

Interest is due annually at each year end. The effective interest rate on the bonds is 11%.

1. Interest income for 2019 is:

2. Interest income for 2020 is:
3. Interest income for 2021 is:

Date Payment Interest income Amortization Present value

January 1, 2019 2,949,428
December 31, 2019 1,300,000 324,437 (975,563) 1,973,856
December 31, 2020 1,200,000 217,124 (982,876) 990,990
December 31, 2021 1,100,000 109,010 (990,990) 0
Problem 7
On January 1, 2019, ABC Co. acquired 10%, P3,000,000 bonds for P2,855,890. The principal is due on
January 1, 2022 but interest is due annually every January 1. The effective interest rate is 12%. The bonds
are measured at fair value through other comprehensive income.

Information on fair values follows:

December 31, 2019 – 98
December 31, 2020 – 103
December 31, 2021 – 104

On January 1, 2021, ABC Co. sold the bolds at 104, the fair value on this date.

Prepare journal entries.

Date Payment Interest income Amortization Present value

January 1, 2019 2,855,890
January 1, 2020 300,000 342,707 42,707 2,898,597
January 1, 2021 300,000 347,832 47,832 2,946,429
January 1, 2022 300,000 353,571 353,571 3,000,000

January 1, 2019
Investment in bonds – FVOCI 2,855,890
Cash 2,855,890

December 31, 2019

Interest receivable 300,000
Investment in bonds – FVOCI 42,707
Interest income 342,707

Investment in bonds – FVOCI 41,403

Unrealized gain – OCI 41,403
(3,000,000 x 98%) – 2,898,597 = 41,403

January 1, 2020
Cash 300,000
Interest receivable 300,000

December 31, 2020

Interest receivable 300,000
Investment in bonds – FVOCI 47,832
Interest income 347,832

Investment in bonds – FVOCI 102,168

Unrealized gain – OCI 102,168
(3,000,000 x 103%) – 2,946,429 = 143,571
143,571 – 41,403 = 102,168
January 1, 2021
Cash 300,000
Interest receivable 300,000

Investment in bonds – FVOCI 30,000

Unrealized gain – OCI 30,000
3,000,000 x (104% – 103%) = 30,000

Cash 3,120,000
Investment in bonds – FVOCI 3,120,000
(3,000,000 x 104%) = 3,120,000

Unrealized gain – OCI 173,571

Gain on sale – P/L 173,571
(41,403 + 102,168 + 30,000) = 173,571