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Sol. Man. - Chapter 10 - Inv. in Debt Securities - Ia Part 1a
Sol. Man. - Chapter 10 - Inv. in Debt Securities - Ia Part 1a
Requirement (b):
(1,000,000 – 967,067) = 32,933 discount
Requirement (c):
1/1/x1
Investment in bonds 967,067
Cash in bank 967,067
12/31/x1
Interest receivable 120,000
Investment in bonds 11,842
Interest income 131,842
1/1/x2
Cash 120,000
Interest receivable 120,000
12/31/x2
Interest receivable 120,000
Investment in bonds 13,499
Interest income 133,499
1
2. Solution:
Interest Interest Present
Date received income Amortization value
1/1/x1 1,075,939
12/31/x1 120,000 96,834.51 23,165 1,052,774
12/31/x2 120,000 94,749.62 25,250 1,027,523
12/31/x3 120,000 92,477.08 27,523 1,000,000
3. C
4. D
5. D
6. B
7. A
8. A
9. Solutions:
Requirement (a):
Interest Interest
Date received income Amortization Present value
1/1/x1 907,135*
12/31/x1 100,000 126,999 26,999 934,134
12/31/x2 100,000 130,779 30,779 964,913
12/31/x3 100,000 135,088 35,088 1,000,000
Requirement (b):
1/1x1
Investment in bonds 907,135
Cash 907,135
12/31/x1
Cash 100,000
Investment in bonds 26,999
Interest income 126,999
12/31/x2
Cash 100,000
Investment in bonds 30,779
Interest income 130,779
2
12/31/x3
Cash 100,000
Investment in bonds 35,088
Interest income 135,088
Cash 1,000,000
Investment in bonds 1,000,000
10. Solution:
Interest Interest Present
Date received income Amortization value
1/1/x1 907,135
12/31/x1 100,000 126,999 26,999 934,134
7/1/x2 50,000 65,389 15,389 949,523
7/1/x2
Interest receivable 50,000
Investment in bonds 15,389
Interest income 65,389
Cash 900,000
Loss on sale of bonds 99,523
Interest receivable 50,000
Investment in bonds 949,523
11. B
12. Solutions:
Requirement (a):
The annual collections are computed as follows:
Date Principal Interest Collections
12/31/x1 1,000,000 (3M x 10%) 300,000 1,300,000
12/31/x2 1,000,000 (2M x 10%) 200,000 1,200,000
12/31/x3 1,000,000 (1M x 10%) 100,000 1,100,000
Requirement (b):
1/1/x1
Investment in bonds 2,900,305
Cash 2,900,305
3
12/31/x1
Cash 1,300,000
Interest income 348,037
Investment in bonds 951,963
13. Solutions:
Requirement (b):
Date Interest income Discount Present value
1/1/x1 IGNORED 94,738
12/31/x1 11,369 IGNORED 106,107
12/31/x2 12,733 IGNORED 118,839
12/31/x3 14,261 IGNORED 133,100
Requirement (c):
1/1/x1
Investment in bonds 94,738
Cash 94,738
12/31/x1
Interest receivable 10,000
Investment in bonds (squeeze) 1,369
Interest income 11,369
12/31/x2
Interest receivable 11,000
Investment in bonds (squeeze) 1,733
Interest income 12,733
14. Solution:
1/1x1
Investment in bonds - FVOCI 907,135
Cash 907,135
4
Amortization table
Interest Interest
Date received income Amortization Present value
1/1/x1 907,135*
12/31/x1 100,000 126,999 26,999 934,134
12/31/x2 100,000 130,779 30,779 964,913
12/31/x3 100,000 135,088 35,088 1,000,000
12/31/x1
Cash 100,000
Investment in bonds - FVOCI 26,999
Interest income 126,999
12/31/x2
Cash 100,000
Investment in bonds - FVOCI 30,779
Interest income 130,779
12/31/x3
Cash 100,000
Investment in bonds - FVOCI 35,088
Interest income 135,088
5
Cumulative balance of gain - 12/31/x2 55,087
Unrealized gain (loss) - OCI in 20x3 (55,087)
Cash 1,000,000
Investment in bonds 1,000,000
15. Solution:
7/1/x2
Interest receivable 50,000
Investment in bonds - FVOCI 15,389
Interest income 65,389
Cash 900,000
Loss on sale – P/L 99,523
Investment in bonds – FVOCI 900,000
Interest receivable 50,000
Unrealized loss – OCI 49,523*
6
PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a):
Interest Interest
Date Amortization Present value
received income
1/1/x1 1,060,747
1/1/x2 140,000 127,290 12,710 1,048,037
1/1/x3 140,000 125,764 14,236 1,033,801
1/1/x4 140,000 124,056 15,944 1,017,857
1/1/x5 140,000 122,143 17,857 1,000,000
Requirement (b):
(1,033,801 - 1,000,000) = 33,801 premium
Requirement (c):
1/1/x1
Investment in bonds 1,060,747
Cash in bank 1,060,747
12/31/x1
Interest receivable 140,000
Investment in bonds 12,710
Interest income 127,290
1/1/x2
Cash 140,000
Interest receivable 140,000
12/31/x2
Interest receivable 140,000
Investment in bonds 14,236
Interest income 125,764
1/1/x3
Cash 140,000
Interest receivable 140,000
12/31/x3
Interest receivable 140,000
Investment in bonds 15,944
Interest income 124,056
1/1/x4
Cash 140,000
Interest receivable 140,000
7
12/31/x4
Interest receivable 140,000
Investment in bonds 17,857
Interest income 122,143
1/1/x5
Cash 1,000,000
Investment in bonds 1,000,000
2. Solution:
Interest Interest Present
Date Amortization
received income value
1/1/x1 1,937,951
12/31/x1 200,000 213,175 13,175 1,951,126
12/31/x2 200,000 214,624 14,624 1,965,749
12/31/x3 200,000 216,232 16,232 1,981,982
12/31/x4 200,000 218,018 18,018 2,000,000
3. Solutions:
Requirement (a):
Interest Interest
Date Amortization Present value
received income
1/1/x1 453,567*
12/31/x1 50,000 63,499 13,499 467,066
12/31/x2 50,000 65,389 15,389 482,456
12/31/x3 50,000 67,544 17,544 499,999
Requirement (b):
Interest Interest
Date Amortization Present value
received income
1/1/x1 512,656*
12/31/x1 50,000 46,139 3,861 508,795
12/31/x2 50,000 45,792 4,208 504,587
12/31/x3 50,000 45,413 4,587 499,999
8
4. Solutions:
Requirement (a):
Interest Interest Present
Date Amortization
received income value
1/1/x1 2,096,073*
12/31/x1 280,000 251,529 28,471 2,067,602
12/31/x2 280,000 248,112 31,888 2,035,714
12/31/x3 280,000 244,286 35,714 2,000,000
Requirement (b):
1/1x1
Investment in bonds 2,096,073
Cash 2,096,073
12/31/x1
Cash 280,000
Investment in bonds 28,471
Interest income 251,529
12/31/x2
Cash 280,000
Investment in bonds 31,888
Interest income 248,112
12/31/x3
Cash 280,000
Investment in bonds 35,714
Interest income 244,286
Cash 2,000,000
Investment in bonds 2,000,000
5. Solution:
Interest Interest Present
Date Amortization
received income value
1/1/x1 2,096,073
12/31/x1 280,000 251,529 28,471 2,067,602
9/30/x2 210,000 186,084 23,916 2,043,686
9/30/x2
Interest receivable 210,000
Investment in bonds 23,916
Interest income 186,084
9
Cash 2,400,000
Interest receivable 210,000
Investment in bonds 2,043,686
Gain on sale of bonds 146,314
6. Solution:
1/1x1
Investment in bonds - FVOCI 2,096,073
Cash 2,096,073
12/31/x1
Cash 280,000
Investment in bonds - FVOCI 28,471
Interest income 251,529
12/31/x2
Cash 280,000
Investment in bonds – FVOCI 31,888
Interest income 248,112
10
12/31/x3
Cash 280,000
Investment in bonds 35,714
Interest income 244,286
Cash 2,000,000
Investment in bonds - FVOCI 2,000,000
7. Solution:
Interest Interest Present
Date Amortization
received income value
1/1/x1 2,096,073
12/31/x1 280,000 251,529 28,471 2,067,602
9/30/x2 210,000 186,084 23,916 2,043,686
9/30/x2
Interest receivable 210,000
Investment in bonds - FVOCI 23,916
Interest income 186,084
11
Cash 2,400,000
Unrealized gain – OCI 356,314
Interest receivable 210,000
Investment in bonds 2,400,000
Gain on sale of bonds 146,314
8. Solutions:
Requirement (a):
The annual collections are computed as follows:
Date Principal Interest Collections
12/31/x1 300,000 (900,000 x 10%) 90,000 390,000
12/31/x2 300,000 (600,000 x 10%) 60,000 360,000
12/31/x3 300,000 (300,000 x 10%) 30,000 330,000
Requirement (b):
1/1/x1
Investment in bonds 870,092
Cash 870,092
12/31/x1
Cash 390,000
Interest income 104,411
Investment in bonds 285,589
9. Solutions:
Requirement (a):
20x1: (2,000,000 x 12%) = 240,000
20x2: (2,000,000 + 240,000) x 12% = 268,800 + 240,000 from 20x1 =
508,800
Requirement (b):
Date Interest income Discount Present value
1/1/x1 IGNORED 2,111,086
12/31/x1 211,109 IGNORED 2,322,195
12/31/x2 232,219 IGNORED 2,554,414
12/31/x3 255,441 IGNORED 2,809,855
12
12/31/x1: (2,322,195 – 240,000 interest receivable) = 2,082,195
12/31/x1: (2,554,414 – 508,800 interest receivable) = 2,045,614
Requirement (c):
1/1/x1
Investment in bonds 2,111,086
Cash 2,111,086
12/31/x1
Interest receivable 240,000
Investment in bonds (squeeze) 28,891
Interest income 211,109
12/31/x2
Interest receivable 268,800
Investment in bonds (squeeze) 36,581
Interest income 232,219
10. Solution:
Purchase price of bonds = Present value of future cash flows
Purchase price of bonds = ₱7,986,000 x PV of ₱1 @16%, n=3
Purchase price of bonds = ₱5,116,292 (7,986,000 x 0.640658)
11. Solution:
Interest PV of cash Interest Present
Date Amortization
income flow receivable value
(a) =ER x (b) = prev. bal. of (d) = (a) - = PV +
(c)
(b) (b) + (a) (b) (d)
1/1/x1 5,116,292 5,116,292
4/1/x1 204,652 5,320,944 150,000 54,652 5,170,944
13
PROBLEM 4: CLASSROOM ACTIVITIES
ACTIVITY #1:
Solutions:
Requirement (a):
1,000 face amount x 1,000 no. of bonds = 1,000,000
Requirement (b):
1,000,000 – 922,783 = 77,217 discount
Requirement (c):
Investment in bonds 922,783
Cash in bank 922,783
Requirement (d):
NIR = 8%
Requirement (e):
Trial & Error
PV = CF x PVF
Requirement (f):
Interest Interest
Date received income Amortization Present value
7/1/x1 922,783.00
1/1/x2 40,000.00 46,139.15 6,139.15 928,922.15
7/1/x2 40,000.00 46,446.11 6,446.11 935,368.26
1/1/x3 40,000.00 46,768.41 6,768.41 942,136.67
7/1/x3 40,000.00 47,106.83 7,106.83 949,243.50
1/1/x4 40,000.00 47,462.18 7,462.18 956,705.68
7/1/x4 40,000.00 47,835.28 7,835.28 964,540.96
1/1/x5 40,000.00 48,227.05 8,227.05 972,768.01
14
7/1/x5 40,000.00 48,638.40 8,638.40 981,406.41
1/1/x6 40,000.00 49,070.32 9,070.32 990,476.73
7/1/x6 40,000.00 49,523.84 9,523.84 1,000,000.57
ACTIVITY #2:
Case #1:
Requirement (a):
7/1/x1
Investment in bonds 10,000.00
Interest income (Interest receivable) 116.67
(10,000 x 7% x 2/12)
Cash in bank 10,116.67
8/1/x1
If “Interest receivable” was debited on 7/1/x1:
Cash in bank (10,000 x 7% x 3/12) 175.00
Interest receivable 116.67
Interest income 58.33
11/1/x1
Cash in bank (10,000 x 7% x 3/12) 175.00
Interest income 175.00
12/x/x1
Interest receivable (10,000 x 7% x 2/12) 116.67
Interest income 116.67
Requirement (b):
(10,000 x 7% x 6/12) = 350
Requirement (c):
(10,000 x 7% x 2/12) = 116.67
Requirement (d):
(175 + 175) see entries above = 350
15
Case #2:
Requirement (a):
Purchase price:
Cash flows PV Factors Purchase price
10,000.00 0.5584 5,584.00
700.00 7.3601 5,152.07
10,736.07
5/1/2000
Investment in bonds 10,736.07
Cash in bank 10,736.07
Requirement (b):
(10,000 x 7% x 8/12) = 466.67
Requirement (c):
Interest Interest Present
Date receivable income Amortization value
5/1/2000 10,736.07
12/31/2000 466.67 429.44 37.22 10,698.85
Case #3:
Requirement (a):
Purchase price of bonds:
(10,000 x 1.07 x 1.07 x 1.07 x 1.07 x 1.07 x 1.07 x 1.07 x 1.07 x 1.07
x 1.07) = 19,671.51 x PV of 1 @8%, n=10 = 9,111.72
Requirement (b):
5/1/2000 to 5/1/2001 10,000 x 7% 700.00
5/1/2001 to 5/1/2002 (10,000 + 700) x 7% 749.00
Total Interest receivable - 5/1/2002 1,449.00
16
Requirement (c):
Date Interest income Discount Present value
5/1/2000 IGNORED 9,111.72
5/1/2001 728.94 IGNORED 9,840.65
5/1/2002 787.25 IGNORED 10,627.91
17
PROBLEM 6: COMPUTATIONAL: MULTIPLE CHOICE
1. B (200K x 98%) + 700 = 196,700
Interest Present
Date Collection income Amortization value
7/1/2003 906,000
12/31/2003 40,000 45,300 5,300 911,300
4. B
Solution:
Let us assume that the face amount is 100,000.
Face amount 100,000
Discount (10,000)
Purchase price 90,000
Subsequent amortization of discount 2,000
Carrying amount on date of sale 92,000
5. A
Solution:
Interest receivable
beg. 38,000
Interest revenue 160,500 152,000 Collections
46,500 end.
6. A
7. A
Solution:
18
First trial: @12% per annum
19