Page |1

Chapter 10
Investments in Debt Securities
PROBLEM 1: TRUE OR FALSE
1. FALSE – fair value plus transaction costs
2. FALSE
3. TRUE
4. TRUE
5. FALSE – higher because there is discount
6. FALSE - increases
7. TRUE
8. FALSE – same amount of interest income
9. FALSE – Interest income on debt-type FVOCI assets is
calculated using the effective interest method.
10. TRUE – 100 sale price – 80 amortized cost = 20 gain

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. A
2. D
3. D
Choice (b) is incorrect. The carrying amount of “term” bonds (as
opposed to “serial” bonds) is reported as noncurrent until a year
before the mature date.

4. A
5. A
6. C
7. A
8. C
9. D
10. A – The investment was acquired at a discount because the
initial carrying amount is less than the face amount (₱86,580 <
₱100,000) and the effective interest rate is higher than the
nominal rate (i.e., 8% > 6%). Therefore, the amortization
increases the carrying amount of the investment each year.
 Page |2

PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a): Amortization table
Interest Interest
Date Amortization Present value
received income
1/1/
1,060,747
x1
1/1/
140,000 127,290 12,710 1,048,037
x2
1/1/
140,000 125,764 14,236 1,033,801
x3
1/1/
140,000 124,056 15,944 1,017,857
x4
1/1/
140,000 122,143 17,857 1,000,000
x5

Requirement (b): Journal entries

1/1/x1
Investment in bonds 1,060,747
Cash 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
 Page |3

Interest receivable 140,000

Investment in bonds 15,944
Interest income 124,056

1/1/x4
Cash 140,000
Interest receivable 140,000

12/31/x4
Interest receivable 140,000
Investment in bonds 17,857
Interest income 122,143

1/1/x5
Cash 140,000
Interest receivable 140,000

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

Requirement (c): Unamortized discount or premium

(1,033,801 - 1,000,000) = 33,801 premium

Requirement (d): Gain or loss on sale

Sale price (1M x 110%) 1,100,000
Transaction costs (40,000)
Net disposal proceeds 1,060,000
Carrying amount on date of sale (see table above) (1,033,801)
Gain on sale 26,199

Jan. Cash [(1M x 110%) - 40K] 1,060,000

1,
Investment in bonds 1,033,80
20x
3 Gain on sale (squeeze) 1
26,199

Requirement (e): Gain or loss on sale

Interest Interest
Date Amortization Present value
received income
 Page |4

1/1/
1,060,747
x1
1/1/
140,000 127,290 12,710 1,048,037
x2
1/1/
140,000 125,764 14,236 1,033,801
x3
7/1/
70,000 62,028 7,972 1,025,829
x3

Sale price including accrued interest (1M x 98%) 980,000

Accrued interest (see table above) (70,000)
Sale price excluding accrued interest 910,000
Transaction costs (38,000)
Net disposal proceeds 872,000
(1,025,829
Carrying amount on date of sale (see table above) )
Loss on sale (153,829)

July Interest receivable 70,000

1,
Investment in bonds 7,972
20x
3 Interest income 62,028
to record the discount amortization
July Cash (1M x 98% – 38K) 942,000
1,
Loss on sale (squeeze) 153,829
20x
3 Investment in bonds 1,025,82
Interest receivable 9
to record the sale 70,000

2. Solutions:
Requirement (a): Amortization table
Interest Interest
Date Amortization Present value
received income
1/1/x1 1,937,950
12/31/x1 200,000 213,175 13,175 1,951,125
12/31/x2 200,000 214,624 14,624 1,965,749
 Page |5

12/31/x3 200,000 216,232 16,232 1,981,981

12/31/x4 200,000 218,019 18,019 2,000,000

Requirement (b): Journal entries

1/1/x1
Investment in bonds 1,937,950
Cash 1,937,950

12/31/x1
Cash 200,000
Investment in bonds 13,175
Interest income 213,175

12/31/x2
Cash 200,000
Investment in bonds 14,624
Interest income 214,624

12/31/x3
Cash 200,000
Investment in bonds 16,232
Interest income 216,232

12/31/x4
Cash 200,000
Investment in bonds 18,019
Interest income 218,019

12/31/x4
Cash 2,000,000
Investment in bonds 2,000,000

Requirement (c): Unamortized discount or premium

(2,000,000 - 1,965,749) = 34,251 discount

Requirement (d): Financial statement presentation

The bonds are presented in Sleek Co.’s 20x2 financial statements
as noncurrent asset because they are collectible only at maturity.
The bonds will be presented as current assets in the 20x3 financial
statements, a year before the maturity date.
 Page |6

Requirement (e): Gain or loss on sale

Sale price (2M x 98%) 1,960,000
Transaction costs (40,000)
Net disposal proceeds 1,920,000
Carrying amount on date of sale (see table above) (1,965,749)
Loss on sale (45,749)

Jan. Cash [(2M x 98%) - 40K] 1,920,000

1,
Loss on sale (squeeze) 45,749
20x
3 Investment in bonds 1,965,74
9

Requirement (f): Gain or loss on sale

Interest Interest
Date Amortization Present value
received income
1/1/x1 1,937,950
12/31/x1 200,000 213,175 13,175 1,951,125
12/31/x2 200,000 214,624 14,624 1,965,749
7/1/x3 100,000 108,116 8,116 1,973,865

1,080,00
Sale price including accrued interest (2M x 1/2 x 108%) 0
Accrued interest (100,000 x 1/2) (50,000)
1,030,00
Sale price excluding accrued interest 0
Transaction costs (20,000)
1,010,00
Total 0
(986,933
Carrying amount on date of sale (1,973,865 x 1/2) )
Gain on sale 23,067

July Interest receivable 100,000

1,
Investment in bonds 8,116
20x
3 Interest income 108,11
to record the discount amortization 6
 Page |7

July Cash (2M x ½ x 108% – 20K) 1,060,000

1,
Investment in bonds (1,973,865 x ½) 986,93
20x
3 Interest receivable (100K x ½) 3
Gain on sale (squeeze) 50,000
to record the sale 23,067

3. Solution:
April Investment in bonds (2M x 98%) 1,960,000
1, Interest income (2M x 12% x 3/12) 60,000
20x1
Cash (2M x 98% + 60K) 2,020,000

4. Solutions:

Requirement (a): Journal entries

The total annual collections are computed as follows:
Interest on outstanding Total
Date Principal
principal balance collections
a b c=a+b
Dec. 31, 20x1 1,000,000 (4,000,000 x 12%) = 480,000 1,480,000
Dec. 31, 20x2 1,000,000 (3,000,000 x 12%) = 360,000 1,360,000
Dec. 31, 20x3 1,000,000 (2,000,000 x 12%) = 240,000 1,240,000
Dec. 31, 20x4 1,000,000 (1,000,000 x 12%) = 120,000 1,120,000

Amortization table - installment:

Interest Present
Date Collections income Amortization value
Jan. 1, 20x1 4,166,027
Dec. 31, 20x1 1,480,000 416,603 1,063,397 3,102,630
Dec. 31, 20x2 1,360,000 310,263 1,049,737 2,052,893
Dec. 31, 20x3 1,240,000 205,289 1,034,711 1,018,182
 Page |8

Dec. 31, 20x4 1,120,000 101,818 1,018,182 -

Jan. Investment in bonds at amortized cost 4,166,027

1,
Cash 4,166,02
20x
1 7
Dec. Cash 1,480,000
31,
Interest income 416,603
20x
1 Investment in bonds at amortized cost 1,063,39
7
Dec. Cash 1,360,000
31,
Interest income 310,263
20x
2 Investment in bonds at amortized cost 1,049,73
7
Dec. Cash 1,240,000
31,
Interest income 205,289
20x
3 Investment in bonds at amortized cost 1,034,71
1
Dec. Cash 1,120,000
31,
Interest income 101,818
20x
4 Investment in bonds at amortized cost 1,018,18
2

Requirement (b): Current and Noncurrent portions on 12/31/20x1

Current portion on 12/31/x1: 1,049,737
Noncurrent portion on 12/31/x1: 2,052,893

5. Solutions:

Requirement (a): Interest receivable

20x1: (100,000 x 10%) = 10,000
20x2: (100,000 + 10,000) x 10% = 11,000 + 10,000 from 20x1 = 21,000

Requirement (b): Investment

Date Interest income Discount Present value
1/1/x1 IGNORED 94,738
 Page |9

12/31/x1 11,369 IGNORED 106,107

12/31/x2 12,733 IGNORED 118,839
12/31/x3 14,261 IGNORED 133,100

12/31/x1: (106,107 – 10,000 interest receivable) = 96,107

12/31/x1: (118,839 – 21,000 interest receivable) = 97,839

Requirement (c): Journal entries

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

12/31/x3
Interest receivable [(100K + 10K + 11K) x 10%] 12,100
Investment in bonds (squeeze) 2,161
Interest income 14,261

12/31/x3
Cash 133,100
Interest receivable 33,100
Investment in bonds 100,000

6. Solution:
 Initial measurement:

1/1x1
Investment in bonds - FVOCI 907,135
 P a g e | 10

Cash 907,135

 Subsequent measurement:
Interest Interest Amortizatio
Date received income n 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 100,000 135,087 35,087 1,000,000

12/31/x1
Cash 100,000
Investment in bonds - FVOCI 26,999
Interest income 126,999

Investment in bonds – FVOCI 45,866

Unrealized gain (loss) – OCI 45,866
[(1M x 98%) – 934,134]

12/31/x2
Cash 100,000
Investment in bonds - FVOCI 30,779
Interest income 130,779

Investment in bonds – FVOCI 9,221

Unrealized gain (loss) – OCI 9,221*

* Fair value - 12/31/x2 1,020,000

Amortized cost - 12/31/x2 964,913
Cumulative balance of gain - 12/31/x2 55,087
Cumulative balance of gain - 12/31/x1 45,866
Unrealized gain - OCI in 20x2 9,221

 Sale:
 P a g e | 11

1/1/x3
Unrealized gain (loss) – OCI [1M x (101% - 102%)] 10,000
Investment in bonds – FVOCI 10,000

Cash (1M x 101%) 1,010,000

Investment in bonds - FVOCI 1,010,000

Unrealized gain (loss) – OCI 45,087**

Gain on sale 45,087

** Net proceeds (1M x 101%) 1,010,000

Amortized cost – 1/1/x3 (see table above) 964,913
Cumulative gain in equity/Reclassification adjustment –
1/1/x3 45,087

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. A (946,000 – 40,000) = 906,000 acquisition cost.

Interest Amortizatio Present

Date Collection income n value
7/1/2003 906,000
12/31/2003 40,000 45,300 5,300 911,300

2. A
Solution:
 P a g e | 12

Interest
Date Interest income Amortization Present value
received
1/1/x1 453,567*
12/31/
50,000 63,499 13,499 467,066
x1
12/31/
50,000 65,389 15,389 482,455
x2
12/31/
50,000 67,545 17,545 500,000
x3

*(428,567 + 25,000) = 453,567

3. B
Solution:
Interest income in 20x2 = 65,389 (see table above)
Carrying amount on 12/31/20x2 = (100 x ₱5,000 x 102%) = 510,000

4. B
Solution:
Net proceeds [(100 x 5,000 x 102%) – 15K] 495,000
Amortized cost – 1/1/x3 (see table above) 482,455
Gain on sale /Reclassification adjustment – 1/3/x3 12,545

5. B (500,000 x8% x 6/12) = 20,000

6. A
Solution:
Interest receivable
beg. 38,000
Interest revenue 160,500 152,000 Collection of interest
46,500 end.
 P a g e | 13

7. D
Solution:
Initial measurement:
[487,656 + (500,000 x 5%)] = 512,656

Trial and error:

 Future cash flows x PV factor at x% = Present value
 (500K x PV of ₱1 @ x%, n=3) + (1M x 12% x PV of an ordinary
annuity of ₱1 @ x%, n=3) = 512,656

There is premium because the carrying amount is greater than the

face amount (512,656 > 500,000). Therefore, the effective interest rate must be
lower than the 10% nominal rate.

First trial: (using 9%)

 (.5M x PV of ₱1 @ 9%, n=3) + (.5M x 10% x PV of an ordinary annuity of
₱1 @ 9%, n=4) = 512,656
 (.5M x 0.77218348005) + (50,000 x 2.53129466611) = 512,656
 (386,092 + 126,565) = 512,656 is equal to 512,656

 The effective interest rate is 9%.

Interest
Date Interest income Amortization Present value
received
1/1/x1 512,656
12/31/
50,000 46,139 3,861 508,795
x1
12/31/
x2
50,000 45,792 4,208 504,587

12/31/
50,000 45,413 4,587 500,000
x3

8. D – (504,587 carrying amt. – 500,000 face amt.) = 4,587

premium
 P a g e | 14

9. C
Solution:
Fair value - 12/31/x2 (.5M x 104%) 520,000
Amortized cost - 12/31/x2 (see table above) 504,587
Cumulative balance of gain in equity – 12/31/x2 15,413
Cumulative balance of gain in equity – 12/31/x1(1) 1,205
Unrealized gain - OCI (20x2) 14,208

(1)
[(.5M x 102%) - 508,795] = 1,205 gain

10. A
Solution:
Interest
Date Interest income Amortization Present value
received
1/1/x1 512,656
12/31/
50,000 46,139 3,861 508,795
x1
12/31/
50,000 45,792 4,208 504,587
x2
7/1/x3 25,000 22,706 2,294 502,293

Sale price including accrued interest (.5M x 1/2 x 103%) 257,500

Accrued interest (25K x 1/2) (12,500)
Sale price excluding accrued interest 245,000
Transaction costs (7,000)
Total 238,000
(251,147
Carrying amount on date of sale (502,293 x ½) )
Loss on sale (13,147)

11. A
Solution:
 P a g e | 15

Trial & Error

PV = CF x PVF

There is discount. Therefore, the EIR must be higher than 10%.

First trial: @12% per annum

4,639,522 = (5,000,000 x PV of 1 @ 12%, n=5) + (500,000 x PV
ordinary annuity @12%, n=5)
 4,639,522 = (5,000,000 x 0.56743) + (500,000 x 3.604776)
 4,639,522 = 2,837,150 + 1,802,388
 4,639,522 approximates 4,639,538 (a difference of only ₱16.00)

 The EIR is 12%.

Interest
Date Interest income Amortization Present value
received
1/1/x1 4,639,522
12/31/
500,000 556,743 56,743 4,696,265
x1

 (5M x 98%) - 4,696,265 = 203,735 unrealized gain

12. C – [(1M x 98%) - (1M x 12% x 1/12)] = 970,000

The purchased interest is only for 1 month because the last interest
payment date was on July 1, and the bonds were acquired on
August 1.

13. B
Solution:
 P a g e | 16

PV Present
Future cash flows PV @ 7%, n=6 factors value
1,000,00
Principal 0 PV of ₱1 0.666342 666,342
60,00 PV of ordinary annuity of
Interest 0 ₱1 4.766540 285,992
952,334

When cash flows are due on semi-annual basis, the period

(‘n’) is doubled because there are two semi-annual installments in
a year. Furthermore, both the nominal and effective interest rates
are divided by two because interest rates are normally stated on a
per annum basis.

14. D
Solution:
 Initial measurement:
Purchase price (6M x 96%) 5,760,000
Transaction costs 40,610
Initial carrying amount 5,800,610

 Trial and error:

Future cash flows x PV factor at x% = Present value

The future cash flows are determined as follows:

Principal + Interest on
Date outstanding principal Total collections
balance
Dec. 31, 20x1 2,000,000 + (6,000,000 x 10%) 2,600,000
Dec. 31, 20x2 2,000,000 + (4,000,000 x 10%) 2,400,000
Dec. 31, 20x3 2,000,000 + (2,000,000 x 10%) 2,200,000

Trial: (using 12%)

Future cash flows x PV factor at x% = Present value
(2,600,000 x PV of ₱1 @12%, n=1) + (2,400,000 x PV of ₱1 @12%, n=2) +
(2,200,000 x PV of ₱1 @12%, n=3) = 5,800,610
 P a g e | 17

(2.6M x 0.892857) + (2.4M x 0.797194) + (2.2M x 0.711780) = 5,800,610

5,800,610 (2,321,428 + 1,913,266 + 1,565,916) is equal to 5,800,610

 The effective interest rate is 12%.

Interest Amortizatio Present

Date Collections
income n value
Jan. 1, 20x1 5,800,610
Dec. 31, 20x1 2,600,000 696,073 1,903,927 3,896,683
Dec. 31, 20x2 2,400,000 467,602 1,932,398 1,964,285
Dec. 31, 20x3 2,200,000 235,714 1,964,286 0

15. D
Solution:
Interest on outstanding Total
Date Principal
principal balance collections
a b c=a+b
July 1, 20x1 1,200,000 (3,000,000 x 5%) = 150,000 1,350,000
Dec. 31, 20x1 800,000 (1,800,000 x 5%) = 90,000 890,000
July 1, 20x2 600,000 (1,000,000 x 5%) = 50,000 650,000
Dec. 31, 20x2 400,000 (400,000 x 5%) = 20,000 420,000

Total Present
collections PV of ₱1 PVF value
1,350,000 PV of ₱1 @ 6%, n=1 0.943396 1,273,585
890,000 PV of ₱1 @ 6%, n=2 0.889996 792,096
650,000 PV of ₱1 @ 6%, n=3 0.839619 545,752
420,000 PV of ₱1 @ 6%, n=4 0.792094 332,679
2,944,112
 P a g e | 18

16. C
Solution:
Interest Amortizatio Present
Date Interest received income n 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

* (827,135 + 80,000) = 907,135

 Amortized cost:
Net selling price [(1M x 94%) – 40K] 900,000
Interest receivable (50,000)
Total 850,000
Amortized cost – 1/1/x3 (see table above) 949,523
Loss on sale (99,523)

 FVOCI:
Net selling price [(1M x 94%) – 40K] 900,000
Interest receivable (50,000)
Total 850,000
Amortized cost – 1/1/x3 (see table above) 949,523
Cumulative loss in equity/Reclassification adjustment –
1/1/x3 (99,523)

Supporting journal entries: FVOCI

1/1/x1
Investment in bonds – FVOCI (827,135 + 80,000) 907,135
Cash 907,135

12/31/x1
Cash 100,000
Investment in bonds - FVOCI 26,999
Interest income 126,999

Investment in bonds – FVOCI 45,866

Unrealized gain (loss) – OCI 45,866
[(1M x 98%) – 934,134]
 P a g e | 19

7/1/x2
Interest receivable 50,000
Investment in bonds - FVOCI 15,389
Interest income 65,389

Unrealized gain (loss) – OCI 145,389*

Investment in bonds – FVOCI 145,389

* Sale price - 12/31/x2 (1M x 94%) 940,000

Interest receivable (50,000)
Transaction costs (40,000)
Total 850,000
Amortized cost - 7/1/x2 (see table above) 949,523
Cumulative balance of loss in equity – 7/1/x2 (99,523)
Less: Cumulative balance of gain in equity –
45,866
12/31/x1
Unrealized loss - OCI (20x2) (145,389)

Cash 900,000
Interest receivable 50,000
Investment in bonds - FVOCI (see T-account below) 850,000

Loss on sale 99,523

Unrealized gain (loss) – OCI (see T-account below) 99,523

Investment in bonds - FVOCI

1/1/x1 907,135

12/31/x1 26,999

12/31/x1 45,866

12/31/x1 980,000
15,38
7/1/x2 9
7/1/x2
 P a g e | 20

145,389
850,00
7/1/x2 0

850,000 7/1/x2

Unrealized gain (loss) – OCI

45,866 12/31/x1
45,866 12/31/x1 - gain, Cr. Bal.
7/1/x2 145,389
7/1/x2 - loss, Dr. bal. 99,523
99,523 7/1/x2
-

17. B
Solution:
 Trial and error

Future cash flows x PV factor at x% = Present value

Future cash flow = (6M x 110% x 110% x 110%) = 7,986,000

Trial: (using 16%)

7,986,000 x PV of ₱1 @16%, n=3 = 5,116,292
5,116,292 (7,986,000 x 0.64065767352) is equal to 5,116,292

 The effective interest rate is 16%.

Shortcut:
Present value - 12/31/x2 (5,116,292 x 116% x 116%) 6,884,483
 P a g e | 21

Interest receivable [(6M x 10%) + (6M x 110% x 10%)] (1,260,000)

Carrying amount of investment - 12/31/x2 5,624,483

Longcut:
Interest PV of cash Interest Amorti- Present
Date income flow receivable zation value
(a) =ER x (b) = prev. (d) =
(c) = PV + (d)
(b) bal. + (a) (a) - (c)
1/1/x1 5,116,292 5,116,292
12/31/x1 818,607 5,934,899 600,000 218,607 5,334,899
12/31/x2 949,584 6,884,483 660,000 289,584 5,624,483
12/31/x3 1,101,517 7,986,000 726,000 375,517 6,000,000

18. C
Solution:
Date Interest income Present value
Jan. 1, 20x1 1,725,218
Dec. 31, 20x1 51,757 1,776,975
Dec. 31, 20x2 53,309 1,830,284
Dec. 31, 20x3 54,909 1,885,192
Dec. 31, 20x4 56,556 1,941,748
Dec. 31, 20x5 58,252 2,000,000

 (2M par + 200K premium) - 1,885,192 = 314,808 gain

Shortcut:
[(1,700,000 + 25,218) x 103% x 103% x 103%] vs. 2.2M = 314,808 gain

19. 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
 P a g e | 22

Face amount 100,000

Premium 14,000
Sale price 114,000
Carrying amount on date of sale (92,000)
Gain on sale 22,000

20. B
Solution:

Effective interest rate: (244,286 interest income in 20x3 ÷ 2,035,714

present value on 12/31/x2) = 12%

Face amount: 2,035,714 present value on 12/31/x2 + (280,000 –

244,286) = 2,000,000 present value at maturity date

The completed amortization table is as follows:

Interest Interest Amortizatio
Date Present value
received income n
1/1/x1 2,096,073
12/31/
280,000 251,529 28,471 2,067,602
x1
12/31/
280,000 248,112 31,888 2,035,714
x2
12/31/
280,000 244,286 35,714 2,000,000
x3

PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY #1:
Solutions:
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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 922,783

Requirement (d):
NIR = 8%

Requirement (e):
Trial & Error
PV = CF x PVF

There is discount. Therefore, the EIR must be higher than 8%.

First trial: @10% per annum (5% semi-annual)

 922,783 = (1,000,000 x PV of 1 @ 5%, n=10) + (40,000 x PV

ordinary annuity @5%, n=10)
 922,783 = (1,000,000 x 0.61391) + (40,000 x 7.72173)
 922,783 = 613,910 + 308,869
 922,783 approximates 922,779 (a difference of only ₱4.00)

Therefore, the EIR is 10% (per annum).

Requirement (f):
Interest Interest Amortizatio
Date received income n Present value
7/1/
x1 922,783.00
1/1/
x2 40,000.00 46,139.15 6,139.15 928,922.15
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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
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 49,523.27* 9,523.27* 1,000,000.00*

* The last figures are ‘squeezed’ to make the amortized cost at maturity date
exactly equal to 1M and eliminate the difference due to rounding-off.

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 10,116.67

8/1/x1
If “Interest receivable” was debited on 7/1/x1:
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Cash (10,000 x 7% x 3/12) 175.00

Interest receivable 116.67
Interest income 58.33

If “Interest income” was debited on 7/1/x1:

Cash (10,000 x 7% x 3/12) 175.00
Interest income 175.00

11/1/x1
Cash (10,000 x 7% x 3/12) 175.00
Interest income 175.00

12/31/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

Case 2:

Requirement (a):
5/1/2000
Investment in bonds 10,736.07
Cash 10,736.07

Requirement (b):
(10,000 x 7% x 8/12) = 466.67
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Requirement (c):
Interest Interest Amortizatio
Date receivable income n Present value
5/1/2000 10,736.07
12/31/2000 466.67 429.44 37.23 10,698.84

Carrying amt. 12.31.2000 10,698.84

Face amount 10,000.00
Premium 12.31.2000 698.84

Case 3:

Requirement (a):

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

Requirement (b):
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

Carrying amt. of bonds and interest receivable 10,627.91

Less: Int. receivable as of 5/1/2002 (see ‘a’
above) (1,449.00)
Carrying amt. of bonds – 5/1/2002 9,178.91

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solutions:
Requirement (a):
Date Interest received Interest Amortization Present
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income value
1/1/x1 941,725
1/1/x2 120,000 131,842 11,842 953,567
1/1/x3 120,000 133,499 13,499 967,066
1/1/x4 120,000 135,389 15,389 982,455
1/1/x5 120,000 137,545 17,545 1,000,000

Requirement (b):
(1,000,000 – 967,066) = 32,934 discount

Requirement (c):
1/1/x1
Investment in bonds 941,725
Cash 941,725

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

1/1/x3
Cash 120,000
Interest receivable 120,000

12/31/x3
Interest receivable 120,000
Investment in bonds 15,389
Interest income 135,389

1/1/x4
Cash 120,000
Interest receivable 120,000
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12/31/x4
Interest receivable 120,000
Investment in bonds 17,545
Interest income 137,545

1/1/x5
Cash 120,000
Interest receivable 120,000

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

2. Solution:
Interest Interest Present
Date received income Amortization value
1/1/x1 1,075,939
12/31/x1 120,000 96,835 23,165 1,052,774
12/31/x2 120,000 94,750 25,250 1,027,524
12/31/x3 120,000 92,476 27,524 1,000,000

3. Solution:
Mar. Investment in bonds (2M x 98%) – 60,000 1,900,00
31,
Interest income (₱2M x 12% x 3/12) 0
20x1
Cash (2M x 98%) 60,000 1,960,00
0

4. Solution:
Purchase price (2M x 95%) 1,900,000
Commission 40,510
Initial carrying amount 1,940,510

Trial and error:

There is discount. Therefore, the effective interest rate must be
higher than the nominal rate of 12%.
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First trial: (using 13%)

Future cash flows x PV factor at x% = Present value
 (2M x PV of ₱1 @ 13%, n=4) + (2M x 12% x PV of an ordinary
annuity of ₱1 @ 13%, n=4) = 1,940,510
 1,226,637 + 713,873 = 1,940,510
 1,940,510 is equal to 1,940,510

 The effective interest rate is 13%.

5. Solution:
Interest Interest Present
Date Amortization
received income value
Jan. 1, 20x1 1,940,510
Dec. 31, 20x1 240,000 252,266 12,266 1,952,776
Dec. 31, 20x2 240,000 253,861 13,861 1,966,637
Dec. 31, 20x3 240,000 255,663 15,663 1,982,300
Dec. 31, 20x4 240,000 257,700 17,700 2,000,000

Sale price (2M x 92% x 1/2) 920,000

Transaction costs (46,000)
Net disposal proceeds 874,000
Carrying amount on date of sale (1,982,300 x ½) (991,150)
Loss on sale (117,150)

Jan. Cash [(2M x 92% x 1/2) - 46K] 874,000

1,
Loss on sale (squeeze) 117,150
20x4
Investment in bonds (1,982,300 x ½) 991,150

6. Solution:
Interest Interest Present
Date Amortization
received income value
Jan. 1, 20x1 1,940,510
Dec. 31, 20x1 240,000 252,266 12,266 1,952,776
Dec. 31, 20x2 240,000 253,861 13,861 1,966,637
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Dec. 31, 20x3 240,000 255,663 15,663 1,982,300

July 1, 20x4 120,000 128,850 8,850 1,991,150

Sale price including accrued interest (2M x 92%) 1,840,000

Accrued interest (see table above) (120,000)
Sale price excluding accrued interest 1,720,000
Transaction costs (82,000)
Net disposal proceeds 1,638,000
(1,991,150
Carrying amount on date of sale (see table above) )
Loss on sale (353,150)

July Interest receivable 120,000

1,
Investment in bonds at amortized cost 8,850
20x
4 Interest income 128,850
to record the discount amortization
July Cash (2M x 92% – 82K) 1,758,000
1,
Loss on sale (squeeze) 353,150
20x
4 Investment in bonds at amortized 1,991,15
cost 0
Interest receivable 120,000
to record the sale

7. Solution:
Purchase price of bonds = Present value of future cash flows

Future cash flows PV factors Present value

Principa
2,000,000 0.751315 1,502,630
l
Interest 240,000 2.486852 596,844
Estimated purchase price on Jan. 1, 20x1 2,099,474
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8. Solution:
Requirement (a):
Principal + Interest on
Date outstanding principal Total collections
balance
Dec. 31, 20x1 2,000,000 + (6,000,000 x 10%) 2,600,000
Dec. 31, 20x2 2,000,000 + (4,000,000 x 10%) 2,400,000
Dec. 31, 20x3 2,000,000 + (2,000,000 x 10%) 2,200,000

Interest Amortizatio Present

Date Collections
income n value
Jan. 1, 20x1 5,800,610
Dec. 31, 20x1 2,600,000 696,073 1,903,927 3,896,683
Dec. 31, 20x2 2,400,000 467,602 1,932,398 1,964,285
Dec. 31, 20x3 2,200,000 235,715 1,964,285 0

Requirement (b):
Current portion of serial bonds 1,932,398
Noncurrent portion of serial bonds 1,964,285
Total carrying amount of serial bonds – Dec. 31, 20x1 3,896,683

9. Solution:
Interest Unearned Present value of
Date
income interest cash flow
a = b x 16% b = previous bal. + a
1/1/x1 5,116,292
D
IGNORE

12/31/x1 818,607 5,934,899

12/31/x2 949,584 6,884,483
12/31/x3 1,101,517 7,986,000

12/31/x1 12/31/x2
Present value (Principal and interest receivable) 5,934,899 6,884,483
Interest receivable (6Mx10%); [600K+(6M x 110% x (1,260,000
10%)] (600,000) )
Carrying amount of investment (Principal) 5,334,899 5,624,483
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Alternative solution: Longcut

Interes
Interest PV of cash t Amorti- Present
Date
income flow receiva zation value
ble
(a) =ER x (b) = prev. (d) = (a) = PV +
(c)
(b) bal. of (b) + (a) - (b) (d)
1/1/x1 5,116,292 5,116,292
12/31/
x1
818,607 5,934,899 600,000 218,607 5,334,899
12/31/
x2
949,584 6,884,483 660,000 289,584 5,624,483
12/31/
x3
1,101,517 7,986,000 726,000 375,517 6,000,000

Alternative solution: Shortcut

 (5,116,292 x 116%) – 600,000 = 5,334,899
 (5,116,292 x 116% x 116%) – 1,260,000 = 5,624,483

10. Solution:
 Initial recognition:
Jan. 1, Investment in bonds – FVOCI 1,049,73
20x1
Cash 7 1,049,73
7

 Subsequent measurement (Dec. 31, 20x1):

Interest Interest Present
Date received income Amortization value
Jan. 1, 20x1 1,049,737
Dec. 31, 20x1 120,000 104,974 15,026 1,034,711
Dec. 31, 20x2 120,000 103,471 16,529 1,018,182
Dec. 31, 20x3 120,000 101,818 18,182 1,000,000

Dec. 31, Cash 120,000

20x1
Interest income 104,974
Investment in bonds – FVOCI 15,026
Dec. 31, Unrealized gain (loss) – OCI* 14,711
20x1
Investment in bonds – FVOCI 14,711
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* Fair value - 12/31/x1 (1M x 102%) 1,020,000

Amortized cost - 12/31/x1 (see table above) 1,034,711
Unrealized loss - OCI (14,711)

 Subsequent measurement (Dec. 31, 20x2):

Dec. 31, Cash 120,000
20x2
Interest income 103,471
Investment in bonds – FVOCI 16,529
Dec. 31, Investment in bonds – FVOCI 46,529
20x2
Unrealized gain (loss) – OCI** 46,529

** Fair value - 12/31/x2 (1M x 105%) 1,050,000

Amortized cost - 12/31/x2 (see table above) 1,018,182
Cumulative balance of gain in equity – 12/31/x2 31,818
Less: Cumulative balance of loss in equity –
12/31/x1 (14,711)
Unrealized gain - OCI 46,529(a)
(a)
Positive amount minus a negative amount results to addition.

 Derecognition
Jan. Unrealized gain (loss) – OCI (a) 10,000
4,
Investment in bonds – FVOCI 10,000
20x3
to recognize the change in fair value
Jan. Cash 1,040,00
4,
Investment in bonds – FVOCI 0 1,040,000
20x3
to derecognize the investment
Jan. Unrealized gain (loss) – OCI (b) 21,818
4,
Gain on sale – P/L (b)
21,818
20x3
to derecognize the cumulative fair value
gains

(a)
[1M x (104% - 105%)] = 10,000
(b)

Net proceeds (1M x 104%) 1,040,000

Amortized cost – 1/1/x3 (see table above) 1,018,182
Cumulative gain in equity/Reclassification adjustment –
1/4/x3 21,818
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The movements in the accounts are analyzed as follows:

Investment in bonds – FVOCI
1/1/x1 1,049,737
15,026 12/31/x1 amortization
14,711 12/31/x1 fair value change
12/31/x1 1,020,000
16,529 12/31/x2 amortization
46,52
12/31/x2 fair value change
9
12/31/x2 1,050,000
10,000 1/4/x3 fair value change
1,040,000 1/4/x3 derecognition
0

Unrealized gain (loss) - OCI

12/31/x1 Loss in OCI 14,711

12/31/x1 – Loss (Debit bal.) 14,711
46,529 12/31/x2 Gain in OCI
12/31/x2 – Gain (Credit
31,818 bal.)
1/4/x3 Loss in OCI 10,000
Reclassification adj. to P/L 21,818 1/4/x3 derecognition
0