PROBLEM NO.

1
Compute for the total amount paid to purchase the debt
securities under the following independent situations:
(Round off present value factors to four decimal places)

Situation 1
Face value P1,000,000
Date of debt securities January 1, 2016
Date of maturity January 1, 2019
Acquisition date January 1, 2016
Nominal rate 10%
Effective rate 12%
Interest payment date January 1

Situation 2
Face value P1,000,000
Date of debt securities January 1, 2016
Date of maturity January 1, 2019
Acquisition date January 1, 2016
Nominal rate 12%
Effective rate 10%
Interest payment dates January 1 and July 1

Situation 3
Face value P1,000,000
Date of debt securities January 1, 2016
Date of maturity January 1, 2019
Acquisition date March 1, 2016
Nominal rate 10%
Effective rate 12%
Interest payment dates January 1 and July 1

Situation 4
Face value P3,000,000
Date of debt January 1, 2016
securities
Date of maturity P1,000,000 annually starting
December 31, 2016
Acquisition date January 1, 2016
Nominal rate 10%
Effective rate 12%
Interest payment December 31

SOLUTION:

Situation 1
PV of P (P1,000,000 x 0.7118) P 711,800
PV of I (P1,000,000 x 10% x 2.4018) 240,180
Purchase price/amount paid P951,980

Situation 2
PV of P (P1,000,000 x 0.7462) P 746,200
PV of I (P1,000,000 x 6% x 5.0757) 304,542
Purchase price/ amount paid P1,050,742

Situation 3
PV of P (P1,000,000 x 0.7050) P705,000
PV of I (P1,000,000 x 5% x 4.9173) 245,865
 Purchase price, 1/1/16 950,865
Add discount amort. 1/1/ - 3/1:
EI (PV on 1/1 x 6% x 2/6) P19,017
NI (P1M x 5% x 2/6) ( 16,667) 2,350
Purchase price, 3/1/16 953,215
Add accrued interest (P1M x 5% x 2/6) 16,667
Total amount paid P969,882

Situation 4
Prin- Int. PVF@
Date cipal @10% Total 12% PV, 1/1/16

12/31/16 1M .3M 1.3M 0.8929 1,160,770

12/31/16 1M .2M 1.2M 0.7972 956,640
12/31/18 1M .1M 1.1M 0.7118 782,980
Total 3M 2,900,390
PROBLEM NO. 2
On January 1, 2016, Isabela Corporation purchased P1,000,000 8% debt securities for P924,164 (including broker’s
commission of P50,000). The debt securities were purchased to yield 10%. Interest is payable annually every January
1. The debt securities mature on January 1, 2021.

Quoted price of the debt securities as of the dates indicated follows:

December 31, 2016 98.0
December 31, 2017 99.0

REQUIRED:
A. Prepare the journal entries on the books of Isabela Corporation to record the following: (Round off present value
factors to four decimal places)
1. purchase of the investment on January 1, 2016;
2. accrual of interest income on December 31, 2016;
3. amortization of premium or discount on December 31, 2016; and
4. fair value adjustment as of December 31, 2016
under the following assumptions:
a. the investment is held for trading;
b. the investment is available-for-sale; and
c. the investment is held-to-maturity

B. Compute for the carrying amount of the investment in debt securities at December 31, 2016 if:
a. the investment is held for trading; P980,000
b. the investment is available-for-sale; and P980,000
c. the investment is held-to-maturity P936,580

C. Assuming the debt securities were sold on December 31, 2017 at 99, prepare the journal entry to record the sale
under the following assumptions:
a. the investment is held for trading;
b. the investment is available-for-sale; and
c. the investment is held-to-maturity

SOLUTION:
FA@FVPL FA@FVOCI FA@AC

A.1) Purchase of investment:

FA@FVPL P874,164 FA@FVOCI P924,164 FA@AC P924,164

Comm. exp. 50,000 Cash P924,164 Cash P924,164
Cash 924,164

A.2) Accrual of interest:

Interest receivable P80,000 Interest receivable P80,000 Interest receivable P80,000
Interest income P80,000 Interest income P80,000 Interest income P80,000

A.3) Amortization of discount:

No entry FA@FVOCI P12,416 FA@AC P12,416
Interest income P12,416 Interest income P12,416

A.4) FV adjustment:
FA@FVPL P105,836 FA@FVOCI P43,420 No entry
FV adj. gain (P/L) P105,836 FV adj. G/L (OCI) P43,420

C) Sale of investment:
To update amortization To update amortization To update amortization
No entry FA@FVOCI P13,658 FA@AC P13,658
 FA@FVPL FA@FVOCI FA@AC
Interest income Interest income
P13,658 P13,658
FV adjustment before sale
No entry FV adjustment before sale FV adjustment before sale
FV adj. G/L (OCI) P3,658 No entry
FA@FVOCI P3,658
Disposal entry
Cash P1,070,000 Disposal entry Disposal entry
FA@FVPL P980,000 Cash P1,070,000 Cash P1,070,000
Interest income 80,000 FV adj. G/L (OCI) 39,762 FA@AC P950,238
Gain on sale 10,000 FA@FVOCI P990,000 Interest income 80,000
Interest income 80,000 Gain on sale 39,762
Gain on sale 39,762

Amortization schedule:
Date EI (10%) NI (8%) Disc. Amort. Amortized cost
01/01/16 P 924,164
12/31/16 P92,416 P80,000 P12,416 936,580
12/31/17 93,658 80,000 13,658 950,238
12/31/18 95,024 80,000 15,024 965,262
12/31/19 96,526 80,000 16,526 981,788
12/31/20 98,212 80,000 18,212 1,000,000