Problem 1. On January 1, 2018, Aurora Co.

purchased P1,000,000 bonds at 100 which includes accrued

interest of 20,000. The bonds mature on December 31, 2021 and pay 12% interest annually beginning
December 31, 2018. Commissions paid on the acquisition amounted to P50,000. Aurora’s business
model is to sell such bonds in the near term to take advantage of fluctuations in fair values for short-
term profit making.

Fair value of bonds at the end of:

2018- 102
2019- 100
2020- 98
On March 1, 2020, the P400,000 bonds were sold at 105 which includes accrued interest and incurred
20,000 transaction cost on the sale.

Requirement: Prepare all the necessary entries from 2018-2020.

Problem 2. (round off up to 2 decimal places)

On Januray 1, 2018, Quezon Company acquired 10% bonds in the face amount of P2,000,000. The bonds
are dated January 1, 2018 and will mature on December 31, 2021. The bonds were acquired to yield 12%
interest. Interest is payable every December 31.

Requirements:
A) Prepare all the necessary entries from 2018 up to 2021.
B) Prepare all the necessary entries from 2018-2021 assuming the principal amount will be paid as
follows:
December 31, 2018- 500,000
December 31, 2019- 500,000
December 31, 2020- 500,000
December 31, 2021- 500,000
C) Prepare all the necessary entries from 2018-2021 assuming the principal amount will be paid as
follows:
December 31, 2018- 750,000
December 31, 2019- 600,000
December 31, 2020- 250,000
December 31, 2021- 400,000
D) Using the original information; On April 1, 2020, the bonds were sold at 105 including accrued
interest. Prepare the entry for the sale transaction.

Problem 3.
BEBOT Company holds debt securities within a business model whose objective is achieved both by
collecting contractual cash flows and selling the debt securities. The contractual cash flows are solely
payments of principal and interest on specified dates.

A 5-year 7% P1,000,000 bond was purchased on December 31, 2014 for 1,086,656. The bonds were
purchased to yield 5% interest.
The following fair values of the bonds at end of the year are as follows:

December 31, 2015 1,065,000

December 31, 2016 1,075,000
December 31, 2017 1,056,500
December 31, 2018 1,030,000
December 31, 2019 1,000,000

Required: Case A) Prepare the necessary journal entries from 2014-2019.

Case B) Assuming the bonds were sold on January 2, 2018 at 1,000,000. Prepare the entry on
the date of sale.