INVESTMENTS IN DEBT SECURITIES

Problem 1
On January 1, 2020, Pau Company acquired 5-year, 15%, Php8,000,000 face value bonds for
Php8,274,646. Based on the company’s business model and the contractual cash flow collectible
from this instrument, Pau Company designates the bonds as bond investments at amortized cost.
Interest on the bonds is payable annually on December 31. The investments were acquired at a price to
yield 14%.

Required:
(a) Prepare a schedule of amortization using effective interest method of amortization. Complete
the amortization table. Round off the present value rate to 4 decimal places (0.0000).
Interest Received Interest Premium
Revenue Amortization Carrying value
01/01/2020
12/31/2020
12/31/2021
12/31/2021
12/31/2022
12/31/2023

(b) Prepare journal entries for years 2020 and 2021.

Problem 2
On January 1, 2016, Buhay Company acquired a 4-year bond with a face value of Php1,200,000 and
stated interest of 10% per year payable annually on December 31. The bonds were acquired to yield
12%. The bonds are to be appropriately classified as financial assets at amortized cost.

Required:
(a) Prepare Amortization table
(b) Journal entries for years 2016 to 2017.

Problem 3
On April 1, 2016, Bigasan Co. acquired 4-year bonds with a face value of Php2,000,000 and stated
interest of 10% per year payable annually on December 31. The bonds were acquired to yield 12%.
The bonds are to be appropriately classified as financial asset at amortized cost.

Required:
(a) Amortization table
(b) Prepare journal entries for years 2016 to 2020.

Problem 4
On January 1, 2016, Itoba Company acquired a 10% interest 4-year bonds with a face value of
Php1,200,000 for Php1,100,000. Transaction cost paid by the company amounted to 44,752. Interest is
payable annually on December 31. The bonds are to appropriately classified as financial asset at
amortized cost.

Required:
(a) Compute yield rate or effective rate using interpolation.
(b) Amortization table
(c) Entries for years 2016 and 2017
Problem 5
On January 1, 2016, Kanoli Company acquired a 4-year bonds with a face value of Php1,800,000 and
stated interest rate of 10% per year. The bonds mature in 4-equal annual installments every December
31. The interest is also payable every December 31. The bonds were acquired to yield 12% interest.
The bonds are to be appropriately classified as financial asset at amortized cost.
Required:
(a) How much is purchased price of bonds
(b) Prepare amortization table
(c) Journal entries from 2016 to 2019.

Problem 6
On June 1, 2020, Sun Company purchased 4,000 of the Php1,000 face value, 8% bonds of Bulacan
Corporation for Php3,691,500. The bonds were purchased to yield 10% interest. Interest is payable
semi-annually on December 1 and June 1. The bonds mature on June 1, 2025. Sun Company uses
the effective interest method of amortization . On November 1, 2024, Sun Company sold the bonds for
Php3,925,000. This amount includes the appropriate accrued interest. Market value of the bonds at the
end of each reporting period follows:
December 31, 2020 - 97
December 31, 2021- 99
December 31, 2022- 98

Required:
(a) Prepare the entries in the books of Sun Company for year 2020 and 2021, including the
adjustments at December 31, as a result of all the foregoing assuming that the securities are
classified as
(1) Debt investments at fair value through profit or loss
(2) Debt investments at amortized cost

(b) Prepare the entry to record the sale of the securities on year 2024, assuming that the securities
are classified as
(1) Debt investments at fair value through profit or loss
(2) Debt investments at amortized cost.

Problem 7
On January 1, 2020, Pau Company purchased Php1,000,000 12% bonds of Paul Company for
Php1,063,394, a price that yields 10%. Interest on these bonds is payable every December 31. The
bonds mature on December 31, 2023. On April 1, 2022, to pay a maturing obligation, Pau Company
sold Php600,000 face value bonds at 101 plus accrued interest. Market value of the bonds on different
dates as follows:
December 31, 2020 108
December 31, 2021 106
December 31, 2022 104

Required:
(1) Assume that the bonds were classified as debt investments at fair value through profit or loss.
(a) How much is interest income for the year ended December 31, 2020?
(b) What amount of gain or loss should Pau Company report on the sale of the bond
investments on April 1, 2022?
(c) At what amount should the bond investments be shown on December 31, 2021 and
December 31, 2022 statement of financial position?
 (2) Assume that the company intended to collect the principal and interest over the term of the
bonds and did not choose the fair value option.
(a) At what amount should the bond investments be shown on December 31, 2021 statement
of financial position?
(b) What amount of gain or loss should pau Company recognize on the sale of investments on
April 1, 2022?
(c) What amount of interest income will be taken to profit or loss for the year ended December
31, 2022?
(d) At what amount should the bond investments be shown on December 31, 2022 statement
of financial position?

Problem 8
Pau Company purchased the following securities during 2020, all of which are classified as financial
assets at fair value through profit or loss.

Mar 1 2,000 shares of Flowery Company ordinary shares for Php374,000. The sharesrepresent 2% of
the total outstanding shares of Flowery.

Apr 1 100 of 10% Php10,000 face value Red Company bonds due April 1, 2030; interest is payable
April 1 and October 1. The bonds were purchased at 101.

July 1 Green Corporation 12% bond; Php150,000 face value dated March 1, 2020, purchased at face
value plus accrued interest. Interest is payable annually on March 1; the bonds are due on
March 1, 2030.

The fair value at December 31 2020 are as follows:

Flowery Company ordinary shares Php 190
Red Company 99%
Green Corporation bonds 102%
Required:
Give all entries during the year 2020, including any adjusting entries at December 31, 2020.

Problem 9
On January 1, 2020, Nandoon Company purchased Php100,000 face value 5-year bond of Walana
Corporation for Php108,660 , a price that yields 5% on a stated interest rate of 7%. Interest is payable
Annually at December 31.

The bond investment is measured at amortized cost.

On December 31, 2022, after paying the periodic interest, Nandoon negotiated for a modification of
interest from 7% to 4.5% for the remaining term of bonds, due to contiunuous decline in the market rate
of interest.

Required:
Give all entries in the books of Nandoon Company for years 2020 through 2023 as a result of the
foregoing.

Problem 10
On June 1, 2020, Cam Company purchased for Php5,353,150 (including transaction costs) plus
accrued interest Php5,000,000 12% bonds of Bless Corporation. These investments are classified as
held to maturity securities. The bonds, which mature on December 31, 2024 pay interest annually on
December 31. Using a financial calculator and an excel worksheet, the yield is computed at 10%

On September 1, 2023, in response to some liquidity problems, Cam Company sold Php3,000,000 of
the bond at 103 plus accrued interest. The bonds are quoted in the market at the following prices, at
selected dates.
June 1, 2020 107 December 31, 2022 104
Dec 31, 2020 105 Sept 1, 2023 103
Dex 31, 2021 106 Dec 31, 2023 103.50

Required:
Prepare the entries in the books of cam Company for years 2020 through 2023 as a result of the
foregoing. (Cam Company reports on a calendar year basis)

Problem 11
On January 1, 2020, Pau Company purchased Php1,000,000 12% bonds of Cam Company for
Php,1063,394, a price that yields 10%. Interest on these bonds is payable every December 31. The
bonds mature on December 31, 2023. On April 1, 2022, to pay a maturing obligation, Pau Company
sold Php600,000 face value bonds at 101 plus accrued interest. Market value of the bonds on different
dates is as follows:
December 31, 2020 108
December 31, 2021 106
December 31, 2022 104

The bonds were classified as Available for Sale Securities.

Required:
(a) What amount shall be taken to equity as a result of properly measuring the investments on
December 31, 2021?
(b) How much is interest income for the year ended December 31, 2021?
(c) What should be the balance of Unrealized Gains and Losses presented as part of equity on
December 31, 2022?