UNIVERSITY OF SANTO TOMAS

UST-Alfredo M. Velayo – College of Accountancy

España, Manila

IAC 11 – INTEGRATED REVIEW IN FINANCIAL ACCOUNTING AND REPORTING

2ND TERM, A.Y. 2019-2020

INVESTMENT IN DEBT SECURITIES

On January 1, 2019, Africa Corporation purchased 2,000 of the
P1,000 face value, 9%, 10-year bonds of Continent Inc. The
company paid a broker’s fee of P100,000. The bonds mature on
January 1, 2029, and pay interest annually beginning December
31, 2019. Africa Corporation purchased the bonds to yield 11%
and classified this as Investment at Fair value through Profit
or Loss.
Market values of the bonds are as follows:
December 31, 2019 95
December 31, 2020 98

1. How much is the interest income for the year 2019? 180,000

Interest income 2,000,000 x 9% 180,000

(Interest income of FVPL debt securities is based on
nominal interest only)

2. What is the carrying value of the investment on December

31, 2020? 1,960,000

Carrying value 2,000,000 x 0.98 = 1,960,000

(Carrying value is equal to the fair value at yearend)

3. How much is the unrealized gain/loss that should be

reported in 2019 profit or loss statement? 135,580

FV on 12/31/19 2,000,000 x 0.95 = 1,900,000

Acquisition cost 1,764,420
Unrealized gain 135,580

On May 1, 2019, Oceania Company purchased a P2,000,000 face

value 9% debt instruments for P1,860,000 including the accrued
interest. The business model in managing the financial assets is
to generate short-term profits from changes in fair value of the
securities. The debt instruments pay interest semi-annually on
January 1 and July 1. On December 31, 2019, the fair market
value of the instruments is P1,940,000.

4. How much is the interest income for the year 2019? 120,000

Interest income 2,000,000 x 9% x 8/12 120,000

5. How much is the unrealized gain or loss that should be

taken to profit or loss for the year 2019? 140,000

FV 12/31/19 1,940,000
Acquisition cost 1,860,000
Less accrued interest (4 mos) 60,000 1,800,000
Unrealized gain 140,000

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 6. How much is the accrued interest on December 31 ,2019?
90,000

Accrued interest 2,000,000 x 9% x 6/12 90,000

Europe Corp. acquired on January 1, 2019 a 5 year, 10%,

P5,000,000 face value bonds, for P4,639,400 dated January 1,
2019. The bonds which pay interest every December 31 had a 12%
prevailing interest rate on the date of acquisition. Europe’s
business model is to collect contractual cash flows and the cash
flows are solely payment of principal and interest. The
prevailing interest rate on December 31, 2019 is at 9%.

7. How much is the correct interest income for the year 2020?
563,535

8. How much is the unrealized gain/loss to be reported in the

company’s 2019 statement of comprehensive income? 0
The security is carried at amortized cost, hence any fair
value change is not recognized.

9. What is the adjusted balance of the Investment as of

December 31, 2019? 4,696,128
For investment at amortized cost, effective rates given at
yearend are only considered if it will result to
impairment. In this case, the 9% ER will obviously result
to higher fair value since it is lower than 12% (If you
will try, the new fair value is P5,161,850, so the
investment is not impaired).

10. How much is the carrying value of Investment on

December 31, 2022? 4,910,714 (rounding-off difference)

On June 30, 2018, Asia Company purchased P 4,000,000 of 16%

bonds to yield 14% for P4,280,752. Interest is payable
semiannually on June 30 and December 31. The bonds mature in
five years. Asia uses the calendar year and the effective
interest method of amortization. The investment was designated
as Investment at FVOCI.

Market values of the bonds on different dates are as follows:

December 31, 2018 108
December 31, 2019 106

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 11. What amount of unrealized gain or loss shall be taken
to OCI in the statement of comprehensive income as a result
of properly measuring the investments on December 31, 2018?
59,595

Fair value (4,000,000 x 1.08) 4,320,000

CV 4,260,405
Cumulative UG 59,595

The difference is the FV and the CV (based on the

amortization table) at yearend is the cumulative balance of
UG/UL to be presented in the OCI-SFP. But since 2018 is the
1st year, it is also the amount presented in the OCI-SCI.

12. How much is interest income for the year ended

December 31, 2019? 594,932

13. How much is the unrealized gain or loss that should be

presented in the statement of financial position on
December 31, 2019? 24,663

12/31/18 12/31/19
FV 4,320,000 4,240,000
CV 4,260,405 4,215,337
Cumulative 59,595 24,663
Previous Year 0 59,595
Current UG (UL) 59,595 (34,933)

14. How much is the carrying value of investment on

December 31, 2019? 4,240,000

On January 1, 2019, South America Company purchased P 1,000,000

12% bonds for P1,063,394, a price that yields 10%. Interest on
these bonds is payable every December 31. The bonds mature on
December 31, 2022. On April 1, 2020, South America sold
P600,000 face value of the bonds at 101 plus accrued interest.
Market values of the bonds on different dates are as follows:
December 31, 2019 108
December 31, 2020 106

15. How much is the gain or loss on sale on April 1, 2020

assuming the bonds are classified as FVPL? 42,000 loss
Selling price 600,000 x 1.01 606,000
Carrying value 600,000 x 1.08 648,000
Loss 42,000

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 16. How much is the gain or loss on sale on April 1, 2020
assuming the bonds are classified as IAC? 21,586 loss

Selling price 600,000 x 1.01 606,000

Carrying value 627,586
Loss 21,586

Additional question:
How much is the gain or loss on sale on April 1, 2020
assuming the bonds are classified as FVOCI? 21,586 loss

Loss 35,977 x 60% 21,586

On December 31, 2018, North America Company invested in a 5-year

bonds of face value of P4,000,000 with 12% interest payable per
year and 14% yield rate for P3,725,488. The company has a
business model of collecting contractual cash flows including
interest and principal for all debt investments. During 2020,
North America Company’s business deteriorated due to political
instability and faltering global economy. After reviewing all
evidences at December 31, 2020, North America company determined
that it was probable that the company will still be able to pay
the annual interest on the original loan but a reduced principal
of 3,400,000 at maturity. As a result, the company decided that
the investment in bond was impaired and that a loss should be
recognized immediately.

17. What amount of impairment loss should North America

Company recognize on its debt instrument? 405,158 (rounding
off difference)

PV of the investment for the remaining 3 years:

PV of new principal 3,400,000 x 0.6750 2,295,000
PV of old interest 4,000,000 x 12% x 2.3216 1,114,368
PV of new investment 3,409,368
CV of old investment 3,814,444
Loss 405,076

a. How much is the interest income for the year 2021?

477,300 (rounding off difference)

Interest 3,409,368 x 14% 477,311

END OF HANDOUT

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 UNIVERSITY OF SANTO TOMAS
UST-Alfredo M. Velayo – College of Accountancy
España, Manila

IAC 11 – INTEGRATED REVIEW IN FINANCIAL ACCOUNTING AND REPORTING

2ND TERM, A.Y. 2019-2020

INVESTMENT IN DEBT SECURITIES

1. Debt securities may be classified as
a. Amortized cost only
b. FVPL and FVOCI
c. FVPL and Amortized cost only
d. FVPL, FVOCI and amortized cost

2. Subsequent to acquisition, these securities are generally

reported in the statement of financial position at amortized
cost.
a. FVOCI only
b. FVPL and FVOCI
c. Amortized cost only
d. FVOCI and Amortized cost

3. Under PFRS 9, debt securities could be measured at amortized

cost if the following conditions are met:
I. Business model in managing the financial asset to
generate profit from changes in fair value.
II. The entity has the ability and positive intention to hold
the asset until maturity date.
a. I only c. I and II
b. II only d. Neither I nor II

4. When investments in debt securities are purchased between

interest payment dates, preferably the
a. investment account should include accrued interest.
b. accrued interest is debited to Interest Expense.
c. accrued interest is debited to Investment account.
d. accrued interest is debited to Interest Receivable.

5. If an entity failed to amortize the discount on its

investment in bond classified at amortized cost, this may
result to
a. Understatement of net income
b. Overstatement of net income
c. No effect on net income
d. Overstatement on investment account

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 6. An entity made a year-end amortization for its only
investment in bonds by debiting Investment at Amortized Cost
and crediting Interest income. The bond investment must have
been purchased at
a. Face value c. A premium
b. A discount d. None of the above

7. For an investment in debt securities portfolio classified as

Investment at Amortized Cost, which of the following amounts
should be included in the period profit or loss?
I. Unrealized temporary gains and losses during the period
as a result of change in fair value
II.Amortization of discount or premium
II. Interest received and accrued
a. I and II c. II and III
b. I and III d. I, II and III

8. When an investor's accounting period ends on a date that

does not coincide with an interest receipt date for bonds
held as an investment, the investor must
a. make an adjusting entry to debit Interest Receivable and
to credit Interest Revenue for the amount of interest
accrued since the last interest receipt date.
b. notify the issuer and request that a special payment be
made for the appropriate portion of the interest period.
c. make an adjusting entry to debit Interest Receivable and
to credit Interest Revenue for the total amount of
interest to be received at the next interest receipt
date.
d. do nothing special and ignore the fact that the
accounting period does not coincide with the bond's
interest period.

9. Gain or loss on disposal of debt securities classified as

Investment at FVOCI shall be recognized in
a. Profit or loss
b. Other comprehensive income
c. Retained earnings
d. None of these

10. Which of the following is not generally correct about

recording a sale of a debt security before maturity date?
a. Accrued interest will be received by the seller even
though it is not an interest payment date.
b. An entry must be made to amortize a discount to the date
of sale.
c. The entry to amortize a premium to the date of sale
includes a credit to the Premium on Investments in Debt
Securities.
d. All of the statements above are true

11. Which of the following is true regarding the

reclassification from investment at fair value through
profit or loss to investment at amortized cost?
a. Reclassification date is made at the beginning of the
next accounting period
b. The initial cost of investment at amortized cost is

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 the amortized cost at the date of reclassification
c. The difference between the fair value and the face
value is a gain or loss on reclassification taken to
profit or loss
d. The carrying amount and the fair value at the date of
reclassification should be amortized over the
remaining life of the bond.

END OF HANDOUT

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