INTERMEDIATE ACCOUNTING 2

Assignment- October 16, 2022

PROBLEM 1
On January 1, 2018, Pauloleng Company purchased bonds with face amount of P5,000,000. The entity
paid P4,600,000 plus transaction cost of P142,000.

The bonds mature on December 31, 2020 and pay 6% interest annually on December 31 of each year
with 8% effective yield.

The bonds are quoted @105 on December 31, 2018 and @110 on December 31, 2019.

The bonds were sold @115 on October 1, 2020.

The business model in managing the financial asset is to collect contractual cash flows that are solely
payments of principal and interest and also to sell the bonds in the open market.

Required:
1. What amount of unrealized gain should be reported as component of other comprehensive income for
2018?

2. What cumulative amount of unrealized gain should be reported as component of other comprehensive
income in the statement of changes in equity for 2019?

3. What is the interest income for 2019?

4. How much is the gain on October 1, 2020?

5. Prepare the necessary journal entries

6. Given the same situation, what is the effective interest rate and the fair value of the bonds if the bonds
were acquired on January 1, 2018 @88 plus transaction costs of P101,100. (Round off present value
factors using 3 decimals only)

7. Disregard the fair value and transaction costs from the given, what is the fair value of the bonds at
date of acquisition if the bonds were acquired with nominal rate of 10% and effective rate of 8%. (use 4
decimal places)
PROBLEM 2
On January 1, 2018, Pauloleng Company purchased bonds with face amount of P4,000,000 for
P4,206,000.

The business model in managing the financial asset is to collect contractual cash flows that are solely
payments of principal and interest and also to sell the bonds in the open market.

The bonds mature on December 31, 2020 and pay 10% interest annually on December 31 each year with
8% effective yield.

The bonds are quoted at 95 on December 31, 2018 and 90 on December 31, 2019.

Required:
1. What amount of unrealized loss should be reported as component of other comprehensive income in
2018?

2. What amount of unrealized loss should be reported as component of other comprehensive income in
2019?

3. What amount of cumulative unrealized loss should be reported in the statement of changes in equity
for 2019?

4. What is the carrying amount of the bond investment on December 31, 2019?

5. Prepare the necessary journal entries