ACCTG14 LECTURE 6 - 7 ASSIGNMENT Answer Key

On January 1, 2015, Queen Company purchased bonds with face amount of P5,000,000 for
P4,760,000 including transaction cost of P160,00. The business model is to collect
contractual cash flows and to sell the financial asset.

The bonds mature on December 31, 2017 and pay 10% interest annually on December 31
with a 12% effective yield.

The bonds are quoted at 102 on December 31, 2015 and 105 on December 31, 2016. The
bonds are sold on June 30, 2017 plus accrued interest.

What amount of unrealized gain should be reported as component of other comprehensive

Table of amortization
income for 2015? of discount The transaction cost is part of the cost of the bond
Date Interest Interest Discount Carrying
investment if the financial asset is measured at fair
received income amotization amount
value through other comprehensive income.
1/1/2015 4,760,000
12/31/2015 500,000 571,200 71,200 4,831,200
Market value December 31, 2015
12/31/2016 500,000 579,744 79,744 4,910,944
(5,000,000 x 102%) 5,100,000
12/31/2017 500,000 589,056 89,056 5,000,000
Carrying amount – Dec. 31, 2015 4,831,200
Interest received is equal to 10% multiplied by face amount. Unrealized gain - OCI for 2015 268,800
Interest income is equal to 12% multiplied by carrying amount.
Table of amortization of discount
Date Interest Interest Discount Carrying
received income amotization amount
1/1/2015 4,760,000
12/31/2015 500,000 571,200 71,200 4,831,200
12/31/2016 500,000 579,744 79,744 4,910,944
12/31/2017 500,000 589,056 89,056 5,000,000

Interest received is equal to 10% multiplied by face amount.

Interest income is equal to 12% multiplied by carrying amount.
On January 1, 2015, Queen Company purchased bonds with face amount of P5,000,000 for P4,760,000 including
transaction cost of P160,00. The busines model is to collect contractual cash flows and to sell the financial asset.
The bonds mature on December 31, 2017 and pay 10% interest annually on December 31 with a 12% effective
yield.
The bonds are quoted at 102 on December 31, 2015 and 105 on December 31, 2016. The bonds are sold on June
30, 2017 plus accrued interest.
What amount of unrealized gain should be reported as component of other comprehensive incoe for 2016?
Market value December 31, 2016 (5,000,000 x 105) 5,250,000
Investment balance - December 31, 2016
(5,100,000 + 79,744) 5,179,744 The increase in unrealized gain is
Increase in unrealized gain in 2016 70,256 reported in the statement of
comprehensive income but the
Another computation cumulative unrealized gain is reported in
Market value - December 31, 2016 5,250,000 the statement of changes in equity.
Carrying amount per table - December 31, 2016
(see table of amortization) 4,910,944
Cumulation unrealized gain - December 31, 2016 339,056
Unrealized gain - December 31, 2015 268,800
Increase in unrealized gain in 2016 70,256
On January 1, 2015, Michelle 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, 2017 and pay 6% interest annually on December 31 of each year 8% effective
yield.
The bonds are quoted at 105 on December 31, 2015 and 110 on December 31, 2016.
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.
What cumulative amount of unrealized gain should be reported as component of other comprehensive income in
the statement of changes in equity 2016?
Date Interest Interest Amortizati Carrying IIB – FVOCI 428,640
received income on amount Unrealized Gain
January 1 4,742,000 428,640
Dec 31 , 300,000 379,360 79,360 4,821,360
2015
Dec 31 , 300,000 385,709 85,709 4,907,069
Market
2016 value - December 31, 2016 (5,000,000 x 110) 5,500,000 Another approach
Carrying amount per table - December 31, 2016 (4,907,069) Market value - December 31, 2016 5,500,000
Cumulative unrealized gain - December 31, 2016 592,931 Inves. balance per book – Dec. 31, 2016
Unrealized gain - December 31, 2015 428,640 (5,250,000 + 85,709) 5,335,709
Increase in unrealized gain in 2016 164,291 Increase in unrealized gain - 2016 164,291
On January 1, 2015, Michelle 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, 2017 and pay 6% interest annually on December 31 of each year 8% effective yield.

The bonds are quoted at 105 on December 31, 2015 and 110 on December 31, 2016.

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.

Date Interest Interest Amortizati Carrying Interest received is equal to NR

received income on amount multiplied by face amount.
January 1 4,742,000 Interest income is equal to ER
Dec 31 , 300,000 379,360 79,360 4,821,360 multiplied by carrying amount.
2015
Dec 31 , 300,000 385,709 85,709 4,907,069
2016
On January 1, 2015, Michelle 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, 2017 and pay 6% interest annually on December 31 of each year 8% effective yield.

The bonds are quoted at 105 on December 31, 2015 and 110 on December 31, 2016.

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.

Date Interest Interest Amortizati Carrying Interest received is equal to NR

received income on amount multiplied by face amount.
January 1 4,742,000 Interest income is equal to ER
Dec 31 , 300,000 379,360 79,360 4,821,360 multiplied by carrying amount.
2015
Dec 31 , 300,000 385,709 85,709 4,907,069
2016
• FVTOCI – bonds
Interest income is based on the amortization table
Interest income for 2016 (8% x 4,821,360) 385,709
 On January 1, 2015, Dumaguete Company purchased bonds with face amount of
P4,000,000. The business model in managing the financial asset is to collect contractual
cash flows that are solely payments of principal and interestand also to sell the bonds in
the open market. The entity paid P4,206,000 for the bond investment.
The bonds mature on December 31, 2017 and pay 10% interest annually on December
31 each year with 8% effective yield.
The bonds are quoted at 95 on December 31, 2015 and 90 on December 31, 2016.
What amount of unrealized loss should be repoted as component other comprehensive
Date
income inInterest
2015? Interest Premium Carrying
received income amortization amount
1/1/2015 4,206,000 Interest received is equal to 10%
12/31/2015 400,000 336,480 63,520 4,142,480 multiplied by face amount.
12/31/2016 400,000 331,398 68,602 4,073,878 Interest income is equal to 8%
12/31/2017 400,000 326,122 73,878 4,000,000 multiplied by carrying amount.

Market value - Dec 31, 2015 3,800,000

Carrying amount per table - December 31, 2015 4,142,480
Unrealized loss - 2015 (342,480)

Annotation made during the

recording
On October 1, 2015, Yost Company purchased 4,000 of the P1,000 face value, 10% bonds of Pell Company for
P4,400,000 which included accrued interest of P100,000.
The bonds, which mature on January 1, 2022, pay interest semiannually on January 1 and July 1.
Yost Company used the straight line method of amortization and appropriately recorded the bonds as financial
asset at amortized cost.
Yost Company used the straight line method of amortization and appropriately recorded the bonds as financial
asset at amortized cost.
What is the carrying amount of the bond investment on December 31, 2015?
October 1, 2015 to January 1, 2022 = 75 months
Carrying amount - beg 4,300,000
Acq. Cost (4,400,000 - 100,000) 4,300,000
Amortization from October 1 to
Face value 4,000,000
December 31, 2015 (12,000)
Premium 300,000
Carrying amount - December 31, 2015 4,288,000
The accrued interest is not part of the cost of bond investment.
Montly amortization of premium (300,000 / 75) 4,000

Premium amortization from Oct 1 – Dec 31 Year 2015 (4,000 X 3 = 12,000)

Interest income 12,000
Investment in bonds 12,000
Jent Company purchased bonds at a discount of P100,000. Subsequently, Jent sold these bonds
at a premium of P140,000. During the period that Jent held this long-term investment,
amortization of the discount amounted to P20,000.

What amount should be reported as gain on the sale of bonds?

Premium on sale of bonds 140,000

Unamortized discount (100,000 - 20,000) 80,000
Gain on sale of bonds 220,000
On October 1, 2015, Danica Company purchased P2,000,000 face value 12% bonds for 98
plus accrued interest and brokerage fee, Interest is pad semiannually on January 1 and July 1.
Brokerage fee for this transaction was P50,000

At what amount should this acquisition of bonds be recorded?

Purchase price (2,000,000 x 98) 1,960,000
Brokerage fee 50,000
Total acquisition cost 2,010,000

The accrued interest of P60,000 (2,000,000 x 12% x 3/12) from July 1 to October 1,
2015 is not part of the cost of investment.
Although, this amount is part of the payment for the bond investment.
Any transction cost is part of the cost of financial asset measured at amortized cost.
On January 1, 2015, Venus Company purchased 10% bonds with face value of
P5,000,000 plus transaction cost of P101,500 with a yield rate of 8%. The
bonds mature on December 31, 2019 and payinterest annually on December 31.
The carrying amount of the investment on December 31, 2015 using the
effective interest method is P5,333, 620.

What is the initial acquisition cost of the bond investment?

Carrying amount - December 31, 2015 5,333,620
Add: Nominal interest (5,000,000 x 10%) 500,000
Total 5,833,620
Divide by (100 + 8%) 108%

Total acquisition cost 5,401,500

On January 1, 2015, Carr Company purchased Fay Company 9% bonds with a face amount
of P4,000,000 for P3,756,000 to yield 10%. The bonds are dated January 1, 2015, mature on
December 31, 2024, and pay interest annually on December 31. Carr Company used the
interest method of amortizing bond discount.

What total amount should be reported as interest revenue from the bond investment for
2015?
Interest income for 2015 (3,756,000 x 10%) 375,600

Under the interest method, the interest income is computed by multiplying the carrying
amount of the bond investment by the effective rate.
On January 1, 2015 Russia Company purchased 5-year
bonds with face amount of P8,000,000 and stated
interest of 10% per year payable semiannually on June
30 and December 31.

The bonds were acquired to yield 8%. PV of principal (8,000,000 x .6756)

5,404,800
Present value of an annuity of 1 for 10 periods at 5% PV of semiannual interest payments
7.72 (400,000 x 8.11) 3,244,000
Present value of an annuity of 1 for 10 periods at 4% Purchase price or present value of bonds
8.11 8,648,8000
Present value of 1 for 10 periods at 4%
0.6756
What is the market price or purchase price of the
bonds?
On January 1, 2015 Russia Company purchased 5-year bonds with face amount of P8,000,000 and stated interest of 10% per
year payable semiannually on June 30 and December 31.

The bonds were acquired to yield 8%.

Present value of an annuity of 1 for 10 periods at 5% 7.72

Present value of an annuity of 1 for 10 periods at 4% 8.11
Present value of 1 for 10 periods at 4% 0.6756

What is the carrying amount of the bond investment on December 31, 2015?

Acquisition cost - January 1, 2015 8,648,800

Amortization of premium - 1/1/2015 to 6/30/2015:
Interest received (5% x 8,000,000) 400,000
Interest income (4% x 8,648,800) 345,952 54,048
Carrying amount - June 30, 2015 8,594,752
Amortization of premium - 7/1/2015 to 12/31/2015:
Interest received 400,000
Interest income (4% x 8,594,752) 343,790 56,210
Carrying amount - December 31, 2015 8,538,542
On January 1, 2015, Dean Company purchased ten-year bonds with a face amount of P1,000,000 and a stated
interest rate of 8% per year payable semiannually June 30 and December 31. The bonds were acquired to yield
10%.

Present value of 1 for 10 periods at 10% .386

Present value of 1 for 20 periods at 5% .377
Present value of an annuity of 1 for 10 periods at 10% 6.145
Present value of an annuity of 1 for 20 periods at 5% 12.462

What is the market price or purchase price of the bonds?

PV of principal (1,000,000 x .377) 377,000

PV of semiannual interest payments
(40,000 x 12.462) 498,480
Total present value 875,480
 On January 1, 2015, Tagbilaran Company purchased bonds with face amount of P2,000,000. The bonds are
dated January 1, 2015 and mature on January 1, 2019.

The interest on the bonds is 10% payable semiannually every June 30 and December 31. The prevailing
market rate of interest on the bonds is 12%.

The present value of 1 at 6% for 8 periods is .63, and the present value of an ordinary annuity of 1 at 6% for
8 periods is 6.21.

What is the present value of the bonds on January 1, 2015?

The term of the bonds is 4 years and the interest is payable semiannually. Therefore, there are 8 interest periods.
PV of principal (2,000,000 x .63) 1,260,000
PV of semiannual interest payments
(100,000 x 6.21) 621,000
Present value or market price of bonds 1,881,000

Semiannual interest payment

(2,000,000 x 10% x 6/12) 100,000
On January 1, 2015, Arabian Company purchased serial bonds with face amount of P3,000,000 and stated 12% interest
payable annually avery December 31. The bonds are to be held as financial asset at amortized cost with a 10% effective yield.
The bonds mature at an annual installment of P1,000,000 every December 31. The rounded present value of 1 at 10% for:
One period 0.91
Two periods 0.83
Three periods 0.75

What is the present value of the serial bonds on January 1, 2015?

Principal payment 1,000,000 December 31. 2015 payment (1,360,000 x .91) 1,237,600
Interest payment (3,000,000 x 12%) 360,000 December 31. 2016 payment (1,240,000 x .83) 1,029,200
Total payment on December 31, 2015 1,360,000 December 31. 2017 payment (1,120,000 x .75) 840,000

Principal payment 1,000,000 Total present value on January 1, 2015 3,106,800

Interest payment (2,000,000 x 12%) 240,000
Total payment on December 31, 2016 1,240,000

Principal payment 1,000,000

Interest payment (1,000,000 x 12%) 120,000
Total payment on December 31, 2017 1,120,000
END OF DISCUSSION Thank You