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Chapter 10
Investments in Debt Securities
1. Securities classified as financial asset measured at amortized cost are reported at
a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.

2. In accounting for investments in debt securities that are classified as held for trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.

3. According to PFRS 9 Financial Instruments, investments in debt securities that are classified at
amortized cost are initially measured at
a. cost including accrued interest.
b. maturity value.
c. cost including brokerage and other fees.
d. fair value plus brokerage and other fees.

4. Pippen Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to
yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the
table value for
a. 10 periods and 10% from the present value of 1 table.
b. 10 periods and 8% from the present value of 1 table.
c. 20 periods and 5% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.

5. Solo Co. purchased ₱300,000 bonds for ₱315,000. The securities are to be held until maturity to
collect the contractual cash flows. The entry to record the investment includes
a. a debit to Held-for-Trading Securities at ₱300,000.
b. a credit to Premium on Investments of ₱15,000.
c. a debit to Investment in bonds measured at amortized cost for ₱315,000.
d. none of these.

Use the following information for the next two questions:

On January 1, 20x1, Kevin Co. acquired 12%, P4,000,000 bonds for P4,198,948. The principal is due
on December 31, 20x3 but interest is made annually starting December 31, 20x1. The effective
interest rate on the bonds is 10%.

6. How much is the interest income recognized in 20x1?

a. 419,895 c. 407,273
b. 413,884 d. 480,000

7. How much is the carrying amount of the investment on December 31, 20x1?
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a. 4,198,948 c. 4,072,727
b. 4,138,843 d. 4,000,000

8. On April 1, 20x1, Ronald Ryan Co. acquired 12%, P4,000,000 bonds dated January 1, 20x1 at 98
including interest. The bonds mature on December 31, 20x3 but pays annual interest at each
year-end. How much is the initial carrying amount of the investment?
a. 3,920,000 b. 3,800,000 c. 4,000,000 d. 4,120,000

9. On January 1, 20x1, Mitch Co. acquired 12%, P4,000,000 bonds at 98. Commission paid to
brokers amounted to P204,000. Principal is due on December 31, 20x4 but interest payments are
made annually starting December 31, 20x1.

The adjusted effective interest rate on the investment is closest to

a. 12% b. 11% c. 10.2650% d. indeterminable

Use the following information for the next three questions:

On January 1, 20x1, ABC Co. acquired 10%, ₱1,000,000 bonds for ₱827,135. The bonds mature on
December 31, 20x3 and pay annual interest every December 31. ABC Co. incurred transaction costs
₱80,000 on the acquisition. The effective interest rate adjusted for the effect of the transaction costs is
14%.

The bonds are to be held under a “hold to collect and sell” business model. Information on fair
values is as follows:
December 31, 20x1…………………………….98
December 31, 20x2……………………………102
December 31, 20x3……………………………100

10. How much is the carrying amount of the investment on December 31, 20x1?
a. 935,134 b. 1,002,000 c. 980,000 d. 965,443

11. How much is the unrealized gain (loss) recognized in other comprehensive income on December
31, 20x1?
a. 45,866 b. (45,866) c. (37,899) d. 0

12. How much is the interest income recognized in 20x2?

a. 126,999 c. 135,088
b. 130,779 d. 144,388

“Do nothing out of selfish ambition or vain conceit. Rather, in humility value others above yourselves, not
looking to your own interests but each of you to the interests of the others. In your relationships with one
another, have the same mindset as Christ Jesus.” (Philippians 2:3-5)

- END –

ANSWERS:
1
. B
2 C
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.
3
. D
4
. D
5
. C

6. A (See amortization table below)

7. B (See amortization table below)
Solution:
Date Collections Interest income Amortization Present value

1/1/x1 4,198,948

12/31/x1 480,000 419,895 60,105 4,138,843

8. B (4,000,000 x 98%) – (4,000,000 x 12% x 3/12) = 3,800,000

9. B
Solution:
Acquisition cost (4M x 98%) 3,920,000

Direct cost 204,000

Initial carrying amount 4,124,000

“Trial and error” approach:

Future cash flows x PV factor at x% = Present value
(4M x PV of P1 @ x%, n=4) + (4M x 12% x PV of an ordinary annuity of P1 @ x%, n=4) = 4,124,000

There is premium because the carrying amount is greater than the face amount. Therefore, the effective
interest rate must be lower than the nominal rate of 12%.

First trial: (using 11%)

Future cash flows x PV factor at x% = PV or initial carrying amount
 (4M x PV of P1 @ 11%, n=4) + (4M x 12% x PV of an ordinary annuity of P1 @ 11%, n=4) =
4,124,000
 (4M x 0.658731) + (480,000 x 3.102446) = 4,124,000
 (2,634,924 + 1,489,174) = 4,124,098 approximates 4,124,000 (a difference of only P98)

If the difference of P98 is judged immaterial, then 11% is deemed the effective interest rate.

10. C = 1M x 98%

11. A Solution:

Amortization table
Interest
Date received Interest income Amortization Present value
1/1/x1 907,135
12/31/x1 100,000 126,999 26,999 934,134
12/31/x2 100,000 130,779 30,779 964,913
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12/31/x3 100,000 135,088 35,088 1,000,000

 [(1M x 98%) – 934,134] = 45,866 Unrealized gain – OCI

12. B (See table above)