Financial Accounting and Reporting: INVESTMENT IN DEBT SECURITIES

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INVESTMENT IN DEBT SECURITIES

PROBLEM 1 Initial recognition

Compute for the total amount paid to purchase the bonds under the following independent situations: (Round of
present value factors to four decimal places)
Scenario 1 Scenario 2
Face value P 1,000,000 Face value P 1,000,000
Date of bonds January 1, 2017 Date of bonds January 1, 2017
Acquisition date January 1, 2017 Acquisition date January 1, 2017
Nominal rate 10% Nominal rate 12%
Effective rate 12% Effective rate 10%
Interest payment date January 1 Interest payment date January 1 and July 1
Date of maturity January 1, 2020 Date of maturity January 1, 2020

Scenario 3 Scenario 4
Face value P 1,000,000 Face value P 3,000,000
Date of bonds January 1, 2017 Date of bonds January 1, 2017
Acquisition date March 1, 2017 Acquisition date January 1, 2017
Nominal rate 10% Nominal rate 12%
Effective rate 12% Effective rate 10%
Interest payment date January 1 and July 1 Interest payment date January 1 and July 1
Date of maturity January 1, 2020 Date of maturity P1,000,000 annually
Starting 12/31/2017
PROBLEM 2 Subsequent reporting
On January 1, 2018, AAA Company purchased P1,000,000 8% bonds for P924,164 (including broker’s commission of

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P50,000). Interest is payable annually every December 31. The bonds mature on December 31, 2022.
Quoted price of the bonds as of the dates indicated follows:

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December 31, 2018 98.00eH w December 31, 2020 98.50
December 31, 2019 99.00 December 31, 2021 99.50

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REQUIRED:
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1. Provide the necessary journal entries for 2018 under the following assumptions (round of present value factors to
four decimal places):
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a. The business model of the AAA Company in managing the investment is to hold the asset in order to collect
contractual cash flows.
b. The business model of the AAA Company in managing the investment is to short-term gains through fair value
changes.
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c. The business model of the AAA Company in managing the investment is to hold the asset in order to collect
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contractual cash flows and to sell the assets.

2. Compute for the carrying amount of the investment in bonds as of December 31, 2018 using the above three
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assumptions:
3. Assuming the bonds were sold on December 31, 2019 at 99, prepare the journal entry to record the sale using the
above three assumptions
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PROBLEM 3 Held for Trading

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On January 1, 2018, NCPAR Co acquired a 3-year bonds with a face value of P3,000,000 for P2,855,940. The bonds
carry an interest of 10% per year payable every December 31. The bonds are to be appropriate classified as held for
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trading. On December 31, 2018, the bonds are quoted at 103. On January 3, 2019, the bonds were sold at 104.
1. How much is the interest income for 2018?
A. 114,104 B. 300,000 C. 342,713 D. 353,579
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Interest ; 3,000,000 x 10% = 300,000

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2. How much is the unrealized gain (loss) in 2018 to be recognized in the profit or loss?
A. P0 B. 30,000 C. 191,347 D. 234,060
December 31, 2018 (3,000,000 x 1.03) = 3,090,000
Cost 2,855,940
------------
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Unrealized Gain (Loss) 234,060

=======
3. How much is the realized gain (loss) on sale in 2019 to be recognized in the profit or loss?
A. P0 B. 30,000 C. 234,060 D. 264,060
January 1, 2019 (3,000,000 x 1.04) 3,120,000
December 31, 2018 3,090,000
------------
Realized gain(loss) 30,000
=======

PROBLEM 4 Financial asset at amortized cost (Term bonds on interest date)

On January 1, 2017, AAA Co acquired a 4-year bonds with a face value of P1,200,000 and stated interest of 10% per
year payable annually on December 31. The bonds were acquired to yield 12%. The bonds are to be appropriate
classified as financial asset at amortized cost (round of present value factors into four decimal places).
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 Financial Accounting and Reporting: INVESTMENT IN DEBT SECURITIES
1. How much is the purchase price of bonds on January 1, 2017?
A. 1,051,730 B. 1,127,076 C. P1,200,000 D. P1,277,076
2. How much is the interest income for 2017?
A. P120,000 B. 126,208 C. P135,249 D. P144,000

SOLUTION:
Present value of principal (P1,200,000x0.6355) P 762,600
Present value of interest payments (P120,000x3.0373) 364,476
Present value of investment in bonds P 1,127,076
Date Collection Interest Amortization PV/CV
1/1/2017 1,127,076
12/31/2017 120,000 135,249.12 15,249 1,142,325
12/31/2018 120,000 137,079.01 17,079 1,159,404
12/31/2019 120,000 139,128.50 19,128 1,178,533
12/31/2020 120,000 141,423.92 21,424 1,199,957
PROBLEM 5 Financial asset at amortized cost (Term bonds in between interest date)
On April 1, 2017, NCPAR Co acquired a 4-year bonds dated January 1, 2017 with a face value of P2,000,000 and stated
interest of 8% per year payable annually on December 31. The bonds were acquired to yield 10%. The bonds are to be
appropriate classified as financial asset at amortized cost (round of present value factors into four decimal places).
1. How much is the total purchase price of the bonds on April 1, 2017?
A. P2,000,000 B. P1,880,014 C. P1,873,184 D. P1,844,464
2. How much is the interest income for 2017?
A. P187,318 B. P160,000 D. P140,489 D. P120,000
SOLUTION:
Present value of principal (P2,000,000x0.6830) P 1,366,000

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Present value of interest payments (P160,000x3.1699) 507,184

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Present value of investment in bonds, 01/01/2017 P 1,873,184

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Present value of investment in bonds, 01/01/2017 P 1,873,184
Amortization up to 04/01/2017 (P27,318 x 3/12) eH w
Present value of investment in bonds, 01/01/2017
6,830
P 1,880,014

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Date Collection Interest Amortization PV/CV
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1/1/2017 1,873,184
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12/31/2017 160,000 187,318.40 27,318 1,900,502

12/31/2018 160,000 190,050.24 30,050 1,930,553
12/31/2019 160,000 193,055.26 33,055 1,963,608
12/31/2020 160,000 196,360.79 36,361 1,999,969
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Interest income (187,318.40 x 9/12) = P140,489

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PROBLEM 6 Financial asset at amortized cost (Serial bonds)

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On January 1, 2017, NCPAR Co acquired a 5-year bonds with a face value of P2,000,000 and stated interest of 10% per
year. The bonds mature in five equal annual installments every December 31. The interest is also payable every
December 31. The bonds were acquired to yield 12%. The bonds are to be appropriate classified as financial asset at
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amortized cost (round of present value factors into four decimal places).
1. How much is the purchase price of bonds on January 1, 2017?
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A. P2,100,500 B. P2,000,000 C. P1,907,004 D. P1,856,874

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2. How much is the carrying amount of the bonds for 2020?

A. P779,363 B. P697,357 C. 400,000 D. P392,887

SOLUTION:
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PV Principal Interest Total coll Total PV

factor
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0.8929 400,000 200,000 600,000 535,740

0.7972 400,000 160,000 560,000 446,432
0.7118 400,000 120,000 520,000 370,136
0.6355 400,000 80,000 480,000 305,040
0.5674 400,000 40,000 440,000 249,656
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Total PV 2,000,000 1,907,004

Date Collection Interest Amortization PV/CV

1/1/2017 1,907,004
12/31/2017 600,000 228,840 (371,160) 1,535,844
12/31/2018 560,000 184,301 (375,699) 1,160,146
12/31/2019 520,000 139,217 (380,783) 779,363
12/31/2020 480,000 93,524 (386,476) 392,887
12/31/2021 440,000 47,146 (392,854) 33

PROBLEM 7 Reclassification from financial assets at amortized cost to held for trading
On January 1, 20Y1, NCPAR Co acquired a 3-year bonds with a face value of P3,000,000 for P2,855,940. The bonds
carry an interest of 10% per year payable every December 31. The bonds were acquired to yield 12%. The bonds are
to be appropriate classified as financial asset at amortized cost.
On July 1, 20Y1, NCPAR Co. changed its business model. It was determined that the investment in bonds at amortized
cost should be reclassified to held for trading securities on reclassification date. On January 1, 20Y2, the bonds were
quoted at 104.
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 Financial Accounting and Reporting: INVESTMENT IN DEBT SECURITIES
1. How much is the interest income for 20Y1?
A. P114,104 B. P300,000 C. P342,713 D. P353,579
2. How much is the gain (loss) on reclassification on January 1, 20Y2?
A. P0 B. P120,000 C. P221,347 D. P242,704
SOLUTION:
Question No. 2
Fair value of the bonds, reclass 3,120,
date 000
less carrying value, reclass date 2,898,
653
Gain on reclassification 221,
347
PROBLEM 8 Reclassification from held for trading to Financial Assets at amortized cost
On January 1, 20Y1, NCPAR Co acquired a 3-year bonds with a face value of P3,000,000 for P2,855,940. The bonds
carry an interest of 10% per year payable every December 31.
The bonds are to be appropriate classified as held for trading. On December 31, 20X1, the bonds are quoted at 103.
On July 1, 20Y1, NCPAR Co. changed its business model. It was determined that the investment in bonds at amortized
cost should be reclassified to financial asset measured at amortized cost on reclassification date. On January 1, 20Y2,
the bonds were quoted at 104.
1. How much is the interest income for 20Y1?
A. P114,104 B. P300,000 C. P342,713 D. P353,579
2. How much is the gain (loss) on reclassification on January 1, 20Y2?
A. P0 B. P30,000 C. P221,347 D. P242,704
SOLUTION:

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Question No. 2

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Fair value of the bonds, reclass 3,120,

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date 000
less carrying value, reclass date
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000
3,090,

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Gain on reclassification 30,
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000
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PROBLEM 9 Impairment of financial asset at amortized cost

On January 1, 20Y1, NCPAR Co acquired a 4-year bonds with a face value of P4,000,000 for P3,756,920. The stated
interest is 10% per year payable annually on December 31.The bonds were acquired to yield 12%. The bonds are to be
appropriate classified as financial asset at amortized cost.
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On December 31, 20Y2, after receiving the interest, the issuer of the financial instrument is in financial difficulties and
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it becomes probable that an impairment loss should be recognized. The company assesses that only the principal
amount will be received on the maturity date. The present value of the future cash flows based on 14% is P3,078,000
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while the present of expected cash flows for the remaining period using 12% is P3,188,800.
1. How much is the impairment loss in 20Y2?
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A. P0 B. P110,800 C. P675,880 D. P786,680

2. How much is the interest income for 20Y3?
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A. P382,656 B. P421,070 C. 430,920 D. 471,599

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SOLUTION:
Present value of Principal (4000000 X 3,188,8
0.7972 ) 00
PV of interest payments (0 X 2 X
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0.7972 ) -
Present value of the investment bonds 3,188,8
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00

Carrying amount of the investment 3,864,6

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less Present value of expected cash 3,188,8

flows 00
Impairment loss 675,8
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Amortization Table
Date Coll Int. Income Amort PV
12/31/20Y2 3,1
88,800
12/31/20Y3 38 (382,6 3,5
- 2,656 56) 71,456

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 Financial Accounting and Reporting: INVESTMENT IN DEBT SECURITIES
PROBLEM 10 Reversal of impairment on financial asset at amortized cost
On January 1, 20Y1, NCPAR Co acquired a 4-year bonds with a face value of P5,000,000 for P4,696,150. The stated
interest is 10% per year payable annually on December 31.The bonds were acquired to yield 12%. The bonds are to be
appropriate classified as financial asset at amortized cost.
On December 31, 20Y2, after receiving the interest, the issuer of the financial instrument is in financial difficulties and
it becomes probable that an impairment loss should be recognized. The company assesses that only the principal
amount will be received on the maturity date. The present value of the future cash flows based on 14% is
P3,847,500 while the present of expected cash flows for the remaining period using 12% is P3,986,000. Impairment
loss of P844,851 was appropriately recognized by the company.
On December 31 20Y3, the financial condition of the borrower has improved and that it can pay its unpaid obligation
including principal and interest at maturity. The prevailing rate of interest on this date is 11%. The present value of
expected cash flows based on this rate is P4,617,000. The present of expected cash flows for the remaining period
using 12% is P 5,357,400.
1. How much is the gain on reversal of impairment loss to be recognized in the profit or loss in 20Y3?
A. P230,850 B. P318,880 C. P446,201 D. P524,371
Present value of Principal (5000000 X 4,464,5
0.8929 ) 00
PV of interest payments (500000 X 2 X 892,9
0.8929 ) 00
Present value of the investment bonds 5,357,4
00
Present value expected cash flows, 5,357,4
date of reversal 00
less would have been PV-No 4,910,5
impairment 21
Lower 4,910,5

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21

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less actual amortized cost 4,464,3
20

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Gain on reversal of impairment eH w 446,2
01

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MULTIPLE CHOICES PROBLEMS
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Use the following information for the next two questions
On April 1, 2013, San Mig Company purchased as a short-term investment a P1,000,000 face value 8% bond for
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P905,000 including accrued interest. San Mig’s business model is to hold the asset for trading. The commission to
acquire the bonds was P5,000. The bonds are dated January 1, 2013 and mature on January 1, 2018, and pay interest
semi-annually on January 1 and July 1. On December 31, 2013, the bonds had a market value of P920,000. On April 1,
2014, Purefoods sold the bonds for a total consideration of P950,000.
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1. What amount should San Mig report as unrealized gain in its 2013 income statement?
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a. P35,000 b. P30,000 c. P15,000 d. P0

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2. How much is the gain from the sale of short-term investment in debt securities on April 1, 2014?
a. P10,000 b. P30,000 c. P45,000 d. P65,000
Use the following information for the next two questions
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On January 1, 2013, Nestle Corporation purchased P1,000,000 10% bonds for P1,051,510 (including broker’s
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commission of P20,000). Interest is payable annually every December 31. The bonds mature on December 31, 2015.
Nestle’s business model is to hold the asset in order to collect contractual cash flows. The bonds were selling at 103
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on December 31, 2013. On December 31, 2014, Alaska sold the bonds at 105. (Round of present value factors to four
decimal places)
3. How much should be recognized as component of equity as of December 31, 2013 related to the bond investment?
a. P21,510 b. P8,130 c. P5,631 d. P0
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4. How much is the gain on sale of bonds on December 31, 2014?

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a. P31,519 b. P20,000 c. P14,369 d. P2,850

Use the following information for the next two questions.
Ramses Company purchased investment in bonds on January 1, 2012. At this date, the cost and fair value is
P1,000,000. Nestle’s business model is to hold the asset in order to collect contractual cash flows. On December 31,
2012 the bonds were selling at 90. Because of the significant financial difficulty of the issuer, the bonds are
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considered impaired on December 31, 2013 when the bonds are quoted at 70. On December 31, 2014, the bonds are
quoted at 95. The increase in the fair value of the bonds on December 31, 2014 is due to the improvement of the
issuer’s credit rating.
5. How much should be recognized in profit or loss in 2013 as a result of the fair value changes?
a. P300,000 b. P200,000 c. P100,000 d. P0
6. How much should be recognized in profit or loss in 2014 as a result of the fair value changes?
a. P250,000 b. P200,000 c. P100,000 d. P0

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 Financial Accounting and Reporting: INVESTMENT IN DEBT SECURITIES
7. On April 1, 2013, Kopi, Inc. purchased P2,000,000 face value, 9%, Treasury Notes for P1,985,000, including accrued
interest of P45,000. The notes mature on July 1, 2014, and pay interest semiannually on January 1 and July 1. Kopi
uses the straight-line method of amortization. The notes were sold on December 1, 2013 for P2,065,000 including
accrued interest of P75,000. If Kopi’s business model is to hold the asset to collect contractual cash flows, the
carrying amount of this investment in the company’s October 31, 2013 statement of financial position should be
a. P1,985,000 b. P1,976,000 c. P1,968,000 d. P1,964,000
8. Nescafe Company purchased bonds at a discount of P5,000,000. Subsequently, Cabagan sold these bonds at a
premium of P2,000,000. During the period that Nescafe held this investment, amortization of the discount
amounted to P1,500,000. What amount should Cabagan report as gain on the sale of the bonds?
a. P2,000,000 b. P3,000,000 c. P3,500,000 d. P5,500,000

Use the following information for the next two questions

On January 1, 2012, Great Taste Corporation purchased P1,000,000 10% bonds designated to be measured at amortize
cost, since the business model of the Company is to hold the asset to collect contractual cash flows. The bonds were
purchased to yield 12%. Interest is payable annually every December 31. The bonds mature on December 31, 2016.
On December 31, 2012 the bonds were selling at 99. On December 31, 2013, Great Taste sold P500,000 face value
bonds at 101. The bonds were selling at 103 on December 31, 2013. (Round of present value factors to four decimal
places
9. How much is the realized gain on sale of the investment in bonds in 2013?
a. P41,060 b. P35,387 c. P29,034 d. P10,000
10. How much should be reported as component of equity on December 31, 2014?
a. P39,034 b. P31,917 c. P29,034 d. P0
SELF-TEST QUIZZER
1. On August 1, 2013, Dasol Co. acquired 80, P1,000, 9% bonds at 97 plus accrued interest. The bonds were dated
May 1, 2013, and mature on April 30, 2017, with interest paid each October 31 and April 30. The bonds will be
added to Dasol’s held for trading portfolio. The preferred entry to record the purchase of the bonds on August 1,
2009 is

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a. Trading securities P 79,400

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Cash P 79,400
b. Trading securities P 77,600

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Interest Receivable eH w 1,800
Cash P 79,400
c. Trading securities P 77,600

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Interest Revenue 1,800
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Cash P 79,400
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d. Trading securities P 80,000

Interest Revenue 1,800
Discount on Debt Securities P 2,400
Cash 79,400
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Use the following information for the next two questions

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On January 1, 2013, Chosen One Corporation purchased P4,000,000 10% bonds for P3,711,520. Chosen One’s
business model is to hold the bonds to collect contractual cash flows. The bonds were purchased to yield 12%. Interest
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is payable annually every December 31. The bonds mature on December 31, 2017. On December 31, 2013 the bonds
were selling at 99. On December 31, 2014, Chosen One sold P2,000,000 face value bonds at 101, which is the fair
value of the bonds on that date, plus accrued interest.
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2. The unrealized gain to be recognized in profit or loss on December 31, 2013 is

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a. P248,480 b. P203,098 c. P152,270 d. P0

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3. The gain on sale of the bonds on December 31, 2014 is

a. P217,684 b. P141,549 c. P116,135 d. P 14,586
4. On January 1, 2013, Joseph Corporation purchased P1,000,000 10% bonds for P927,880 (including broker’s
commission of P20,000). Joseph’s business model is to hold the investment to collect contractual cash flows. The
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bonds were purchased to yield 12%. Interest is payable annually every December 31. The bonds mature on
December 31, 2017. On December 31, 2013 the bonds were selling at 99. How much is the carrying amount the
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investment in bonds on December 31, 2013?

a. P916,534 b. P939,226 c. P961,626 d. P990,000
5. On June 30, 2013, Aileen Corp. purchased a two-year bond at par. The bond had a stated principal amount of
P10,000,000, which Aileen Corp. will receive on June 30, 2015. The stated coupon interest rate was 10% per year,
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which is paid semiannually on December 31 and June 30. The bonds are designated as financial asset at fair value
through profit or loss. On December 31, 2013, the bonds are quoted at 101.1. How much should be recognized in
profit or loss as of December 31, 2009 related to this bond investment?
a. P167,468 b. P110,000 c. P78,567 d. P0
6. On January 1, 2013, SMB Company acquired the entire issue of Beerman’s P6,000,000 12% serial bonds. The
bonds were purchased to yield 10%. Bonds of P2,000,000 mature at annual intervals beginning December 31,
2013. Interest is payable annually on December 31. What is the carrying amount of the investment in bonds on
December 31, 2013?
a. P6,105,650 b. P4,304,622 c. P4,105,650 d. P3,820,702

“You may not be there yet, but you’re closer that you were yesterday.”
b.
END OF HANDOUTS

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