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Intermediate Accounting Chapter 3 Problems

This document provides accounting information for various debt investments classified and accounted for under different methods: 1) Amortized cost method where interest revenue is recognized semi-annually and investments are recorded at amortized cost. 2) Fair value through profit or loss method where changes in fair value and interest revenue are recognized in profit or loss. 3) Fair value through other comprehensive income method where changes in fair value are recognized in other comprehensive income and interest revenue in profit or loss. Examples of accounting entries for purchases, sales, and interest are shown.

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170 views34 pages

Intermediate Accounting Chapter 3 Problems

This document provides accounting information for various debt investments classified and accounted for under different methods: 1) Amortized cost method where interest revenue is recognized semi-annually and investments are recorded at amortized cost. 2) Fair value through profit or loss method where changes in fair value and interest revenue are recognized in profit or loss. 3) Fair value through other comprehensive income method where changes in fair value are recognized in other comprehensive income and interest revenue in profit or loss. Examples of accounting entries for purchases, sales, and interest are shown.

Uploaded by

Pattranite
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Problem 1

(a)
Stated Rate 5%
Market Rate 4%
Difference in Interest Rates 1%
Face value 5,000,000
PV annuity factor 8.1108957759
Premium 405,544.79

Face value 5,000,000


Add: Premium 405,545
Total bond price 5,405,544.79

(b)
Stated Rate 6%
Market Rate 8%
Difference in Interest Rates 2%
Face value 10,000,000
PV annuity factor 5.7466
Discount 1,149,320.00

Face value 10,000,000


Less: Discount 1,149,320
Total bond price 8,850,680
160,777
* remaining 8 periods nalang so mausob ang PV annuity factor
Problem 3

(a-1) Debt Investments at Amortized Cost

Year 1
Jun-01 Debt Investments at Amortized Cost
Cash

Dec-01 Cash
Debt Investments at Amortized Cost
Interest Revenue

31 Interest Receivable
Debt Investments at Amortized Cost
Interest Revenue
160,000 x 1/6 = 26,667
25,804 x 1/6 = 4,301

Year 2
Jan-01 Interest Revenue
Interest Receivable
Debt Investments at Amortized Cost

Jun-01 Cash
Debt Investments at Amortized Cost
Interest Revenue

Dec-01 Cash
Debt Investments at Amortized Cost
Interest Revenue

31 Interest Receivable
Debt Investments at Amortized Cost
Interest Revenue
160,000 x 1/6 = 26,667
28,449 x 1/6= 4,742

(a-2) Debt Investments at Fair value through profit and loss.

Year 1
Jun-01 Debt Investments at FVPL
Cash

Dec-01 Cash
Interest Revenue (4M x 8% x ½)
31 Interest Receivable
Interest Revenue (4M x 8% x 1/12)

31 Debt Investments at FVPL


Unrealized Gain on Debt Investments at FVPL
4M x .97 = 3,880,000
3,880,000 – 3,691,500 = 188,500

Year 2
Jan-01 Interest Revenue
Interest Receivable

Jun-01 Cash
Interest Revenue

Dec-01 Cash
Interest Revenue

31 Interest Receivable
Interest Revenue

31 Debt Investments at FVPL


Unrealized Gain on Debt Investments at
FVPL
4M x 0.99 = 3,960,000
3,960,000 – 3,880,000 = 80,000

(a-3) Debt Investments at Fair Value Through Other Comprehensive Income

Year 1
Jun-01 Debt Investments at FV through OCI
Cash

Dec-01 Cash
Debt Investments at Fair Value through OCI
Interest Revenue

Dec-31 Interest Receivable


Debt Investments at Fair Value through OCI
Interest Revenue

31 Fair Value Adjustment – Debt Investments at FV through OCI

Unrealized Gain on Debt Investments at


FVPL
Amortized cost
3,716,075 + 4,301 = 3,720,376
3,880,000 – 3,720,376 = 159,624

Year 2
Jan-01 Interest Revenue
Interest Receivable
Debt Investments at FV through OCI

Jun-01 Cash
Debt Investments at Amortized Cost
Interest Revenue (see table)

Dec-01 Cash
Debt Investments at Amortized Cost
Interest Revenue (see table)

31 Interest Receivable
Debt Investments at Amortized Cost
Interest Revenue
160,000 x 1/6 = 26,667
28,449 x 1/6= 4,742

31 Fair Value Adjustment – Debt Investments at FV through OCI

Unrealized Gain on Debt Investments at


FVPL
Amortized cost
3,768,973 + 4,742 = 3,773,715
3,960,000 –3,773,715 =186,285
186,285 – 159,624 = 26,661

(b-1)  Sale of securities at amortized cost

Nov-01 Debt Investments at Amortized Cost


Interest Receivable
Interest Revenue 192,933 x 5/6
32,933 x 5/6 = 27,444

1 Cash
Loss on Sale of Debt Investments at Amortized Cost

Interest Receivable
Debt Investments at Amortized Cost
(b-2) Sale of securities at FV through P/L

Nov. 1 Cash
Loss on Sale of Debt Investments at FVPL
Interest Revenue
Debt Investments at FVPL

(b-3) Sale of securities at FV through OCI

Nov. 1 Debt Investments at FV through OCI (32,933 x 5/6)


Interest Receivable
Interest Revenue (192,933 x 5/6)

1 Unrealized Gains/Losses on Debt Investments at FV through OCI


Fair Value Adjustment – Debt Investments at FV through OCI
3,858,658 + (32,933 x 5/6) = 3,886,102
3,886,102 – 3,791,667 = 94,435
94,435 + 186,285 = 280,720

1 Cash
Fair Value Adjustment-Debt Investments at FV through OCI
Interest Receivable
Debt Investments at FV through OCI

Retained Earnings
Unrealized Gain/Losses on Debt Investments at FV through OCI
(a)
3,691,500
3,691,500

160,000
24,575
184,575

26,667
4,301
30,968

30,968
26,667
4,301

160,000
25,804
185,804

160,000
27,094
187,094

26,667
4,742
31,409

3,691,500
3,691,500

160,000
160,000
26,667
26,667

188,500
188,500

26,667
26,667

160,000
160,000

160,000
160,000

26,667
26,667

80,000

80,000

3,691,500
3,691,500

160,000
24,575
184,575

26,667
4,301
30,968

159,624

159,624
30,968
26,667
4,301

160,000
25,804
185,804

160,000
27,094
187,094

26,667
4,742
31,409

26,661

26,661

27,444
133,333
160,777

3,925,000

94,435
133,333
3,886,102
3,925,000
128,333
133,333
3,920,000

27,444
133,333

280,720
280,720

3,925,000
94,435
133,333
3,886,102

94,435
94,435
*The interest is payable semi-annually

Nominal Interest(4%) * Effective Interest (5%)*


Date
June 1, Year 1
Dec. 1, Year 1 160,000 184,575
June 1, Year 2 160,000 185,804
Dec. 1, Year 2 160,000 187,094
June 1, Year 3 160,000 188,449
Dec. 1, Year 3 160,000 189,871
June 1, Year 4 160,000 191,365
Dec. 1, Year 4 160,000 192,933
Carrying value
As of June 1, Year 4 3,858,658
Amortization June 1 to Nov. 4 27,444
Carrying value of investment sold 3,886,102
Selling price 3,791,667
Loss on sale 94,435
Carrying value 3,920,000
Price 3,925,000
Accrued Interest = 4M x 8% x 5/12 133,333
Selling price 3,791,667
Loss on sale 128,333
Amortization Amortized Cost
of Discount
3,691,500
24,575 3,716,075
25,804 3,741,879
27,094 3,768,973
28,449 3,797,422
29,871 3,827,293
31,365 3,858,658
32,933 3,891,591
Problem 5
2020
Apr-01 Debt Investments – FVPL – Peach Co. Bonds 1,010,000
Cash 1,010,000

Jul-01 Debt Investments – FVPL – Buttercup Bonds 150,000


Interest Receivable (150,000 x 12% x 4/12) 6,000
Cash 156,000

Oct-01 Cash 50,000


Interest Income (1,000,000 x 10% x 6/12) 50,000

Dec-31 Interest Receivable 34,000


Interest Income 34,000
1M x 10% x 3/12 = 25,000
150,000 x 12% x 6/12 = 9,000
25,000 + 9,000 = 34,000

31 Unrealized Loss on Investments at FVPL 17,000


Debt Investments – FVPL - Buttercup Bonds 3,000
Debt Investments – FVPL - Peach Bonds 20,000
Cost Fair value Unrealized Gains/Losses
Peach 10% Bonds 1,010,000 990,000 -20,000
Buttercup 12% Bonds 150,000 153,000 3,000
1,160,000 1,143,000 -17,000
zed Gains/Losses
Problem 6

Year 1
Jan. 1 Debt Investments at Amortized Cost – Wolf Bonds 108,660
Cash

Dec. 31 Cash 7,000


Debt Investments at Amortized Cost – Wolf Bonds
Interest Income

Year 2
Dec. 31 Cash 7,000
Debt Investments at Amortized Cost – Wolf Bonds
Interest Income

Year 3
Dec. 31 Cash 7,000
Debt Investments at Amortized Cost – Wolf Bonds
Interest Income

31 Impairment Loss on Debt Investments 3,153


Allowance for Impairment Loss 1,500
Debt Investments at Amortized Cost – Wolf Bonds

Year 4
Dec. 31 Cash 4,500
Debt Investments at Amortized Cost – Wolf Bonds 453
Interest Income

Year 5
Dec. 31 Cash 4,500
Debt Investments at Amortized Cost – Wolf Bonds 480
Interest Income
Date

108,660 Jan. 1, Year 1


Dec. 31, Year 1
Dec. 31, Year 2
1,567 Dec. 31, Year 3
5,433 Dec. 31, Year 4
Dec. 31, Year 5

1,645
5,355

1,728
5,272

Carrying value, Dec. 31, Year 3


Present value of future cash inflows
4,653 100,000 x 0.9070
4,500 x 1.8594
Impairment Loss

Date
4,953

Dec. 31, Year 3


Dec. 31, Year 4
Dec. 31, Year 5
4,980
Nominal Interest Effective Interest Premium Amortized Cost
Amortization
108,660
7,000 5,433 1,567 107,093
7,000 5,355 1,645 105,448
7,000 5,272 1,728 103,720
7,000 5,186 1,814 101,906
7,000 5,094 1,906 100,000

103,720
re cash inflows
70 90,700
8,367 99,067
4,653

Nominal Interest Effective Interest Discount Amortized Cost


Amortization

99,067
4,500 4,953 453 99,520
4,500 4,980 480 100,000
Problem 7

2020
Jun-01 Debt Investments at Amortized Cost- Blessie Co. 5,353,150
Interest Revenue (5M x 12% x 5/12) 250,000
Cash 5,603,150

Dec-31 Cash 600,000


Interest Revenue 562,267
Debt Investments at Amortized Cost- Blessie Co. 37,733

2021
Dec-31 Cash 600,000
Interest Revenue 531,542
Debt Investments at Amortized Cost - Blessie Co. 68,458

2022
Dec-31 Cash 600,000
Interest Revenue 524,696
Debt Investments at Amortized Cost (Blessie) 75,304

2023
Sep-01 Interest Receivable (3M x 12% x 8/12) 240,000
Debt Investments at Amortized Cost- Blessie Co. 33,134
Interest Revenue (517,166 x 3/5 x 8/12) 206,866

1 Cash (3,090,000 + 240,000) 3,330,000


Gain on Sale of Debt Investments
Interest Receivable
Debt Investments at Amortized Cost- Blessie Co.

Dec-31 Cash 240,000


Interest Receivable 206,866
Debt Investments at Amortized Cost- Blessie Co. 33,134
2M x 12% = 240,000
517,166 x 2/5 = 206,866
82,834 x 2/5 = 33,134
Date Nominal Interest Effective Interest Discount
Amortization
June 1, 2020
Dec. 31, 2020 350,000 312,267 37,733
Dec. 31, 2021 600,000 531,542 68,458
Dec. 31, 2022 600,000 524,696 75,304
Dec. 31, 2023 600,000 517,166 82,834

Carrying value of investment sold:


As of 12/31/19 (5,171,655 x 3/5)
Amortization from 1/1/20-9/1/20
20,141 Carrying value as of 9/1/20
240,000 Selling price
3,069,859 Gain on sale
Carrying Value

5,353,150
5,315,417
5,246,959
5,171,655
5,088,821

3,102,993
33,134
3,069,859.00
3,090,000.00
20,141.00
Problem 8

Date Nominal Interest(12%) Effective Interest (10%) Premium Amortized cost


Amortization
1/1/Year 1 1,063,394
12/31/Year 1 120,000 106,339 13,661 1,049,733
12/31/Year 2 120,000 104,973 15,027 1,034,706
12/31/Year 3 120,000 103,471 16,529 1,018,177

(a) Market value, 12/31/ Year 2 (1.06 x 1M)


Amortized cost, 12/31/Year 2
Unrealized Gain on 12/31 Year 2

(b) Interest income for Year 2

(c) Market value, 12/31/Year 3 (1.04 x 400,000)


Amortized cost (1,018,177 x 4/10)
Unrealized Gain on 12/31/Year 3
1,060,000
1,034,706
25,394

104,973

416,000
407,271
8,729
Problem 10

Date Nominal Interest Effective Interest Premium


Amortization
Jan. 2, Year 1
Dec. 31, Year 1 6,000 5,217 783
Dec. 31, Year 2 6,000 5,177 823
Dec. 31, Year 3 6,000 5,136 863
Dec. 31, Year 4 6,000 5,093 907
Dec. 31, Year 5 6,000 5,044 954

(b) PV of modified cash flow


Present value of new principal (90% x 100,000 = 90,000)
90,000 x 0.9070
Present value of reduced interest (6% x 90,000 = 5,400)
5,400 x 1.8594
Total

(c)
Carrying value of bond investment, Dec. 31, Year 3 101,861
Present value based on modified terms 91,671
Impairment loss 10,190

(d)
Date Nominal Interest Effective Interest Premium
Amortization
Dec. 31, Year 3
Dec. 31, Year 4 5,400 4,584 816
Dec. 31, Year 5 5,400 4,542 855
Amortized Cost

104,330
103,547
102,724
101,861
100,954
100,000

81,630

10,041
91,671

Impairment Loss 10,190


Debt Investments at Fair Value Through OCI 10,190

Amortized Cost

91,671 Interest Revenue, Year 4 4,584


90,855 Interest Revenue, Year 5 4,542
90,000
Problem 11

1 B and C 6 B and C 11 C
2A 7A 12 B and C
3 B and C 8A 13 A
4A 9 B and C 14 A
5 B and C 10 B and C 15 B
Problem 12

1.             Building Construction Fund Cash


Cash

2.             Building Expansion Fund Securities


Building Expansion Fund Cash

3.             Building Expansion Fund Securities


Interest Receivable – Building Expansion Fund
Building Expansion Fund Cash

4.             Building Expansion Fund Cash


Dividend Income

5.             Building Expansion Fund Expenses


Building Expansion Fund Cash

6.             Building Expansion Fund Cash


Interest Receivable – Building Expansion Fund
Interest Income

7.             Building Expansion Fund Securities


Building Expansion Fund Cash

8.             Building Expansion Fund Cash


Building Expansion Fund Securities
Gain on Sale of Building Expansion Fund Securities
Interest Income

9.             Building Expansion Fund Cash


Dividend Income

10.          Building Expansion Fund Cash


Building Expansion Fund Securities
Gain on Sale of Building Expansion Fund Securities

11.          Buildings
Building Expansion Fund Cash

12.          Cash
Building Expansion Fund Cash
Problem 13

(a) Amount required 15,000,000


FV of ordinary annuity of 1 at 4% 29.7781
Required semiannual deposit 503,725.89

(b)
2020
Jun-30 Bond Sinking Fund Cash 503,726
Cash 503,726

Dec-31 Bond Sinking Fund Cash 523,875


Cash 503,726
Interest Revenue (503,726 * 4%) 20,149
Problem 14

2020
Jul-01 Prepaid Life Insurance 120,000
Cash 120,000

Dec-31 Life Insurance Expense 60,000


Prepaid Life Insurance 60,000

2021
Jul-01 Prepaid Life Insurance 120,000
Cash 120,000

Dec-31 Life Insurance Expense 120,000


Prepaid Life Insurance 120,000

2022
Jul-01 Prepaid Life Insurance 120,000
Cash 120,000

Dec-31 Life Insurance Expense 120,000


Prepaid Life Insurance 120,000

2023
Jul-01 Prepaid Life Insurance 120,000
Cash 120,000

Dec-31 Life Insurance Expense 120,000


Prepaid Life Insurance 120,000

Cash Surrender Value 36,000


Life Insurance Expense 36,000

2024
Jul-01 Prepaid Life Insurance 120,000
Cash 120,000

Dec-31 Life Insurance Expense 120,000


Prepaid Life Insurance 120,000

Cash Surrender Value 13,000


Life Insurance Expense 13,000

2025 Life Insurance Expense 30,000


Prepaid Life Insurance 30,000
Receivable from Insurance Company 4,000,000
Prepaid Life Insurance 30,000
Cash Surrender Value 49,000
Gain on Insurance Settlement 3,921,000

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