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Chap 10

The document discusses various topics related to accounting for investments in debt securities measured at amortized cost. It provides examples of calculating interest income, amortization of discounts and premiums, and accounting entries for purchases and sales of bonds. It also discusses the treatment of serial bonds and zero-coupon bonds. The key points are how to record investments in bonds initially, calculate interest income over time, and account for gains and losses on sales before and after interest payment dates.

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Shiela Dimaculangan
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629 views5 pages

Chap 10

The document discusses various topics related to accounting for investments in debt securities measured at amortized cost. It provides examples of calculating interest income, amortization of discounts and premiums, and accounting entries for purchases and sales of bonds. It also discusses the treatment of serial bonds and zero-coupon bonds. The key points are how to record investments in bonds initially, calculate interest income over time, and account for gains and losses on sales before and after interest payment dates.

Uploaded by

Shiela Dimaculangan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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CHAPTER 10 INVESTMENT IN DEBT SECURITIES

PROBLEM 6
1 FINANCIAL ASSETS MEASURED AT AMORTIZED COST - DISCOUNT
REQUIREMENT A:
DATE INTEREST INTEREST AMORTIZATION PRESENT VALUE
RECEIVED INCOME
1/1/20x1 ₱ 941,725.00
1/1/20x2 ₱ 120,000.00 ₱ 131,842.00 ₱ 11,842.00 ₱ 953,567.00
1/1/20x3 ₱ 120,000.00 ₱ 133,499.00 ₱ 13,499.00 ₱ 967,066.00
1/1/20x4 ₱ 120,000.00 ₱ 135,389.00 ₱ 15,389.00 ₱ 982,455.00
1/1/20x5 ₱ 120,000.00 ₱ 137,545.00 ₱ 17,545.00 ₱ 1,000,000.00
REQUIREMENT B:
(1,000,000 - 967,06= 32,934 discount

REQUIREMENT C:
1/1/20x1 Investment in bonds ₱ 941,725.00
Cash ₱ 941,725.00

12/31/20xInterest receivable ₱ 120,000.00


Investment in bonds ₱ 11,842.00
Interest income ₱ 131,842.00

1/1/20x2 Cash ₱ 120,000.00


Interest receivable ₱ 120,000.00

12/31/20x2 Interest receivable ₱ 120,000.00


Investment in bonds ₱ 13,499.00
Interest income ₱ 133,499.00

1/1/20x3 Cash ₱ 120,000.00


Interest receivable ₱ 120,000.00

12/31/20x3 Interest receivable ₱ 120,000.00


Investment in bonds ₱ 15,389.00
Interest income ₱ 135,389.00

1/1/20x4 Cash ₱ 120,000.00


Interest receivable ₱ 120,000.00

12/31/20x4 Interest receivable ₱ 120,000.00


Investment in bonds ₱ 17,545.00
Interest income ₱ 137,545.00
1/1/20x5 Cash ₱ 120,000.00
Interest receivable ₱ 120,000.00

Cash ₱ 1,000,000.00
Investment in bonds ₱ 1,000,000.00

2 FINANCIAL ASSETSS MEASURED AT AMORTIZED COST - PREMIUMS


DATE INTEREST INTEREST AMORTIZATION PRESENT VALUE
RECEIVED INCOME
1/1/20x1 ₱ 1,075,939.00
1/1/20x1 ₱ 120,000.00 ₱ 96,835.00 ₱ 23,165.00 ₱ 1,052,774.00
1/1/20x2 ₱ 120,000.00 ₱ 94,750.00 ₱ 25,250.00 ₱ 1,027,524.00
1/1/20x3 ₱ 120,000.00 ₱ 92,476.00 ₱ 27,524.00 ₱ 1,000,000.00

3 ACQUIRED ASSETS
Mar-31 Investment in bonds ₱ 1,900,000.00
20x1 Interest income ₱ 60,000.00
Cash ₱ 1,960,000.00

4 TRANSACTION COST (ADJUSTMENT TO EFFECTIVE INTEREST RATE)

Purchase price (2M x 95%) 1,900,000


Commission 40,150
Initial carrying amount 1,940,150

Trial and Error:


There is discount. Therefore, the effective interest rate must be higher than the nominal
rate of 12%.

First trial: (using 13%)


Future cash flows x PV factor at x% = Present value
* (2M x PV of P1 @13%, n=4)+(2M x 12% of PV of an ordinary annuity of P1 @13%,n=4) = 1,940,510
* 1,226,637 + 713,873 = 1,940,510
*1,940,510 is equal to 1,940,510

* The effective interest rate is 13%


5 SALE OF BONDS AT INTEREST PAYMENT DATE
DATE INTEREST INTEREST AMORTIZATION PRESENT VALUE
RECEIVED INCOME
1/1/20x1 ₱ 1,940,510.00
12/31/20x1 ₱ 240,000.00 ₱ 252,266.00 ₱ 12,266.00 ₱ 1,952,776.00
12/31/20x2 ₱ 240,000.00 ₱ 253,861.00 ₱ 13,861.00 ₱ 1,966,637.00
12/31/20x3 ₱ 240,000.00 ₱ 255,663.00 ₱ 15,663.00 ₱ 1,982,300.00
12/31/20x4 ₱ 240,000.00 ₱ 257,700.00 ₱ 17,700.00 ₱ 2,000,000.00

Sale price (2M x 92% x 1/2) ₱ 920,000.00


Transaction costs -₱ 46,000.00
Net disposal proceeds ₱ 874,000.00
Carrying amount on date of sale (1,982,300 x 1/2 -₱ 991,150.00
Loss on sale -₱ 117,150.00

Jan-01 Cash (2M x 92% x 1/2) - 46k ₱ 874,000.00


20x4 Loss on sale (squeeze) ₱ 117,150.00
Investment in bonds ₱ 991,150.00

6 SALE OF BONDS IN BETWEEN INTEREST PAYMENT DATES


DATE INTEREST INTEREST AMORTIZATION PRESENT VALUE
RECEIVED INCOME
1/1/20x1 ₱ 1,940,510.00
12/31/20x1 ₱ 240,000.00 ₱ 252,266.00 ₱ 12,266.00 ₱ 1,952,776.00
12/31/20x2 ₱ 240,000.00 ₱ 253,861.00 ₱ 13,861.00 ₱ 1,966,637.00
12/31/20x3 ₱ 240,000.00 ₱ 255,663.00 ₱ 15,663.00 ₱ 1,982,300.00
7/1/20x4 ₱ 120,000.00 ₱ 128,850.00 ₱ 8,850.00 ₱ 1,991,150.00

Sale price including accrued interest (2M x 92%) ₱ 1,840,000.00


Accrued interest -₱ 120,000.00
Sale price excluding accrued interest ₱ 1,720,000.00
Transaction costs -₱ 82,000.00
Net disposal proceeds ₱ 1,638,000.00
Carrying amount on date of sale -₱ 1,991,150.00
Loss on sale -₱ 353,150.00
Jul-01 Interest receivable 120,000
20x4 Investment in bonds at amortized cost 8,850
Interest income ₱ 128,850.00

Jul-01 Cash 1,758,000


10x4 Loss on sale 353,150
Investment in bonds at amortized ₱ 1,991,150.00
Interest receivable ₱ 120,000.00

7 PURCHASE PRICE OF BONDS

FUTURE PV FACTORS PRESENT


CASH FLOWS VALUE
Principal ₱ 2,000,000.00 0.751315 ₱ 1,502,630.00
Interest ₱ 240,000.00 2. 486852 ₱ 596,844.00
Estimated purchase price on Jan. 1, 20x1 ₱ 2,099,474.00

8 SERIAL BONDS
DATE PRINCIPAL + INTEREST ON TOTAL
OUTSTANDING PRINCIPAL BALANCE COLLECTIONS
Dec. 31,20x1 2,000,000 + (6,000,000 x 10%) 2,600,000
Dec. 31,20x2 2,000,000 + (4,000,000 x 10%) 2,400,000
Dec. 31,20x3 2,000,000 + (2,000,000 x 10%) 2,200,000

REQUIREMENT B:
Current portion of serial bonds 1,932,398
Noncurrent portion of serial bonds 1,964,285
TOTAL CARRYING AMOUNT OF SERIAL BONDS - DEC.31,20x1 3,896,683

9 ZERO-COUPON BONDS
DATE INTEREST INCOME UNEARNED PRESENT VALUE
INTEREST OF CASH FLOW
a = b x 16% b = prev. bal. + a
1/1/20x1 IG 5,116,292
12/31/20x1 818,607 N 5,934,899
12/31/20x2 949,584 O 6,884,483
12/31/20x3 1,101,517 RED 7,986,000

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