Sol. Man. Chapter 10 Investments in Debt Securities Ia Part 1a 2020 Edition
Sol. Man. Chapter 10 Investments in Debt Securities Ia Part 1a 2020 Edition
Sol. Man. Chapter 10 Investments in Debt Securities Ia Part 1a 2020 Edition
Chapter 10
Investments in Debt Securities
PROBLEM 1: TRUE OR FALSE
1. FALSE – fair value plus transaction costs
2. FALSE
3. TRUE
4. TRUE
5. FALSE – higher because there is discount
6. FALSE - increases
7. TRUE
8. FALSE – same amount of interest income
9. FALSE – Interest income on debt-type FVOCI assets is
calculated using the effective interest method.
10. TRUE – 100 sale price – 80 amortized cost = 20 gain
4. A
5. A
6. C
7. A
8. C
9. D
10. A – The investment was acquired at a discount because the
initial carrying amount is less than the face amount (₱86,580 <
₱100,000) and the effective interest rate is higher than the
nominal rate (i.e., 8% > 6%). Therefore, the amortization
increases the carrying amount of the investment each year.
Page |2
PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a): Amortization table
Interest Interest
Date Amortization Present value
received income
1/1/
1,060,747
x1
1/1/
140,000 127,290 12,710 1,048,037
x2
1/1/
140,000 125,764 14,236 1,033,801
x3
1/1/
140,000 124,056 15,944 1,017,857
x4
1/1/
140,000 122,143 17,857 1,000,000
x5
12/31/x1
Interest receivable 140,000
Investment in bonds 12,710
Interest income 127,290
1/1/x2
Cash 140,000
Interest receivable 140,000
12/31/x2
Interest receivable 140,000
Investment in bonds 14,236
Interest income 125,764
1/1/x3
Cash 140,000
Interest receivable 140,000
12/31/x3
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1/1/x4
Cash 140,000
Interest receivable 140,000
12/31/x4
Interest receivable 140,000
Investment in bonds 17,857
Interest income 122,143
1/1/x5
Cash 140,000
Interest receivable 140,000
Cash 1,000,000
Investment in bonds 1,000,000
1/1/
1,060,747
x1
1/1/
140,000 127,290 12,710 1,048,037
x2
1/1/
140,000 125,764 14,236 1,033,801
x3
7/1/
70,000 62,028 7,972 1,025,829
x3
2. Solutions:
Requirement (a): Amortization table
Interest Interest
Date Amortization Present value
received income
1/1/x1 1,937,950
12/31/x1 200,000 213,175 13,175 1,951,125
12/31/x2 200,000 214,624 14,624 1,965,749
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12/31/x1
Cash 200,000
Investment in bonds 13,175
Interest income 213,175
12/31/x2
Cash 200,000
Investment in bonds 14,624
Interest income 214,624
12/31/x3
Cash 200,000
Investment in bonds 16,232
Interest income 216,232
12/31/x4
Cash 200,000
Investment in bonds 18,019
Interest income 218,019
12/31/x4
Cash 2,000,000
Investment in bonds 2,000,000
1,080,00
Sale price including accrued interest (2M x 1/2 x 108%) 0
Accrued interest (100,000 x 1/2) (50,000)
1,030,00
Sale price excluding accrued interest 0
Transaction costs (20,000)
1,010,00
Total 0
(986,933
Carrying amount on date of sale (1,973,865 x 1/2) )
Gain on sale 23,067
3. Solution:
April Investment in bonds (2M x 98%) 1,960,000
1, Interest income (2M x 12% x 3/12) 60,000
20x1
Cash (2M x 98% + 60K) 2,020,000
4. Solutions:
5. Solutions:
12/31/x1
Interest receivable 10,000
Investment in bonds (squeeze) 1,369
Interest income 11,369
12/31/x2
Interest receivable 11,000
Investment in bonds (squeeze) 1,733
Interest income 12,733
12/31/x3
Interest receivable [(100K + 10K + 11K) x 10%] 12,100
Investment in bonds (squeeze) 2,161
Interest income 14,261
12/31/x3
Cash 133,100
Interest receivable 33,100
Investment in bonds 100,000
6. Solution:
Initial measurement:
1/1x1
Investment in bonds - FVOCI 907,135
P a g e | 10
Cash 907,135
Subsequent measurement:
Interest Interest Amortizatio
Date received income n 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
12/31/
x3 100,000 135,087 35,087 1,000,000
12/31/x1
Cash 100,000
Investment in bonds - FVOCI 26,999
Interest income 126,999
12/31/x2
Cash 100,000
Investment in bonds - FVOCI 30,779
Interest income 130,779
Sale:
P a g e | 11
1/1/x3
Unrealized gain (loss) – OCI [1M x (101% - 102%)] 10,000
Investment in bonds – FVOCI 10,000
2. A
Solution:
P a g e | 12
Interest
Date Interest income Amortization Present value
received
1/1/x1 453,567*
12/31/
50,000 63,499 13,499 467,066
x1
12/31/
50,000 65,389 15,389 482,455
x2
12/31/
50,000 67,545 17,545 500,000
x3
3. B
Solution:
Interest income in 20x2 = 65,389 (see table above)
Carrying amount on 12/31/20x2 = (100 x ₱5,000 x 102%) = 510,000
4. B
Solution:
Net proceeds [(100 x 5,000 x 102%) – 15K] 495,000
Amortized cost – 1/1/x3 (see table above) 482,455
Gain on sale /Reclassification adjustment – 1/3/x3 12,545
6. A
Solution:
Interest receivable
beg. 38,000
Interest revenue 160,500 152,000 Collection of interest
46,500 end.
P a g e | 13
7. D
Solution:
Initial measurement:
[487,656 + (500,000 x 5%)] = 512,656
Interest
Date Interest income Amortization Present value
received
1/1/x1 512,656
12/31/
50,000 46,139 3,861 508,795
x1
12/31/
x2
50,000 45,792 4,208 504,587
12/31/
50,000 45,413 4,587 500,000
x3
9. C
Solution:
Fair value - 12/31/x2 (.5M x 104%) 520,000
Amortized cost - 12/31/x2 (see table above) 504,587
Cumulative balance of gain in equity – 12/31/x2 15,413
Cumulative balance of gain in equity – 12/31/x1(1) 1,205
Unrealized gain - OCI (20x2) 14,208
(1)
[(.5M x 102%) - 508,795] = 1,205 gain
10. A
Solution:
Interest
Date Interest income Amortization Present value
received
1/1/x1 512,656
12/31/
50,000 46,139 3,861 508,795
x1
12/31/
50,000 45,792 4,208 504,587
x2
7/1/x3 25,000 22,706 2,294 502,293
11. A
Solution:
P a g e | 15
Interest
Date Interest income Amortization Present value
received
1/1/x1 4,639,522
12/31/
500,000 556,743 56,743 4,696,265
x1
The purchased interest is only for 1 month because the last interest
payment date was on July 1, and the bonds were acquired on
August 1.
13. B
Solution:
P a g e | 16
PV Present
Future cash flows PV @ 7%, n=6 factors value
1,000,00
Principal 0 PV of ₱1 0.666342 666,342
60,00 PV of ordinary annuity of
Interest 0 ₱1 4.766540 285,992
952,334
14. D
Solution:
Initial measurement:
Purchase price (6M x 96%) 5,760,000
Transaction costs 40,610
Initial carrying amount 5,800,610
15. D
Solution:
Interest on outstanding Total
Date Principal
principal balance collections
a b c=a+b
July 1, 20x1 1,200,000 (3,000,000 x 5%) = 150,000 1,350,000
Dec. 31, 20x1 800,000 (1,800,000 x 5%) = 90,000 890,000
July 1, 20x2 600,000 (1,000,000 x 5%) = 50,000 650,000
Dec. 31, 20x2 400,000 (400,000 x 5%) = 20,000 420,000
Total Present
collections PV of ₱1 PVF value
1,350,000 PV of ₱1 @ 6%, n=1 0.943396 1,273,585
890,000 PV of ₱1 @ 6%, n=2 0.889996 792,096
650,000 PV of ₱1 @ 6%, n=3 0.839619 545,752
420,000 PV of ₱1 @ 6%, n=4 0.792094 332,679
2,944,112
P a g e | 18
16. C
Solution:
Interest Amortizatio Present
Date Interest received income n value
1/1/x1 907,135*
12/31/x1 100,000 126,999 26,999 934,134
7/1/x2 50,000 65,389 15,389 949,523
Amortized cost:
Net selling price [(1M x 94%) – 40K] 900,000
Interest receivable (50,000)
Total 850,000
Amortized cost – 1/1/x3 (see table above) 949,523
Loss on sale (99,523)
FVOCI:
Net selling price [(1M x 94%) – 40K] 900,000
Interest receivable (50,000)
Total 850,000
Amortized cost – 1/1/x3 (see table above) 949,523
Cumulative loss in equity/Reclassification adjustment –
1/1/x3 (99,523)
12/31/x1
Cash 100,000
Investment in bonds - FVOCI 26,999
Interest income 126,999
7/1/x2
Interest receivable 50,000
Investment in bonds - FVOCI 15,389
Interest income 65,389
Cash 900,000
Interest receivable 50,000
Investment in bonds - FVOCI (see T-account below) 850,000
1/1/x1 907,135
12/31/x1 26,999
12/31/x1 45,866
12/31/x1 980,000
15,38
7/1/x2 9
7/1/x2
P a g e | 20
145,389
850,00
7/1/x2 0
850,000 7/1/x2
17. B
Solution:
Trial and error
Shortcut:
Present value - 12/31/x2 (5,116,292 x 116% x 116%) 6,884,483
P a g e | 21
Longcut:
Interest PV of cash Interest Amorti- Present
Date income flow receivable zation value
(a) =ER x (b) = prev. (d) =
(c) = PV + (d)
(b) bal. + (a) (a) - (c)
1/1/x1 5,116,292 5,116,292
12/31/x1 818,607 5,934,899 600,000 218,607 5,334,899
12/31/x2 949,584 6,884,483 660,000 289,584 5,624,483
12/31/x3 1,101,517 7,986,000 726,000 375,517 6,000,000
18. C
Solution:
Date Interest income Present value
Jan. 1, 20x1 1,725,218
Dec. 31, 20x1 51,757 1,776,975
Dec. 31, 20x2 53,309 1,830,284
Dec. 31, 20x3 54,909 1,885,192
Dec. 31, 20x4 56,556 1,941,748
Dec. 31, 20x5 58,252 2,000,000
Shortcut:
[(1,700,000 + 25,218) x 103% x 103% x 103%] vs. 2.2M = 314,808 gain
19. B
Solution:
Let us assume that the face amount is 100,000.
Face amount 100,000
Discount (10,000)
Purchase price 90,000
Subsequent amortization of discount 2,000
Carrying amount on date of sale 92,000
P a g e | 22
20. B
Solution:
ACTIVITY #1:
Solutions:
P a g e | 23
Requirement (a):
1,000 face amount x 1,000 no. of bonds = 1,000,000
Requirement (b):
1,000,000 – 922,783 = 77,217 discount
Requirement (c):
Investment in bonds 922,783
Cash 922,783
Requirement (d):
NIR = 8%
Requirement (e):
Trial & Error
PV = CF x PVF
Requirement (f):
Interest Interest Amortizatio
Date received income n Present value
7/1/
x1 922,783.00
1/1/
x2 40,000.00 46,139.15 6,139.15 928,922.15
P a g e | 24
7/1/
x2 40,000.00 46,446.11 6,446.11 935,368.26
1/1/
x3 40,000.00 46,768.41 6,768.41 942,136.67
7/1/
x3 40,000.00 47,106.83 7,106.83 949,243.50
1/1/
x4 40,000.00 47,462.18 7,462.18 956,705.68
7/1/
x4 40,000.00 47,835.28 7,835.28 964,540.96
1/1/
x5 40,000.00 48,227.05 8,227.05 972,768.01
7/1/
x5 40,000.00 48,638.40 8,638.40 981,406.41
1/1/
x6 40,000.00 49,070.32 9,070.32 990,476.73
7/1/
x6 40,000.00 49,523.27* 9,523.27* 1,000,000.00*
* The last figures are ‘squeezed’ to make the amortized cost at maturity date
exactly equal to 1M and eliminate the difference due to rounding-off.
ACTIVITY #2:
Case 1:
Requirement (a):
7/1/x1
Investment in bonds 10,000.00
Interest income (Interest receivable) 116.67
(10,000 x 7% x 2/12)
Cash 10,116.67
8/1/x1
If “Interest receivable” was debited on 7/1/x1:
P a g e | 25
11/1/x1
Cash (10,000 x 7% x 3/12) 175.00
Interest income 175.00
12/31/x1
Interest receivable (10,000 x 7% x 2/12) 116.67
Interest income 116.67
Requirement (b):
(10,000 x 7% x 6/12) = 350
Requirement (c):
(10,000 x 7% x 2/12) = 116.67
Requirement (d):
(175 + 175) see entries above = 350
Case 2:
Requirement (a):
5/1/2000
Investment in bonds 10,736.07
Cash 10,736.07
Requirement (b):
(10,000 x 7% x 8/12) = 466.67
P a g e | 26
Requirement (c):
Interest Interest Amortizatio
Date receivable income n Present value
5/1/2000 10,736.07
12/31/2000 466.67 429.44 37.23 10,698.84
Case 3:
Requirement (a):
Requirement (b):
Date Interest income Discount Present value
5/1/2000 IGNORED 9,111.72
5/1/2001 728.94 IGNORED 9,840.65
5/1/2002 787.25 IGNORED 10,627.91
1. Solutions:
Requirement (a):
Date Interest received Interest Amortization Present
P a g e | 27
income value
1/1/x1 941,725
1/1/x2 120,000 131,842 11,842 953,567
1/1/x3 120,000 133,499 13,499 967,066
1/1/x4 120,000 135,389 15,389 982,455
1/1/x5 120,000 137,545 17,545 1,000,000
Requirement (b):
(1,000,000 – 967,066) = 32,934 discount
Requirement (c):
1/1/x1
Investment in bonds 941,725
Cash 941,725
12/31/x1
Interest receivable 120,000
Investment in bonds 11,842
Interest income 131,842
1/1/x2
Cash 120,000
Interest receivable 120,000
12/31/x2
Interest receivable 120,000
Investment in bonds 13,499
Interest income 133,499
1/1/x3
Cash 120,000
Interest receivable 120,000
12/31/x3
Interest receivable 120,000
Investment in bonds 15,389
Interest income 135,389
1/1/x4
Cash 120,000
Interest receivable 120,000
P a g e | 28
12/31/x4
Interest receivable 120,000
Investment in bonds 17,545
Interest income 137,545
1/1/x5
Cash 120,000
Interest receivable 120,000
Cash 1,000,000
Investment in bonds 1,000,000
2. Solution:
Interest Interest Present
Date received income Amortization value
1/1/x1 1,075,939
12/31/x1 120,000 96,835 23,165 1,052,774
12/31/x2 120,000 94,750 25,250 1,027,524
12/31/x3 120,000 92,476 27,524 1,000,000
3. Solution:
Mar. Investment in bonds (2M x 98%) – 60,000 1,900,00
31,
Interest income (₱2M x 12% x 3/12) 0
20x1
Cash (2M x 98%) 60,000 1,960,00
0
4. Solution:
Purchase price (2M x 95%) 1,900,000
Commission 40,510
Initial carrying amount 1,940,510
5. Solution:
Interest Interest Present
Date Amortization
received income value
Jan. 1, 20x1 1,940,510
Dec. 31, 20x1 240,000 252,266 12,266 1,952,776
Dec. 31, 20x2 240,000 253,861 13,861 1,966,637
Dec. 31, 20x3 240,000 255,663 15,663 1,982,300
Dec. 31, 20x4 240,000 257,700 17,700 2,000,000
6. Solution:
Interest Interest Present
Date Amortization
received income value
Jan. 1, 20x1 1,940,510
Dec. 31, 20x1 240,000 252,266 12,266 1,952,776
Dec. 31, 20x2 240,000 253,861 13,861 1,966,637
P a g e | 30
7. Solution:
Purchase price of bonds = Present value of future cash flows
8. Solution:
Requirement (a):
Principal + Interest on
Date outstanding principal Total collections
balance
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. Solution:
Interest Unearned Present value of
Date
income interest cash flow
a = b x 16% b = previous bal. + a
1/1/x1 5,116,292
D
IGNORE
12/31/x1 12/31/x2
Present value (Principal and interest receivable) 5,934,899 6,884,483
Interest receivable (6Mx10%); [600K+(6M x 110% x (1,260,000
10%)] (600,000) )
Carrying amount of investment (Principal) 5,334,899 5,624,483
P a g e | 32
10. Solution:
Initial recognition:
Jan. 1, Investment in bonds – FVOCI 1,049,73
20x1
Cash 7 1,049,73
7
Derecognition
Jan. Unrealized gain (loss) – OCI (a) 10,000
4,
Investment in bonds – FVOCI 10,000
20x3
to recognize the change in fair value
Jan. Cash 1,040,00
4,
Investment in bonds – FVOCI 0 1,040,000
20x3
to derecognize the investment
Jan. Unrealized gain (loss) – OCI (b) 21,818
4,
Gain on sale – P/L (b)
21,818
20x3
to derecognize the cumulative fair value
gains
(a)
[1M x (104% - 105%)] = 10,000
(b)