FATHER SATURNINO URIOS UNIVERSITY

ACCOUNTANCY PROGRAM

INTERMEDIATE ACCOUNTING II

Name: Date: Score:

Instructor: Sean Justin F. Espina, CPA

Prelim Quiz #1: Investment in Bonds

Problem 1. FSUU JPIA Company had the following transactions in bond investment held as trading for the
current year 2018:

March 1 Purchased 2,000, P1,000, 12% bonds of RFJPIA Co. at 93 excluding accrued interest. Interest
is payable on February 1 and August 1.

April 1 Purchased 4,000, P1,000, 12% bonds of NFJPIA Co. at 95 plus accrued interest. Interest is
payable March 1 and September 1.

October 1 Sold 1,000 of the NFJPIA Co. bonds at 105 excluding accrued interest.

December 1 Sold all of the RFJPIA Co. bonds at 100 plus accrued interest.

December 31 The market value of the NFJPIA Co. bonds is 90.

On March 1, 2019, FSUU JPIA Co. sold all the remaining bonds of NFJPIA Co. at 101 plus accrued interest.

Requirements:
1. Prepare all the necessary journal entries to record the transactions for year 2018 and 2019.
2. Compute for the following:
a. What amount of interest income should be reported on December 31, 2018?
b. What amount should be recognized as total gain on sale of the bond investment on December 31,
2018?
c. What amount (net) should be reported as component of Net Income (Loss)/ Profit (Loss) on
December 31, 2018?
d. What is the carrying amount of the bond investment (trading) on December 31, 2018?
e. What amount (net) should be reported as component of Net Income (Loss)/ Profit (Loss) on
December 31, 2019?

Problem 2. On January 1, 2019, an investor acquired P1,000,000 face amount of bonds dated January 1, 2019.
The bonds mature in 3 years and bear 12% interest payable semiannually on June 30 and December 31. The
cost of the bonds will yield an effective interest of 10%. (Round the present values in 4 decimal places).

Requirements:
1. Prepare all necessary journal entries to record the transactions for year 2019.
2. Prepare a table of amortization.
3. Compute for the following:
a. What is the market price or purchase price of the bonds on January 1, 2019?
b. What amount of interest income should be reported on December 31, 2019?
c. What is the balance of unamortized premium on December 31, 2020?
d. What is the carrying amount of the bond investment on December 31, 2020?
Problem 3. On January 1, 2018, Q Company purchased bonds with face amount of 5,000,000 for 4,760,000
including transaction cost of 160,000. The business in managing the financial asset is to collect contractual cash
flows that are solely payments of principal and interest and also to sell the bonds in the open market. The
bonds mature on December 31, 2020 and pay 10% interest annually on December 31 with a 12% effective yield.
The bonds are quoted at 102 on December 31, 2018 and 105 on December 31, 2019. The bonds are sold on June
30, 2020 for 5,500,000 plus accrued interest.

Requirements:
1. Prepare all the necessary journal entries to record the transactions for year 2018, 2019 and 2020.
2. Compute for the following:
a. What amount should be recognized as gain on sale of the bond investment on June 30, 2020?
b. What amount of unrealized gain should be reported as component of other comprehensive income
for 2018?
c. What amount should be reported as Carrying Amount of the investment on December 31, 2019?

Problem 4. On January 1, 2018, R Company purchased 12% bonds with face amount of 5,000,000 for with an
effective rate of 10%. The bonds are dated January 1, 2018, mature on January 1, 2023 and pay interest annually
on December 31 of each year. The bonds are quoted at 120 on December 31, 2018. The entity has elected the
fair value option for bond investment. (Round the present values in 4 decimal places).

Requirements:
1. Prepare the necessary journal entries to record the transactions for year 2018.
2. Compute for the following:
a. What amount of gain from change in fair value should be reported for 2018?
b. What amount of interest income should be reported for 2018?
c. What is the carrying amount of the bond investment on December 31, 2018?
d. What is the total amount of income from the investment should be reported in the income statement
for 2018?