Analysis of investments in debt instrument (HTM)

On June 1, 2014, Panday Corporation purchased as a long term investment 6,000 of the P1,000
face value, 8% bonds of Pira Corporation. Panday Corporation has the positive intention and
ability to hold these bonds to maturity. The bonds were purchased to yield 10% interest. Interest
is payable semi-annually on December 1 and June 1. The bonds mature on June 1, 2020. On
November 1,2015, Panday Corporation sold the bonds for a total consideration of P5,887,500.

REQUIRED:

Determine the following: (Round off present value factors to four decimal places)

1. The purchase price of the bonds on June 1, 2014

2. The carrying amount of the investment in bonds as of December 31, 2014.
3. The interest income for the year 2015
4. The gain on sale of investment in bonds on November 1, 2015.

SOLUTION:

1. P5,467,992

PV of principal (P6,000,000 x 0.5568) 3,340,800

PV of interest [(P6,000,000 x 4%) x 8.8633] 2,127,192
Purchase price 5,467,992

2. P5,507,237

Date EI (5%) NI (4%) Disc. Amort. Amort. Cost

6/1/11 5,467,992
12/1/11 273,400 240,000 33,400 5,501,392
6/1/12 275,070 240,000 35,070 5,536,462
12/1/12 276,823 240,000 36,823 5,573,285

Carrying amount, 12/1/11 (see amortization schedule) 5,501,392

Add discount amortization, 12/1/11 to 12/31/11 (P35,070/6) 5,845
Carrying amount, 12/31/11 5,507,237

3. P459,911

Jan. 1 to May 31 (P275,070 x 5/6) 229,225

June 1 to Nov. 1 (P276,823 x 5/6) 230,686
Total interest income for 2012 459,911

4. P120,352
Total proceeds 5,887,500
Accrued interest (P240,000 x 5/6) (200,000)
Net proceeds 5,687,500
Less carrying amount, 11/1/12:
Carrying amount, 6/1/12 (see amortization schedule) 5,536,462
Add discount amortization, 6/1/12 to 11/1/12 (P36,823 x
5/6) 30,686 5,567,148
Gain on sale on investment in bonds 120,352