BSA 10

1. On July 1, 2014, Throw Company purchased Pillow, Inc. 10-year, 12% bonds
with a face value of P2,000,000 for P1,791,840. The bonds will mature on July 1,
2024 and pay interest annually on July 1. Bonds effective interest rate is 14%.
Throw Company has a business model of collecting all contractual cash flows on
all its debt securities until maturity.

What is the amount of income Throw Company should recognize related to the
bond investment on December 31, 2015?
a. P250,857
b. P251,100
c. P251,617
d. P254,111

ANSWER: C

Acquisition & Interest Interest Discount Book Value

Interest Date Earned Income Amortization
12% rate 14% rate
07/01/14 0 0 0 1,791,840
07/01/15 240,000 250,857 10,858 1,802,698
07/01/16 240,000 252,378 12,378 1,815,076
07/01/17 240,000 254,111 14,111 1,829,187

Interest income from Jan. to June 30 (P250,857 x ½) P125,428

Interest income from July to December 30 (252,378 x ½) 126,189
Total interest income in 2015 P251,617

2. On July 1, 2014, Cola Corporation acquired a debt security in Color Company’s

10-year 12% bonds, with a face value of P5,000,000, for P5, 386,300. Interest is
payable semi-annually on January 1 and July 1. The bonds mature on July 1,
2019. The bonds July 1, 2019. Bonds effective rate is 10%. On December 31,
2015, Cola Corporation sold its debt instrument for P5,500,000.

If the company has a business model with the objective of collecting all the
contractual cash flows what amount of gain should Cola Corporation recognize
as a result of the disposal?
a. P144,385
b. P176,604
c. P210,434
d. P245,956
ANSWER: C
Selling Price P5,500,000
Amortized cost, December 31, 2015 5,289,566
Gain on sale of investment P 210,434

Acquisition & Interest Interest Premium Book Value

Interest Date Earned Income Amortization
6% rate 5% rate
07/01/14 0 0 0 5,386,300
12/31/14 300,000 269,315 30,685 5,355,615
07/01/15 300,000 267,781 32,219 5,323,396
12/31/15 300,000 266,170 33,830 5,289,566

3. On January 1, 2014, David Company purchased Goliath Corporation’s 9% debt

instrument with a face value of P4,000,000 for P3,823,800 to yield 10% interest.
The bonds are dated January 1, 2014 and mature on December 31, 2019, and
pay interest annually on December 31.

On January 2, 2016, David Company acquired an equity instrument in exchange

for its investment in debt security. On the date of exchange, market value of the
equity securities was not clearly determinable, while the debt instrument was
selling at its prevailing rate of interest of 11%.

If the Company has a business model with the objective of not trading and
making profit from changes in fair value, what amount of gain or loss should
David Company recognize as a result of the exchange? (carry present fair value
factors up to 3 decimal places)
a. P118,087
b. P93,460
c. P71,080
d. P66,958

ANSWER: D
Fair value/exchange price: (at 11% market rate)
Present value of interest (P360,000 x 2.44) P 879,840
Present value of the face (P4,000,000 x .731) 2,924,000
Total P3,803,840
Less: Amortized cost 3,870,798
Loss on exchange P 66,958
 Acquisition & Interest Interest Discount Book Value
Interest Date Earned Income Amortization
01/01/14 0 0 0 3,823,800
12/31/14 360,000 382,380 22,380 3,846,180
12/31/15 360,000 384,618 24,618 3,870,798

4. On January 1, 2014, Alarm Company purchased as long-term investment

P5,000,000 face value of Clock Corporation’s 8% bonds for P4,683,000 to yield
10% interest per year. The bonds mature on January 1, 2018, and pay interest
annually on January 1. On January 2, 2016, Alarm Company sold the debt
security when the market rate of interest was 12%.

If the company’s model has the objective of collecting the contractual cash flows
of the debt securities until maturity what amount should Alarm Company report
as gain or loss on the sale of the debt instrument? (carry present value factors up
to 3 decimal places)
a. P165,430
b. P173,570
c. P240,700
d. P317,000

ANSWER: A
Fair value as of Jan. 2, 20015/Selling price: (at 12% rate)
Present value of future interest (P400,000 x 1.690) P 676,000
Present value of the face (P5,000,000 x .797) 3,985,000
Total P4,661,000
Less: Amortized cost (Jan. 2, 2015) 4,826,430
Loss on sale of debt instruments P 165,430

5. On July 1, 2014, Royal Corporation acquired a long-term investment in Blood

Company’s 10-year 12% bonds, with face value of P5,000,000, for P5,386,300.
Interest is payable semi-annually on January 1 and July 1. The bonds mature on
July 1, 2019. Bonds effective rate is 10%. Royal Company has a business model
with the objective of collecting all contractual cash flows until maturity for all debt
instruments.

What is the carrying value of the bond investment and interest income to be
reported in Royal’s financial statements on December 31, 2014, respectively?
a. P5,386,300 and P269,315
b. P5,386,300 and P300,000
c. P5,355,615 and P300,000
d. P5,355,615 and P269,315

ANSWER: D
Acquisition & Interest Interest Discount Book Value
Interest Date Earned Income Amortization
6% rate 5% rate
07/01/14 0 0 0 5,386,300
12/31/14 300,000 269,315 30,685 5,355,615