EXAMINATION about INVESTMENT 15

General Rule: Read the following carefully and answer it wisely. All solutions are needed, so put it in the last
page. (20 Points)

1. On January 1, 2010. Gadgets Company purchases 10% P10,000,000 10 year with interest payable on
December 31 each year. The bonds purchase price is P10,811,100. The bonds effective interest rate
was 8.75%. At the time of acquisition the bonds were classified as held-to-maturity. On December
31, 2015, When the bonds amortized cost was P10,407,192 and a fair value at a market rate of 7.75%
was P10,749,395, the company sells P1,000,000 bonds and realizes a gain on disposal of P34,215.

Since the company sold more than an insignificant amount of its held-to-maturity investment, the portfolio is trained. As a
result the company has reclassified the remaining investment to available-for-sale. Question 1: What is the initial carrying
value of the available-for-sale investment at the time of reclassification?
a. P9,000,000 c. P9,366,473
b. P9,520,464 d. P9,674,406
Answer: D
Total FV of 10M bonds P10,749,340
x ratio of remaining bonds over total 9/10
FV of bonds reclassified P 9,674,406

Question 2: What is the amount of unrealized gain or loss should the company immediately recognize at the of
reclassification?
a. None c. P34,215
b. P307,933 d. P342,203
Answer: B
FV of bonds reclassified P9,674,406
Less: Amortized cost of bonds P10,497,192
x ratio of remaining bonds 9/10 P9,366,473
Unrealized gain P 307,933

2. On January 2, 2007, Super Company investment in a 10-year 10% debt instrument with a face value
of P3,000,000 in which interest is to be received every December 31. The debt instrument has an
effective interest rate of 8% and was acquired for P3,402,000. Super company originally classified
the debt instrument as available-for-sale. On January 2, 2011 or after four years of having this
instrument as available-for-sale its market rate of interest is on a stand still and as a result of this rare
event for debt instrument the company decided to reclassify the investment to amortized cost
Classification.

PV factor of 8% after 6 years 0.630

PV factor of annuity of 8% after 6 years 4.623

What amount should Super Company measure the net classification at the time transfer?
a. P3,276,900 c. P3,311,620
b. P3,344,093 d. P3,374,160
Answer: A
Amortized cost after 4 yrs
PV of future interest (P300,000 x 4.623) P1,386,900
 PV of future amount (P3,000,000 x .630) P1,890,000
Amortized cost on Jan 2, 2008 P3,276,900

3. On January 1, 2009, Cream Company purchased the debt instruments of Silk Company with a face
value of P5,000,000 bearing interest rate of 8% for P4,621,006 to yield 10% interest per year. The
bonds mature on January 1 2013 and pay interest annually on December 30 but cream Company does
not intend to hold the instrument until maturity. On December 31, 2010 the fair value of bond was P
P4,525,800.

The company did not receive the interest due on December 30, 2011 and it soon became clear that the issuer was in
financial difficulties. On December 31, 2011 the company reviews the issuer’s financial condition and a prospect for
repayment of the loan determines that the bond is impaired. On the basis of the information available at the time, the
company’s best estimate of future cash flows is a receipts of P2,000,000. On December 31,2011 current marker rate for
discounting the cash flows is 12% (12% risk-free rate on acquisition plus 200 basis point)

Question 1: What amount of unrealized loss should the company report in its December 31,2010 statement of financial
position?
a. P173,440 c. P225,618
b. P248,582 d. P317,760
Answer: C
FV P4,525,800
Less; Amortized cost P4,751,418
Unrealized loss P 225,618

Question 2: What amount of impairment loss should Cream Company recognize in its December 31, 2011 profit or loss?
a. P1,273,578 c. P1,047,960
b. P904,507 d. P842,406
Answer: A
Interest Interest Discount Book
Date Earned Income amortization Value
1.1.09 P4,621,006
12.31.09 P400,000 P462,101 P62,101 P4,683,107
12.31.10 P400,000 P468,311 P68,311 P4,751,418
12.31.11 P400,000 P475,142 P75,142 P4,826,560

PV of the cash flows on:

12,31.12 (P2,000,000 x .8928) P1,785,600
12,31.12 (P4,500,000 x .7972) P1,993,000
FMV of the instrument P3,778,600
Less: Amortized cost of instrument P4,826,560
Amt of impairment loss P1,047,960
Add: Unrealized loss in equity P 225,618
Total impairment loss P1,273,578

4. On July , 2011, Parry Company an 8%, 4 year, P8,000,000 face value bonds for P7,492,800. The
bonds are dated July 1, 2011 and pays interest for June 30. Effective rate of the bonds is 10%. The
bonds were classified as held-to-maturity security.
 The company did not receive the interest due on June 30, 2012 and it soon became clear that the issuer was in
financial difficulties. On June 30, 2012 the company reviews the issuer’s financial conditions and a prospect for
repayment of the loan determines that the bonds is impaired. On the basis of the information available at the time, the
company’s best estimate of future cash flows is a total receipt of P5,000,000 on maturity. The fair value of the estimated
cash flow as of June 30, 2012 is P3,756,600.

On June 30, 2013, on the basis of new information the issuer entity has improved its credit rating and the basis of
the new information, the company’s best estimated of future cash flow is a total receipt of P7,000,000 on maturity. The
fair value of the new cash flow as of June 30, 2013 is P5,785,100. What is the amount of impairment reversal should
Parry Company report in its profit or loss for the year-ended June 30, 2013?
a. None c. P1,214,900
b. P1,652,840 d. P1,600,500
Answer: B
Carrying value – Jun 30, 2012 P3,756,600
Add: interest income (P3,756,600 x 10%) 375,660
Amortized cost P4,132,260
FV on Jun 30, 2013 P5,785,100
Impairment recovery to profit or loss P1,652,840

5. On July 1, 2011, Taker Company purchased P3,000,000 face, 8%, 5-year bonds for P3,251,880 the
effective rate of the bonds is 6%. The bonds are dated July 1, 2011 and pays interest every June 30.

What the total interest income to be recognized by Taker in its December 31, 2011 profit or loss?
a. P35,000 c. P 97,556
b. P192,000 d. P256,000
Answer: C
Carrying value at acquisition P3,251,880
x effective rate (semi-annually) 3%
Total interest income P 97,556