ASSESSMENT ACTIVITIES

DISCUSSION QUESTIONS
In a separate sheet of paper, kindly copy the questions, then answer.
1. What are the characteristics of a bond investment?
2. Based on IFRS 9, what are the classifications of investment in debt securities? Explain.
3. What is the business model and cash flow characteristics of a bond investment for it to
be classified as financial asset at amortized cost?
4. What is the initial measurement of investment in debt securities?
5. What is the difference between bond premium and bond discount?
6. What is the effect of amortizing bond premium and bond discount on interest income?
7. Why is there a need to amortize discount or premium?
8. What are convertible bonds?
9. Based on IFRS 9, how do we reclassify bond investment at fair value to amortized cost?
10. Based on IFRS 9, how do we reclassify bond investment at amortized cost to fair value?

PROBLEMS
Show your complete solution, in good accounting form, on a separate sheet of paper.

Problem 1
Jungkook Company acquired P2,000,000 bonds on May 1, 2020 and its accountant correctly
prepared the following entry:
Investment in Debt Securities at Amortized Cost 2,294,416
Cash 2,294,416
These bonds pay interest at a rate of 8% per annum every April 30 and will mature after 10 years.
Market rate of interest for the same bonds was 6%.

Based on the foregoing, determine the following:

1. Premium amortization for the year 2020.
2. The interest income to be presented in the 2022 Statement of Comprehensive
Income.

Problem 2
Taehyung, Inc. purchased a bond investment in 2020 and was classified the same as
investment at amortized cost. Portion of the amortization table was presented below:
NOMINAL EFFECTIVE CARRYING
DATE AMORTIZATION
INTEREST INTEREST VALUE
5/1/26 P160,000 P128,317 P31,683 P2,106,939
5/1/27 160,000 126,416 33,584 2,073,356
5/1/28 160,000 124,401 35,599 2,037,757
5/1/29 160,000 122,243 37,757 2,000,000
On November 30, 2028, Taehyung sold the investments at 102 plus accrued interest.

Determine the gain or loss on sale of investment

Problem 3
On January 1, 2020, Jimin Co. purchased debt securities which carry a 10% fixed interest for
P765,540 to be held as financial assets at amortized cost. The securities have face value of
P600,000, and interests are receivable semi-annually every June 30 and December 31. The
prevailing market interest rate of debt securities of this type is 7%.
On October 31, 2021, Jimin Co. sold 40% of the securities including any accrued interest for a
gain of P 5,250.

Based on the foregoing, determine the following:

1. The carrying value of the bond investment on December 31, 2020.
2. Total amount received by Jimin Co. on the sale of 40% bond investment on
October 31, 2021.
3. Interest income to be reported in the December 31, 2021 Statement of
Comprehensive Income.
4. Carrying value of the bond investment on December 31, 2021.

Problem 4
RM Company carried out the following transactions in bond investments held for trading during
the current year:
8/1 Purchased 5,000, P 1,000, 12% bonds of AAA Company at 104 plus
accrued interest. The bonds pay interest semi-annually on May 1 and
November 1.

8/31 Purchased 2,000, P 1,000, 12% bonds of BBB Company at 98 plus

accrued interest. Semi-annual payments of interest are on June 30 and
December 31.

12/1 Sold 2,000 of the AAA bonds at 102 plus accrued interest. Brokerage fee
of P 160,000 was incurred.

12/31 AAA bonds were selling at 98. BBB bonds were selling at 99.

Based on the foregoing, determine the following:

1. Gain (loss) on sale of AAA bonds.
2. Total interest income for the year.
3. Unrealized gain (loss) to be reported in the profit or loss section of statement of
comprehensive income for the year.

Problem 5
For P 3,691,500, Suga Company purchased a 5-year, 8% P 4,000,000 face value bonds of BTS
Company on June 1, 2020. The bonds were purchased to yield 10% and pay interest every
June 1 and December 1.

The market value of the bonds on December 31, 2020, December 31, 2021 and December 31,
2022 were quoted at 97, 99, and 98, respectively.

If the investment in bonds were designated as Investment at fair value through profit or
loss, determine the following:
1. The 2020 interest income.
2. The unrealized gain to be reported in 2020 profit or loss section of the Statement
of comprehensive income.
3. The total amount to be reported in 2021 profit or loss section of the Statement of
comprehensive income
Problem 6
On December 1, 2020, J-Hope Company purchased P 5,000,000, 15% face value bonds at 98.
The bonds mature on November 30, 2027 and pay interest semi-annually every May 31 and
November 30. Transaction costs incurred in relation to acquisition is 3% of the bonds face
value. J-Hope classified this investment as trading securities.

On November 30, 2023 after receiving the periodic interest, J-Hope sold the investment at 101.

The bonds were quoted in the market at 98, 99 102, 100, and 97 on December 31, 2020, 2021,
2022, 2023, and 2024, respectively.

Determine the gain or loss on sale of the investments.

Problem 7
On January 1, 2020, Euphoria Corporation purchased 3 – year, 10%, 5,000 of P1,000 face
value bonds for P4,600,000. In relation to this acquisition, Euphoria incurred P160,000 broker’s
commission. Euphoria intended to collect contractual cash flows and to sell the financial asset.

On June 30, 2022, Euphoria sold the bonds at 110 plus interest.

Meanwhile, Euphoria determined the following fair values at each year-end:

December 31, 2020 102
December 31, 2021 105
December 31, 2022 104

Using a 12% effective interest rate, determine the following:

1. Amount of unrealized gain to be reported as part as component of other
comprehensive income in the 2021 statement of comprehensive income
2. Gain on sale of the bond on June 30, 2022.

Problem 8
On December 31, 2018, Life Goes On Company purchased 5 – year, P500,000 face value
bonds at a premium of P43,300 and classified the same as investment at fair value through
other comprehensive income. The bond indenture stated that Life Goes On will receive interest
of P35,000 annually.
In 2020, Life Goes On’s accountant recorded premium amortization of the bond in the amount of
P 8,227. On December 31, 2021, Life Goes On sold 60% of the bonds for P300,450. Following
are the fair values of the bonds at each year-end:

DATE FAIR VALUE

12/31/19 P 535,500
12/31/20 P 537,500
12/31/21 P 500,750
12/31/22 P 210,060
12/31/23 P 250,130
Determine the following:
1. Carrying the value of the bond on December 31, 2020.
2. Amount of unrealized gain or loss to be presented in the December 31, 2020
statement of comprehensive income. (identify whether gain or loss)
3. Interest income in 2021.
4. Gain or loss on sale