INVESTMENT IN DEBT SECURITIES - PROBLEMS

PROBLEM 1: DEBT SECURITIES – BUSINESS MODEL

On January 1, 2019, Sun 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, 2024 and pay interest annually on December 30. On December 31,
2019 the prevailing rate of interest is 9%.
Question 1: If the investment is designated as FVPI, what amount of unrealized gain or loss should
the company disclose in their December 31, 2019 profit or loss?
a. None
b. P26,559 unrealized gain
c. P154,907 unrealized gain
d. P217,008 unrealized gain
Question 2: If the investment is designated as FVOCI, what amount of unrealized gain or loss
should the company disclose in their December 31, 2019 other comprehensive income?
a. None
b. P26,559 unrealized gain
c. P154,907 unrealized gain
d. P217,008 unrealized gain
Question 3: If the investment is designated as Amortized Cost, at what amount should the
investment be reported in the company’s statement of financial position for the year ended
December 31, 2019?
a. P4,621,006
b. P4,683,107
c. P4,751,418
d. P4,838,014

PROBLEM 2: RECLASSIFICATION OF DEBT INSTRUMENTS

On January 2, 2019, Saint Company Invested in a 4-year 10% bond with a face value of P6,000,000
in which interest is to be paid every December 31. The bonds has an effective interest rate of 9%
and was acquired for P6,194,383. On December 31, 2019, the security has a fair value of
P6,229,862 which is based on the prevailing market rate of 8.5%.
Question 1: Assume that the debt security was classified initially as Investment at Fair Value to
profit or loss, assume further that during the year 2019 there was a change in the business model
and cash flow characteristics but they decided to make a reclassification on January 2, 2020 to
Investment at Fair value to Other Comprehensive Income. On December 31, 2020, the debt
investment has a fair value of P6,213,992 which is based on the prevailing rate of 8%. What
amount should be debt investment be reported in the December 31, 2020 statement of financial
position?
a. P6,082,949
b. P6,159,400
c. P,6,213,992
d. P6,229,862
Question 2: Assume that the debt security was classified initially as Investment at Fair Value to
Profit or Loss, assume further that during the year 2019 there was a change in the business model
and cash flow characteristics but they decided to make a reclassification on January 2, 2020 to
Investment at Amortized Cost. On December 31, 2020, the debt investment has a fair value of
P6,213,992 which is based on the prevailing rate of 8%. What amount should the debt investment
be reported in the December 31, 2020 statement of financial position?
a. P6,082,949
b. P6,159,400
c. P6,213,992
d. P6,229,862
Question 3: Assume that on the date of acquisition the debt security was designated as Investment
at Amortized Cost, but the investment at amortized cost valuation was reclassified on January 1,
2020 as Investment at fair value to profit or loss, at what amount of gain or loss should the
company recognize on the date of transfer/ reclassification?
a. None
b. P35,479
c. P77,984
d. P113,373
Question 4: Assume that on the date of acquisition the debt security was designated as Investment
at Amortized Cost, but the investment at amortized cost valuation was reclassified on January 1,
2020 as Investment at fair value to other comprehensive income, at what amount of gain or loss
should the company recognize in the profit or loss on the date of transfer/ reclassification?
a. None
b. P35,479
c. P77,984
d. P113,373
Question 5: Assume that on the date of acquisition the debt security was designated as Investment
at Fair value to Other Comprehensive Income, but the investment at was reclassified on January
1, 2020 as Investment at Amortized Cost, at what amount should the investment account be
reported in the statement of financial position as of December 31, 2020?
a. P6,105,547
b. P6,151,878
 c. P6,159,400
d. P6,229,862
Question 6: Assume that on the date of acquisition the debt security was designated as Investment
at Other Comprehensive Income, but the investment at was reclassified on January 1, 2020 as
Investment at Fair Value to Profit or Loss, what amount of gain or loss should the company
recognize in the profit loss on the date of transfer/ reclassification?
a. None
b. P35,479
c. P77,984
d. P113,37