PROBLEMS

FINANCIAL ASSET AT AMORTIZED COST :

BOND INVESTMENT

ACFAR 2233 INTERMEDIATE ACCOUNTING 2

LEOPOLDO D. MEDINA, CPA, MSA
PROBLEM 1
At the beginning of current year, LM Company acquired bonds with
face amount of P4,000,000 at a cost of P3,761,000. The bonds are
held for trading.
Bonds pay interest of 12% semiannually on January 1 and July 1
and mature after four years.
The bonds have an effective yield of 14% and are quoted at 105 at
year-end.
 
Required: Prepare journal entries for the current year:
 HELD FOR TRADING
1/1 Trading securities 3,761,000
Cash 3,761,000

7/1 Cash 240,000 4M x 12% x 6/12

Interest income 240,000 interest is based on face
value; effective rate is not
used for trading securities
12/31 Accrued interest receivable 240,000
Interest income 240,000

Trading securities 439,000   4M x 105%

Unrealized gain - TS 439,000 3.761 M vs 4,200,000
PROBLEM 2
MN Company carried out the following transactions in bond
investments held for trading during the current year.
Aug. 1 Purchased 5,000, P1,000, 12% bonds of AC Company at
104 plus accrued interest of P150,000. The bonds pay interest
semiannually on May 1 and November 1.
31 Purchased 2,000, P1,000, 12% bonds of AV Company at 98
plus accrued interest. Semiannual payment of interest, June 30 and
December 31.
Dec. 1 Sold 2,000 of the AC bonds at 102 plus accrued interest.
31 The following quotations were obtained: AC bonds 98 ; AV
bonds 99
Required:
(1) HELD FOR TRADING
8/1 Trading securities 5,200,000 5M x 104%  
AC Interest income 150,000 5M x 12% x 3/12 = 150T
Cash 5,350,000 May 1 to Aug 1 : 3 mos.

Note : the terms "plus" or "exluding" are the same; this means
that the bond price does not include the accrued interest;

8/31 Trading securities 1,960,000 2M x 98%  

AV Interest income 40,000 2M x 12% x 2/12
Cash 2,000,000 June 30 to Aug 31: 2 mos

11/1 Cash 300,000 5M x 12% x 6/12 = 300T

AC Interest income 300,000 May 1 to Nov 1 : 6 mos

12/1 Cash 2,060,000 Cash received

AC Loss on sale 40,000 2M x 102% 2,040,000
Trading securities 2,080,000 +Acc Int
Interest income 20,000 2Mx12%x1/12 20,000
Nov 1-Dec 1
2,060,000

Cost of Inv sold: 5.2M x 2/5

Loss: SP-Cost 2.04M-2.08M =40T

12/31 Cash 120,000 2M x 12% x 6/12
AV Interest income 120,000 June 30 to Dec 31: 6 mos

AC Accrued interest receivable 60,000

Interest income 60,000 3M x 12% x 2/12
Nov 1 to Dec 31: 2 mos

Unrealized loss - TS 160,000

Trading securities 160,000

    CA MV 12/31    

AC 5.2 M - 2.08 M 3,120,000 2,940,000 3M x 98%

Face x %
AV 1,960,000 1,980,000 2M x 99%
  5,080,000 4,920,000  
    160 T decrease      

(2) Current assets

Trading Securities 4,920,000
PROBLEM 3
NO Company had the following transactions in bond investment held as trading
for the current year.
Mar. 1 Purchased 2,000, P1,000, 12% bonds of L Company at 93 excluding
accrued interest. Interest is payable on February 1 and August 1.
Apr. 1 Purchased 4,000, P1,000, 12% bonds of N Corporation at 95 plus
accrued interest. Interest is payable March 1 and September 1.
Oct. 1 Sold 1,000 of the N bonds at 105 excluding accrued interest.
Dec. 1 Sold all of the L bonds at 100 plus accrued interest.
31 The market value of the N bonds is 90.
Required:
1. Prepare journal entries to record the transactions including receipt and
accrued of interest.
2. Statement presentation of the bond investment on December 31.
(1) HELD FOR TRADING

3/1 Trading securities 1,860,000 2M x 93% = 1.86M

L Interest income 20,000 2M x 12% x 1/12 = 20T
Cash 1,880,000 Feb 1 to Mar 1: 1 month

4/1 Trading securities 3,800,000 4M x 95% = 3.8M

N Interest income 40,000 4M x 12% x 1/12 =40T
Cash 3,840,000

8/1 Cash 120,000 2M x 12% x 6/12 = 120T

L Interest income 120,000 Feb 1 to Aug 1  

9/1 Cash 240,000 4M x 12% x 6/12 = 240T

N Interest income 240,000 Mar 1 to Sep 1  

10/1 Cash 1,060,000 SP 1M x 105% 1,050,000

N Interest income 10,000 Cost 1/4 x 3.8M 950,000
Trading securities 950,000 Gain 100,000
Gain on sale 100,000
Accrued interest  
1M x 12% x 1/12 = 10 T
Sep 1 to Oct 1: 1 month

Cash received : 1.05M + 10T

12/1 Cash 2,080,000 SP 2M X 100% 2,000,000
L Interest income 80,000 Cost 1,860,000
Trading securities 1,860,000 Gain 140,000
Gain on sale 140,000
Accrued interest  
2M x 12% x 4/12 = 80T
Aug 1 to Dec 1 : 4 months

Cash received : 2M + 80T

12/31 Accrued interest receivable 120,000 3M x 12% x 4/12 = 120T

N Interest income 120,000 Sep 1 to Dec 31 : 4 months

Unrealized loss - TS 150,000

Trading securities 150,000

  CA MV 12/31    
N 3.8M - 950T 2,850,000 2,700,000 3M x 90%
  decrease by 150T    

(2) Current assets 2,700,000

Trading securities
PROBLEM 4
On July 1, 2020, OP Company purchased as trading investment a
P2,000,000 face amount 8% bond for P2,200,000 plus accrued
interest and commission of P50,000. The bond pays interest
annually on December 31.
On December 31, 2020, the bond investment was quoted at 95. On
March 31, 2021, the entity sold the bond investment for
P2,100,000 plus accrued interest.
Required:
Prepare journal entries for 2020 and 2021.
 HELD FOR TRADING
7/1 Trading securities 2,200,000
Commission expense 50,000
Interest income 80,000 Accrued interest
Cash 2,330,000 2M x 8% x 6/12 = 80T
Dec 31 to July 1

12/31 Cash 160,000 2M x 8%  

Interest income 160,000 Annual interest

Unrealized loss - TS 300,000 CA MV 12/31

Trading securities 300,000 2M x 95%

2,200,000 1,900,000
decreased by 300T
 2021

3/31 Cash 2,140,000 SP 2,100,000

Interest income 40,000 CA 1,900,000

Trading securities 1,900,000 Gain 200,000

Gain on sale 200,000

Accrued interest
2M x 8% x 3/12 = 40T
Dec 31 to Mar 31: 3 mos

Cash
received  
2.1 M + 40 T = 2.14 M
PROBLEM 5
On October 1, 2020, PQ Company purchased 4,000 of the P1,000
face amount, 10% bonds of QR Company for P4,400,000 which
included accrued interest of P100,000.
The bonds, which mature on January 1, 2027, pay interest
semiannually on January 1 and July 1.
The entity used the straight line method of amortization and
appropriately recorded the bonds as financial asset at amortized
cost.
 
Required:
Prepare journal entries for 2020 and 2021.
 FINANCIAL ASSET AT AMORTIZED COST
2020

10/1 Investment in bonds 4,300,000 4.4 M includes accrued int;

Interest income 100,000 4.4 M - 100T = 4.3M is

Cash 4,400,000 the acquisition cost

12/31 Accrued interest receivable 200,000 * 4M x 10% x 6/12

Interest income 200,000 Jul 1 to Dec 31  

* for reversal at the beginning of the following year

Amortization  

Interest income 12,000 10/1/20 to 1/1/27 : 75 mos

Investment in bonds 12,000 Premium : 4.3M vs 4M = 300T
300T/75 mos= 4,000
Oct 1-Dec 31 x 3 mos
  12,000
Premium amort decreases
the investment balance
 2021 Reversing entry
1/1 Interest income 200,000
Accrued interest receivable 200,000

Cash 200,000 semi-annual interest

Interest income 200,000

7/1 Cash 200,000 semi-annual interest

Interest income 200,000

12/31 Accrued interest receivable 200,000 *

Interest income 200,000

* for reversal at the beginning of the following year

Interest income 48,000 4T monthly amort x 12 mos

Investment in bonds 48,000

Investment in bonds
4,300,000
  12,000
  48,000
 
CA on 12/31/2021 4,240,000
PROBLEM 6
RS Company acquired P6,000,000 of ST 12% bonds on May 1, 2020
at 94 plus accrued interest to be held as financial asset at
amortized cost.
The bonds pay interest semiannually on February 1 and August 1,
and mature on February 1, 2024.
The fiscal period for RS Company is the calendar period.
Amortization is done following the straight line method.
On May 1, 2022, RS Company sold all the bonds at 105 plus
accrued interest.

Required:
Prepare journal entries for 2020, 2021 and 2022.
 FINANCIAL ASSET AT AMORTIZED COST
2020
5/1 Investment in bonds 5,640,000 Acq cost  
Interest income 180,000 6M x 94% 5,640,000
Cash 5,820,000 +Acc Int  
6Mx12%x3/12 180,000
Cash paid 5,820,000
   
Feb 1 to May 1: 3 months

8/1 Cash 360,000 semi-annual interest

Interest income 360,000 6M x 12% x 6/12

12/31 Accrued interest receivable 300,000 * 6M x 12% x 5/12

Interest income 300,000 Aug 1 to Dec 31

* for reversal at the beginning of the following year

Amortization  
Investment in bonds 64,000 5/1/20 to 2/1/24 : 45 mos
Interest income 64,000 Discount : 5.64M vs 6M = 360T
360T/45 mos= 8,000
May 1-Dec 31 x 8 mos
  64,000
Discount amort increases
the investment balance
 2021Reversing entry
1/1 Interest income 300,000
Accrued interest receivable 300,000

2/1 Cash 360,000 semi-annual interest

Interest income 360,000

8/1 Cash 360,000 semi-annual interest

Interest income 360,000

12/31 Accrued interest receivable 300,000

Interest income 300,000

* for reversal at the beginning of the following year

Investment in bonds 96,000 Monthly amort 8,000

Interest income 96,000 x 12 months
  96,000
2022Reversing entry
1/1 Interest income 300,000
Accrued interest receivable 300,000

2/1 Cash 360,000 semi-annual interest

Interest income 360,000

5/1 Investment in bonds 32,000 update amortization of discount

Interest income 32,000   8,000
Jan 1-May 1 x 4 months
  32,000
 Investment in bonds
5,640,000
64,000
96,000
32,000  
 
5,832,000

Cash 6,480,000 SP 6M x 105% 6,300,000

Interest income 180,000 + Acc interest  
Investment in bonds 5,832,000 Feb 1-May 1  
Gain on sale 468,000 6Mx12%x3/12 180,000
Cash received 6,480,000

SP 6,300,000
-CA 5,832,000
Gain 468,000
Note

Do not study anymore the Bond

Outstanding Method for serial bonds.

For this chapter, we shall only focus on

straight line method for term bonds.
“A seed grows with no sound
but a tree falls with huge
noise. Destruction has
noise but creation is quiet.
This is the power of
silence. Grow silently.”
-Elin Peer