UNIVERSITY OF SANTO TOMAS

AMV-COLLEGE OF ACCOUNTANCY
ACC5112-AUDIT OF INVESTMENTS

INVESTMENT IN DEBT SECURITIES

AMORTIZED COST
Cathy Company acquired P2,000,000 bonds on May 1, 2017 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 2017.
a. P63,553
b. P42,369
c. P22,335
d. P14,890

2. The interest Income to be presented in the 2019 Statement of comprehensive Income.

a. P135,378
b. P136,325
c. P135,851
d. P134,904

3. Jaily, Inc. purchased a bond investment in 2017 and classified the same as investment
at amortized cost. Portion of the amortization table was presented below:

Nominal Effective Amor- Carrying

Date
Interest Interest tization Value
5/1/23 160,000 128,317 31,683 2,106,939
5/1/24 160,000 126,416 33,584 2,073,356
5/1/25 160,000 124,401 35,599 2,037,757
5/1/26 160,000 122,243 37,757 2,000,000

On November 30, 2025, Jaily sold the investments at 102 plus accrued interest.

Determine the gain or loss on sale of investment.

a. P24,268 Gain
b. P24,268 Loss
c. P12,587 Loss
d. P12.587 Gain

On January 1, 2017, Chiara 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 the debt securities of this type is
7%.

On October 31, 2018, Chiara sold 40% of the securities including any accrued interest
for a gain of P5,250.

Based on the foregoing, determine the following:

4. The carrying value of the bond investment on December 31, 2017.
a. P762,334
b. P759,016
c. P600,000
d. P771,840
5. Total amount received by Arlenie on the sale of the 40% bond investment on October
31, 2018.
a. P326,535
b. P314,534
c. P265,250
d. P245,250

6. Interest income be reported in the December 31, 2018 statement of comprehensive

income.
a. P60,000
b. P56,000
c. P49,485
d. P53,011

7. Carrying value of the bond investment on December 31, 2018.

a. P451,216
b. P360,000
c. P752,147
d. P448,991

FAIR VALUE THROUGH PROFIT OR LOSS

8. Connie Company carried out the following transactions in bond investments held for
trading during the current year:

8/1 Purchased 5,000, P1,000, 12% bonds of AAA Company at 104 plus accrued
interest. The bonds pay interest semiannually on May 1 and November 1

8/31 Purchased 2,000, P1,000 12% bonds of BBB Company at 98 plus accrued
interest. Semiannual payment 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
P160,000 was incurred.

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

Determine the following:

Gain (loss) on sale of AAA bonds.
a. P40,000 Loss
b. P40,000 Gain
c. P200,000 Loss
d. P200,000 Gain

9. Total interest income for the year.

a. P500,000
b. P310,000
c. P270,000
d. P230,000

10. Unrealized gain (loss) to be reported in the profit or loss section of statement of
comprehensive income for the year.
a. P160,000 UG
b. P300,000 UG
c. P160,000 UL
d. P280,000 UL

For P3,691,500, Cherry Company purchased a 5-year, 8% P4,000,000 face value bonds
of XYZ Company on June 1, 2017. 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, 2017, December 31, 2018 and
December 31, 2019 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:

11. The 2017 interest income.

12. The unrealized gain to be reported in 2017 profit or loss section of the Statement of
comprehensive income.

13. The total amount to be reported in 2018 profit or loss section of the Statement of
comprehensive income.

14. On December 1, 2017, Ronald Company purchased P5,000,000, 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 cost incurred in relation to the acquisition is 3%
of the bonds face value. Ronald classified these investments as trading securities.

On November 30, 2020 after receiving the periodic interest, Ronald sold the investment
at 101.

The bonds were quoted in the market at 98, 99, 102, 100 and 97 on December 31,
2017, 2018, 2019, 2020 and 2021, respectively.

Determine the gain or loss on sale of the investments.

a. P50,000 gain
b. P50,000 loss
c. P150,000 gain
d. P150,000 loss

FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

On January 1, 2017, Alvin Corporation purchased 3-year, 10%, 5,000 of P1,000 face value
bonds for P4,600,000. In relation to this acquisition, Alvin incurred P160,000 broker’s
commission. Alvin intended to collect contractual cash flows and to sell the financial asset.

On June 30, 2019, Alvin sold the bonds at 110 plus interest.

Meanwhile, Alvin determined the following fair values at each yearend:

December 31, 2017 102
December 31, 2018 105
December 31, 2019 104

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

15. Amount of unrealized gain to be reported as component of other comprehensive income
in the 2018 statement of comprehensive income.
a. P0
b. P70,256
c. P339,056
d. P221,200

16. Gain on sale of the bond on June 30, 2019.

a. 250,000
b. P544,528
c. P589,056
d. P794,528
On December 31, 2015, Alfred 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 Alfred will receive interest of
P35,000 annually.

In 2017, Alfred’s accountant recorded premium amortization of the bond in the amount of
P8,227. On December 31, 2018, Angler sold 60% of the bonds for P300,450.

Following are the fair values of the bonds at each year-end:

Date FV
12/31/16 P 532,500
12/31/17 537,500
12/31/18 500,750
12/31/19 210,060
12/31/20 250,130

Determine the following:

17. Carrying value of the bond on December 31, 2017.
a. P535,465
b. P527,238
c. P537,500
d. P518,600

18. Amount of unrealized gain or loss to be presented in the December 31, 2017 statement
of comprehensive income.
a. P5,000 UG
b. 5,000 UL
c. P13,227 UG
d. P13,227 UL

19. Interest income in 2018.

a. P26,773
b. P26,362
c. P35,000
d. P0

20. Gain or loss on sale.

a. P27,500 Gain
b. P27,500 Loss
c. P10,710 Loss
d. P10,710 Gain

END