FAR EASTERN UNIVERSITY

ACCOUNTING FOR DEB INVESTMENTS

FINANCIAL ACCOUNTING AND REPORTING-THEORIES

1. Which of the following statements is true concerning recognition of unrealized gains and losses?
a. Unrealized gains and losses on financial assets held for trading shall be included in profit or loss.
b. Unrealized gains and losses on financial assets measured at amortized cost are not recognized.
c. Unrealized gains and losses on financial assets at fair value through other comprehensive income are
not recognized in the income statement.
d. All of the above statements are true.

2. Under IFRS 9, the classification of debt investment shall be made on the basis of
a. The business model for managing the financial asset.
b. Contractual cash flow characteristics of the financial asset.
c. Management’s intention of holding the debt instruments.
d. Both the business model for managing the financial asset and contractual cash flow characteristics of
the financial asset.

3. An entity purchased government bonds. The entity’s business model in managing financial assets is achieved
by collecting cash flows that are solely for payment of principal and interest and by selling the financial assets.
Which of the following is the most appropriate classification for the investment in bonds?
a. Held for trading
b. At fair value through profit or loss
c. At amortized cost
d. At fair value through other comprehensive income.

4. If the financial asset is measured at fair value through profit or loss, transaction costs directly attributable to
the acquisition shall be
a. Capitalized as cost of the financial asset.
b. Expensed immediately when incurred.
c. Deferred and amortized over a reasonable period
d. Included as component of other comprehensive income.

5. “Reclassification date” for purposes of reclassifying financial assets refers to

a. End of the current reporting period.
b. First day of the next reporting period following the change in business model.
c. Date when management decided to change the business model for managing financial assets
d. No definition of reclassification date as this would depend on the judgment of management.

6. Under IFRS 9, investments in debt securities that meet the business model test of collecting cash flows and for
which the enterprise does not exercise its option to measure at fair value shall be initially recognized at
a. Purchase price
b. Fair value
c. Purchase price plus transaction cost
d. Purchase price plus transaction cost plus accrued interest.
7. Which of the following is true assuming the debt securities designated initially as FVPL was reclassified to FVOCI?
a. Gain or loss on remeasurement on reclassification date is reported in profit or loss
b. Initial carrying value of FVOCI is the amortized cost on reclassification date
c. Interest income subsequent to reclassification date is the nominal interest
d. UG/UL taken to equity subsequent to reclassification date is the difference between the
amortized cost and fair value

8. The bonds issued on June 1 of the current year have interest payment dates of April 1 and October 1. Bond
interest income for the current year ended December 31 is for a period of
a. 3 months
b. 4 months
c. 6 months
d. 7 months

9. An investor purchased debt investments at amortized cost on January 1. Annual interest was received on
December 31. The investor’s interest income for the year would be lower than the annual interest received if
the debt instrument was purchased at
a. A discount
b. A premium
c. Par
d. Face value

10. An entity made a year-end amortization for its only investment in bonds by debiting Investment at amortized
cost and crediting Interest income. The bond investment must have been purchased at
a. Premium.
b. Discount
c.. Face value
d. At middle of nowhere

11. If an entity failed to amortize the discount on its investment in bond classified as FVPL, this may result to
a. Understatement of net income
b. Overstatement of net income
c. No effect on net income
d. Overstatement on investment account

12. For an investment in debt securities portfolio classified as Investment at Amortized Cost, which of the following
amounts should be included in the period profit or loss?
 I. Unrealized temporary gains and losses during the period as a result of change in fair value
II. Amortization of discount or premium
III. Interest received and accrued

a. I and II
b. III
c. II and III
d. I and III

13. An entity made a year-end amortization for its only investment in bonds by debiting Investment at amortized
cost and crediting Interest income. The bond investment must have been purchased at
a. Premium.
b. Discount
c. Face value
d. At middle of nowhere

14. Subsequent to acquisition, these securities are generally reported in the statement of financial position at
AMORTIZED COST.
a. FVOCI only c. FVPL and FVOCI
b. Investment at Amortized cost only d. FVOCI and Investment at Amortized cost

15. When an investor's accounting period ends on a date that does not coincide with an interest receipt date for
bonds held as an investment, the investor must
a. Make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of
interest accrued since the last interest receipt date.
b. Notify the issuer and request that a special payment be made for the appropriate portion of the interest
period.
c. Make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of
interest to be received at the next interest receipt date.
d. Do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest
period.

FINANCIAL ACCOUNTING AND REPORTING-PROBLEMS

Problem 1: On January 1, 2021, Snow Company purchased 2,000 of the P1,000 face value, 9%, 10-year bonds of
White Company. Snow Company paid a broker’s fee of P100,000. The bonds mature on January 1, 2031, and pay
interest annually beginning December 31, 2021. Snow Company purchased the bonds to yield 11% and classified
this as Investment at Fair value through Profit or Loss.

PV factor of 11% after 10 years 0.3522

PV factor of 9% after 10 years 0.4224
PV factor of annuity of 11% after 10 years 5.8890
PV factor of annuity of 9% after 10 years 6.4180

Market values of the bonds are as follows:

December 31, 2021 95
December 31, 2022 98

1. How much is the interest income for the year 2021?

a. 220,000 c. 158,798
b. 180,000 d. 194,086

2. How much is the carrying value of the investment that should be reported in the Statement of
Financial Position on December 31, 2022?
a. 1,900,000 c. 1,794,142
b. 1,676,199 d. 1,960,000

3. How much is the unrealized gain/loss that should be reported in the Profit or Loss Statement for the
year 2021?
a. 35,580 c. 135,580
b. 121,494 d. 221,494

Problem 2: On May 1, 2021, Doc Company purchased a P2,000,000 face value 9% debt instruments for P1,860,000
including the accrued interest. The debt instruments pay interest semi-annually on January 1 and July 1. On
December 31, 2021, the fair value of the instruments is P1,940,000. The investment was designated as Investment
at FVPL.

4. How much is the interest income for the year 2021?

a. 120,000 c. 162,000
b. 180,000 d. 108,000

5. How much is the unrealized gain or loss that should be taken to profit or loss for the year 2021?
a. 80,000 c. 60,000
b. 140,000 d. 0

6. How much is the accrued interest/interest receivable on December 31, 2021?

a. 120,000 c. 180,000
b. 90,000 d. 0

Problem 3: On June 30, 2021, Grumpy Company purchased P4,000,000 of 16% bonds to yield 14% for P4,280,752.
Interest is payable semiannually on June 30 and December 31. The bonds mature in five years. Grumpy Company
uses the calendar year and the effective interest method of amortization. The investment was designated as
Investment at FVOCI.

Market values of the bonds on different dates are as follows:

December 31, 2021 108

December 31, 2022 106

7. What amount of unrealized gain or loss shall be taken to OCI as a result of properly measuring the
investments on December 31, 2021?
a. 320,000 c. 59,595
b. 39,248 d. 20,347

8. How much is interest income for the year ended December 31, 2022?
a. 594,932 c. 296,704
b. 298,228 d. 596,457

9. How much is the unrealized gain or loss that should be presented in the Statement of Financial
Position on December 31, 2021?
a. 34,932 c. 59,595
b. 24,663 d. 45,068

Problem 4: Happy Company acquired on January 1, 2021 a 5 year, 10%, P5,000,000 face value bonds, for
P4,639,400 dated January 1, 2021. The bonds which pay interest every December 31 had a 12% prevailing interest
rate on the date of acquisition. Happy’s business model is to collect contractual cash flows and the cash flows are
solely payment of principal and interest. The prevailing interest rate on December 31, 2021 is 9%.

10. How much is the correct interest income for the year 2022?
a. 500,000 c. 563,535
b. 556,728 d. 422,652

11. How much is the carrying value of the investment that should be reported in the Statement of
Financial Position on December 31, 2021?
a. 5,450,000 c. 4,759,663
b. 4,696,128 d. 5,161,850

12. How much is the amortized cost of the Investment on December 31, 2024?
a. 4,910,714 c. 4,759,817
b. 5,000,000 d. 4,830,995

Problem 5: On January 1, 2021, Sleepy Company purchased P 1,000,000, 12% bonds for P1,063,394, a price that
yields 10%. Interest on these bonds is payable every December 31. The bonds mature on December 31, 2024.
On April 1, 2022, Sleepy Company sold P600,000 face value bonds at 101 plus accrued interest. Market values of
the bonds were as follows:

December 31, 2021 108

December 31, 2022 106

13. How much is the gain or loss on sale on April 1, 2022 assuming the bond investments were classified
as FVPL?
a. 42,000 gain c. 24,000 gain
b. 42,000 loss d. 24,000 loss

14. How much is the gain or loss on sale on April 1, 2022 assuming the bond investments were classified
as IAC?
a. 21,586 loss c. 3,586 loss
b. 21,586 gain d. 3,586 gain

Problem 6: Bashful Company acquired on January 1, 2021 a 5 year, 10%, P5,000,000 face value bonds, for
P4,639,400 dated January 1, 2021. The bonds which pay interest every December 31 had a 12% prevailing interest
rate on the date of acquisition. Bashful’s business model is to collect contractual cash flows and the cash flows are
solely payment of principal and interest. On December 31,2022, the P4,000,000 face value was disposed of when
the market rate was 11%. The management decided the that the business model is no longer appropriate and
reclassified the remaining investment to FVPL. The prevailing interest rate on December 31, 2023 is at 11.5%.

15. How much is the gain or loss on reclassification on January 1, 2023?

a.23,637 gain taken to P/L c. 23,637 gain taken to OCI
b.23,637 loss taken to P/L d. 23,637 loss taken to OCI

16. How much is the carrying value of the investment that should reported in the Statement of Financial
Position on December 31, 2023?
a.990,991 c. 982,143
b.986,547 d. 974,520

Problem 7: Sneezy Company acquired on January 1, 2021 a 5 year, 10%, P5,000,000 face value bonds, for
P4,639,400 dated January 1, 2021. The bonds which pay interest every December 31 had a 12% prevailing interest
rate on the date of acquisition. Sneezy’s business model is to sell the investment in the short-term to generate
profits. The fair values of the investment on December 31, 2021 and December 31, 2022 are based on 11.5% and
11% respectively. On December 31,2022, Sneezy Company decided that the investment is no longer for sale but
now held to collect contractual cash flow. The prevailing interest rate on December 31, 2023 is at 10.5%.

17. How much is the carrying value of the investment as of December 31, 2022?
a. 5,500,000 c. 4,877,850
b. 4,759,663 d. 5,550,000

18. How much is the interest income for the year 2023?
a. 500,000 c. 536,564
b. 571,160 d. 585,342

Problem 8: On January 2, 2019, Dopey 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 have an effective interest rate of 9% and was acquired
for P6,194,383. The investment was designated as Investment at FVOCI. The following information pertains to the
debt security:

Date Fair Value*/Amortized cost at 9% Fair Value*/Amortized cost at 8.5%

01/01/19 P6,194,383 * None
12/31/19 P6,151,878 P6,229,862 *
12/31/20 P6,105,547 P6,159,400
12/31/21 P6,055,046 P6,082,949
12/31/22 P6,000,000 P6,000,000

19. Assume the investment was reclassified on January 2, 2020 as Investment at Fair Value to Profit or
Loss when the prevailing rate of interest was 8.5%, what amount of unrealized gain or loss reported
in the equity must be reclassified to profit loss on the date of transfer/reclassification?
a none c. P 77,984
b P35,479 d. P113,373

20. Assume the investment was reclassified on January 2, 2020 as Investment at Amortized Cost when
the prevailing rate of interest was 8.5%, what amount should the investment account be reported
in the Statement of Financial Position on December 31, 2020?
a P6,105,547 c. P6,159,400
b P6,151,878 d. P6,229,862