DEBT INVESTMENTS – Amortized Cost / FVOCI – Answers

3-1.

(a)
Interest Premium
Interest Carrying
Date Received Amortization
Revenue Value
01/01/Y1 8,274,646.00
12/31/Y1 1,200,000 1,158,450.44 41,549.56 8,233,096.44
12/31/Y2 1,200,000 1,152,633.50 47,366.50 8,185,729.94
12/31/Y3 1,200,000 1,146,002.19 53,997.81 8,131,732.13
12/31/Y4 1,200,000 1,138,442.50 61,557.50 8,070,174.63
12/31/Y5 1,200,000 1,129,824.45 70174.63* 8,000,000.00

*adjusted

(b)
Y1
Jan. 1 Debt Investments at Amortized Cost 8,274,646
Cash 8,274,646

Dec. 31 Cash 1,200,000

Debt Investments at Amortized Cost 41,549.50
Interest Revenue 1,158,450.44

Dec. 31 Cash 1,200,000

Debt Investments at Amortized Cost 47,366.50
Interest Revenue 1,152,633.50

3-2.

(a)
(1) Securities are classified as at amortized cost

To facilitate computation, a partial amortization table is presented below.

Interest Interest
Received Revenue Amortization Amortized
Date
of Discount Cost
June 1, Year 1 3,691,500.00
Dec. 1, Year 1 160,000 184,575.00 24,575.00 3,716,075.00
June 1, Year 2 160,000 185,803.75 25,803.75 3,741,878.75
Dec. 1, Year 2 160,000 187,093.94 27,093.94 3,768,972.69
June 1, Year 3 160,000 188,448.63 28,448.63 3,797,421.32
Dec. 1, Year 3 160,000 189,871.07 29,871.07 3,827,292.39
June 1, Year 4 160,000 191,364.62 31,364.62 3,858,657.01
Dec. 1, Year 4 160,000 192,932.85 32,932.85 3,891,589.86

Year 1
June 1 Debt Investments at Amortized Cost 3,691,500
Cash 3,691,500

Dec. 1 Cash 160,000

Debt Investments at Amortized Cost 24,575
Interest Revenue (see above table) 184,575

31 Interest Receivable 26,667.67

Debt Investments at Amortized Cost 4,300.63
Interest Revenue 30,967.30
160,000 x 1/6 = 26,667
25,803.75 x 1/6 = 4,300.63
Year 2
June 1 Cash 160,000
Debt Investments at Amortized Cost 21,503.12
Interest Receivable 26,666.67
Interest Revenue (see above table)* 154,836.46
*185,803.75 x 5/6

Dec. 1 Cash 160,000

Debt Investments at Amortized Cost 27,093.94
Interest Revenue (see above table) 187,093.94

31 Interest Receivable 26,666.67

Debt Investments at Amortized Cost 4,741.44
Interest Revenue 31,408.11
160,000 x 1/6 = 26,666.67
28,449 x 1/6= 4,741.44

(3) Securities are classified as at Fair Value Through Other Comprehensive Income

Year 1
June 1 Debt Investments at FV through OCI 3,691,500
Cash 3,691,500

Dec. 1 Cash 160,000

Debt Investments at Fair Value through OCI 24,575
 Interest Revenue (see table) 184,575

Dec.31 Interest Receivable 26,666.67

Debt Investments at Fair Value through OCI 4,300.63
Interest Revenue 30,967.30

Dec. 31 Fair Value Adjustment – Debt Investments

at FV through OCI 159,624.37
Unrealized Gain/Losses on Debt
Investments at FV through OCI 159,624.37

Amortized cost
3,716,075 + 4,300.63 =3,720,375.63
Fair value -3,880,000 – 3,720,375.63=
159,624.37

Year 2
June 1 Cash 160,000
Debt Investments at FV through OCI 21,503.12
Interest Receivable 26,666.67
Interest Revenue (see table) 154,836.46

Dec. 1 Cash 160,000

Debt Investments at FV through OCI 27,093.94
Interest Revenue (see table) 187,093.94

31 Interest Receivable 26,666.67

Debt Investments at FV through OCI 4,741.44
Interest Revenue 31,408.11
160,000 x 1/6 = 26,666.67
28,448.63 x 1/6= 4,741.44

31 Fair Value Adjustment – Debt Investments

at FV through OCI 26,661.50
Unrealized Gain/Losses on Debt
Investments at FV through OCI 26,661.50

Amortized cost
3,768,972.69 + 4,741.44 = 3,773,714.13
Fair value- 3,960,000 –3,773,714.13
=186,285.87
186,285.87– 159,624.37 = 26,661.50
(b) Journal entry/entries to record sale of investment on November 1, Year 4.
(1) Securities are classified as at amortized cost.

Nov. 1 Debt Investments at Amortized Cost 27,444.04

Interest Receivable 133,333.33
Interest Revenue 192,932.85 x 5/6 160,777.37
32,932.85 x 5/6 = 27,444.04

1 Cash 3,925,000
Loss on Sale of Debt Investments at Amortize
Cost 94,434.38
Interest Receivable 133,333.33
Debt Investments at Amortized Cost 3,886,101.05

CV of Debt Investments sold:

As of June 1, Year 4 3,858,657.01
Amortization June 1 to
Nov. 1, Year 4 27,444.04
As of Nov. 1, Year 4 3,886,101.05
Sales price 3,791,666.67
Loss on sale 94,434.38

(2) Securities are classified as at Fair Value through Other Comprehensive Income

Nov. 1 Debt Investments at FV through OCI (32,932.85 x 27,444.04

5/6)
Interest Receivable 133,333.33
Interest Revenue (192,932.85 x 5/6) 160,777.37

1 Unrealized Gains/Losses on Debt Investments at

FV through OCI 181,914.55
Fair Value Adjustment – Debt Investments at
FV through OCI 181,914.55
Amortized cost - 3,858,657.01 + (32,932.85x 5/6) =
3,886,101.05
3,886,101.05 – 3,791,666.67 (Selling price)= 94,434.38
cum loss
94,434.38 + 87,480.17* = 280,720 .25
*FV, 12/31Yr 3 – 3,920,000
CV, 12/31/Yr3 – 3,832,519.83
Cum. Unrealized G/L 87,480.17
Credit balance

1 Cash 3,925,000
Fair Value Adjustment-Debt Investments at FV
through OCI 94,434.38
Interest Receivable 133,333.33
Debt Investments at FV through OCI 3,886,101.05
 Loss on sale of Debt investment at FVOCI 94,434.38
Unrealized Gain/Losses on Debt Investments
at FV through OCI 94,434.38
3-3.

(1) Classified as at Amortized Cost

Amortization Table
Prem Amortized
Date Nom Int Effect Int
Amort cost, end
1/1/Year 1 1,063,394.00
12/31/Year 1 120,000 106,339.40 13,660.60 1,049,733.40
12/31/Year 2 120,000 104,973.34 15,026.66 1,034,706.74
12/31/Year 3 120,000 103,470.67 16,529.33 1,018,177.41
12/31/Year 4 120,000 101,817.74 18,177.41* 1,000,000.00

(a) Carrying value, 12/31/Year 2 (see table) P1,034,706.74

(b) Sales price P 606,000

Carrying value, 1/1/Year 3 (1,034,706.74 x 600/1000) P 620,824.04
Amortization 1/1/Year 3 – 4/1/Year 3
16,529.33 x 3/12 x 600/1000 (2,479.40) 618,344.64
Loss on sale P 12,344.64

(c) Interest income for Year 3

Jan 1 to Mar 31 103,470.67 x 3/12 P 25,867.67
Apr 1 to Dec 31 103,470.67 x 400/1000 x 9/12 31,041.20
Total interest income for Year 3 P 56,908.87

(d) Carrying value, 12/31/Y3 (1,018,177.41x 400/1000) P 407,270.96

(3) Classified as at Fair Value Through Other Comprehensive Income

(a) Carrying value, 12/31/Year 2 (1M x 1.06) P1,060,000

(1,034,706.74 + 25,293.26 FV Adj)

(b) Sales price P 606,000

Amortized cost 618,344.64
Loss on sale P 12,344.64

(c) Interest income for Year 3:

Jan 1 to Mar 31 103,470.67 x 3/12 P 25,867.67
Apr 1 to Dec 31 103,470.67 x 400/1000 x 9/12 31,041.20
 Total interest income for Year 3 P 56,908.87

(d) Fair value, December 31, Year 3 (400,000 x 1.04) P 416,000

Amortized cost, December 31, Year 3
1,018,177.41 x 4/10 407,270.96
Cumulative amount of unrealized gains/loss P 8,729.04
3-6. (Raffy Company)

To facilitate computation, a partial amortization table is presented below.

Interest Interest Amortization

Date Carrying Value
Received Revenue of Premium

1-Jun-18 5,353,150
Dec. 31, 2018 350,000 312,267.08 37,732.92 5,315,417.08
Dec. 31, 2019 600,000 531,541.71 68,458.29 5,246,958.79
Dec. 31, 2020 600,000 524,695.88 75,304.12 5,171,654.67
Dec. 31, 2021 600,000 517,165.47 82,834.53 5,088,820.14

2018
June 1 Debt Investments at FVOCI 5,353,150
Interest Receivable (5M x 12% x 5/12) 250,000
Cash 5,603,150

Dec. 31 Cash 600,000

Interest Receivable 250,0000
Interest Revenue 312,267.08
Debt Investments at FVOCI 37,732.92

Fair Value Adjustment – Debt Investments at FV 34,582.92

through OCI
Unrealized Gains/Losses on Debt 34,582.92
Investments at FV through OCI
Fair value ,12/31/2018 (5,000,000 X 1.07) = 5,350,000
Amortized cost, 12/31/2018 = 5,315,417.08
Cum. Unrealized gains & losses 34,582.92
Credit balance

2019
Dec. 31 Cash 600,000
Interest Revenue 531,541.71
Debt Investments at FVOCI 68,458.29
 Unrealized Gains/Losses on Debt Investments at 31,541.71
FV through OCI
Fair Value Adjustment – Debt Investments 31,541.71
at FV through OCI
Fair value ,12/31/2019 (5,000,000 X 1.05) = 5,250,000
Amortized cost, 12/31/2019 = 5,246,958.79
Cum. Unrealized gains & losses 3,041.21
Credit balance,12/31/2019
Cum. Unrealized gains & losses
Credit balance,12/31/2018 34,582.92
Unrealized loss 31,541.71

2020
Dec. 31 Cash 600,000
Interest Revenue 524,695.88
Debt Investments at FVOCI 75,304.12

Fair Value Adjustment – Debt Investments at FV 25,304.12

through OCI
Unrealized Gains/Losses on Debt 25,304.12
Investments at FV through OCI
Fair value ,12/31/2020 (5,000,000 X 1.04) = 5,200,000
Amortized cost, 12/31/2020 = 5,171,654.67
Cum. Unrealized gains & losses 28,345.33
Credit balance,12/31/2020
Cum. Unrealized gains & losses
Credit balance,12/31/2019 3,041.21
Unrealized gain 25,304.12

2021
Sept. 1 Interest Receivable 400,000
Debt Investments at FVOCI 55,223.02
Interest Revenue (517,165.47 x 8/12) 344,776.98

Fair Value Adjustment – Debt Investments at FV 3,133.81

through OCI
Unrealized Gains/Losses on Debt 3,133.81
Investments at FV through OCI

Cash (3,090,000 + 240,000) 3,330,000

Gain on Sale of Debt Investments 20,141.01
Interest Receivable 240,000
Debt Investments at FVOCI 3,069,858.99

CV of debt investment sold:

As of 12/31/20 (5,171,654.67x 3M/5M) 3,102,992.80
 Amort from 1/1/20-9/1/20 (82,834. 53 x8/12x3M/5M) 33,133.81
CV as of 9/1/20 3,069,858.99
Sales price(3,000,000 X1.03) 3,090,000
Cumulative Unrealized gain & losses,9/1/2021 20,141.01
Credit balance pertaining to 3M bonds sold
Cumulative Unrealized gain & losses,12/31/2020 17,007.20
Credit balance pertaining to 3M bonds sold 3,133.81
(28,345.33 x 3m/5m)

Dec. 31 Cash 240,000

Interest Revenue 206,866.19
Debt Investments at FVOCI 33,133.81
2M x 12% = 240,000
517,165.47 x 2/5 = 206,866.19
82,834.53 x 2/5 = 33,133.81

Unrealized Gains/Losses on Debt 6,866.19

Investments at FV through OCI
Fair Value Adjustment – Debt 6,866.19
Investments at FV through OCI
Fair value ,12/31/2021 (2,000,000 X 1.02) = 2,040,000
Amortized cost, 12/31/2021 (5,088,820.14 X2M/5M)= 2,035,528.06
Cum. Unrealized gains & losses
Credit balance,12/31/2021. 4,471.94
Cum. Unrealized gains & losses
Credit balance,12/31/2020 (28,345.33 X 2M/5M) 11,338.13

Unrealized loss 6,866.19

3-7

Amortization Table
Prem Amortized
Date Nom Int Effect Int
Amort cost, end
1/1/Year 1 1,063,394.00
12/31/Year 1 120,000 106,339.40 13,660.60 1,049,733.40
12/31/Year 2 120,000 104,973.34 15,026.66 1,034,706.74
12/31/Year 3 120,000 103,470.67 16,529.33 1,018,177.41
12/31/Year 4 120,000 101,817.74 18,177.41* 1,000,000.00

(a) Market value, 12/31/ Year 2 (1.06 x 1M) P1,060,000

 Amortized cost, 12/31/Year 2 1,034,706.74
Unrealized Gain or Loss (In Equity) P 25,293.26

(b) Interest income for Year 2 P 104,973.34

(c) Market value, 12/31/Year 3 (1.04 x 400,000) P 416,000

Amortized cost (1,018,177.41 x 400/1000) 407,270.96
Unrealized Gain on 12/31/Year 3 P 8,729.04