TFA 1

Chapter 40 – Bond Investment

Lady Michaela R. Palicpic

Problem 40-3 (IFRS)

 
On January 1, 2019, Dumaguete Company purchased bonds with face amount of P 4,000,000 for
P 4,206,000.

The business model in managing the financial asset is to collect contractual cash flows that are
solely payments of principal and interest and also to sell the bonds in the open market.

The bonds mature on December 31, 2021 and pay 10% interest annually on December 31 each
year with 8% effective yield.

The bonds are quoted at 95 on December 31, 2019 and 90 0n December 31, 2020.

1. What amount of unrealized loss should be reported as component other comprehensive

income in 2019?

a. 342,480
b. 406,000
c. 469,520
d. 0

2. What amount of unrealized loss should be reported as component of other comprehensive

income in 2020?

a. 473,878
b. 131,398
c. 200,000
d. 0

3. What amount of cumulative unrealized loss should be reported in the statement of

changes in equity for 2020?

a. 406,000
 b. 606,000
c. 473,878
d. 0

3. What is the carrying amount of the bond investment on December 31, 2020?
a. 4,206,000
b. 3,600,000
c. 3,800,000
d. 4,673,878

Solution 40-3

Question 1 Answer a

Interest Interest Premium Carrying

Date received Income Amortization Amount

1/1/2019 4,206,000
12/31/2019 400,000 336,480 63,520 4,142,480
12/31/2020 400,000 331,398 68,602 4,073,878
12/31/2021 400,000 326,122 73,878 4,000,000

Interest received is equal to 10% multiplied by face amount.

Interest income is equal to 8% multiplied by the carrying amount.

Market value- December 31, 2019 (4,000,000 x 95) 3,800,000

Carrying amount per table – December 31, 2019 4,142,480
Unrealized loss – 2019 (342,480)
Question 2 Answer b

Market value- December 31, 2020 (4,000,000 x 90) 3,600,000

Carrying amount per table – December 31, 2020 4,073,878

Cumulative Unrealized loss – December 31, 2020 (473,878)

Unrealized loss - December 31, 2019 (342,480)

Increase in unrealized loss - 2020 (131,398)

The increase in unrealized loss is reported in the statement of comprehensive income.

Question 3 Answer c (473,878)

The cumulative unrealized loss is reported in the statement of changes in equity.

Question 4 Answer b

Carrying amount of bond investment – December 31, 2020

(4,000,000 x 90) 3,600,000

Problem 40-4 (IAA)

 
On January 1, 2019, Reign Company purchased 12% bonds with face amount of P 5,000,000 for
P 5,380,000 with an effective yield of 10%.

The bonds are dated January 1, 2019, mature on January 1, 2024 and pay interest annually on
December 31 of each year.

The bonds are quoted at 120 on December 31, 2019. The entity has elected the fair value option
for the bond investment.

What total income should be reported for 2019?

a. 1,200,000
b. 1,120,000
c. 1,138,000
d. 600,000
Solution 40-4 Answer a

Market value- December 31, 2019 (5,000 x 120) 6,000,000

Carrying amount – January 1, 2019 5,380,000

Gain from change in fair value 620,000

Interest income (5,000 x12%) 600,000

Total income 1,220,000

PFRS 9, paragraph 4.1.5, provides that an entity at initial recognition may irrevocably designate
a financial asset as measured at fair value through profit or loss even if the financial asset
satisfies the amortized cost measurement or fair value through other comprehensive income
measurement.

In other words, investment in bonds can be designated irrevocably as measured at fair value
through profit or loss even if the bonds are held for collection of held for collection and for
trading as business model.

Under the fair value option, all changes in fair value are recognized in profit or loss.

Moreover, the interest income is based on the nominal interest rate rather than the effective
interest rate.

Problem 40-5 (IAA)

On January 1, 2019, Gelyka Company purchased 12% bonds with face amount of P 5,000,000
for P 5,500,000 including transaction cost of P 100,000. The bonds provide an effective yield of
10%.

The bonds are dated January 1, 2019 and pay interest annually on December 31 of each year.

The bonds are quoted at 115 on December 31, 2019. The entity has irrevocably elected the fair
value option.

1. What amount of gain from change in fair value should be reported for 2019?

a. 750,000
b. 250,000
c. 350,000
d. 0
2. What amount of interest income should be reported for 2019?

a. 600,000
b. 550,000
c. 660,000
d. 540,000

3. What is the carrying amount of the bond investment on December 31, 2019?

a. 5,750,000
b. 5,400,000
c. 5.500,000
d. 5,450,000

4. What total amount of income from the investment should be reported in the income statement
for 2019?

a. 540,000
b. 950,000
c. 890,000
d. 900,000

Solution 40-5

Question 1 Answer c

Purchase price 5,500,000

Transaction cost (100,000)
Adjusted cost 5,400,000

The transaction cost is expensed immediately if the financial asset is measured at fair value
through profit or loss.

Market value (5,000,000 x 115) 5,750,000

Adjusted cost 5,400,000

Gain from change in fair value 350,000

Question 2 Answer a

Interest Income (12% x 5,000,000) 600,000

Under the fair value option, interest income is based on nominal rate rather than effective rate.

Question 4 Answer b
Gain from change in fair value 350,000
Interest income 600,000

Total income from investment 950,000

Under the fair value option, any change in fair value is recognized in profit or loss.