EXAMINATION about INVESTMENT 14

General Rule: Read the following carefully and answer it wisely. All solutions are needed, so put it in the last
page. (10 Points)

1. On January 1, 2012 Sun Company purchased the debt instruments of Silk Company with a face value
of P5,000,000 bearing interest rate of 8% for P4,621,006 to yield 10% interest per year. The bonds
mature on January 1, 2016 and pay interest annually on December 30 but Sun Company does not
intend to hold instrument until maturity.

If the market of the instruments as of December 31, 2012 is 96% face amount, what amount of unrealized gain or loss
should Sun Company report in its 2012 shareholders’ equity?
a. None c. P26,559 unrealized gain
b. P48,582 unrealized gain d. P116,892 unrealized gain
Answer: B
Interest Interest Discount Book
Date Earned Income amortization Value
1.1.11 P4,621,006
12.31.11 P400,000 P462,101 P62,101 P4,683,107
12.31.12 P400,000 P468,311 P68,311 P4,751,418

FMV (P5,000,000 x 96%) P4,800,000

Less: Carrying value of the debt P4,751,418
Unrealized gain – Stockholders’ equity P 48,582

2. On January 1, 2011, Marcus Company made P3,967,120 investments in the Camper Corporation’s
8%, 5-year bonds with face value of P4,000,000. The effective rate for similar financial asset is 10%
Marcus Company intends to hold the bolds until maturity.

On December 31, 2012, Because of financial difficulty the management of Marcus Company has decided not to hold the
instrument until maturity. Because of the inability to hold the instrument based on its initial intent, the investment was
reclassified to available-for-sale. The market value of the securities on the date of reclassification was P4,000,000. On
March 31, 2013, the debt security was sold at the prevailing rate of similar debt instruments. What amount of unrealized
gain should Marcus Company recognize on the date of transfer?
a. None c. P138,333
b. P198,485 d. P253,168
Answer: B
Interest Interest Discount Book
Date Earned Income amortization Value
1.1.11 P3,697,120
12.31.11 P320,000 P369,712 P49,712 P3,746,832
12.31.12 P320,000 P374,683 P54,683 P3,801,515

FMV – 12.31.12 P4,000,000

Less: Carrying value of the debt P3,801,515
Unrealized gain – Stockholders’ equity P 198,485
 3. On January 1, 2010 Marvel Company made P3,697,120 investment in the caper Corporation’s 8%, 5-
year bonds with face value of P4,000,000. effective rate for similar financial asset is 10%. Marvel
Company intends to hold the bonds until maturity. PV factor of 11% after 3 years, 0.731 and the PV
factor of annuity of 11% after 3 years, 2.444

On December 31, 2011, Marvel could no longer hold the bonds investments in the Caper Corporation until
maturity and decided to transfer it to available for sale securities. The market rate of interest on December 31, 2011 on
similar debt instrument is 11%. What amount of unrealized gain/loss should Marvel Company recognize on the date of
transfer?
a. P 95,435 c. P 18,192
b. P253,168 d. P371,360
Answer: A
Interest Interest Discount Book
Date Earned Income amortization Value
1.1.10 P3,697,120
12.31.10 P320,000 P369,712 P49,712 P3,746,832
12.31.11 P320,000 P374,683 P54,683 P3,801,515

FMV – 12.31.11 P3,706,080

Less: Carrying value of the debt P3,801,515
Unrealized loss – Stockholders’ equity P 95,435

Interest (P4,000,000 x 8% x 2.444) P 782,080

Face (P4,000,000 x .731) P2.924,000
Total P3,706,080

4. On January 2, 2010, Holy Company investment in a 4-year 10% bond with a face value of
P4,000,000 in which interest is to be paid every December 31. The bonds has an effective interest rate
of 10% and was acquired for P4,000,000. Holy Company originally classified the bonds as held-to-
maturity securities. On November 30, 2011, Holy Company is in need of cash and decided to sell part
of its investment in held-to-maturity. On December 31, 2011, P3,000,000 face value of the held-to-
maturity was sold at the prevailing effective market rate of 12%. Immediately after the sale the
remaining held-to-maturity security was reclassified to available-for-sale security.

PV factor of 12% 2 years 0.797

PV factor of annuity of 12% after 2 years 1.690

What amount of unrealized loss should Holy Company recognize at the date of transfer?
a. None c. P34,000
b. P102,000 d. P136,000
Answer: C
FV 12.31.11 – based on market
Face (P1,000,000 x .797) P 797,000
Interest (100,000 x 1.690) P 169,000
Total P 966,000
Less: historical cost P1,000,000
Unrealized loss P 34,000
 5. On January 2, 2010, Saint Company 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 has an effective interest rate of 9% and was
acquired for P6,194,220. Saint Company originally Classified the bonds as held-to-maturity
securities.

During December 2011, Saint Company is in financial scrape that it decided to dispose P4,000,000 face value of its
investment in held-to-maturity which will be used to settle an obligation and to finance of its operating costs.

On December 31, 2011 the four million face value held-to-maturity debt instrument was disposed of when market rate of
similar instrument was 11%. On the same date, Saint Company immediately reclassified the remaining held-to-maturity to
available-for-sale security.

PV factor of 11% after 2 years 0.8116

PV factor of annuity of 11% after 2 years 1.7125

Question 1: What is the amortized cost of the debt instrument on December 31, 2011?
a. P6,000,000 c. P6,105,353
b. P6,151,700 d. P6,194,220
Answer: C
Interest Interest Premium Book
Date Earned Income amortization Value
1.1.10 P6,194,220
12.31.10 P600,000 P557,480 P42,520 P6,151,700
12.31.11 P600,000 P553,653 P46,347 P6,105,353

Question 2: What is the amount of unrealized gain or loss should the company recognize in their 2011 shareholder’s
equity as a result of the transfer?
a. P51,358 c. P69,418
b. P78,134 d. P96,330
Answer: C
FV 12.31.11 – based on market
Face (P2,000,000 x .8116) P1,623,200
Interest (200,000 x 1.7125) P 342,500
Total P1,965,700
Less: Carrying value of the debt
(P6,105,353 x 2/6) P2,035,118
Unrealized loss P 69,418