Investment Bonds Exam Solutions
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BLACKPINKLisaRoseJisooJennieEXAMINATION about INVESTMENT 16
General Rule: Read the following carefully and answer it wisely. All solutions are needed, so put it in the last
page. (20 Points)
1. On July 1, 2011, Royal Corporation acquired a long-term investment in Blood Company’s 10-year
12% bonds, with value of P5,000,000, for P5,386,300. Interest is payable semi-annually on January 1.
The bonds mature on July 1, 2016, Bonds effective rate is 10%. What is the carrying value of the
investment and interest income to be reported in Royal’s financial statements on December 31, 2011,
respectively?
a. P5,386,300 and P269,315 c. P5,386,300 and P300,000
b. P5,355,615 and P300,000 d. P5,355,615 and P269,315
Answer: D
Interest InterestDiscount Book
Date Earned Income amortization Value
07.01.11 P5,386,300
12.31.11 P300,000 P269,315 P30,685 P5,355,615
2. On July 1, 2010, Throw Company Pillow, INC. 10-year, 12% bonds with a face value of P2,000,000
for P1,791,840. The bonds will on July 1, 2020 and pay interest annually on July 1. Bonds effective
rate is 14%.
What is the amount of income throw Company should recognize related to the bond investment on December 31, 2011?
a. P250,857 c. P251,100
b. P251,617 d. P254,111
Answer: B
Interest Interest Discount Book
Date Earned Income amortization Value
12% 14%
07.01.10 P1,791,840
07.01.11 P240,000 P250,857 P10,858 P1,802,698
07.01.12 P240,000 P252,378 P12,378 P1,815,076
07.01.13 P240,000 P254,111 P14,111 P1,829,187
Interest Income 2011
Jan 1 – Jun 30 (P250,857 x ½ ) P125,428
Jul 1 – Dec 31 (P252,378 x ½) P126,189
Total Interest Income – 2011 P251,617
3. On January 1, 2010, Alarm Company purchased as long-term investment P5,000,000 face value of
Clock Corporation’s 8% bonds for P4,683,000 to yield 10% interest per year. The bonds mature on
January 1, 2014, and pay interest annually on January 2, 2012, Alarm Company sold the debt security
when the market rate of interest was 12%. What amount should Alarm Company report as gain or on
the sale of the debt instrument (Carry present value factor up to 3 decimal places)
a. P165,430 c. P173,570
b. P240,700 d. P317,000
Answer: A
PV of future interest (P400,000 x 1.690) P 676,000
PV of the face (P5,000,000 x 0.797) P3,985,000
Total P4,661,000
Less: Amortized cost P4,826,420
Loss on sales P 165,430
4. Warrior Company has an outstanding bonds investment as of April 1, 2010 with a face value of
P5,000,000. The bond was acquired at face and bears interest of 8% per annum and matures on March
31, 2016. The bonds were classified as held-to-maturity.
On March 31, 2010 bond’s fair value when market rate of interest of 6% is P5,491,732 consisting of the present value of
the principal only strip of P3,524,802 and present value of the interest only strip of P1,966,930. On the same day warrior
company unconditionally transferred its right to the principal only strip to under a legal assignment for cash payment
equal strip to under a legal assignment for cash payment equal to its fair value without any recourse whatsoever. The
company retained the interest only strip (right to receive the interest annual interest of P400,000 until maturity). What
amount of gain should the company recognize on the disposal of the principal only strip?
a. None c. P176,740
b. P315,612 d. P491,732
Answer: B
Selling Price P3,524,802
Less: Carrying value P3,209,190
Gain on Sales P 315,612
Principal P3,524,802 64.1837% P3,209,190
Interest P1,966,930 35.8163% P1,790,810
Total P5,491,732 P5,000,000
Note: When an entity transfers an asset that is part of a larger financial asset (meaning transfer interest only or principal
only), this will qualifies for de-recognition in its entirety. Hence, the previous carrying value of the financial asset is
allocated between the part that continues to be recognized and the part that is de-recognized. The allocation is based on
the relative fair values of those parts as the date of transfer,
Investment in Property
5. On January 2, 2011, Silent Corporation has an investment property that was carried at fair value with
a carrying amount of P2,500,000 (historical cost P2,400,000). As of the December 31, 2011, the fair
market value of the property is P2,600,000. On December 31, 2012, the fair market value of the
property was P2,800,000. On this date, Silent Corporation decided to reclassify/transfer the property
to inventory. On the date of transfer, what amount should the inventory be valued?
a. P2,400,000 c. P2,500,000
b. P2,600,000 d. P2,800,000
Answer: D
Note: Transfer from investment property carried at FV to owner-occupied property (PPE) or to inventories, the fair value
at the time of transfer is the measure of its new classification.