CHAPTER 10 INVESTMENT IN DEBT SECURITIES

PROBLEM 6
1 FINANCIAL ASSETS MEASURED AT AMORTIZED COST - DISCOUNT
REQUIREMENT A:
DATE INTEREST INTEREST AMORTIZATION PRESENT VALUE
RECEIVED INCOME
1/1/20x1 ₱ 941,725.00
1/1/20x2 ₱ 120,000.00 ₱ 131,842.00 ₱ 11,842.00 ₱ 953,567.00
1/1/20x3 ₱ 120,000.00 ₱ 133,499.00 ₱ 13,499.00 ₱ 967,066.00
1/1/20x4 ₱ 120,000.00 ₱ 135,389.00 ₱ 15,389.00 ₱ 982,455.00
1/1/20x5 ₱ 120,000.00 ₱ 137,545.00 ₱ 17,545.00 ₱ 1,000,000.00
REQUIREMENT B:
(1,000,000 - 967,06= 32,934 discount

REQUIREMENT C:
1/1/20x1 Investment in bonds ₱ 941,725.00
Cash ₱ 941,725.00

12/31/20xInterest receivable ₱ 120,000.00

Investment in bonds ₱ 11,842.00
Interest income ₱ 131,842.00

1/1/20x2 Cash ₱ 120,000.00

Interest receivable ₱ 120,000.00

12/31/20x2 Interest receivable ₱ 120,000.00

Investment in bonds ₱ 13,499.00
Interest income ₱ 133,499.00

1/1/20x3 Cash ₱ 120,000.00

Interest receivable ₱ 120,000.00

12/31/20x3 Interest receivable ₱ 120,000.00

Investment in bonds ₱ 15,389.00
Interest income ₱ 135,389.00

1/1/20x4 Cash ₱ 120,000.00

Interest receivable ₱ 120,000.00

12/31/20x4 Interest receivable ₱ 120,000.00

Investment in bonds ₱ 17,545.00
Interest income ₱ 137,545.00
 1/1/20x5 Cash ₱ 120,000.00
Interest receivable ₱ 120,000.00

Cash ₱ 1,000,000.00
Investment in bonds ₱ 1,000,000.00

2 FINANCIAL ASSETSS MEASURED AT AMORTIZED COST - PREMIUMS

DATE INTEREST INTEREST AMORTIZATION PRESENT VALUE
RECEIVED INCOME
1/1/20x1 ₱ 1,075,939.00
1/1/20x1 ₱ 120,000.00 ₱ 96,835.00 ₱ 23,165.00 ₱ 1,052,774.00
1/1/20x2 ₱ 120,000.00 ₱ 94,750.00 ₱ 25,250.00 ₱ 1,027,524.00
1/1/20x3 ₱ 120,000.00 ₱ 92,476.00 ₱ 27,524.00 ₱ 1,000,000.00

3 ACQUIRED ASSETS
Mar-31 Investment in bonds ₱ 1,900,000.00
20x1 Interest income ₱ 60,000.00
Cash ₱ 1,960,000.00

4 TRANSACTION COST (ADJUSTMENT TO EFFECTIVE INTEREST RATE)

Purchase price (2M x 95%) 1,900,000

Commission 40,150
Initial carrying amount 1,940,150

Trial and Error:

There is discount. Therefore, the effective interest rate must be higher than the nominal
rate of 12%.

First trial: (using 13%)

Future cash flows x PV factor at x% = Present value
* (2M x PV of P1 @13%, n=4)+(2M x 12% of PV of an ordinary annuity of P1 @13%,n=4) = 1,940,510
* 1,226,637 + 713,873 = 1,940,510
*1,940,510 is equal to 1,940,510

* The effective interest rate is 13%

5 SALE OF BONDS AT INTEREST PAYMENT DATE
DATE INTEREST INTEREST AMORTIZATION PRESENT VALUE
RECEIVED INCOME
1/1/20x1 ₱ 1,940,510.00
12/31/20x1 ₱ 240,000.00 ₱ 252,266.00 ₱ 12,266.00 ₱ 1,952,776.00
12/31/20x2 ₱ 240,000.00 ₱ 253,861.00 ₱ 13,861.00 ₱ 1,966,637.00
12/31/20x3 ₱ 240,000.00 ₱ 255,663.00 ₱ 15,663.00 ₱ 1,982,300.00
12/31/20x4 ₱ 240,000.00 ₱ 257,700.00 ₱ 17,700.00 ₱ 2,000,000.00

Sale price (2M x 92% x 1/2) ₱ 920,000.00

Transaction costs -₱ 46,000.00
Net disposal proceeds ₱ 874,000.00
Carrying amount on date of sale (1,982,300 x 1/2 -₱ 991,150.00
Loss on sale -₱ 117,150.00

Jan-01 Cash (2M x 92% x 1/2) - 46k ₱ 874,000.00

20x4 Loss on sale (squeeze) ₱ 117,150.00
Investment in bonds ₱ 991,150.00

6 SALE OF BONDS IN BETWEEN INTEREST PAYMENT DATES

DATE INTEREST INTEREST AMORTIZATION PRESENT VALUE
RECEIVED INCOME
1/1/20x1 ₱ 1,940,510.00
12/31/20x1 ₱ 240,000.00 ₱ 252,266.00 ₱ 12,266.00 ₱ 1,952,776.00
12/31/20x2 ₱ 240,000.00 ₱ 253,861.00 ₱ 13,861.00 ₱ 1,966,637.00
12/31/20x3 ₱ 240,000.00 ₱ 255,663.00 ₱ 15,663.00 ₱ 1,982,300.00
7/1/20x4 ₱ 120,000.00 ₱ 128,850.00 ₱ 8,850.00 ₱ 1,991,150.00

Sale price including accrued interest (2M x 92%) ₱ 1,840,000.00

Accrued interest -₱ 120,000.00
Sale price excluding accrued interest ₱ 1,720,000.00
Transaction costs -₱ 82,000.00
Net disposal proceeds ₱ 1,638,000.00
Carrying amount on date of sale -₱ 1,991,150.00
Loss on sale -₱ 353,150.00
 Jul-01 Interest receivable 120,000
20x4 Investment in bonds at amortized cost 8,850
Interest income ₱ 128,850.00

Jul-01 Cash 1,758,000

10x4 Loss on sale 353,150
Investment in bonds at amortized ₱ 1,991,150.00
Interest receivable ₱ 120,000.00

7 PURCHASE PRICE OF BONDS

FUTURE PV FACTORS PRESENT

CASH FLOWS VALUE
Principal ₱ 2,000,000.00 0.751315 ₱ 1,502,630.00
Interest ₱ 240,000.00 2. 486852 ₱ 596,844.00
Estimated purchase price on Jan. 1, 20x1 ₱ 2,099,474.00

8 SERIAL BONDS
DATE PRINCIPAL + INTEREST ON TOTAL
OUTSTANDING PRINCIPAL BALANCE COLLECTIONS
Dec. 31,20x1 2,000,000 + (6,000,000 x 10%) 2,600,000
Dec. 31,20x2 2,000,000 + (4,000,000 x 10%) 2,400,000
Dec. 31,20x3 2,000,000 + (2,000,000 x 10%) 2,200,000

REQUIREMENT B:
Current portion of serial bonds 1,932,398
Noncurrent portion of serial bonds 1,964,285
TOTAL CARRYING AMOUNT OF SERIAL BONDS - DEC.31,20x1 3,896,683

9 ZERO-COUPON BONDS
DATE INTEREST INCOME UNEARNED PRESENT VALUE
INTEREST OF CASH FLOW
a = b x 16% b = prev. bal. + a
1/1/20x1 IG 5,116,292
12/31/20x1 818,607 N 5,934,899
12/31/20x2 949,584 O 6,884,483
12/31/20x3 1,101,517 RED 7,986,000