CDD: Auditing Problems – Investments in Debt Securities
COLEGIO DE DAGUPAN
Arellano St., Dagupan City
INVESTMENT IN DEBT SECURITIES
PROBLEM NO. 1 Held for Trading Interest Income and Unrealized Gains or Losses
On January 1, 2015, Atok Co. acquired a 3-year bonds with a face value of P3,000,000 for P2,855,940. The bonds carry
an interest of 10% per year payable every December 31. The bonds are to be appropriately classified as held for
trading. On December 31, 2015, the bonds are quoted at 104%.
Questions:
Based on the above data, answer the following:
1. How much is the interest income for 2015?
a. 300,000 c. 353,579
b. 342,713 d. 114,104
2. How much is the unrealized gain (loss) in 2015 to be recognized in the profit or loss?
a. Nil c. 191,347
b. 234,060 d. 264,060
PROBLEM NO. 2 Derecognition of Held for Trading Debt Securities
On January 1, 2014, Bakun Co. acquired a 3-year bonds with a face value of P3,000,000 for P2,855,940. The bonds
carry an interest of 10% per year payable every December 31. The bonds are to be appropriately classified as held for
trading. On December 31, 2014, the bonds are quoted at 103. On January 3, 2015, the bonds were sold at 104.
How much is the realized gain (loss) on sale in 2015 to be recognized in the profit or loss?
a. Nil c. 264,060
b. 34,060 d. 30,000
PROBLEM NO. 3 Acquisition of FAAC Term Bonds on Interest Date
On January 1, 2015, Bokod Co. acquired a 4-year bonds with a face value of P1,200,000 and stated interest of 10% per
year payable annually on December 31. The bonds were acquired to yield 12%. The bonds are to be appropriately
classified as financial asset at amortized cost.
Questions:
Based on the above data, answer the following:
1. How much is the purchase price of bonds on January 1, 2015?
a. 0 c. 1,127,076
b. 277,076 d. 1,051,730
2. How much is the interest income for 2015?
a. 120,000 c. 139,128
b. 135,249 d. 114,104
PROBLEM NO. 4 Acquisition of FAAC Term Bonds in Between Interest Dates
On April 1, 2015, Buguias Co. acquired a 4-year bonds with a face value of P2,000,000 and stated interest of 10% per
year payable annually on December 31. The bonds were acquired to yield 12%. The bonds are to be appropriately
classified as financial asset at amortized cost.
Questions:
Based on the above data, answer the following:
1. How much is the purchase price of bonds on April 1, 2015?
a. 1,922,106 c. 1,878,460
b. 1,028,460 d. 1,934,814
2. How much is the interest income for 2015?
a. 150,000 c. 173,911
b. 169,061 d. 85,578
PROBLEM NO. 5 Interpolation of Effective Interest Rate of FAAC - Term Bonds and Computation of Interest
Income
On January 1, 2015, Itogon Co. acquired a 10% interest, 4-year bonds with a face value of P1,200,000 for P1,100,000.
Transaction cost paid by the company amounted to P44,752. Interest is payable annually on December 31.The bonds
are to be appropriately classified as financial asset at amortized cost.
How much is the interest income for 2015?
a. 120,000 c. 134,479
b. 131,646 d. 114,104
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Driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – H009
CDD: Auditing Problems – Investments in Debt Securities
PROBLEM NO. 6 Acquisition of FAAC - Serial Bonds
On January 1, 2015, Kabayan Co. acquired a 4-year bonds with a face value of P1,800,000 and stated interest of 10%
per year. The bonds mature in 4 equal annual installments every December 31. The interest is also payable every
December 31. The bonds were acquired to yield 12%. The bonds are to be appropriately classified as financial asset at
amortized cost.
Questions:
Based on the above data, answer the following:
1. How much is the purchase price of bonds on January 1, 2015?
a. Nil c. 1,727,834
b. 612,167 d. 1,030,521
2. How much is the interest income for 2015?
a. Nil c. 156,621
b. 207,340 d. 188,052
PROBLEM NO. 7 Reclassification from Financial Assets at Amortized Cost to Held for Trading
On January 1, 2013, Sorsogon Company purchased 5-year bonds with face value of P8,000,000 and stated interest of
10% per year payable semiannually June 30, and December 31. The bonds were acquired P8,648,800 to yield 8%. The
objective of Da King’s business model is to hold the investment until maturity and to collect the contractual cash flows
(principal and interest).
The quoted market price of the investment on December 31, 2013 and December 31, 2014 was 106% and 104%,
respectively. On December 31, 2014, the business model of Sorsogon Company changed in which bonds are sold in the
near term to take advantage of fluctuations in fair values for short-term profit taking.
Required:
1) What is the new cost of the FVTPL?
2) How much is the gain or loss on the reclassification of the financial asset at amortized cost to FVTPL?
PROBLEM NO. 8 Reclassification: Held for Trading to Financial Asset at Amortized Cost
On January 1, 2014, Kibungan Co. acquired a 3-year bonds with a face value of P3,000,000 for P2,855,940. The bonds
carry an interest of 10% per year payable every December 31.
The bonds are to be appropriately classified as held for trading.
On July 1, 2014, Kibungan Co. changed its business model. It was determined that the investment in bonds at
amortized cost should be reclassified to financial asset measured at amortized cost on reclassification date. On
December 31, 2014, the bonds are quoted at 103.
On January 1, 2015, the bonds were quoted at 104.
Questions:
Based on the above data, answer the following:
1. How much is the interest income for 2014?
a. 300,000 c. 353,579
b. 342,713 d. 114,104
2. How much is the gain (loss) on reclassification on January 1, 2015?
a. Nil c. 242,704
b. 221,347 d. 30,000
PROBLEM NO. 9 Impairment and Reversal
On January 1, 2013, Legazpi Company acquired 12% P2,000,000 face amounts bonds for P2,126,776. The bonds
mature on December 31, 2016. The bonds were acquired to yield 10%. Interest is payable on December 31. The
bonds are to be classified as financial asset at amortized cost.
On December 31 2014, after receiving the interest, the issuer of the financial instrument is in financial difficulties and
it becomes probable that an impairment loss should be recorded. The company assesses that only principal amount
will be received on the maturity date. The prevailing rate of interest on this date is 11%.
On December 31 2015, the financial condition of the borrower has improved and that it can pay its unpaid obligation
including principal and interest at maturity. The prevailing rate of interest on this date is 12%.
The following present value factors are available:
PV of 1 @ 10% @ 11% @ 12%
One period .9091 .9009 .8929
Two periods .8264 .8116 .7972
Three periods .7513 .7312 .7118
Four periods .6830 .6587 .6355
Required:
A. Compute for the following
1) Impairment loss on December 31, 2014.
2) Gain on reversal of impairment loss in 2015.
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Driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – H009
CDD: Auditing Problems – Investments in Debt Securities
PROBLEM NO. 10
Your audit of Un-unnoy Corporation disclosed that the company owned the following securities on December 31,
2014:
Trading Securities
Security Shares Cost Market
Panaghoy, Inc. 14,400 216,000 276,000
Lamentations, Inc. 24,000 648,000 432,000
Total 864,000 708,000
Fair value through other comprehensive income securities:
Equity Securities Shares Cost Market
Zephaniah, Inc. 360,000 9,360,000 8,760,000
FA at amortized cost:
Book
13%, 2,000,000 face value, Exodus Cost value
bonds (int. payable annually Dec. 31) 1,881,000 1,903,150
12%, 5,000,000 face value, Genesis bonds,
acquired on January 1, 2014 (int. payable every
December 31) 5,311,400 5,242,540
The following transactions occurred:
March 1, 2015: Sold 12,000 shares of Lamentations, Inc. stock for P204,000.
December 30, 2015: The Company changed its business model. It was determined that the Exodus bonds be
reclassified to held for trading.
On January 1, 2016, the bonds were quoted at 101. The Exodus bonds were purchased on January 2, 2014. The
discount was amortized using effective interest method.
The market values of the stocks and bonds on December 31, 2015, are as follows:
Panaghoy, Inc. P22 per share
Lamentations, Inc. P15 per share
Zephaniah, Inc. P28 per share
Questions:
Based on the above and the result of your audit, determine the following:
1. Gain (or loss) on sale of 12,000 Lamentations, Inc shares on March 1, 2015
a. 12,000 c. (96,000)
b. (12,000) d. 96,000
2. Interest income on the Genesis Bonds for the year 2015
a. 537,499 c. 531,140
b. 524,254 d. 600,000
3. Interest income on the Exodus bonds for the year 2015.
a. 260,000 c. 285,473
b. 282,150 d. 247,410
4. The gain (loss) on reclassification on January 1, 2016?
a. 228,590 c. 91,377
b. 185,460 d. Nil
5. The carrying value of the trading securities and Financial assets at amortized cost as of December 31, 2015 should
be
Trading securities FA at amortized cost
a. 496,800 5,166,794
b. 496,800 7,095,417
c. 540,000 5,166,794
d. 540,000 7,095,417
END OF HANDOUTS!
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Driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – H009
