CHAPTER 9: INVESTMENT

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Petty cash fund 10,000
Cash in bank 40,000
Notes receivable 130,000
Discount on note receivable (7,000)
Loans receivable 80,000
Loss allowance on loans receivable (4,000)
Held for trading securities 60,000
Investment in associate 40,000
Plant expansion fund 75,000
Total financial assets 424,000

2. Solutions:

Requirement (a):
Market price in Market #2 265
Less: Transport costs (15)
Fair value 250

Requirement (b):
The ‘most advantageous market’ is determined as follows:
Market #1 Market #2
Market price 270 265
Transaction costs (6) (5)
Transport costs (10) (15)
Sale proceeds 254 245

 Market #1 is the ‘most advantageous market’ because the sale proceeds is higher. The
fair value is measured as follows:

Market price in Market #1 270

Less: Transport costs (10)
Fair value 260

3. Solution:
Acquisition Held for trading securities 390,000
Taxes and licenses 18,500
Cash 408,500
Sale Cash [(3,000 x 82) – 12,300] 233,700
Loss 6,300
Held for trading sec. (3,000 x 80) 240,000
Dec. 31, Held for trading securities 22,000
20x1 Gain (a) 22,000

value on 12/31/x1 (10,000 sh. + 5,000 sh. – 3,000 sh.) x ₱81

(a) Fair 972,000
Carrying amount (10,000 sh. x ₱80) beg. + 390,000 Dr. – 240,000 Cr. 950,000
 Gain 22,000

Realized loss on sale (6,300)

Unrealized gain on fair value change 22,000
Net gain 15,700

 Reconciliation:
Held for trading - beg. 800,000
Acquisitions during the year 390,000
Total 1,190,000

Held for trading - end. 972,000

Net proceeds from sale 233,700
Total 1,205,700

Total net gain from fair value change and sale 15,700

4. Solution:
12/3/x1
Held for trading securities (12,000 x ₱3) 36,000
Commission expense 1,800
Cash 37,800

12/31/x1
Held for trading securities [(12,000 x ₱5) – ₱36,000] 24,000
Unrealized gain – P/L 24,000

1/16/x2
Cash [(12,000 x ₱8) – ₱4,800] 91,200
Held for trading securities (12,000 x ₱5) 60,000
Realized gain 31,200

5. Solution:
12/3/x1
Held for trading securities (12,000 x ₱3) 36,000
Commission expense 1,800
Cash 37,800

12/31/x1
Fair value adjustment [(12,000 x ₱5) – ₱36,000] 24,000
Unrealized gain – P/L 24,000

1/16/x2
Cash [(12,000 x ₱8) – ₱4,800] 91,200
Held for trading securities 36,000
Fair value adjustment 24,000
Realized gain 31,200

6. Solution:
12/3/x1
Investment in equity securities – FVOCI 37,800
[(12,000 x ₱3) + ₱1,800]
Cash 37,800

12/31/x1
Investment in equity securities - FVOCI 22,200
Unrealized gain – OCI [(12,000 x ₱5) – 37,800] 22,200

1/16/x2
Investment in equity securities - FVOCI 31,200
Unrealized gain – OCI [(12,000 x ₱8) – 4,800] – 60,000 31,200

Cash [(12,000 x ₱8) – 4,800] 91,200

Investment in equity securities – FVOCI 91,200

Unrealized gain – OCI (22,200 + 31,200) 53,400

Retained earnings 53,400

CHAPTER 10: INVESTMENT IN DEBT SECURITIES

PROBLEM 6: FOR CLASSROOM DISCUSSION

Solutions:
Requirement (a):
Date Interest received Interest income Amortization Present value
1/1/x1 941,725
1/1/x2 120,000 131,842 11,842 953,567
1/1/x3 120,000 133,499 13,499 967,066
1/1/x4 120,000 135,389 15,389 982,455
1/1/x5 120,000 137,545 17,545 1,000,000

Requirement (b):
(1,000,000 – 967,066) = 32,934 discount

Requirement (c):
1/1/x1
Investment in bonds 941,725
Cash 941,725

12/31/x1
Interest receivable 120,000
Investment in bonds 11,842
Interest income 131,842

1/1/x2
Cash 120,000
Interest receivable 120,000

12/31/x2
Interest receivable 120,000
Investment in bonds 13,499
 Interest income 133,499

1/1/x3
Cash 120,000
Interest receivable 120,000

12/31/x3
Interest receivable 120,000
Investment in bonds 15,389
Interest income 135,389

1/1/x4
Cash 120,000
Interest receivable 120,000

12/31/x4
Interest receivable 120,000
Investment in bonds 17,545
Interest income 137,545

1/1/x5
Cash 120,000
Interest receivable 120,000

Cash 1,000,000
Investment in bonds 1,000,000

Solution:
Interest Present
Date received Interest income Amortization value
1/1/x1 1,075,939
12/31/x1 120,000 96,835 23,165 1,052,774
12/31/x2 120,000 94,750 25,250 1,027,524
12/31/x3 120,000 92,476 27,524 1,000,000

Solution:
Mar. Investment in bonds (2M x 98%) – 60,000 1,900,000
31, Interest income (₱2M x 12% x 3/12) 60,000
20x1 Cash (2M x 98%) 1,960,000

Solution:
Purchase price (2M x 95%) 1,900,000
Commission 40,510
Initial carrying amount 1,940,510

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 ₱1 @ 13%, n=4) + (2M x 12% x PV of an ordinary annuity of ₱1 @ 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%.

Solution:
Interest Interest
Date Amortization Present value
received income
Jan. 1, 20x1 1,940,510
Dec. 31, 20x1 240,000 252,266 12,266 1,952,776
Dec. 31, 20x2 240,000 253,861 13,861 1,966,637
Dec. 31, 20x3 240,000 255,663 15,663 1,982,300
Dec. 31, 20x4 240,000 257,700 17,700 2,000,000

Sale price (2M x 92% x 1/2) 920,000

Transaction costs (46,000)
Net disposal proceeds 874,000
Carrying amount on date of sale (1,982,300 x ½) (991,150)
Loss on sale (117,150)

Jan. Cash [(2M x 92% x 1/2) - 46K] 874,000

1, Loss on sale (squeeze) 117,150
20x4 Investment in bonds (1,982,300 x ½) 991,150

Solution:
Interest Interest
Date Amortization Present value
received income
Jan. 1, 20x1 1,940,510
Dec. 31, 20x1 240,000 252,266 12,266 1,952,776
Dec. 31, 20x2 240,000 253,861 13,861 1,966,637
Dec. 31, 20x3 240,000 255,663 15,663 1,982,300
July 1, 20x4 120,000 128,850 8,850 1,991,150

Sale price including accrued interest (2M x 92%) 1,840,000

Accrued interest (see table above) (120,000)
Sale price excluding accrued interest 1,720,000
Transaction costs (82,000)
 Net disposal proceeds 1,638,000
Carrying amount on date of sale (see table above) (1,991,150)
Loss on sale (353,150)

July Interest receivable 120,000

1, Investment in bonds at amortized cost 8,850
20x4 Interest income 128,850
to record the discount amortization
July Cash (2M x 92% – 82K) 1,758,000
1, Loss on sale (squeeze) 353,150
20x4 Investment in bonds at amortized cost 1,991,150
Interest receivable 120,000
to record the sale

Solution:
Purchase price of bonds = Present value of future cash flows

Future cash flows PV factors Present value

Principal 2,000,000 0.751315 1,502,630
Interest 240,000 2.486852 596,844
Estimated purchase price on Jan. 1, 20x1 2,099,474

Solution:
Requirement (a):
Principal + Interest on
Date Total collections
outstanding principal balance
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

Interest
Date Collections Amortization Present value
income
Jan. 1, 20x1 5,800,610
Dec. 31, 20x1 2,600,000 696,073 1,903,927 3,896,683
Dec. 31, 20x2 2,400,000 467,602 1,932,398 1,964,285
Dec. 31, 20x3 2,200,000 235,715 1,964,285 0

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

Solution:

Unearned Present value of cash

Date Interest income
interest flow
 a = b x 16% b = previous bal. + a
1/1/x1 5,116,292

ED
IGNOR
12/31/x1 818,607 5,934,899
12/31/x2 949,584 6,884,483
12/31/x3 1,101,517 7,986,000

12/31/x1 12/31/x2
Present value (Principal and interest receivable) 5,934,899 6,884,483
Interest receivable (6Mx10%); [600K+(6M x 110% x 10%)] (600,000) (1,260,000)
Carrying amount of investment (Principal) 5,334,899 5,624,483

Alternative solution: Longcut

Interest
Interest Amorti- Present
Date PV of cash flow receivabl
income zation value
e
(b) = prev. bal. (d) = (a) -
(a) =ER x (b) (c) = PV + (d)
of (b) + (a) (b)
1/1/x1 5,116,292 5,116,292
12/31/x1 818,607 5,934,899 600,000 218,607 5,334,899
12/31/x2 949,584 6,884,483 660,000 289,584 5,624,483
12/31/x3 1,101,517 7,986,000 726,000 375,517 6,000,000

Alternative solution: Shortcut

(5,116,292 x 116%) – 600,000 = 5,334,899
(5,116,292 x 116% x 116%) – 1,260,000 = 5,624,483

Solution:
Initial recognition:
Jan. 1, Investment in bonds – FVOCI 1,049,737
20x1 Cash 1,049,737

Subsequent measurement (Dec. 31, 20x1):

Interest Interest Present
Date received income Amortization value
Jan. 1, 20x1 1,049,737
Dec. 31, 20x1 120,000 104,974 15,026 1,034,711
Dec. 31, 20x2 120,000 103,471 16,529 1,018,182
Dec. 31, 20x3 120,000 101,818 18,182 1,000,000

Dec. 31, Cash 120,000

20x1 Interest income 104,974
Investment in bonds – FVOCI 15,026
Dec. 31, Unrealized gain (loss) – OCI* 14,711
20x1 Investment in bonds – FVOCI 14,711

* Fair value - 12/31/x1 (1M x 102%) 1,020,000

Amortized cost - 12/31/x1 (see table above) 1,034,711
 Unrealized loss - OCI (14,711)

Subsequent measurement (Dec. 31, 20x2):

Dec. 31, Cash 120,000
20x2 Interest income 103,471
Investment in bonds – FVOCI 16,529
Dec. 31, Investment in bonds – FVOCI 46,529
20x2 Unrealized gain (loss) – OCI** 46,529

** Fair value - 12/31/x2 (1M x 105%) 1,050,000

Amortized cost - 12/31/x2 (see table above) 1,018,182
Cumulative balance of gain in equity – 12/31/x2 31,818
Less: Cumulative balance of loss in equity – 12/31/x1 (14,711)
Unrealized gain - OCI 46,529(a)

(a) Positive amount minus a negative amount results to addition.

Derecognition
Jan. Unrealized gain (loss) – OCI (a) 10,000
4, Investment in bonds – FVOCI 10,000
20x3 to recognize the change in fair value
Jan. Cash 1,040,000
4, Investment in bonds – FVOCI 1,040,000
20x3 to derecognize the investment
Jan. Unrealized gain (loss) – OCI (b) 21,818
4, Gain on sale – P/L (b) 21,818
20x3 to derecognize the cumulative fair value
gains

(a) [1M x (104% - 105%)] = 10,000

(b)
Net proceeds (1M x 104%) 1,040,000
Amortized cost – 1/1/x3 (see table above) 1,018,182
Cumulative gain in equity/Reclassification adjustment – 1/4/x3 21,818

The movements in the accounts are analyzed as follows:

Investment in bonds – FVOCI
1/1/x1 1,049,737
15,026 12/31/x1 amortization
14,711 12/31/x1 fair value change
12/31/x1 1,020,000
16,529 12/31/x2 amortization
12/31/x2 fair value change 46,529
12/31/x2 1,050,000
10,000 1/4/x3 fair value change
1,040,000 1/4/x3 derecognition
0
Unrealized gain (loss) - OCI

12/31/x1 Loss in OCI 14,711

12/31/x1 – Loss (Debit bal.) 14,711
46,529 12/31/x2 Gain in OCI
31,818 12/31/x2 – Gain (Credit bal.)
1/4/x3 Loss in OCI 10,000
Reclassification adj. to P/L 21,818 1/4/x3 derecognition
0