CLASSROOM EXERCISES ON INVESTMENT IN DEBT SECURITIES

Problem 1
On January 1, 2016, Aldridge Co. purchased P2,000,000 face value 9% bonds for P1,924,184.26, to yield 10%. The
bonds mature on December 31, 2020, and pay interest annually every December 31.
On December 31, 2016, the bonds have a fair value of 99. On December 31, 2017, the bonds have a yield of 12%.
On July 1, 2018, the bonds were sold at 104 plus accrued interest.
Prepare the necessary journal entries from 2016 to 2018, assuming the bonds were classified as follows:
1. Financial asset at fair value through profit or loss
2. Financial asset at fair value through other comprehensive income

Problem 2
Banks Corp. acquired P3,000,000, 12% bonds at face value on January 1, 2016, and classified them as trading
securities. The bond mature on December 31, 2020, and pay interest every December 31. At the end of the year, the
bonds have a fair value of P3,100,000. On December 31, 2017, due to a change in the entitys business model, the
bonds were reclassified to financial asset at amortized cost. On this date, the bonds have a fair value of
P3,190,191.93. Effective interest rate on this date was 10%.
1. Prepare the journal entries from 2016 to 2018.
2. Assume that instead of initially recognizing the financial assets as FAFVOCI, Banks recognized them as
financial assets at fair value through other comprehensive income. Prepare the necessary journal entries from
2016 to 2018.

Problem 3
On June 30, 2016, Christensen Inc. purchased 5-year, 12% bonds with a face value of P1,000,000 to yield 10%. The
bonds pay interest every July 1 and January 1, and was dated January 1. Brokers fee paid by Christensen on the
bonds amounted to P37,953.64. This adjusted the effective rate of the bonds to 9%. The bonds were classified as
financial assets at amortized cost.
1.
2.
3.
4.
5.

Compute for the total cash payment made by Christensen on June 30, 2016.
How much should Christensen initially recognize the investment?
How much should be recognized by Christensen as interest receivable on December 31, 2016?
Determine the investments carrying amount at the end of 2017.
Determine the interest income recognized by Christensen in 2017.

Problem 4
On January 1, 2016, Daniela Co. purchased a bond investment with a face value of P4,000,000 and a stated rate of
10% payable annually every December 31. The bonds were to be held to maturity with a 12% effective yield. The
bonds mature at an annual instalment of P1,000,000 every December 31.
Prepare the journal entries in 2016 as well as the amortization table for the whole duration of the bonds.