On July 1, 2016, Crazy Company paid ₱1,198,000 of 10%, 20-year bonds with a face amount of ₱1,000,000. Interest is paid on June 30 and December 31. The bonds were purchased to yield 8%. The effective interest method is used to recognize interest income from this long-term investment. 1. What is the carrying amount of the investment in bonds on December 31, 2016?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Problem 1
On July 1, 2016, Crazy Company paid ₱1,198,000 of 10%, 20-year bonds with a face
amount of ₱1,000,000. Interest is paid on June 30 and December 31.
The bonds were purchased to yield 8%. The effective interest method is used to recognize
interest income from this long-term investment.
1. What is the carrying amount of the investment in bonds on December 31, 2016?
Problem 2
On January 1, 2016, Pretty Company purchased as a long-term investment ₱5,000,000 face
value of Shaw Company’s 8% bonds for ₱4,562,000. The bonds were purchased to yield
10% interest.
The bonds mature on January 1, 2021 and pay interest annually on December 31. The
interest method of amortization is used.
2. What is the interest income for 2017?
3. What is the carrying amount of the bond investment on December 31, 2017?
Problem 3 On July 1, 2016, EllahCompany purchased as a long-term investment ₱5,000,000 face
amount, 8% bonds of Rand Company for ₱4,615,000 to yield 10% per year. The bonds pay
interest semiannually on January 1 and July 1.
4. On December 31, 2016, what amount should be reported as interest receivable?
Problem 4
Jester Company purchased bonds at a discount of ₱100,000. Subsequently, Jester sold
these bonds at premium of ₱140,000.
During the period that Jester held these long-term investment, amortization of the discount
amounted to ₱20,000.
5. What amount should be reported as gain on the sale of bonds?
Problem 5
On October 1, 2016, Danica Company purchased ₱2,000,000 face value 12% bonds for 98
plus accrued interest and brokerage fee. Interest is paid semiannually on January 1 and
July. Brokerage fee for this transaction was ₱50,000.
6. At what amount should this acquisition of bonds be recorded?
Problem 6
On July 1, 2018, Darling Company purchased 30,000 shares of Eagle Company’s 100,000
outstanding ordinary shares for P200 per share. On December 15, 2018, the investee paid
P400,000 in cash dividend to the ordinary shareholders.
The investee’s net income for the year ended December 31, 2018 was P1,200,000, earned
evenly throughout the year.
7. What amount of income from the investment should be reported in 2018?
Problem 7
On April 1, 2018, Affleck Company purchased 40% of the outstanding ordinary shares of
Clarke Company for P10,000,000. On that date, Clarke’s net assets were P20,000,000 and
Affleck cannot attribute the excess of the cost of its investment in Clarke over its equity in
Clarke’s net assets to any particular factor.
The investee’s net income for 2018 is P5,000,000
8. What is the maximum amount which could be included in 2018 income before tax to
reflect the “equity in net income of investee”?
Problem 8
Bryan Company purchased 10% of Tot’s Company’s 100,000 outstanding shares on January
1, 2018 for P500,000. On December 31, 2018, Bryan Company purchased an additional
20,000 shares of Tot’s Company for P1,500,000. Tot Company had not issued any additional
shares during 2018. The investee reported earnings of P3,000,000 for 2018. The fair value
of the 10% interest is P900,000 on December 31, 2018.
9. What is the carrying amount of the investment in associate on December 31, 2018?
Problem 9.
Fact Pattern: On January 1, 2018, XYZ acquired 10%, 1,000,000 bonds for 951,963. The
principal is due on December 31, 2020 but interest is due annually. The effective interest
rate is 12%. In 2019, XYZ changed its business model. It was ascertained that the
investment should be reclassified to another measurement category. XYZ prepares annual
financial statements only.
Information on fair values follows:
December 31, 2018 P 98
December 31, 2019 P 103
January 1, 2020 (reclassification date) P 104
Requirement: Prepare the entry to record the reclassification on January 1, 2020 under the
following independent cases:
Case #1: (Amortized cost to FVPL). The bonds were initially measured at amortized cost
and are to be reclassified to the FVPL category
Case #2: (FVPL to Amortized cost). The bonds were initially classified as held for trading
(FVPL) and are to be reclassified to the amortized cost category.
Case #3: (Amortized cost to FVOCI). The bonds were initially measured at amortized cost
and are to be reclassified to the FVOCI category.
Case #4: (FVOCI to Amortized Cost). The bonds were initially classified as FVOCI and are
to be reclassified to the amortized cost category.
Case #5: (FVPL to FVOCI). The bonds were initially classified as held for trading (FVPL) and
are to be reclassified to the FVOCI category.
Case #6: (FVOCI to FVPL). The bonds were initially classified as FVOCI and are to be
reclassified to the FVPL category as held for trading.
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