FINANCIAL ACCOUNTING AND REPORTING, PART I

REFRESHER COURSE HANDOUT 1: INVESTMENT IN DEBT SECURITIES

1) Financial assets are initially measured

A. At fair value
B. At fair value plus transaction cost
C. At fair value plus transaction cost, except for financial assets measured at fair value through profit or
loss which are initially measured at fair value only
D. At cost, if the financial assets are unquoted

2) Debt securities may be classified as

A. FVPL only C. FVPL or FVOCI
B. FVOCI only D. FVPL, FVOCI and Investment at Amortized Cost

3) On January 1, 2017, Python Company purchased eight-year bonds with a face value of P2,000,000 and a
stated interest rate of 12%, payable semi-annually on June 30 and December 31. The bonds were
purchased to yield 14%. Present value (PV) factors are:
12% 14% 6% 7%
PV of 1 for 8 periods 0.4039 0.3506 0.6274 0.5820
PV of 1 for 16 periods 0.1631 0.1229 0.3936 0.3387
PV of annuity of 1 for 8 periods 4.9676 4.6389 6.2098 5.9713
PV of annuity of 1 for 16 periods 6.9740 6.2651 10.1059 9.4466

What is the purchase price for the bonds?

A. 1,163,080 C. 1,814,536
B. 1,810,992 D. 2,000,000

Use the following information for the next two (2) questions:
On January 1, 2016, Bagaman Company acquired a 4-year bond 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. Amortization table is provided
below:
Date Interest received Interest income Amortization Present value
January 1, 2016 1,127,076
December 31, 2016 120,000 135,249 15,249 1,142,325
December 31, 2017 120,000 137,079 17,079 1,159,404
December 31, 2018 120,000 139,129 19,129 1,178,533
December 31, 2019 120,000 141,424 21,423 1,199,957

4) How much is the purchase price of bonds on January 1, 2016?

A. 1,127,076 C. 994,730
B. 1,051,730 D. 227,076

5) How much is the interest income for 2016?

A. 139,128 C. 120,000
B. 135,249 D. 114,104

6) If the yield rate for a bond is greater than its coupon rate, the bond is acquired at
A. Face value C. A discount
B. Maturity value D. A premium

7) If an entity failed to amortize the discount on its investment in bond classified at amortized cost, this
may result to
A. Understatement of net income C. No effect on net income
B. Overstatement of net income D. Overstatement on investment account
Use the following information for the next two (2) questions:
On January 1, 2016, Nozomi Company purchased 10%, P3,000,000 bonds at 96. Transaction costs incurred
amounted to P20,305. The bonds were classified as investment measured at amortized cost. Principal on the
bonds mature as follows: (EFFECTIVE INTEREST IS 12%)
December 31, 2016 1,000,000
December 31, 2017 1,000,000
December 31, 2018 1,000,000
Total 3,000,000

Present value of 1 for 1 periods at 12% 0.892857

Present value of 1 for 2 periods at 12% 0.797194
Present value of 1 for 3 periods at 12% 0.711780
Present value of an annuity of 1 for 10 periods at 4% 2.401831

8) How much should be debited to investment in bonds account on January 1, 2016?

A. 2,900,305 C. 2,855,989
B. 3,000,000 D. 2,135,634

9) What is the carrying value of the bond investment on December 31, 2016?
A. 1,948,342 C. 2,898,708
B. 2,948,341 D. 1,898,708

10) On July 1, 2017, Mosco Company purchased 5-year bonds with face value of P8,000,000 and stated
interest of 10% per year payable semiannually on June 30 and December 31. The bonds were acquired
to yield 8%. Present value factors are:
Present value of an annuity of 1 for 10 periods at 5% 7.72
Present value of an annuity of 1 for 10 periods at 4% 8.11

What is the carrying amount of the bonds investment on December 31, 2017?
A. 8,648,800 C. 8,702,848
B. 8,594,752 D. 8,540,704

11) On September 1, 2017, the Royal Company acquired P1,000,000 face value, 12% bonds of Doug
Company at 104 plus accrued interest. The company did not exercise its options to measure the bonds
at fair value. the bonds were dated May 1, 2017 and mature on April 30, 2021 with interest payable
each October 31 and April 30. What entry should Royal Company make to record the purchase of the
bonds on September 2014?
A. Debt investment 1,040,000
Interest receivable 40,000
Cash 1,080,000
B. Debt investments 1,080,000
Cash 1,080,000
C. Debt investments 1,080,000
Interest receivable 40,000
Cash 1,080,000
D. Debt investments 1,000,000
Premium on bonds 80,000

12) When investments in debt securities are purchased between interest payment dates, preferably the
A. Securities account should include the accrued interest.
B. Accrued interest is debited to interest expense.
C. Accrued interest is debited to investment account.
D. Accrued interest is debited to interest receivable.

13) An interest purchased a bond classified as investment at amortized cost between interest dates at a
premium. At the purchase date, the carrying amount of the bond is
A. Less than the bond face value and the cash paid to the seller.
B. Less than the bond face value but more than the cash paid to the seller.
C. More than the bond face value but less than the cash paid to the seller.
D. More than the bond face value and the cash paid to the seller.

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Use the following information for the next two (2) questions:
On June 1, 2016, Gaboon Viper purchased as debt investments at amortized cost, 8,000 of P1,000 face
value, 8% bonds of Doug Company for P7,383,000. The bonds were purchased to yield 10% interest.
Interest is payable semi-annually on December 1 and June 1. On June 1, 2017, Gaboon Viper sold the bonds
for P7,850,000. The amount includes the appropriate accrued interest.

14) What is the gain or loss on the sale of the bond investment?
A. 368,700 C. 48,700
B. 366,240 D. 46,240

15) If Gaboon Viper’s accounting year is the calendar year, how much is the interest revenue for the year
ended December 31, 2016?
A. 320,000 C. 371,608
B. 369,150 D. 431,085

16) A bond investment with interest payment dates on May 1 and November 1 is purchased on August 1.
The amount of interest receivable and interest income on December 31 would be equal to
Interest receivable Interest income
A. 5 months 8 months
B. 2 months 8 months
C. 5 months 5 months
D. 2 months 5 months

17) When interest payment dates are February 1 and August 1 and a bond investment is sold June 1, the
cash received from the sale.
A. Excludes accrued interest.
B. Does not include the accrued interest.
C. Include interest accrued for four (4) months
D. Include accrued interest for seven (7) months

18) If a bond investment is purchased between interest payment dates, the buyer should pay, in addition to
the purchase price of the bonds, the amount of accrued interest computed.
A. From the date of acquisition to the nearest interest payment.
B. From the last interest payment date to the date of acquisition.
C. From the last interest payment date to the next interest payment date.
D. None of the above.

19) A trading securities is

A. A security which has been purchased recently.
B. A security held in the account of a brokerage firm.
C. A security which is held for resale in the near future.
D. A security which will be transferred in exchange for another security.

20) Debt investments not held for collection are reported at

A. Fair value C. The lower of amortized cost or fair value
B. Amortized cost D. Net realizable value

21) A financial asset classified as at fair value through profit or loss shall be initially recognized at
A. Fair value C. Fair value minus transaction cost
B. Amortized cost D. Fair value plus transaction cost

22) Under PFRS 9, which is not a category for accounting for investment?
A. Held-to-maturity C. Fair value through other comprehensive income
B. Amortized cost D. Fair value through profit or loss

Use the following information for the next three (3) questions:
On January 1, 2017, Shad Moss Corporation purchased 2,000 of the P1,000 face value, 9%, 10-year bond of
Doug Inc. The company paid a broker’s fee of P100,000. The bonds mature on January 1, 2027, and pay
interest annually beginning December 31, 2017. Shad Moss Corporation purchased the bonds to yield 11%
and classified this as Investment at Fair value through profit or loss.
PV factor of 11% after 10 years 0.3522
PV factor of 9% after 10 years 0.4224

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 PV factor of annuity of 11% after 10 years 5.8890
PV factor of annuity of 9% after 10 years 6.4180

Market values of the bonds are as follows:

December 31, 2017 95
December 31, 2018 98

23) How much is the interest income for the year 2017?
A. 220,000 C. 158,798
B. 180,000 D. 194,086

24) What is the carrying amount of the investment on December 31, 2018?
A. 1,900,000 C. 1,794,142
B. 1,676,199 D. 1,960,000

25) How much is the unrealized gain/loss that should be reported in 2017 profit or loss statement?
A. 35,580 C. 135,580
B. 121,494 D. 221,494

26) Which of the following is not correct in regard to trading investments?

A. They are held with the intention of selling them in a short period of time.
B. Unrealized holding gains and losses are reported as part of net income.
C. Any discount or premium is not amortized.
D. All of these are correct.

Use the following information for the next four (4) questions:
On June 30, 2016, Gucci Mane Company purchased P4,000,000 of 16% bonds to yield 14% for P4,280,752.
Interest is payable semiannually on June 30 and December 31. The bonds mature in five years. Gucci Mane
uses the calendar year and the effective interest method of amortization. The investment was designated as
Investment at fair value through other comprehensive income.
Market values of the bonds are as follows:
December 31, 2016 108
December 31, 2017 106

27) What amount of unrealized gain or loss shall be taken to OCI as a result of properly measuring the
investments on December 31, 2016?
A. 320,000 C. 59,595
B. 39,248 D. 20,347

28) How much is interest income for the year ended December 31, 2017?
A. 594,932 C. 296,704
B. 298,228 D. 596,457

29) How much is the unrealized gain or loss that should be presented in the statement of financial position
on December 31, 2017?
A. 34,932 C. 59,595
B. 24,663 D. 45,068

30) How much is the carrying amount of investment on December 31, 2017?
A. 4,320,000 C. 4,260,000
B. 4,240,000 D. 4,215,337

Use the following information for the next two (2) questions:
On January 1, 2017, DJ Khaled Company purchased P1,000,000 12% bonds for P1,063,394, a price that
yields 10%. Interest on these bonds is payable every December 31. The bonds mature on December 31,
2020. On April 1, 2018, DJ Khaled sold P600,000 face value of the bonds at 101 plus accrued interest.
Market values of the bonds on different dates as follows:
Market values of the bonds are as follows:
December 31, 2017 108
December 31, 2018 106

31) How much is the gain or loss on sale on April 1, 2018 assuming the bonds are classified as FVPL?
A. 42,000 gain C. 24,000 gain

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 B. 42,000 loss D. 24,000 loss

32) How much is the gain or loss on sale on April 1, 2018 assuming the bonds are classified as amortized
cost?
A. 21,586 loss C. 3,586 loss
B. 21,586 gain D. 3,586 gain

Use the following information for the next four (4) questions:
Dr. Dre Corporation acquired on January 1, 2017 a 5-year, 10%, P5,000,000 face value bonds, for
P4,639,400 dated January 1, 2017. The bonds which pay interest every December 31 had a 12% prevailing
interest rate on the date of acquisition. Dr. Dre’s business model is to collect contractual cash flows and the
cash flows are solely payment of principal and interest. Prevailing interest rate on December 31, 2017 is at
9%.

33) How much is the correct income for the year 2018?
A. 500,000 C. 563,535
B. 556,728 D. 422,652

34) How much is the unrealized gain/loss to be reported in the company’s 2017 statement of comprehensive
income?
A. 303,872 C. 56,728
B. 522,450 D. 0

35) What is the adjusted balance of the Investment as of December 31, 2017?
A. 5,450,000 C. 4,759,663
B. 4,696,128 D. 5,161,850

36) How much is the carrying amount of Investment on December 31, 2020?
A. 4,910,714 C. 4,759,817
B. 5,000,000 D. 4,830,995

Use the following information for the next two (2) questions:
On January 1, 2016, Anaconda Company purchased bonds with a face value of P3,000,000 for P3,108,000 to
yield 12%. The bonds are due on December 31, 2022 and carry a 13% interest rate. Interest is receivable
annually on December 31. The bonds are measured at amortized cost.

On June 30, 2017, one-half of the bonds were sold for P1,595,000 plus accrued interest. The remainder was
reclassified as at fair value because of a change in business model. At December 31, 2017, the bonds were
quoted at 101.

37) What is the gain on the sale of the bonds investment?

A. 95,000 C. 49,250
B. 54,291 D. 41,000

38) What is the carrying amount of the remaining bond investment reported in Anaconda’s December 31,
2017 statement of financial position?
A. 1,556,250 C. 1,526,250
B. 1,541,250 D. 1,515,000

39) On January, 1, 2016, Chartreux Company purchased 12% bonds, having a face value of P8,000,000, for
P8,607,000. The bonds provide the bondholders with a 10% yield are dated January 1, 2016, and
mature January 1, 2021, with interest receivable December 31 of each year. The business model is to
hold these bonds to collect contractual cash flows. What amount of interest income should be recognized
by for 2017?
A. 960,000 C. 850,770
B. 860,700 D. 900,000

40) Sphynx Company purchased bonds at a discount of P500,000. Subsequently, the entity sold these bonds
at a premium of P700,000. During the period that the entity held this long-term investment,
amortization of the discount amounted to P100,000. What amount should be reported as gain on the
sale of bonds?
A. 1,200,000 C. 1,300,000
B. 1,100,000 D. 700,000

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41) On January 1, 2016, Norwegian Forest Company purchased bonds with face value of P5,000,000 to be
measured at amortized cost. The entity paid P4,600,000 plus transaction costs of P142,000. The bonds
mature on December 31, 2018 and pay 6% interest annually on December 31 of each year with 8%
effective interest. The bonds are quoted at 105 on December 31, 2016. The bonds are sold at 110 on
December 31, 2017. What amount of gain on sale on these bonds should be reported in 2017 income
statement?
A. 500,000 C. 592,931
B. 250,000 D. 758,000

42) On July 1, 2016, Savannah Company purchased P1,000,000 face value 8% bonds for P950,000 including
accrued interest to yield 10%. The bonds mature on January 1, 2023, pay interest annually on
December 31, and are classified as trading securities. On December 31, 2016, the bonds had a market
value of P960,000. On February 13, 2017, the entity sold the bonds for P980,000. What total amount of
income should recognized for the year ended December 31, 2016?
A. 130,000 C. 90,000
B. 95,500 D. 50,000

43) On July 1, 2017, Eyelash Company purchased term bonds of Doug Company for a total amount of
P3,050,000 which included direct transaction costs of P100,000 and appropriate accrued interest. The
face value of the bonds was P3,000,000 and the coupon rate is 10%. The bonds will mature on
December 31, 2021 and pay interest annually on December 31. Because of fair opportunities, Doug
bonds were classified as at fair value. the bonds are quoted at 105 on December 31, 2017. What is the
unrealized gain to be recognized in Eyelash Company’s profit and loss for 2017?
A. 50,000 C. 250,000
B. 200,000 D. 350,000

44) On October 1, 2017, Garter Company purchased as trading securities, P100,000, 14% bonds of Doug
Company for 99 plus accrued interest and broker’s fee. Interest is paid semi-annually on February 1 and
August 1. Broker’s fees incident to this purchase amounted to P500. What is the amount of interest
revenue reported by Garter on this bond investment in the 2017 statement of comprehensive income?
A. 0 C. 3,483
B. 3,465 D. 3,500

45) On July 1, 2013, Dayum Girl Company purchased as investment measured at amortized cost P1,000,000
of Doug Company 8% bonds for P946,000 including accrued interest of P40,000. The bonds were
purchased to yield 10% interest. The bonds mature on January 1, 2020, and pay interest annually on
January 1. Dayum Girl uses the effective interest method of amortization. In its December 31, 2013
balance sheet, what amount should Dayum Girl report as investment in bonds?
A. 911,300 C. 953,300
B. 916,600 D. 960,600

END OF HAND OUT 1

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