BSA 5

1. On January 1, 2012, Marcus Company made P3,697,120 investments in the

Camper Corporation’s 8%, 5-year bonds with face value of P4,000,000. The
effective rate for similar financial asset is 10%. Marcus Company has a business
model of collecting all the contractual cash flows involving the interests and
principal on all debt securities.

What amount should the debt security be valued on the December 31, 2013
statement of financial position?

a. P3,697,120
b. P3,746,832
c. P3,801,515
d. P4,000,000

ANSWER: C

Acquisition & Interest Interest Discount Book Value

Interest Date Earned Income Amortization
01/01/12 3,697,120
12/31/12 320,000 369,712 49,712 3,746,832
12/31/13 320,000 374,683 54,683 3,801,515

Data for no. 22 and 23

On May 1, 2014, Golden Company purchased a short-term P4,000,000 face value 9%

debt instruments for P3,720,000 excluding the accrued interest and classified it as a
trading security. Golden Company incurred and paid P20,000 transaction cost related to
the acquisition of the instrument. The debt instrument mature on January 1, 2017, and
pay interest semi-annually on January 1 and July 1. On December 31, the fair value of
the instrument is P3,880,000. On February 2, 2015, Golden Company sold the trading
security for P3,960,000.

2. What is the initial cost of Golden Company’s investment in trading securities?

a. P3,720,000
b. P3,740,000
c. P3,880,000
d. P4,000,000
ANSWER: A

3. What amount should Golden Company report for short-term debt securities on
December 31, 2014?

a. P3,600,000
b. P3,720,000
c. P3,880,000
d. P3,960,000

ANSWER: C

EXPLANATION:
Investment held for trading securities are initially recorded at the fair value of the
securities received which is equal to the market value of the consideration being
sacrificed in acquiring the instrument. Any transaction cost incurred in relation to the
acquisition of an instrument under the category of held for trading securities is not
included as part of the cost on initial recognition.

4. Maker Company purchased a held to maturity instruments with a face value of

P5,000,000 on January 2, 2014. The bonds will mature on January 2, 2019 and
the nominal rate of interest is 12%. Interest is payable annually every December
30. The market rate of interest on this date is 10%.

PV factor after 5 years 0.567

PV factor of 10% after 5 years 0.621
PV factor of annuity of 12% after 5 years 3.605
PV factor of annuity of 10% after 5 years 3.791
How much did Maker pay in acquiring the instruments?

a. P5,247,610
b. P5,326,006
c. P5,348,580
d. P5,379,600

ANSWER: D
Expected cash flows discounted at the prevailing market rate of interest:
Future interest (P5,000,000 x 12% x 3.791) P2,274,600
Face (5,000,000 x .621) 3,105,000
Purchase price- amount paid P5,379,600

5. Marker Company purchased a held to maturity instruments with a face value of

P5,000,000 on July 1, 2014. The 5-year 12% bonds were issued on January 2,
2014 and will mature on January 2, 2019. Interest is payable annually every
December 30. Market rate of interest for similar debt instrument at the time of
 acquisition is 10% that is also the market rate of interest for a similar debt
instrument at the time the instrument was issued.

PV factor of 12% after 5 years 0.567

PV factor of 10% after 5 years 0.621
PV factor of annuity of 12% after 5 years 3.605
PV factor of annuity of 10% after 5 years 3.791

What is the fair value of the debt instrument at the time of acquisition?

a. P5,348,580
b. P5,626,000
c. P5,648,580
d. P5,679,600

ANSWER: A
Expected cash flows discounted at the prevailing market rate of interest:
Future interest (P5,000,000 x 12% x 3.791) P2,274,600
Face (5,000,000 x .621) 3,105,000
Purchase price if acquired on the date the bonds were issued P5,379,600
Less: Amortization of premium for 6 months
Interest Income (P5,379,600 x 5%) P268,980
Interest Earned (P5,000,000 x 6%) 300,000 31,020
Fair value/Purchase Price on July 1, 2014 P5,348,580