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Investments in Debt Securities 559 13. Scaffolding Co. is contemplating on investing on 3-year, p1,000,000, 12% bonds to be classified as investment measured at amortized cost. Principal is due at maturity but interest is due semi-annually every July 1 and December 31. The current market rate on January 1, 20x1 is 14%. How much is the estimated purchase price of the bonds on January 1, 20x1? a. 960,964 b. 952,334 c. 949,812 d. 936,431 (49 Hint: Test-check your answer by preparing an amortization table. The amortized cost at maturity date should be equal to the face amount.) 14. On Jan. 1, 20x1, Joe Satriani Co. purchased P6,000,000 face amount, 10% bonds at 96. Joe incurred transaction costs of P40,610 on the acquisition. The bonds mature in three equal annual installments every Dec. 31. Interest on the outstanding principal balance of the bonds is also due annually at each year-end. What is the effective interest rate and how much is the current portion of the bonds on Dec. 31, 20x1? a. 6%; 863,247 c. 11%; 1,002,249 b. 9%; 932,341 d. 12%; 1,932,398 15. On January 1, 20x1, Washing Co. contemplates on acquiring P3,000,000, 10% bonds to be classified as investment measured at amortized cost. Principal on the bonds will mature in four semi-annual installments as follows: July 1, 20x1 1,200,000 December 31, 20x1 800,000 July 1, 20x2 600,000 December 31, 20x2 400,000 Total 3,000,000 Interest on the outstanding principal balance is also due semi- annually. The effective rate on January 1, 20x1 is 12%. How much is the estimated purchase price of the bonds on January 1, 20x1? a. 2,449,112 b. 2,494,112 c. 2,782,667 d. 2,944,112 16. On Jan. 1, 20x1, Bok Choy Co. acquired P1,000,000 face amount, 10% bonds of Pechay, Inc. for P827,135. Bok Choy560 Chapter 10 incurred transaction costs of P80,000 on the acquisition. The bonds mature on Dec. 31, 20x3 and pay annual interest every Dec. 31. The effective interest rate is 14%. The quoted price on Dec. 31, 20x1 was 98. The bonds were sold at 94 on July, 1, 20x2. Transaction costs incurred on the sale amounted to P40,000. What amount of gain (loss) is recognized in profit or loss on July 1, 20x1 if the bonds were classified as: Amortized cost FVOCI Amortized cost FVOCI a. (49,523) (49,523) c. (99,523) (99,523) b. (49,523) 0 d. (99,523) (145,389) 17. On Jan. 1, 20x1, Yngwie Co. purchased P6,000,000, 10% bonds issued by Malmsteen, Inc. for P5,116,292. The bonds together with compounded interest are due on Dec. 31, 20x3. What is the effective interest rate on the bonds and how much is the carrying amount of the investment on Dec. 31, 20x2? a. 18%; 7,897,017 c. 16%; 6,884,483 b. 16%; 5,624,483 d. 8%; 4,928,774 18. On Jan. 1, 20x1, Zach Co. purchases P2,000,000 par value of unquoted perpetual preference shares issued by Bandolin Co. for P1,700,000. Zach incurs acquisition costs of P25,218. The shares have a fixed non-discretionary dividend rate of 6% per annum, which approximates the market rate of interest for perpetual instruments. If there are insufficient distributable profits to pay the dividend in one year, the dividend will roll forward and become payable in the future. Interest accrues on deferred amounts. Zach holds the investment under a 'hold to collect' business model and estimates a five-year holding period. The effective interest rate is 3%. On Dec. 31, 20x3, the investment is redeemed at a premium of P200,000. How much is the gain (loss) recognized on redemption date? a. 0 b. 500,000 c. 314,808 d. 269,321 19. Jent Corp. purchased bonds at a discount of P10,000. Subsequently, Jent sold these bonds at a premium of P14,000.Investments in Debt Securities 561 During the period that Jent held this investment, amortization of the discount amounted to P2,000. What amount should Jent report as gain on the sale of bonds? a. 12,000 b. 22,000 c. 24,000 (AICPA) d. 26,000 20. The computer of your neighbor, who is an accountant, was hacked by mystical creatures. Your neighbor needs your help in reconstructing the amortization table for his company's investment in 3-year bonds: A B C D E Date Interest received Interest income Amortization Present value 1/1/x1 12/31/x1 280,000 2,067,602 12/31/x2 31,888 2,035,714 12/31/x3 280,000 244,286 How much is the face amount of the bonds and what is the effective interest rate? a. 2,096,073; 12% c. 2,071,428; 14% b. 2,000,000; 12% d. I don't know. My brain is hacked too!@ PROBLEM 5: CLASSROOM ACTIVITIES ACTIVITY #1: You are the accountant of ABC Co. On July 1, 20x1, your company acquired bonds issued by B-Cull Co. to be held as investment. The objective of ABC's business model for managing financial assets is to hold investments in order to collect contractual cash flows. You have 1,000 pieces of the document shown below with serial numbers SR/213-2 (shown below) to SR/213-1001 (not shown to save space ). The total acquisition cost of the investment is P922,783, inclusive of transaction costs.562 15084 126 Chapter 10 SERIES SR/213-2 AUTHORIZED ISSUE P18,000,000 ISSUE OF JULY 1, 20X1 INTEREST PAYABLE SEMI-ANNUALLY 1000 JULY 1 AND JANUARY 1 PRINCIPAL PAYABLE JULY 1, 20X6 INTEREST RATE 8% PER ANNUM DATED - JULY 1, 20951 B-CULL Co. ONE THOUSAND PESOS Mevestments in Debt Securities 563 Requirements: How much is the total face amount of the investment in B-Cull bonds? . Is there a premium or discount on the investment? If yes, how much? Indicate if it is a premium or discount. c Provide the journal entry on July 1, 20x1. d. What is the per annum nominal interest rate on the investment? e. What is the per annum effective interest rate on the investment? Prepare the amortization table using the spread sheet below.UNIT 4 ACCOUNTING FOR INVESTMENTS Topic 3 - Derivatives PRETEST Basic Derivatives 677 PROBLEMS PROBLEM 1: TRUE OR FALSE 1. An increase in prices would result to the recognition of a gain in a "short" futures contract. 2. If the market price exceeds the strike price in a put option contract, the option is said to be in the money. 3. The maximum amount of loss in an option contract that is not designated as a hedging instrument is equal to the acquisition cost of the option. 4. Dogs Co. enters into a futures contract. At the inception, Dogs Co. pays a deposit to the broker. The deposit forms part of the carrying amount of the derivative instrument. 5. Howl Co. acquires an option. Howl Co. pays an amount for the option. The payment forms part of the carrying amount of the derivative instrument. 6. According to PFRS 9, all derivatives shall be measured at fair value. 7. Derivatives that are not designated as hedging instruments are accounted for as held for trading securities. All subsequent changes in the fair value of the derivative is recognized in profit or loss. 8. Entity A enters into a foreign currency swap. Entity A does not designate the swap as a hedging instrument. The gain or loss on the measurement of the swap at each reporting date shall be recognized in profit or loss. 9. Entity X enters into a forward contract to buy 1,000 foreign currencies at a forward rate of P1.00. At the reporting date, the forward rate is P1.50. Entity X will recognize a gain of P500 on the forward contract. 10. Entity Y enters into a forward contract to buy 1,000 foreign currencies at a forward rate of P2.00. At settlement date, the spot rate increases to P3.00. On the net settlement of the P1,000. forward contract, Entity Y receives a net cash payment ofACTIVITY 1 678 Chapter 13 PROBLEM 2: MULTIPLE CHOICE - THEORY 1. Which of the following is not a characteristic of a derivative? a. It is settled at a future date b. It derives its value from the changes in value of some other notional amount. c. It requires no initial net investment or only a very minimal initial net investment d. All of these are valid characteristics of a derivative. 2. Which of the following can be an underlying for a derivative? a. temperature or climate c. interest or exchange rate b. specified price d. all of these 3. Entity X enters into a forward contract to sell 1,000,000 foreign currency units at a forward rate of P0.50. At the reporting date and on settlement date, the current rates are P0.48 and P0.52, respectively. Identify the notional amount and the underlying in the contract. Notional amount Underlying a. P0.50 1,000,000 b. 1,000,000 Foreign currency C. 1,000,000 Forward rates d. P0.50, PO.48 and P0.52 1,000,000 4. It is an agreement between two parties to exchange a specified amount of a commodity, security, or foreign currency at a specified date in the future at a pre-agreed price. It is most likely an over-the-counter transaction rather than a standardized and traded instrument. a. Forward contract c. Backward contract b. Futures contract d. Pasts contract 5. Which of the following derivatives is most likely to be settled on a net cash basis? a. Forward contract c. Call option b. Futures contract d. Put optionBasic Derivatives 679 6. An entity acquires futures contract for 1,000 units of a commodity. The futures price at contract inception is P80 per unit. The current price on settlement date is P90. Which of the following statements is correct? If the entity is in the.... the entity will recognize a. Short position Gain. b. Long position Gain. c. Long position Loss. d. Wrong position None. 7. Classic Co. enters into a "short" futures contract during the period. The futures contract will be settled net in the following period. At the reporting date, Classic Co. recognizes a gain on the futures contract. Which of the following statements is correct? a. Classic Co.'s current period statement of financial position will include a derivative liability for the futures contract. b. Prices have increased. c. Prices have decreased. d. a and c 8. If the strike price in a call option contract exceeds the current price, the option is considered a. In the money. c. At the money. b. Out of the money. d. No money, no honey. 9. In which of the following instances would the holder of the instrument recognizes loss when the market rate or price decreases? a. Futures contract where the holder is in the long position. b. Forward contract to purchase a specified quantity of a commodity. c. Call option d. Put option