Supporting records of Mayon Corporations trading securities portfolio show the

following debt and equity securities:

SECURITY

COST

FAIR VALUE
200 ordinary shares Concave Co.
121,500

P 127,250

P 400,000 Tipo Co. 7% bonds

387,000

398,250

P 600,000 Turkey Co. 7 % bonds

609,450

603,750

Totals
1,117,950

P 1,129,250

Interest dates on the bonds are January 1 and July 1. Mayon Corporation uses the
income approach to record the purchase of bonds with accrued interest. During
2012 and 2013, Mayon completed the following transactions related to trading
securities:
2012
Jan. 1 Received semiannual interest on bonds. Assume that the appropriate
adjusting entry was made
on Dec. 31, 2011.
April 1 Sold P 300,000 of 7 1/2 % Turkey bonds at 102 plus accrued interest.
Brokerage fees were
P1,000.
May 21 Received dividend of P 1.25 per share on the Concave ordinary share
capital. The dividend had not been recorded on the declaration date.
July 1 Received semiannul interest on bonds and then sold the 7% Tipo bonds at 97
1/2 . Brokerage fees were P1,250.
Aug. 15 Purchased 100 shares of Newman, Inc. ordinary share capital at P580 per
share plus brokerage fees of P250.
Nov. 1 Purchased P250,000 of 8% Toll Co. bonds at 101 plus accrued interest.
Brokerage fees were P625. Interest dates are January 1 and July 1.
Dec. 31 Market prices of securities were:
Concave ordinary shares

P550

7 1/2 % Turkey bonds

101

8% Toll bonds

101

Newman ordinary shares

P583.75

2013
Jan. 2 Recorded the receipt of semiannual interest on bonds.
Feb. 1 Sold the remaining 7 1/2 % Turkey bonds at 101 plus accrued interest.
Brokerage fee were P1,500.
Requirements:
1. What is the total interest and dividend income for 2012?
2. What amount should be reported as gain on sale of trading securities in
2012?
3. What amount should be reported as gain on sale of trading securities in
2012?
4. What amount of unrealized gain or loss should be reported in the income
statement for the year ended December 31, 2012?
5. What is the carrying amount of the remaining trading securities on December
31, 2012?
6. What is the loss on the sale of the remaining Turkey bonds on February 1,
2013?
PROBLEM 2
COLOONG CO. designates purchased debt securities as available for sale. The
following schedules relates to its 5-year, P1,000,000 7% bonds purchased on
December 31, 2010 for P1,086,565. The bonds were purchased to yield 5% interest.
DATE
INTEREST RECEIVED
INTEREST INCOME
AMORTIZATION AMORTIZED COST

PREMIUM

12-31-10
P 1,086,565
12-31-11
1,070,893

P 70,000

P 54,328

P 15,672

12-31-12
1,054,438

70,000

53,545

12-31-13
1,037,160

70,000

52,722

17,278

12-31-14
1,019,018

70,000

51,858

18,142

16,455

12-31-15
1,000,000

70,000

50,982

19,018

The following schedule presents the amortized cost and fair value of the bonds at
year-end.
FAIR VALUE

AMORTIZED

COST
December 31, 2011

P 1,065,000

P 1,070,893

December 31, 2012

1,075,000

1,054,438

December 31, 2013

1,056,500

1,037,160

December 31, 2014

1,030,000

1,019,018

December 31, 2015

1,000,000

1,000,000

Requirements:
1. What amount should be reported as investment in available for sale
securities in the statement of financial position of Coloong Co. on December
31, 2012?
2. What amount of unrealized gain should be shown as component of other
comprehensive income in the 2012 statement of comprehensive income?
3. What amount of unrealized loss should be shown as component of other
comprehensive income in the 2013 statement of comprehensive income?
4. What amount of unrealized loss should be shown as component of other
comprehensive income in the 2014 statement of comprehensive income?
5. What amount of unrealized gain shown be shown in the 2014 statement of
changes in equity?
PROBLEM 3
On January 1,2012, RAMBUTAN CORP. purchased debt securities for cash of
P765,540. The securities have a face value of P 600,000 and they mature in 15
years. The securities carry fixed interest of 10%, that is receivable semiannually on
June 30 and December 31. The prevailing market interest rate on these debt
securities is 7% compounded semiannually. Rambutan Corp. intends and has the
financial resources to hold these securities to maturity.
REQUIREMENTS:
1. What is the carrying value of the debt securities on December 31, 2012 at
amortized cost using the effective interest rate method?
2. What is the interest income to be reported for 2012 using the effective
interest rate method?

PROBLEM 4
The following investment related transactions were completed by DALANDAN CORP.
during 2012:
a. Purchased P3,000,000 of X Company 7% bonds, paying 102.5 plus accrued
interest at P52,500. In addition, the company paid brokerage fee of P15,000.
Dalandan classified these bonds as a trading security.
b. Purchased 30,000 shares of Y Company ordinary shares at P125 per share
plus brokerage fees of P28,500. Dalandan classified this stock as an
available-for-sale security.
c. Received semiannual interest on the X Company bonds.
d. Sold 4,500 shares of Y Company at P132 per share.
e. Sold P480,000 of X Company 7% bonds at 102, plus accrued interest of
P2,790.
REQUIREMENTS:
1. What should X Company bonds be initially measured and recognized at?
2. What is the realized gain or loss on the sale of X Company bonds?
3. What should the 30,000 Y Company shares acquired be initially measured
and recognized at?
4. What is the realized gain or loss on the sale of Y Company stock?

PROBLEM 5
On January 2, 2010 PLUM COMPANY purchased as a long-term investment a debt
instrument with a five-year term for its fair value of P1,386,275. The instrument has
a principal amount of P1,500,000 and carries a fixed interest of 8% annually. The
effective interest is determined to be 10%. The companys management has the
positive intent and ability to hold the debt instrument until maturity.
During 2012, the issuer of the instrument is in financial difficulties and it becomes
probable that the issuer will be put into administration by a receiver. The fair value
of the instrument is estimated to be P750,000 at the end of 2012, calculated by
discounting the expected future cash flows at 10%. No cash flows are received
during 2013. At the end of 2013, the issuer is released from administration and
Plum receives a letter from the receiver stating that the issuer will be able to meet
its remaining obligations, including interest and repayment of principal.
1. What is the book value of the held-to-maturity investment at the end of
2011?
2. What amount of impairment loss should be recognized in 2012?

3. How much interest income should be recognized in 2013?

4. What amount of impairment loss reversal should be recognized in 2013?
5. How much discount amortization should be recognized in 2014?

PROBLEM 6
LETTUCE CO. purchased 40% of MU Corp. on April 1, 2012 for P500,000 when MUs
book value was P1,260,000. On the date of acquisition, the market value of MUs
net assets equaled their book values except for the following:
-

MU s equipment has a fair value of P50,000 less than its book value. The
equipment has a remaining useful life of 10 years.

MUs building has a fair value of P40,000 more than its book value. The
building has a remaining useful life of 20 years.

MUs results of operations in 2012 and 2013 are as follows:

2012 net income
2013 net income

P 150,000
30,000

MU paid cash dividends of P20,000 and P10,000 in 2012 and 2013, respectively.
1. What amount of investment income should be reported on Lettuce
Companys income statement for the year ended December 31, 2012?
2. What is the investment loss to be reported on Lettuce Companys 2013
income statement?
3. What is the carrying value of the stock investment on December 31, 2012?
4. What is the carrying value of the stock investment on December 31, 2013?