FINANCIAL INSTRUMENTS

Debt Instruments

Problem 15-1: (Measurement at initial recognition)

On May 1, 2011, Graham Company purchased a short-term P 2,000,000 face value, 9% debt instruments
for P1,860,000 including the accrued interest and classified it as an investment to profit or loss security.
The debt instruments mature on January 1, 2014, and pay interest semi-annually on January 1 and July
1. On December 31, the fair market value of the instruments is 98%. On March 2, 2012, Graham
Company sold the trading security for P 1,980,000. At what amount should the investment be initially
recorded?
a) P 1,800,000 c) P 1,860,000
b) P 1,845,000 d) P 2,000,000

Problem 15-2: (Measurement at initial recognition)

On April 1, 2011, Swiss Bank purchased as a temporary investment P 100,000, face amount, 10%, BSP
treasury notes with interest payments set semi - annually on January 1 and July 1. The notes were
purchased at 102 excluding accrued interest.

Which of the following entries correctly records this purchase?

a) Trading Securities -10% BSP Treasury Notes 100,000
Interest Receivable…………………………. 2,500
Premium on Trading Securities……….. 2,000
Cash……………………………….. 104,500

b) Trading Securities 10% BSP Treasury Notes 102,000

Interest Receivable……………………….. 2,500
Cash……………………………….. 104,500

c) Trading Securities -10% BSP Treasury Notes 100,000

Interest Receivable............................ 4,500
Cash……………………………….. 104,500

d) Trading Securities 10% BSP Treasury Notes 102,000

Cash……………………………….. 102,000

Problem 15-3: (Measurement at initial recognition)

On May 1, 2014, Parrot Company purchased a debt security having a face value of P 2,000,000 with an
interest rate of 9% for P 2,100,000 including the accrued interest. Parrot. Company has a business model
with the objective of collecting all the contractual cash flows of debt securities. The bonds mature on
January 1, 2019, and pay interest semi-annually on January 1 and July 1. On December 31, 2014, the
bonds had a market value of P 2,205,000.
What amount should Parrot report for short-term investment in debt securities at initial recognition?
a) P 2,000,000 c) P 2,100,000
b) P 2,040,000 d) P 2,205,000
Problem 15-4: (Measurement at initial recognition)
On October 1, 2014, Nile Company purchased a debt security having a face value of P 3,000,000 with an
interest rate of 10% for P 3,200,000 including the accrued interest. A total of P 50,000 was incurred and
paid by Nile Company which is in relation to the acquisition of the debt instrument. Nile Company has a
business model that collects all contractual cash flows for interest and principal payments. The bonds
mature on January 1, 2019, and pay interest semi-annually on January 1 and July 1. On December 31,
2014, the bonds had a market value of P 3,400,000. What amount should the investment be initially
recorded?

a) P 3,125,000 c) P 3,200,000
b) P 3,175,000 d) P 3,250,000

Problem 15-5: (Measurement at initial recognition)

On January 1, 2014, Orbit Company purchased a 10-year, 10%, P 3,000,000 face value bonds for
110 incurring incidental transaction cost of P 36,000. Interests are received semi-annually on January 1
& July 1. Orbit Company has a business model of collecting all contractual cash flows of debt
instruments until maturity.
What is the total carrying value of the bonds on January 1, 2014?

a) P 3,000,000 c) P 3,300,000
b) P 3,264,000 d) P 3,336,000

Problem 15-6: (Measurement at initial recognition)

On January 1, 2014, Mare Corporation purchased 2,000 of the P 1,000 face value, 9%, 10-year bonds
of Pare, Inc. The bonds mature on January 1, 2024, and pay interest annually beginning January 1,
2015. At the time of acquisition the market rate of interest for similar debt instrument is 11%.

PV factor of 11% after 10 years 0.3522

PV factor of 9% after 10 years 0.4224
PV factor of annuity of 11% after 10 years 5.8890
PV factor of annuity of 9% after 10 years 6.4180

Problem 15-7: (IAS 39 Based - Measurement Initial)

On May 1, 2011, Parrot Company purchased a debt security having a face value of P 2,000,000
with an interest rate of 9% for P 2,100,000 including the accrued interest. Parrot Company
intends to hold the instrument for an indefinite period but not until maturity. The bonds mature
on January 1, 2016, and pay interest semi-annually on January 1 and July 1. On December 31,
2011, the bonds had a market value of P 2,205,000.
What amount should Parrot report for short-term investment in debt securities?
(a) P 2 100,000 c) P 2,100,000
(b) P 2,040,000 d) P 2,205,000,
Problem 15-8: (Measurement at initial recognition)
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 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

How much did Maker pay in acquiring the instruments?

a) P 5,247,610 c) P 5,348,580
b) P 5,326,006 d) P 5,379,600

Problem 15-9: (Measurement at initial recognition)

Marker Company purchased a held to maturity instruments with a face value of P 5,000,000 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 a 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) P 5,348,580 c) P 5,648,580
b) P 5,626,000 d) P 5,679,600

Problem 15-10: (IFRS 9 Based - Measurement Initial and subsequent)

On May 1, 2014, Golden Company purchased a short-term P 4,000,000 face value 9% debt
instruments for P 3,720,000 excluding the accrued interest and classified it as a investment to
profit or loss which is based on the business model of the entity to buy and sell portfolio of
securities and to make profit for shorter movements in the market rate of interest. Golden
Company incurred and paid P 20,000 transaction cost related to the acquisition of the instrument.
The debt instruments mature on January 1, 2017, and pay interest semi-annually on January 1
and July 1. On December 31, the fair market value of the instruments is P 3,880,000 On
February 2, 2015, Graham Company sold the debt security for P 3,960,000.

Question 1: What is the initial cost of Golden Company's investment.in trading securities?
a) P 3,720,000 c) P 3,880,000
d) P 4,000,000 b) P 3,740,000
Question 2. What amount should Golden Company report for short-term debt securities on
December 31, 2014?
a) P 3,600,000 c) P 3,880,000
b) P 3,720,000 d) P 3,960,000
Problem 15-11: (IFRS 9 Based -Measurement subsequent to acquisition)
On January 1, 2014, Sun Company purchased the debt instruments of Silk Company with a face
value of P 5,000,000 bearing interest rate of 8% for P 4,621,006 to yield 10% interest per year.
The bonds mature on January 1, 2019 and pay interest annually on December 30.

On December 31, 2014 the fair value of the investment is P 4,838,014 which is based on the
prevailing market rate of 9%.?

Question 1: If the company's business model has the objective of trading and meking a profit from
changes in the fair value of the securities, what amount of unrealized gain or loss should the
company disclose in their December 31, 2014 profit or loss?

a) None c) P 154,907 unrealized gain

b) P 26,559 unrealized gain d) P 217,008 unrealized gain

Question 2: f the company's business model has the objective of collecting all the contractual cash
flows including interest and principal, at what amount should the investment be reported in the
company's statement of financial position for the year ended December 31, 2014?
a) P 4,621,006 c) P 4,751,418
b) P 4,683,107 d) P 4,838,014

Problem 15-12: (Measurement subsequent to initial recognition)

On January 2, 2012, Super Company invested in a 10-year 10% debt instrument with a face value of P
3,000,000 in which interest is to be received every December 31. The debt instrument has an effective
interest rate of 8% and was acquired for P 3,402,000. Super Company has a business model of collecting
all the contractual cash flows related to the instrument.

On December 31, 2015, the debt instrument has a prevailing market rate of 9%.

The following are relevant present value factors:

PV factor of 8% after 6 years 0.630

PV factor of annuity of 8% after 6 years 4.623
PV factor of 9% after 6 years 596
PV factor of annuity of 9% after 6 years 4.486

What amount should the debt investment be reported in the December 31, 2015 statement of financial
position?
a) P 3,133,800 c) P 3,344,093
b) P 3,276,900 d) P 3,374,160

Problem 15-13: (IFRS 9 Based-Subsequent to initial recognition)

On January 1, 2012, Sun Company purchased the debt instruments of Silk Company with a face value of
P5,000,000 bearing interest rate of 8% for *P4,621,006 to yield 10% interest per year. The bonds mature
on January 1, 2017 and pay interest annually on December 30 but Sun Company does not intend to hold
the instruments until maturity.
If the market value of the instruments as of December 31, 2014 is P 4,800,000 of its face amount, what
amount of unrealized gain or loss should Sun Company report in its 2014 shareholders' equity?
a) None c) P 48,582 unrealized gain
b) P 26,559 unrealized gain d) P 116,892 unrealized gain
15-14: (Measurement subsequent to initial recognition)
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) P 3,697,120519 c) P 3,801,515
b) P 3,746,832. d) P 4,000,000

Problem 15-15: (IFRS 9 Based Measurement subsequent to acquisition)

Thread Company with a business model of collecting all the contractual cash flows pertaining to interest
and principal of outstanding debt securities, purchased at face on January 2, 2014, purchased a 6-year
12% P5,000,000 face value bond.

Thread Company is in dire need of cash to finance the acquisition of a long lived asset to be used in its
continuing operation. On December 1, 2015, the company unitarily decided to dispose partly its debt
investment. The sale was completed on December 31, 2015 and the company managed to sell 25% of
the debt instrument at the prevailing rate of 14%.
PV factor of 14% after 4 years 0.592
PV factor of 14% after 5 years 0.519
PV factor of annuity of 14% after 4 years 2.914
PV factor of annuity of 14% after 5 years 3.433

On January 1, 2016, the management has the intention of reclassifying the investment from amortized
cost valuation to fair value to profit or loss valuation.

Question 1: What total amount of gain or loss should the company recognize as a result of transfer?
a) None c) P 218,700
b) P 72,900 d) P 291,600

Question 2: What is the amount of gain or loss from the sale of the securities?
a) None c) P 218,700
b) P 72,900 d) P 291,600

Problem 15-16: (IFRS 9 Based Reclassification of Debt Instrument)

On January 2, 2013, Saint Company invested in a 4-year 10% bond with a face value of P 6,000,000 in
which interest is to be paid every December 31. The bonds has an effective interest rate of 9% and was
acquired for P 6,194,220.

During December 2014, the management of Saint Company decided to dispose P 4,000,000 face value
debt instrument which will be used to settle an obligation and to finance some of its operating costs.

The company has a business model of collecting the contractual cash flows for all their debt security
investments, however due to frequent sale and disposal of investments the management has decided
that the business model is no longer appropriate.

On December 31, 2014, the four million face value debt instrument was disposed of when the market
rate of similar instrument was 11%.

PV factor of 11% after 2 years 0.8116

PV factor of annuity of 11% after 2 years 1.7125
Question 1: What is the amortized cost of the debt instrument on December 31,2014?
a) P 6,000,000 c) P 6,151,700
b) P 6,105,353 d) P 6,194,220

Question 2: What is the amount of gain or loss should the company recognize in its 2014 profit or
loss as a result of the transfer?
a) None c) P 78,134
b) P 69,418 d) P 96,330

Problem 15-17: (Reclassification of Debt Instrument)

On January 1, 2010, Gadgets Company purchased 10% P 10,000,000 10-year with interest payable
on December 31 each year. The bonds purchase price is P 10,811,100. The bonds effective interest
rate was 8.75%. The company has a business model of collecting all contractual cash flows on all its
debt securities. On December 31, 2015, when the bonds amortized cost was P10,407,192 and a fair
value at a market rate of 7.75% was P10,749,340, the company sells P1,000,000 bonds.

Since the company sold more than an insignificant amount of its debt security investment the
management would like to reclassify the debt security to investment measured at fair value to profit
or loss.

Question 1: What amount of debt investment should the company report in its December 31, 2015
statement of financial position?
a) P 9,366,473 c) P 10,407,192
b) P 9,674,406 d) P 10,749,340

Question 2: What amount of interest income should the company report in its December 31,
2017 profit or loss?
a) P 804,875 c) P 819,566
b) P 812,528 d) P 900,000
Problem 15-18: (Reclassification of Debt Instrument)
On January 2, 2013, Saint Company invested in a 4-year 10% bond with a face value of P
6,000,000 in which interest is to be paid every December 31. The bonds has an effective interest rate of
9% and was acquired for P 6,194,220. Saint Company has a portfolio of commercial loans that it holds to
sell in the short term. On December 31, 2013, the security has a fair value of P 6,400,000.

On December 31, 2013, Saint Company acquires Joseph Company that manages commercial loans and
has a business model that holds the loans in order to collect the contractual cash flows.

Saint Company original portfolio of commercial loans is no longer for sale, and the portfolio is now
managed together with the acquired commercial loans and all are held to collect the contractual cash
flows. On December 31, 2014, the debt investment has a fair value of P 6,550,000.

What amount should the debt investment be reported in the December 31, 2014 statement of financial
position?
a) P 6,105,353 c) P 6,400,000
b) P 6,151,700 d) P 6,550,000
15-19: (IAS 39 Based-Reclassification of Debt Instrument)
On January 2, 2011, Thread Company purchased a 6-year 12% P 5,000,000 face value bond. Thread
Company paid P 5,000,000 and classified this as held to maturity. Thread Company is in dire need of
cash to finance the acquisition of a long-lived asset to be used in its continuing operation. On December
1, 2012, the company unitarily decided to dispose partly its investment in held to maturity security. The
sale was completed on December 31, 2012 and the company managed to sell 75% of the debt
instrument at the prevailing rate of 14%. Thread Company immediately reclassified the remaining
security as available for sale.

PV factor of 14% after 4 years 0.592

PV factor of 14% after 5 years 0.519
PV factor of annuity of 14% after 4 years 2.914
PV factor of annuity of 14% after 5 years 3.433

Question 1: What total amount of unrealized loss on the remaining securities should be included in
Thread's balance sheet for the year ended December 31, 2012?
a) None c) P 218,700
b) P 72,900 d) P 291,600

Question 2: What is the amount of gain or loss from the sale of the held-to- maturity security?
a) None c) P 218,700
b) P 72,900 d) P 291,600

Problem 15-20: (IFRS Based - AFS to Loans and Receivables)

On January 2, 2011, Super Company invested in a 10-year 10% debt instrument with a face value of P
3,000,000 in which interest is to be received every December 31. The debt instrument has an effective
interest rate of 8% and was acquired for P 3,402,000. Super Company originally classified the debt
instrument as available-for-sale but the security would have been classified as loans and receivable. On
January 2, 2015 the company has decided to reclassify the instrument to loans and receivable because
the entity has the intention and ability to hold the financial asset for the foreseeable future. At the time
of transfer, the debt instrument has a fair value of P 3,500,000 which is equal to its fair value on
December 31, 2014.
What amount should super company measure the financial asset at the time of transfer?
a) P 3,276,900 c) P 3,344,090
b) P 3,311,620 d) P 3,500,000

Problem 15-21: (Impairment Debt Security at amortized cost)

On December 31, 2013, Outer Company invested in the 5-year bonds of Inner Corporation. The bonds
have a face value of P 3,000,000 with 8% interest payable per year. Outer Company paid P 2,772,552 to
acquire the instruments. The effective interest rate for the same instrument at the time of acquisition is
10%.

During 2015, Inner Corporation's business deteriorated due to political instability and faltering global
economy. After reviewing all available evidence at December 31, 2015, Outer Company determined that
it was probable that Inner would pay back only P 2,100,000 at maturity. As a result, Outer Company
decided that the investment in bonds was impaired, and that a loss should be recorded immediately.

Assuming the market rate of interest on December 31, 2015 remains to be at 10%, what amount of
impairment loss should Outer Company recognize on its debt instruments?
a) P 1,140,000 c) P 1,318,095
b) P 1,273,688 d) P 1,367,681
Problem 15-22: (Impairment Reversal on debt security)
On July 1, 2011, Parry Company purchased an 8%, 4-year, P 8,000,000 face value bonds, for P 7,492,800.
The bonds are dated July 1, 2011 end pays interest every June 30. Effective rate of the bonds is 10%. The
company has a business model of collecting all the contractual cash flows and has no intention of
trading and making profits.

The company did not receive the interest due on June 30, 2012 and it soon became clear that the issuer
was in financial difficulties. On June 30, 2012 the company reviews the issuer's financial condition and a
prospect for repayment of the loan determines that the bond is impaired. On the basis of the
information available at the time, the company's best estimate of future cash flows is a total receipt of
P 5,000,000 on maturity. The fair value of the estimated cash flow as of June 30, 2012 is P 3,756,600.

On June 30, 2013, on the basis of new information the issuer entity has improved its credit rating and
the basis of the new information, the company's best estimate of future cash flow is a total receipt of
P 7,000,000 on maturity. The fair value of the new cash flow as of June 30, 2013 is P 5,785,100.

What is the amount of impairment its profit or loss for the year-ended reversal should Parry Company
report in June 30, 2013?
a) none c) P1,652,840
b) P1,214,900 d) P2,028,500

Problem 15-23: (Interest Income)

On July 1, 2014, Taker Company purchased P3,000,000 face, 8%, 5-year bonds for P3,251,880. The
effective rate of the bond is 6%. The bonds are dated July 1, 2014 and pays interest every June 30.
The company has a business model of collecting all contractual cash flows for all debt securities.

What is the total interest income to be recognized by Taker in its December 31, 2014 profit or loss?
a) P35,000 c) P192,000
b) P97,556 d) P256,000

Problem 15-24: (Interest Income)

On July 1, 2014, Granny Company purchased an 8%, 4-year, P4,000,000 face value bonds for P3,746,400.
The bonds are dated July 1, 2014 and pays interest every June 30. Effective rate of the bonds is 10%.

Question 1: If the company has a business model of collecting all contractual cash flows involving
interests and principal on outstanding debt security, what is the total amount of interest income that
Granny should report in its December 31, 2015 profit or loss?
a) P320,000 c) P377,372
b) P374,640 d) P380,104

Question 2: If the company has a business model with the objective of trading and selling all debt
instruments, what is the total amount of interest income that Granny should report in its December 31,
2015 profit or loss?
a) P 320,000 c) P377,372
b) P 374,640 d) P380,104

Problem 15-25: (Interest Income & Carrying Value)

 On January 1, 2014, Bell Company purchased 4,000 of P1,000 face value, 10% bonds of Pepper
Company for P4,270,600. The bonds will mature on January 1, 2015 pay interest semi-annually on
January 1 and July 1. Bonds effective interest rate is 8%. Bell Company measures its investment at
amortized cost.

Question 1: in its December 31, 2014 profit or loss, how much should Bell Company report as interest
income on the bonds?
a) P160,000 c) P170,824
b) P169,657 d) P340,481

Question 2: In its December 31, 2014 statement of financial position, how much should Bell Company
report as debt investment?
a) P 4,211,081 c) P 4,270,000
b) P4,241,424 d) P4,377,000

Problem 15-26: (Interest Income & Carrying Value)

On July 1, 2014, Royal Corporation acquired a long-term investment in Blood Company's 10-year 12%
bonds, with face value of P5,000,000, for P5,386,300. Interest is payable semi-annually on January 1 and
July 1. The bonds mature on July 1, 2019. Bonds effective rate is 10%. Royal Company has a business
model with the objective of collecting all contractual cash flows until maturity for all debt instruments.

What is the carrying value of the bond investment and interest income to be reported in Royal's
financial statements on December 31, 2014, respectively?
a) P5,386,300 and P269,315 c ) P5,355,615 and P300,000
b) P5,386,300 and P300,000 d) P5,355,615 and P269,315

Problem 15-27: (Interest Income)

On July 1, 2014, Throw Company purchased Pillow, Inc. 10-year, 12% bonds with a face value of
P2,000,000 for P1,791,840. The bonds will mature on July 1, 2024 and pay interest annually on July 1.
Bonds effective interest rate is 14%. Throw Company has a business model of collecting all contractual
cash flows on all its debt securities until maturity. What is the amount of income Throw Company should
recognize related to the bond investment on December 31, 2015?
a) P250,857 c) P251,617
b) P251,100 d) P254,111

Problem 15-28: (Sale of debt securities)

On January 2, 2013, Holy Company invested in a 3-year 10% bond with a face value of P4,000,000 in
which interest is to be paid every December 31. The bonds has an effective interest rate of 10% and was
acquired for P4,000,000. On November 30, 2013, Holy Company is in need of cash and decided to sell
part of its investment. On December 31, 2013, P3,000,000 face value of the debt security was sold at the
prevailing effective market rate of 9%.
PV factor of 9% after 2 years 0.842
PV factor of annuity of 9% after 2 years 1.759

Question 1: What amount of gain or loss from the sale assuming the company's business model has the
objective of trading and making profit from changes in the fair value of the securities?
a) P34,000 c) P102,000
b) P53,700 d) P136,000

Question 2: What amount of gain or loss from the sale assuming the company's business model has the
objective of collecting the contractual cash flows of the debt securities until maturity?
a) P34,000 c) P102,000
b) P53,700 d) P136,000

Problem 15-29: (Derecognition-Through Sale)

 On July 1, 2014, Cola Corporation acquired a debt security in Color Company's 10-year 12% bonds, with
face value of P5,000,000, for P5,386,300. Interest is payable semi-annually on January 1 and July 1. The
bonds mature on July 1, 2019. Bonds effective rate is 10%. On December 31, 2015, Cola Corporation sold
its debt instrument for P5,500,000.

If the company has a business model with the objective of collecting all the contractual cash flows what
amount of gain should Cola Corporation recognize as a result of the disposal?
a) P144,385 c) P210,434
b) P176,604 d) P245,956

Problem 15-30 (Derecognition-Through Sale)

On January 1, 2014, Alarm Company purchased as long-term investment P5,000,000 face value of Clock
Corporation's 8% bonds for P4,683,000 to yield 10% interest per year. The bonds mature on January 1,
2018, and pay interest annually on January 1. On January 2, 2016, Alarm Company sold the debt security
when the market rate of interest was 12%.

If the company's business model has the objective of collecting the contractual cash flows of the debt
securities until maturity what amount should Alarm Company report as gain or loss on the sale of the
debt instrument? (Carry present value factors up to 3 decimal places)
a) P165,430 c) P240,700
b) P173,570 d) P317,000

Problem 15-31 (Transferred asset is part of a larger asset)

Warrior Company with a business model of collecting all the contractual cash flows involving interests
and principal payments, has an outstanding bond investment as of April 1, 2010 with a face value of
P5,000,000. The bond was acquired at face, and bears interest of 8% per annum and matures on March
31, 2016.

On March 31, 2010, the bond's fair value when the market rate of interest of 6% is P5,491,732 consisting
of the present value of the principal only strip of P3,524,802 and present value of the interest only strip
of P1,966,930. On the same day Warrior Company unconditionally transferred its right to the principal
only strip to a bank under a legal assignment for cash payment equal to its fair value without any
recourse whatsoever. The company retained the interest only strip (right to receive the interest the
annual interest of P400,000 until maturity).

What amount of gain should the company recognize on the disposal of the principal only strip?
a) none c) P315,612
b) P176,740 d) P491,732

Problem 15-32: (Derecognition-Through Exchange)

On January 1, 2014, David Company purchased Goliath Corporation's 9% debt instrument with a face
value of P4,000,000 for P3,823,800 to yield 10% interest. The bonds are dated January 1, 2014 and
mature on December 31. 2019, and pay interest annually on December 31.

On January 2, 2016, David Company acquired an equity instruments in exchange for its investment in
debt security. On the date of exchange, market value of the equity securities was not clearly
determinable, while the debt instrument was selling at its prevailing rate of interest of 11%.

If the company has a business model with the objective of not trading and making profit from changes in
fair value, what amount of gain or loss should David Company recognize as a result of the exchange?
(Carry present value factors up to 3 decimal places)
a) P118,078 c) P71,080
b) P 93,460 d) P66,958

Problem 15-33: (Derecognition - Through Retirement)

 On July 1, 2014, Bugs Corporation purchased 3,000 of the P1,000 face value, 8% debt instrument of
Bunny Company for P2,768,640 to yield 10% interest per annum. The bonds, which mature on July 1,
2019, pay interest semi- annually on January 1 and July 1. Bugs uses the interest method of amortization
and the instruments are appropriately recorded at amortized cost under the model of collecting all
contractual cash flows. On January 2, 2016, Bugs Corporation retired the debt instrument and received a
lump sum amount of P2,950,000.
What amount of gain or loss on retirement should Bugs Company recognize on the retirement?
a) P110,265 c) P162,928
b) P123,253 d) P181,360

Problem 15-34 (Derecognition - Through Retirement)

On July 1, 2014, Rice Company purchased P2,000,000 of Cooker Company's 8% debt instruments for
P1,940,988 including the accrued interest of P80,000. The bonds were purchased to yield 10% interest
and the bonds will mature on January 1, 2019. The Company has a business model of collecting all the
contractual cash flows of financial assets. The bonds pay interest annually and Rice uses the interest
method of amortization. On December 31, 2015, the market rate of interest on this debt instrument had
risen to 14% and the management of Rice Company is contemplating on to retire the debt instrument at
this rate.

If the management decides to retire the debt instrument based on the prevailing rate of interest, what
amount of gain or loss should be recognized?
a) P 1,521 c) P 218,921
b) P 97,441 d) P 232,243