CHAPTER 20

Problem 20-1

Date Interest received Interest income Discount Present value

Feb. 1, 2023 5,486,000
Feb. 1, 2024 720,000 822,900 102,900 5,588,900
Feb. 1, 2025 720,000 838,335 118,335 5,707,235
Feb. 1, 2026 720,000 856,085 136,085 5,843,320
Feb. 1, 2027 720,000 876,680 156,680 6,000,000

Date Particulars Debit Credit

2023
Feb. 1 Investment in bonds 5,486,000
Cash 5,486,000

Dec. 31 Accrued interest (6,000,000 x 12% x 11/12) 660,000

Interest income 660,000

Investment in bonds (102,900 x 11/12) 94,325

Interest income 94,325

2024
May 1 Investment in bonds (118,335 x 3/12) 29,584
Interest income 29,584

Cash 6,480,000
Investment in bonds 5,618,484
Interest income 180,000
Gain on sale 681,516

Computations:
Sales price (6,000,000 x 105%) 6,300,000
Add: Accrued interest (6,000,000 x 12% x 3/12) 180,000
Cash received 6,480,000

Sales price 6,300,000

Less: Carrying amount (5,588,900 + 29,584) 5,618,484
Gain on sale 681,516

Problem 20-2

Date Interest received Interest income Premium Principal Present value

Jan. 1, 2023 5,241,500
Dec. 31, 2023 600,000 524,150 75,850 1,000,000 4,165,650
Dec. 31, 2024 480,000 416,565 63,435 1,000,000 3,102,215
Dec. 31, 2025 360,000 310,222 49,778 1,000,000 2,052,437
Dec. 31, 2026 240,000 205,244 34,756 1,000,000 1,017,681
Dec. 31, 2027 120,000 102,319 17,681 1,000,000 -

Date Particulars Debit Credit

2023
 Jan. 1 Investment in bonds 5,241,500
Cash 5,241,500

Dec. 31 Cash 600,000

Interest income 600,000

Interest income 75,850

Investment in bonds 75,850

Cash 1,000,000
Investment in bonds 1,000,000

2024
Dec. 31 Cash 480,000
Interest income 480,000

Interest income 63,435

Investment in bonds 63,435

Cash 1,000,000
Investment in bonds 1,000,000

Problem 20-3

Date Interest received Interest income Discount Principal Present value

Jan. 1, 2023 7,679,000
Dec. 31, 2023 800,000 921,480 121,480 2,000,000 5,800,480
Dec. 31, 2024 600,000 696,058 96,058 2,000,000 3,896,538
Dec. 31, 2025 400,000 467,585 67,585 2,000,000 1,964,123
Dec. 31, 2026 200,000 235,695 35,695 1,964,123 -

Requirement a
Date Particulars Debit Credit
2023
Jan. 1 Investment in bonds 7,679,000
Cash 7,679,000

Dec. 31 Cash 2,800,000

Interest income 800,000
Investment in bonds 2,000,000

Investment in bonds 121,480

Interest income 121,480

2024
Dec. 31 Cash 2,600,000
Interest income 600,000
Investment in bonds 2,000,000

Investment in bonds 96,058

Interest income 96,058
Requirement b
Present value 7,679,000
Add: Discount amortization - 2023 121,480
Total 7,800,480
Less: Annual payment 2,000,000
Carrying amount - Dec. 31, 2023 5,800,480

Carrying amount - Dec. 31, 2023 5,800,480

Add: Discount amortization - 2024 96,058
Total 5,896,538
Less: Annual payment 2,000,000
Carrying amount - Dec. 31, 2024 3,896,538

Problem 20-4

Requirement a
Date Interest received Interest income Discount Present value
Jan. 1, 2023 4,742,000
Dec. 31, 2023 300,000 379,360 79,360 4,821,360
Dec. 31, 2024 300,000 385,709 85,709 4,907,069
Dec. 31, 2025 300,000 392,931 92,931 5,000,000

Requirement b
Date Particulars Debit Credit
2023
Jan. 1 FA-FVOCI 4,742,000
Cash 4,742,000

Dec. 31 Cash 300,000

Interest income 300,000

FA-FVOCI 79,360
Interest income 79,360

FA-FVOCI 428,640
Unrealized gain 428,640

Computations:
Market value (5,000,000 x 105%) 5,250,000
Less: Carrying amount (4,742,000 + 79,360) 4,821,360
Unrealized gain 428,640

2024
Dec. 31 Cash 300,000
Interest income 300,000

FA-FVOCI 85,709
Interest income 85,709

FA-FVOCI 164,291
Unrealized gain 164,291

Computations:
 Market value (5,000,000 x 110%) 5,500,000
Less: Carrying amount - 2024 4,907,069
Cumulative unrealized gain 592,931
Less: Unrealized gain - 2023 428,640
Increased unrealized gain 164,291

2025
Dec. 31 FA-FVOCI 92,931
Interest income 92,931

Cash 5,000,000
Unrealized gain 592,931
FA-FVOCI 5,592,531

Problem 20-5

Date Particulars Debit Credit

2023
Jan. 1 FA-FVPL 5,380,000
Cash 5,380,000

Dec. 31 Cash (5,000,000 x 12%) 600,000

Interest income 600,000

FA-FVPL 620,000
Gain from change in fair value 620,000

Computations:
Market value (5,000,000 x 120%) 6,000,000
Less: Carrying amount 5,380,000
Gain from change in fair value 620,000

2024
Dec. 31 Cash 600,000
Interest income 600,000

Loss from change in fair value 250,000

FA-FVPL 250,000

Computations:
Market value (5,000,000 x 115%) - 2024 5,750,000
Less: Market value - 2023 6,000,000
Loss from change in fair value - 2024 250,000

Problem 20-6

Requirement a
Date Particulars Debit Credit
2023
Jan. 1 FA-FVPL 5,400,000
Transaction cost 100,000
Cash 5,500,000
 Dec. 31 Cash (5,000,000 x 12%) 600,000
Interest income 600,000

FA-FVPL 350,000
Gain from change in fair value 350,000

Computation:
Market value (5,000,000 x 115%) 5,750,000
Less: Carrying amount 5,400,000
Gain from change in fair value 350,000

Requirement b
Gain from change in fair value 350,000
Add: Interest income 600,000
Total amount of income 950,000

Requirement c
Face amount 5,000,000
Multiply by quoted price 115%
Carrying amount - 2023 5,750,000

Problem 20-7
Requirement a

PV of principal (8,000,000 x 0.68) 5,440,000

Add: PV of interest (400,000 x 8.11) 3,244,000
Market price of bond 8,684,000

Annual nominal Interest payment (8,000,000 x 10% x 400,000

6/12)

Principal 8,000,000
Less: Present value 8,684,000
Bond premium 684,000

Date Interest received Interest income Premium Present value

Jan. 1, 2023 8,684,000
July 1, 2023 400,000 347,360 52,640 8,631,360
Dec. 31, 2023 400,000 345,254 54,746 8,576,614

Requirement B
Date Particulars Debit Credit
2023
Jan. 1 Investment in bonds 8,684,000
Cash 8,684,000

July 1 Cash 400,000

Interest income 400,000

Interest income 52,640

Investment in bonds 52,640
 Dec. 31 Accrued interest 400,000
Interest income 400,000

Interest income 54,746

Investment in bonds 54,746

Requirement C
Present value - Jan. 1, 2023 8,684,000
Less: Premium - July 1 52,640
Premium - Dec. 31 54,746 107,386
Carrying amount - 2023 8,576,614

Problem 20-8
Annual installment 1,000,000
Add: Accrued interest (3,000,000 x 12%) 360,000
Total cash flow - 2023 1,360,000

Annual installment 1,000,000

Add: Accrued interest (2,000,000 x 12%) 240,000
Total cash flow - 2024 1,240,000

Annual installment 1,000,000

Add: Accrued interest (1,000,000 x 12%) 120,000
Total cash flow - 2025 1,120,000

Cash flow - 2023 (1,360,000 x 0.91) 1,237,600

Cash flow - 2024 (1,240,000 x 0.83) 1,029,200
Cash flow - 2025 (1,120,000 x 0.75) 840,000
Market price 3,106,800

Principal 3,000,000
Less: Present value 3,106,800
Bond premium 106,800

Date Interest received Interest income Premium Annual installment Present value
Jan. 1, 2023 3,106,800
Dec. 31, 2023 360,000 310,680 49,320 1,000,000 2,057,480

Requirement b
Date Particulars Debit Credit
2023
Jan. 1 Investment in bonds 3,106,800
Cash 3,106,800

Dec. 31 Cash 360,000

Interest income 360,000

Interest income 49,320

Investment in bonds 49,320

Requirement c
Present value 3,106,800
Less: Annual installments 1,000,000
Premium amortization 49,320 1,049,320
Carrying amount - Dec. 31, 2023 2,057,480

Problem 20-9

Face of the note 3,756,000

Multiply by nominal rate 10%
Interest income 375,600

Problem 20-10
Face of the note 5,000,000
Multiply by nominal rate 8%
Accrued interest for a year 400,000
Multiplied and Divided by 6/12
Accrued interest receivable 200,000

Problem 20-11

Date Interest received Interest income Premium Present value

July 1, 2023 1,198,000
Dec. 31, 2023 50,000 47,920 2,080 1,195,920

Problem 20-12
Interest received (1,000,000 x 8% x 6/12) 40,000
Less: Interest income (906,000 x 10% x 6/12) 45,300
Discount amortization 5,300

Present value 906,000

Add: Discount amortization 5,300
Carrying amount - 2023 911,300

Problem 20-13
Interest received (5,000,000 x 8%) 400,000
Less: Interest income (4,562,000 x 10%) 456,200
Discount amortization 56,200

Present value 4,562,000

Add: Discount amortization 56,200
Carrying amount - 2023 4,618,200

Interest received (5,000,000 x 8%) 400,000

Less: Interest income (4,618,200 x 10%) 461,820
Discount amortization 61,820

Present value 4,618,200

Add: Discount amortization 61,820
Carrying amount - 2024 4,680,020

Problem 20-14
Interest received (5,000,000 x 8% x 6/12) 200,000
Add: Discount amortization 18,000
Interest income 218,000

Problem 20-15
1.
Market value (4,000,000 x 95%) 3,800,000
Less: Carrying amount (4,206,000 - 63,520) 4,142,480
Unrealized loss 342,480

Interest received (4,000,000 x 10%) 400,000

Interest income (4,206,000 x 8%) 336,480
Premium amortization 63,520

2.
Market value (4,000,000 x 90%) 3,600,000
Less: Carrying amount (4,142,480 - 68,576) 4,073,904
Cumulative unrealized loss 473,904
Less: Unrealized loss - 2023 342,480
Increased in unrealized loss - 2024 131,424

Interest received (4,000,000 x 10%) 400,000

Interest income (4,142,480 x 8%) 331,424
Premium amortization 68,576
3.
Market value (4,000,000 x 90%) 3,600,000

Problem 20-16

Interest received (5,000,000 x 8% x 6/12) 200,000

Interest income (5,208,000 x 7% x 6/12) 182,280
Premium amortization 17,720

Present value 5,208,000

Less: Premium amortization 17,720
Carrying amount - June 30, 2023 5,190,200

Interest received (5,000,000 x 8% x 6/12) 200,000

Interest income (5,190,200 x 7% x 6/12) 181,660
Premium amortization 18,660

Present value 5,190,200

Less: Premium amortization 18,660
Carrying amount - Dec. 31, 2023 5,171,860

1.
Interest income (5,208,000 x 7%) 364,560

2.
Market value (5,000,000 x 106%) 5,300,000
Less: Carrying amount 5,171,860
Unrealized gain 128,140
Problem 20-17
PV of principal 1,900,000
PV of interest 2,492,000
Market price of the bond 4,392,000

Semi-annual nominal interest payment (5,000,000 x 8% x 200,000

6/12)

Face amount 5,000,000

PV 4,392,000
Discount 608,000