On January 1, 2020, Penny Company purchased bonds with face value of P5,000,000 at a cost of P4,500,000 plus transaction cost of P139,400. The stated interest rate is 10% and payable annually every December 31. The bonds mature in 5 years or on January 1, 2024. The bonds effective yield including the transaction cost is 12%. The fair value of the bonds on December 31, 2020 is P5,200,000 while the fair value of the bonds on December 31, 2021 is P5,393,500 with an effective yield of 7%. Lastly, the bonds had a fair value of P5,500,000 on December 31, 2022.

Required:

a) Assume the bonds are held for the purpose of trading and to realize changes in fair value

1) What is the 2020 interest income?

2) What is the unrealized gain to be recognized in the 2020 income statement?

3) What is the unrealized gain to be recognized in the 2021 income statement?

b) Assume the bonds are held to collect contractual cash flows and the cash flows are solely payment of principal and interest.

1) What is the 2020 interest income?

2) What is the December 31, 2020 carrying amount?

3) What is the 2021 interest income?

4) What is the December 31, 2021 carrying amount?

c) Assume the bonds are held to collect contractual cash flows and to sell financial assets while the cash flows are solely payment of principal and interest.

1) What is the 2020 interest income?

2) What amount of unrealized gain in other comprehensive income shall be recognized in shareholders' equity in 2020?

3) What is the cumulative unrealized gain in shareholders' equity at the end of 2021? 4) What is the unrealized gain to be recognized in the statement of comprehensive income for the year ended December 31, 2021?

d) If the bonds are reclassified from FVPL to FVOCI due to a change in business model in 2021

1) Prepare the journal entries related to the reclassification, including year-end adjustments.

2) What is the 2022 interest income?

3) What is the unrealized gain to be recognized in other comprehensive income in 2022?

e) If the bonds are reclassified from FVPL to Amortized Cost due to a change in business model in 2021

1) Prepare the journal entries related to the reclassification, including year-end adjustments.

2) What is the 2021 interest income?

3) What is the carrying amount on December 31, 2022?

f) If the bonds are reclassified from FVOCI to FVPL due to a change in business model in 2021

1) Prepare the journal entries related to the reclassification, including year-end adjustments.

2) What is the gain to be recognized in profit or loss as a result of the reclassification?

3) What is the unrealized gain to be recognized in profit or loss for the year ended December 31, 2022?

g) If the bonds are reclassified from FVOCI to Amortized Cost due to a change in business model in 2021

1) Prepare the journal entries related to the reclassification, including year-end adjustments.

2) What is the 2022 interest income?

3) What is the carrying amount on December 31, 2022?

h) If the bonds are reclassified from Amortized Cost to FVPL due to a change in business model in 2021

1) Prepare the journal entries related to the reclassification, including year-end adjustments.

2) What is the gain to be recognized in profit or loss as a result of the reclassification?

3) What is the unrealized gain to be recognized in profit or loss for the year ended December 31, 2022?

i) If the bonds are reclassified from Amortized Cost to FVOCI due to a change in business model in 2021

1) Prepare the journal entries related to the reclassification, including year-end adjustments.

2) What is the 2022 interest income?

3) What is the cumulative unrealized gain in OCI for the year ended December 31, 2022?