Problem 1

On January 1, Year 1, Grow Company purchased P1,000,000 12% bonds of Glow Company for P1,063,394, a price that yields 10%. Interest on these bonds is payable every December 31. The bonds mature on December 31, Year 4. On April 1, Year 3, to pay a maturing obligation, Grow sold P600,000 face value bonds at 101 plus accrued interest. Market value of the bonds on different dates is as follows:

December 31, Year 1 108

December 31, Year 2 106

December 31, Year 3 104

Required:

I. Assume that the bonds were classified as debt investments at fair value through profit or loss.

a) How much is interest income for the year ended December 31, Year 1?

b) What amount of gain or loss should Grow report on the sale of the bond investments on April 1, Year 3?

c) At what amount should the bond investments be shown on December 31, Year 2 and December 31, Year 3 statement of financial position?

II. Assume that the company intended to collect the principal and interest over the term of bonds and did not choose the fair value option.

a) At what amount should the bond investments be shown on December 31, Year 2 statement of financial position?

b) What amount of gain or loss should Grow recognize on the sale of investments on April 1, Year 3?

c) What amount of interest income will be taken to profit or loss for the year ended December 31, Year 3?

d) At what amount should the bond investments be shown On December 31, Year 3 statement of financial position?