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Bsa 7

Plum Company purchased a debt instrument in 2008 for its fair value of P1,386,275 with a principal of P1,500,000 and 8% annual interest. In 2010, the issuer's financial difficulties caused the fair value to drop to P750,000. In 2011, the issuer was released from administration and able to meet obligations. The book value at the end of 2009 was P1,425,393. In 2010, an impairment loss of P697,932 was recognized. In 2011, interest income of P75,000 was recognized and an impairment loss reversal of P647,725.

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218 views

Bsa 7

Plum Company purchased a debt instrument in 2008 for its fair value of P1,386,275 with a principal of P1,500,000 and 8% annual interest. In 2010, the issuer's financial difficulties caused the fair value to drop to P750,000. In 2011, the issuer was released from administration and able to meet obligations. The book value at the end of 2009 was P1,425,393. In 2010, an impairment loss of P697,932 was recognized. In 2011, interest income of P75,000 was recognized and an impairment loss reversal of P647,725.

Uploaded by

Gray Javier
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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BSA 7

1. The amount of interest income to be reported in Sineguelas Company’s income


statement for the year ended December 31, 2010, is
a. P6.4 million
b. P12.8 million
c. P6.61 million
d. 13.21 million

ANSWER: D
Interest Income (P6.60 + P6.61) P13.21

Data for no. 32 – 36

On January 2, 2008, 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 company’s management has the positive intent and ability to hold the debt
instrument until maturity.

During 2010, 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 2010, calculated by discounting the expected future
cash flows at 10%. No cash flows are received during 2011. At the end of 2011, 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.

2. What is the book value of the held–to-maturity investment at the end of 2009?
a. P1,347,157
b. P1,460,882
c. P1,500,000
d. P1,425,393

ANSWER: D (SEE AMORTIZATION TABLE BELOW)

3. What amount of impairment loss should be recognized in 2010?


a. P697,932
b. P750,000
c. P636,275
d. P675,393

ANSWER: A
Book value at the end of 2010 P1,447,932
Less: Fair value of investment at the end of 2010 750,000
Impairment Loss P 697,932

4. How much interest income should be recognized in 2011?


a. P24,793
b. P 0
c. P75,000
d. P120,000

ANSWER: C
Interest income to be recognized in 2011 (P750,000 x 10%) P75,000

5. What amount of impairment loss reversal should be recognized in 2011?


a. P697,932
b. P647,725
c. P750,000
d. P 0

ANSWER: B
Pre-impairment book value at the end of 2011 P1,472,725
Actual book value (P750,000 + P75,000) 825,000
Reversal of impairment loss P 647,725

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