On January 1, 2020, Naruto Company, a financial service firm, purchased P100,000, face value 5-year bond of Wolverine Corporation for P108,660, a price that yields 5% on a stated interest rate of 7%

Subject:BusinessPrice:5.87 Bought7

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On January 1, 2020, Naruto Company, a financial service firm, purchased P100,000, face value 5-year bond of Wolverine Corporation for P108,660, a price that yields 5% on a stated interest rate of 7%. Interest is payable annually at December 31. Fair values at year-end are as follows:

 

December 31, 2020         106.5

December 31, 2021         107.5

December 31, 2022         105.7

December 31, 2023         106.0

 

Naruto's business model for managing debt securities of this type is collecting cash flows that are solely payment for principal and interest. Naruto did not exercise its option to measure the investments at fair value.

 

Towards the end of 2022, after reviewing it strategic direction, Naruto decides to shut down it retail mortgage business and actively markets its debt investments portfolio in response to profit taking opportunities.

 

Naruto sold the Wolverine Corporation bonds on May 31, 2023 @106 plus accrued interest.

 

Requirement:

a. how much interest income should Naruto recognize for the year 2020 as a result of this investment?

b. at what amount should the investment be shown on December 31, 2021 statement of financial position?

c. prepare entries in the books of Naruto relating to the foregoing for years 2022 and 2023.