Reference no: EM133008318

On October 1, 2020, SMH Corporation acquired debt securities paying a lumpsum price of P5,050,000 plus transaction cost of P137,910. The acquired securities are consisted of P2,000,000 face value, 10%, serial bond, of which P500,000 face value matures every October 1, starting October 1, 2021 and P3,000,000 face value, 5-year, 12%, debenture bond dated October 1, 2020. Both securities pay interest annually every October 1.

At the date of acquisition there is no available market for the debenture bonds while the serial bonds are selling at a market rate of 11%.

On July 1, 2022, due to the emergency needs for fund infusion to finance the business expansion, the entity sold P500,000 face value of the serial bonds that mature on October 1, 2022 at face value plus accrued interest, and another P1,000,000 of the debenture bonds at 110 inclusive of accrued interest.

The company's business model for these types of securities is to collect contractual cash flows.

Round present value factor to 3 decimal places.

Required compute for the following:

Problem 1. Amount of acquisition cost allocated to Serial Bonds.

Problem 2. Effective rate applicable to the Debenture Bonds.