Reference no: EM132949122

Question - Donna Corporation holds bonds of Olivia Company purchased on January 2, Year 1 for P104,330, a price that yields 5% return on the investment. The P100,000 face value bonds mature on December 31, Year 5 and bear a stated interest rate of 6%, payable every December 31. Donna manages its debt investments for both purposes of collections consisting solely of principal plus interest and selling them when market opportunity arises. From Year 2 to Year 3, Olivia suffered massive financial losses due to discovered defect on one of its major products, which caused a decline to credit status of Olivia Company. Olivia bonds were quoted at 102 at December 31, Year 1, and 97 at December 31, Year 2. After paying the accrued interest on December 31, Year 3, Olivia completed negotiation with its creditors to reduce the principal of its obligations to 90% of the face value, simultaneous to adjustment of interest at the original stated rate based on reduced face value. Donna Corporation was not able to sell the bond investments as these bonds disappeared in the market.

Required -

(a) Prepare amortization table used on the original terms of the bonds from Year 1 to Year 3.

(b) Determine the present value of the modified cash flow from the investment based on negotiation completed at December 31, Year 3.

(c) Assume that Olivia is expected to honor fully the terms of the modified obligation.

(c.1) Compute the impairment loss at December 31, Year 3.

(c.2) Record any necessary entry in Donna's books to record the impairment at December 31, Year 3.

(d) Compute the amount of interest income that will be recognized in Year 4 and Year 5.