Chapter 25

Financial Asset at Amortized

Cost

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 Definition of a bond
A bond is a formal unconditional promise made under seal to pay a specified sum of
money at a determinable future date, and to make a periodic interest payments at a
stated rate until the principal sum is paid.

In simple language, a bond is a contract of debt whereby one party called the issuer
borrows fund from another party called the investor.

Thus, a bond is a debt security because the bondholder is a creditor and the issuer is a
debtor.

A bond is evidenced by a certificate and the contractual agreement between the issuer and
investor is contained in another document known as bond indenture.

A bond is issued in small denomination of P100, P1 000 or P 10 000 to enable more

investors to purchase the bond issue.

For example, a P50 000 000 bond issue may be issued in denomination of P1 000.
Thus, there shall 50 000 bonds with face of P1 000 each.

An investor acquires a bond either as a temporary or permanent investment and

derives regular income in the form of interest. 2
 Interest payment due

The interest on the bond investment is usually paid semi-annually or every six months
as follows:

a. January 1 and July 1 d. April 1 and October 1

b. February 1 and August 1 e. May 1 and November 1
c. March 1 and September 1 f. June 1 and December 1

Of course, there are certain bonds that pay interest annually or at the end of the bond
year.

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 Classification of bond investments

Bonds may be required as current or non-current investment depending on the

business model of managing financial assets.

Accordingly, bond investments are classified and accounted for as follows:

a. Financial asset held for trading

b. Financial asset at amortized cost
c. Financial asset at fair value through other comprehensive income
d. Financial asset at fair value through profit or loss by irrevocable designation or
by fair value option

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 Initial measurement

In accordance with PFRS 9, paragraph 5.1.1, bond investments are recognized

initially at fair value plus transaction cost that are directly attributable to the
acquisition.

However, transaction costs attributable to the acquisition of bond investments held for
trading or at fair value through profit or loss are expressed immediately.

Subsequent measurement

Subsequent to initial recognition, bond investments are measured and accounted for
as follows:

a. At fair value through profit or loss

b. At amortized cost
c. At fair value through other comprehensive income
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 Acquisition of bond investments

Bonds may be acquired on interest date or between interest dates. When bonds are
acquired on interest date, there is no accounting problem because the purchase price
is initially recognized as the acquisition cost.

When bonds are acquired between interest dates, meaning the date of acquisition is
not any one of the interest dates, the purchase price normally includes the accrued
interest.

That portion of the purchase price representing accrued interest should not be reported as part of
the cost of investment but should be accounted for separately.

In effect, in this case, two assets are acquired, namely the bonds and the accrued
interest. On the date of acquisition, the accrued interest is charged either to accrued
interest receivable or interest income.

When accrued interest receivable is debited, upon receipt of the first semi-annual
interest, the accrued interest receivable account is closed and interest income is
credited for the excess. When interest income is debited, the receipt for the first semi-
annual interest is credited entirely to interest income.
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 Accrued interest on date of acquisition

An entity acquired 12% bonds with face amount of P2 000 000 for P2 200 000 which
includes accrued interest of P20 000. The bonds are held for “trading” and recorded
as follows:

Trading securities 2 180 000

Accrued interest receivable 20 000
Cash 2 200 000
#

When the first semi-annual interest of P120 000 is received, the journal entry is:

Cash 120 000

Accrued interest receivable 20 000
Interest income 100 000
#

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 Another approach

The accrued interest purchased or paid is charged to “interest income” instead of

accrued interest receivable.
Using the same example, the journal entry to record the acquisition of the bond
investment is:

Trading securities 2 180 000

Interest income 20 000
Cash 2 200 000
#

The subsequent collection of interest is simply credited to interest income.

Thus, when the semi-annual interest of P120 000 is received, the journal entry is:
Cash 120 000
Interest income 120 000
#

The above approach is more convenient and will be followed for illustration in this
book. 8
 Illustration- Trading securities

April 1 Purchased P1 000 000 12% bonds at 96 plus accrued interest. Interest is
payable January 1 and July 1. The bonds are held as trading investment.

Trading securities 960 000

Interest income 30 000
Cash 990 000
#

Note that the accrued interest is for three months from January1 to April 1. The
computation of the accrued interest is P1 000 000 x 12% x 3/12 = P30 000.

July 1 Received semi-annual interest:

Cash 60 000
Interest income 60 000
#

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Oct 31 Sold P600 000 face value bonds for 101 plus accrued interest.

Cash 630 000

Trading securities 576 000
Interest income 24 000
Gain on sale of trading securities 30 000
#

Sale price (600 000 x 101) 606 000

Add: Accrued interest from July 1 to Oct 31
(600 000 x 12% x 4/12) 24 000
Total cash received 630 000

Sale price 606 000

Less: Carrying amount of bonds sold
(6/10 x 960 000) 576 000
Gain on sale 30 000

10
Dec 31 Recorded the accrued interest from July 1 to December 31 on the remaining
bonds of P400 000:

Accrued interest receivable 24 000

Interest income 24 000
#

The accrued interest on P400 000 face amount is for six months from July 1 to
December 31. The computation is P400 000 x 12% x 6/12 = P24 000.

Dec 31 The bonds are quoted at 120 at the end of the year. Changes in fair value of
trading securities are recognized in profit or loss.

Trading securities 96 000

Unrealized gain- TS 96 000
#

Market value (400 000 x 120) 480 000

Carrying amount of remaining bonds
(960 000 – 576 000) (380 000)
Unrealized gain 96 000

When bond investment is held for “trading” or measured at fair value through profit or
loss, it is not necessary to amortize any premium or discount. 11
 Investment in bonds at amortized cost

PFRS 9, paragraph 4.1.2, provides that a financial asset shall be measured at amortized
cost if both of the following conditions are met:

a. The business model is to hold the financial asset in order to collect contractual cash
flows on specified dates.
b. The contractual cash flows are solely payments of principal and interest on the
principal amount outstanding.

Amortized cost is the initial recognition amount of the investment minus repayments,
plus amortization of discount, minus amortization of premium, and minus reduction for
impairment or uncollectibility.

When bonds are acquired and classified as financial asset at amortized cost, the bond
investments are classified as non-current investments.

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 Amortization of premium or discount

Investment in bonds shall be measured subsequently at amortized cost.

This means the any premium or discount on the acquisition of long-term investment in
bonds must be amortized.

Bonds premium or discount is amortized over the life of the bonds. On the part of the bondholder,
the life of the bonds is from the date of acquisition to the date of maturity.

Amortization is done through the interest income account.

a. Amortization of bond discount:

Investment in bonds xx
Interest income xx
b. Amortization of bond premium:
Interest income xx
Investment in bonds xx

Amortization may be made on interest dates or at the end of the reporting period. It is
more convenient to record amortization at the end of reporting period. 13
 Problem: Bullish Company

Bullish Company had the following transactions in bond investment held as trading for
the current year.

Mar. 1 Purchased 2 000, P1 000, 12% bonds of Long Company at 93 excluding

accrued interest. Interest is payable on February 1 and August 1.

Apr. 1 Purchased 4 000, P1 000, 12% bonds of National Corporation at 95 plus

accrued interest. Interest is payable March 1 and September 1.

Oct. 1 Sold 1 000 of the National bonds at 105 excluding accrued interest.

Dec. 1 Sold all of the Long bonds at 100 plus accrued interest.
31 The market value of the National bonds is 90.

Required:
a. Prepare journal entries to record the transactions including receipt and accrued of
interest.
b. Statement presentation of the bond investment on December 31.
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 A. Journal Entries

Mar. 1 Purchased 2 000, P1 000, 12% bonds of Long Company at 93 excluding

accrued interest. Interest is payable on February 1 and August 1.

Mar. 1 Trading Securities (2 000 000 x 93%) 1 860 000

Interest Income (2 000 000 x 12% x 1/12) 20 000
Cash 1 880 000
#

Apr. 1 Purchased 4 000, P1 000, 12% bonds of National Corporation at 95 plus

accrued interest. Interest is payable March 1 and September 1.

Apr. 1 Trading Securities (4 000 000 x 95%) 3 800 000

Interest Income (4 000 000 x 12% x 1/12) 40 000
Cash 3 840 000
#

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Aug. 1 Cash (2 000 000 x 12% x 6/12) 120 000
Interest Income 120 000
#

Sept. 1 Cash (4 000 000 x 12% x 6/12) 240 000

Interest Income 120 000
#

Oct. 1 Sold 1 000 of the National bonds at 105 excluding accrued interest.

Oct. 1 Cash 1 060 000

Trading Securities 950 000
Interest Income 10 000
Gain on sale of trading securities 100 000

Sale Price (1 000 000 x 105%) 1 050 000

Add: Accrued Interest from Sept. 1-Oct. 1
(1 000 000 x 12% x 1/12) 10 000
Total Cash Received 1 060 000
16
 Sale Price 1 050 000
Less: Carrying amount of bonds sold
(3 800 000 x ¼) 950 000
Gain on sale 100 000

Dec. 1 Sold all of the Long bonds at 100 plus accrued interest.
31 The market value of the National bonds is 90.

Dec. 1 Cash 2 080 000

Trading Securities 1 860 000
Interest Income 80 000
Gain on sale of trading securities 140 000
#

Sale Price 2 000 000

Add: Accrued Interest from Aug. 1-Dec. 1
(2 000 000 x 12% x 4/12) 80 000
Total Cash Received 2 080 000
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 Sale Price 2 000 000
Less: Cost of Bonds sold 1 860 000
Gain on sale 140 000

31 Accrued Interest Receivable

(3 000 000 x 12% x 4/12) 120 000
Interest Income 120 000
#

_ Unrealized Loss- TS 150 000

Trading Securities 150 000
#

Cost of bonds (3 000 000 x 95%) 2 850 000

Market Value- Dec. 31 (3 000 000 x 90%) 2 700 000
Unrealized loss 150 000

B. Statement of Presentation
Current Asset:
Trading Securities, at fair value (3 000 000 x 90%) 2 700 000 18
 Multiple Choice: Saxe Company

On April 1, 2017, Saxe Company purchased P2 000 000 face amount, 9%, Treasury
Notes for P1 985 000, including accrued interest of P45 000. The notes mature on July
1, 2018, and pay interest seme-annually on January 1 and July 1. The entity used the
straight line method of amortization.

What is the carrying amount of this investment on October 31, 2017?

a. 1 940 000
b. 1 968 000
c. 1 972 000
d. 1 990 000

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Term of notes from April 1, 2017-July 1, 2018 15 months
Monthly amortization (60 000 / 15 months) P4 000

Face value of treasury notes 2 000 000

Less: Cost of treasury notes 1 940 000
Discount on notes 60 000

Purchase Price 1 985 000

Accrued interest (45 000)
Cost of notes 1 940 000
Amortization from Apr. 1-Oct. 31, 2017 (4 000 x 7 months) 28 000
Carrying amount of investment on 31 Oct. 2017 1 968 000

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