DEBT SECURITIES

Investment in Bonds

Bond
1. 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 periodic interest payments at a
stated rate until the principal sum is paid.
2. The issuer of the bonds is the borrower of the funds.
3. The investor is the lender of the funds.
4. Bond indenture is the group contract between the issuer and the bondholders.
The indenture details the rights and obligations of the contracting parties, indicates the
property pledged as well as the protection offered on the loan and name of the bank or
trust company that is to represent the bondholders.
5. Bond certificates represent evidence of indebtedness. Bonds are usually issued
in denominations of P1,000 or more.
6. Interest is usually paid every six months.
7. Bond investment may either be current or non-current.

Classification of Bond Investment

1. Financial Asset at Fair Value --Trading Securities
2. Financial Asset at Amortized Cost -- Held to Maturity

Valuation of Debt Securities

1. Trading Securities – at fair value
2. Held to Maturity – at amortized cost

Definition of Terms
1. Bond Premium – the excess of the acquisition cost over the face value of the
bond investment
2. Bond Discount – the excess of the face value of the bond investment over its
acquisition cost.

Methods of Amortization
1. Straight-line – provides for an equal amount of amortization for each accounting
period.
2. Accelerated – applicable to callable bonds
3. Bond Outstanding – applicable to serial bonds
4. Effective or Scientific Method – prescribed in IFRS 9
a. Nominal or Coupon or Face Rate – rate appearing on the face of the bonds
b. Effective or Yield Rate – true or actual rate of interest which bondholder earns on
his investment.

Special Types of Bonds

1. Callable Bonds – those which may be called in or redeemed by the issuing
corporation prior to their maturity date.
2. Convertible Bonds – those which give the bondholders the right to exchange their
bonds for other securities of the issuing corporation.
 3. Serial Bonds – those which have a series of maturity dates or those bonds which
are payable in installments.

Pro-forma Entries – Trading Securities

Purchase of Trading securities – bonds xxx

Bonds Cash xxx
On an Interest
Payment Date

Purchase of Trading securities – bonds xxx

Bonds Interest income xxx
Between Interest Cash xxx
Payment Dates

Receipt of Cash xxx

Interest Interest Income xxx

Fair Value Trading securities – bonds xxx

adjustment Unrealized gain on trading securities xxx

Unrealized loss on trading securities xxx

Trading securities – bonds xxx

Sale of Cash xxx

Bonds on an Loss on sale of trading securities – bonds xxx
Interest Trading securities – bonds xxx
Payment Date Gain on sale of trading securities – bonds xxx

Sale of Cash xxx

Bonds Loss on sale of trading securities – bonds xxx
Between Interest Trading securities – bonds xxx
Payment Dates Interest income xxx
Gain on sale of trading securities – bonds xxx

Amortization of Note: Theoretically, trading debt securities should

Bond Premium or amortize discount or premium. Recall that one of the
Discount primary reasons for the amortization process is to
ensure the carrying amount is equal to its maturity
value. If securities are not classified as held-to-maturity,
then the amortization process becomes less relevant.
[Intermediate Accounting by Skousen, Stice and Stice
14E]

Pro-forma Entries – Held to Maturity Securities

Purchase of Held to maturity securities – bonds xxx
Bonds Cash xxx
On an Interest
Payment Date

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Purchase of Held to maturity securities – bonds xxx
Bonds Interest income xxx
Between Cash xxx
Interest
Payment Dates

Receipt of Cash xxx

interest Interest income xxx

Amortization of Interest income xxx

Premium Held to maturity securities –bonds xxx

Amortization of Held to maturity securities – bonds xxx

Discount Interest income xxx

Redemption of Cash xxx

Bonds on Held to maturity securities –bonds xxx
Maturity Date

Sale of Cash xxx

Bonds Loss on sale of held to maturity securities – bonds xxx
Prior to Maturity Held to maturity securities –bonds xxx
On an Interest Gain on sale of held to maturity securities – bonds xxx
Payment
Date * Update premium/discount amortization.

Sale of Bonds Cash xxx

Prior to Maturity Loss on sale of held to maturity securities – bonds xxx
Between Held to maturity securities – bonds xxx
Interest Interest income xxx
Payment Gain on sale of held to maturity securities – bonds xxx
Dates
*Update premium/discount amortization.

Reclassification Note: IFRS 9 provides that when an entity reclassifies a

from Amortized financial asset at amortized cost to financial asset at fair
Cost to Fair value, the fair value is determined at reclassification
Value date. The difference between the previous carrying
amount and fair value is recognized in profit or loss.

Carrying value Loss on reclassification of financial asset xxx

higher than Held to maturity securities - bonds xxx
fair value

Carrying value Held to maturity securities - bonds xxx

lower than Gain on reclassification of financial asset xxx
fair value

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 Reclassification Trading Securities - bonds xxx
Entry Held to maturity securities - bonds xxx

Reclassification Note: IFRS 9 provides that when an entity reclassifies a

from fair value to financial asset at fair value to financial asset at
amortized cost amortized cost, the fair value at the reclassification date
becomes the new carrying amount of the financial asset
at amortized cost.

The difference between the new carrying amount of the

financial asset at amortized cost and the face value of
the financial asset shall be amortized through profit or
loss over the remaining life of the financial asset using
the effective interest method.

Unrealized loss on trading securities xxx

Trading securities – bonds xxx
OR
Trading securities – bonds xxx
Unrealized gain on trading securities xxx

Held to maturity securities - bonds xxx

Trading securities - bonds xxx

Financial Statement Presentation

Trading securities – bonds Current asset
Held to maturity securities – bonds Non – current asset
Loss on sale of bonds Other expense
Gain on sale of bonds Other income
Unrealized gain on trading securities Other income
Unrealized loss on trading securities Other expense
Loss on reclassification of financial asset Other expense
Gain on reclassification of financial asset Other income

June 2012