CHAPTER 19

'
FINANCIAL ASSET AT
investment AMORTIZED
Bond COST
TECHNICAL IQVOWLEDGE

To understand the nature bf a bond.

To know the initial and subsequentmeasurementof bond

investment.

To understand the acquisition of bond investment held for

trading.

To understand the measurement of bond investment at

amortized cost.

ofamortizing
Toapplythestraightlinemethod discount
bond
and prem ium.

Toapply
the method
outstanding
bond of bond
amortizing
discountand premium.
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 periodic interest payments at a stated rate until tin
principal sum is paid. \

In simple language. a bond is a contract of debt whereby om

party called the issuer borrows fund from another party calleq
the investor.

Thus, a bond is a debt security because the bondholder is g

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 I0,000 to enablemoreinvestorsto purchasethe hand 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 acquiresa bond either as a temporary or permanent

investment and derives regular income in the form of interest

Interest payment date

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

a. January 1 and July 1 d. April. 1 and October1

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

Of course,
therearecertainbonds
that payinterestannually
01 at the end of the bond year.
 Classification of bond investments

Bondsmay be acquired as current or noncurrent investment

depending on the business model of managing fmancial
assets.

Accordingly, bond investments are classified and accounted

for as follows:
,1. Financial asset held for trading

1).. Financial asset at amortized cost

a. Financial asset at fair value through other comprehensive

income

(1. Financial asset at fair value. through profit or 16ss by

irrevocable designation or by fair value option

fnitial measurement
In accordance with PFRS 9, paragraph 5.1.1, bond
investments are recognized initially at fair value plus
transaction costs that are directly attributable to the
acquisition.

However, transacticm costs attributable to the acquisition

of bond investments held for trading or at fair value through
profit or loss are expensed immediately.

. Subsequent measurement

Subsequentto initial recognition,bond investmentsare

measured and accounted for as follows:

a. At fair value through profit or loss

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

Bonds may be acquired on interest date or between

interest dates. When bonds are acquired on interest data,
there is no accounting problem because the purchase pm
is initially recognized as the acquisition cost.

When bondsare 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 eSect, 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 semiannual interest, the accrued interest
receivable account is closed and interest income is credited
for the excess. When interest income is debited, the receipt
of the first semiannual interest is credited entirely to
interest income.

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".

Trading securities 2, 180,000

Accrued interest receivable 20,000
Cash 2.200.000

When the first semiannual interest of P120,000 is received

the journal entry is:

Cash 120,000
Accruedinterestreceivable 20,000
Interest income 100,000
 Anotheraliproach
interest
Theaccrued tointerest
,orpaidischarged
purchased
income instead of accrued interest receivable.
na-

Using the same example, the journal entry to record the

acquisitionof-the bond investment is:

Trading securities 2,180,000

IntereStincome _ 20,000
Cash ~ 2,200,000

- The subsequentcollectionof interest is simply credited to

.
interest income.

whentheSsmiannual
Thus, ofP120,000.is
interest received,
théjournalentry is:)
Cash 120,000
Interest income 120,000

The above approach is more convenient and Will be followed

for illustration in this book.
'
Illustration Trading securities.
April 1 PurchasedP1,000,00012%boridsat 96 plus accrued
interest. Interest is payable J anuary 1 and J uly 1. The
bonds are held as trading investment.

, Trading securities 960,000

, Interest income . \ 30,000
' '
Cash 990,000
I
~

Note that the accruedinterestis for threemohths

from J anuary 1 to April 1. The computation of the
accrued interest is P1, 000, 000 x 12% x 3 / 12 equals
P30, 000.

Received semiannual interest:

Cash 60,000
Interest income 60.000
 0 Q060 000 '
MN; name 630,
576,000
. A00
(800 gsecll'ities i" " 30,000
3'00
.
10 Q03? 01)
Iter
0
606,000
a1 (300o00x y 1m
301 ghrBCeive
d 12%
x4/12) M
Qprice
1% . ..
80"
Q
"
-
"_6_3_Qz
_.___.._..__......

G' 30mg amount

I10 x ofbonds
801
(1
606,000
0113819 960.000) 576,000.
Re 30,000

Trading
securities. 96,000 ~
Unrealized --
gamTS 96,000
Market
value(400,000
x 120)
amountofremaim'ng
Carrying bonds
480,000
-
(960,000576000)
Unrealized (384,000
gain
96,000
Oct. 31' Sold P600,000facevalue bondsfor 101 plus accrual
interest.

Cash 630,000
Trading securities 576,000
Interest income 24,000
Gain on saleof trading securities 30,000

Saleprice (600,000 x 101) 606,000

Add: Accrued interest from J uly 1 to
October 31 (600,000 x 12% x 4 / 12) 24,000
Totalcashreoeived 630,000
'
Sale
price 606,000
Less:Carryingamountofbondssold
(6 / 10 x 960 0,00) 576,000
Gain on sale 30,000

Dec.31' Recordedthe accruedinterest 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 the 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.
Changesin fair value of trading securitiesare
1n
recognized or loss.
profit ,
'
Trading securities 96,000
Unrealizedgain TS . 96,000

Market value (400,000 x 120) 480,000

Carrying amount of remaining bonds
(960,000 - 576,000) . (384,000
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 07
discount.
 in bonds at amortizedcost
1nvestment
that a hnancial
4.1.2,provides
?FRS9, paragraph assetshall
be measuredat of the
amortized cost if both following
conditions are met;
a. The business model is to hold the financial asset in order to
collect contractual cash flows on specified dates.

13,Theeontractual cash
flowsaresolely ofprincipal
payments
interest on
and the principal amount outstanding.

Amortized cost is the initial recognition amount of the

investment minus repayments, plus amortlzatlon of
discount, mlnus amortlzation of premlum, and mmus
reduction for impairment or uncollectibilityd

When bonds are acquired and classified as financial asset at

amortized cost, the bond investments are classified as
'
noncurrent investments.

Amortization of premium or discount

Investnientin bonds shall be measuredsubsequentlyat
amortized cost.
This means that any premium or discount on the acquisition of
long-term investment in bonds must be amortized.
Bond 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 1 1:
Interest income x x

b. Amortization of bond premium:

Interest income 1! 1:
Investment in bonds 1 x

Amortization may be made on interest dates or at the end of

the reporting period. It is mote convenient to record
amortlzation at the end of reportmg period,
 \V
Philosophy on amortization
The reason for amortization of bond premium or discount18to
bring the carrying amount of the investment to face amount on
the date of maturity.
When the bonds are redeemed on the date of maturity, the
entry will simply be a debit to cash and a credit to investment
in bonds at face value.

The bondholder is a creditor and will collect on the date of maturity

an amount equal only to the face amount of the bonds no more and
no less.

Conoeptually, bond premium is a loss on the part of the bondholder

because the bondholder paid more than what can be collected on
the date of maturity.

Such loss is not recognized outright but allocated over the life of
the bonds to be offset against the interest income to be derived
from the bond investment.

On the other hand, bond discount is a gain on the part of the .

bondholder because the bondholder paid less than what can be
collected on the date of maturity.

Such gain is not recognized outright but allocated over the life
of the bonds to be added to the interest income derived from
the bond investment.

Such processof allocatingthe bond premium as deduction from

the interest income and the bond discount as addition to interest
income is what is traditionally called amortization.

Acquisition on interest date

2020
April 1 Purchased P1,000,000 face amount 12% bonds at 94.
Bondspay interest semiannually April 1 and October
1 and mature on April 1, 2025.

'Investmentin bonds 940,000

Cash (1,000,000 1: 94) ' 940,000

Inasmuchas the acquisitionis on interest date, April

1, there is no accrued interest involved.
 Cash(1.000.000x 12%x 8/ 12) 60'000
Interestincome 00 000

Dec.31 Adjustmentfor accruedinterest for three months.

Accruedinterest receivable 30,000
Interest income 30,000
(1,000,000 1: 12% x 3/12)

Dec.31 Amertizationof the bonddiscountfor 9 monthsfrom

Aprll 1 to December 31, 2020. To simplify the
illustration, the straight line method of
amortization is used.

Investment inbonds 9,000

Interest income 9,000

Face amount 1,000,000

Cost 940,000
Discount " 60,000

Annual amortization (60,000 / 5 years) 12,000

Amortization for 9 months (12,000x 9 / 12) . 9,000

2021
Jan. 1 Reversalof the adjustmentfor accruedintereston
December 31, 2020.
income
Interest 30,000
Accrued receivable
interest 30,000
interest:
semiannual
April1 Received
60,000
Cash
60,000
Interest income

Oct. 1 :Received interest:

semiannual
Cash 60,000 60000
Interestincome
 '
2021 '
Dec. 31 Adjustment for accruei interest for three months:
\

'
Accniedinterestreceivable 302000
Interest income . 30,000

31 Adjustmentfor amortizationof bonddiscountfor One

-
year: .2-

'Investmentinbonds 12,000 .
' 12,000
Interestincome

Note that duringthe life of the bonds,the investment account,

after giving due recognition for discount amortization will
'
appear as follows: -
Ju'

Investment in bonds

April 1,éozoCost April1,20251,000,000

940,000 Balance,
Dec. 31, 2020 Amortization 9,000 . . . -_
Dec. 31, 2021 Amortization 12,000
Dec. 31, 2022 Amortization 12,000
Dec. 31, 2023 Amortization 12,000
Dec. 31, 2024 Amortization 12,000
April 1, 2025 Amortization 3, 000
-_hr

1,000,000
0
1,000,000
thaton
Observe thematuritydate: AP - .
amount ofthemvestment
.
is 1, 202 ,
the face amount of the bond,131,000,053
an£0311:
n Carrgrlm
equ to

Theredemption
ofthebondsmaythen
be simplyrecorde
' d.
Cash
I
Investment in bonds 1000000
Acquisitionbetween interest dates

_ .000,000 face
amount bonds at 105
plus Interest
onFebruary1,2021.Interest is
:13qu
e onApril1andOctober 1.Bonds
Payza 88111131111qu
are ted Apnl 1, 2020andmatureon April 1. 20253
Investment in bonds
. 1,050,000
Interestmcome
40,000
Cesh . 1,090,000
Cost
(1,000,000 x 105) 1,050,000
Accruedmterest from October1, 2020to Feb. 1, 2021
. (1,000,000 x 12% x 4 I 12) 40,000
Total cashpaid -
_ 1,090,000

April 1 Received semiannual interest:

' '
'Cash ' 60,000
Interest income - 60.000

Oct. 1 Received semiannual interest:

Cash 60,000
Interest income 60,000

PL. . 31 foraccrued
Adjustment forthreemonths
interest from
October 1 to December 31, 2021:

Accruedinterestreceivable 30,000
- 30,000
Interest income

31 Adjustment ofthebondpremium
fortheamortization
31,2021or 11months
from February1 to December
usingthestraightlinemethod ofamortization.
(11x 1,000)
income
Interest 11,000
Investmentinbonds 11,000
-=from February1,202100 .
bonds
L1fe 1,2025 50month
April /50) 1,000
(50.000
amortization
Monthly
-A
 .
betweeninterest
. data, it
Note bonds
thatwhen areaoqmre
amorthmtwn
rather
d

to men
convenienteoqxputo thly
inmono
thanan annualamorazatnon.
' ' '
rig. will be prepared.If prop.r
years,
[nsucceechng amulet ant ,
W111
are made,
amortizatione the investme nt account appear
as follows:

Investment in bond!
Feb.1,2021 1,060,000 Dec.31,2021Amordzanon 11,000
Dee 31,2022 Amortlzatlon 12,000
Dec. 31,2023 Amortization 12,000
Dec 31,2024 Amortization 12,000
April 1, 2025 Amortization 3,000
BalanceApril 1,2025 1,000,000
. 1,050,000 1,050,000
.
Again, on the date of maturity, when the bonds are redeemed
by the issuing entity, the journal entry is:
'
Cash 1,000,000
Investment in bonds 1,000,000

Sale of bonds prior to maturity

When investment in bonds is sold prior to the date of
maturity, it is necessary to determine the carrying amount
of the bond investment to be used as basis in computing gain
or loss on the sale.

In suchaocase,
amortization
ofthepremium should
ordiscount
be recogmzedup to the date of sale. '

If the sale is betweeninterest dates, the sale price normally

includes the accrued interest.

that portionof the salepricepertainingto the

Accordingly,
accrued interest should be credited to interest income.

The differencebetweenthe sale price, after deductingthe

accrued interest, and the carrying amount of the ban
the gainor loseon the saleof the
represents
investment
investment.
 Illustration
I

2020
Aug, 1 Purchased 12% P1,000,000 face amount bondsfor
P1,075,000 including accrued interest. Interest is
payable semiannually May 1 and November 1. Bonds
are dated May 1, 2020 and mature May 1, 2024.

Investment in bonds 1,045,000

Interest income 30,000
Cash 1,07 5,000

Total cash paid -

1,075,000
Accrued interest from May 1 to August 1, 2020
(1,000,000 x 12% x 3 / 12) ( 30,000)
Cost of bond investment 1,045,000

Note that the cash payment of P1,075,000includes

accrued interest.

interest
Theaccrued is notpart ofcost.Thus,
purchased ' '
the same is deducted frqm the cash paid.

Nov. 1 Received the semiannual interest:

' "
Cash » 60,000
Interest income , -" _ 60,000.

Dec. 31 fer the accrued

Adjustment interestfor twomonths
hom November 1 to December 31, 2020.
Accrued interest receivable ' 20,000
Interest income 20,000
(1,000,000 x 12% x 2 / 12)

31 Adjustment for the amortizationof premium from

August 1 to December 31, 2020 or 5 months. The
straight line method. of .amortization is used.

Interestincome . 5,000
Investmentinbonds 5.000
monthsx 1,000)
at(5
1er of bonds = from August 1, 2020 to
May1,2024 45
$35th
Monthly amortization (45,000 I 45)
-A
 Sale of bonds

OnFebruary thebonds
1,2022, at1081318
sold
were accrued
'
interest.

Saleprice 108)-
(1,000,000): -1»080»000
Add: Accruedinterestfor threemonthsfrom .
November1, 2021to February1, 2022
12%x3/12)
(1,000,000x - 30,000
' '
Totalcashreceived 1 110:000

Originalcost 1,045,000
Less: Amortization from August 1, 2020 to
February1, 2022or 18monthsx 1,000 18,000
' '
CarryingamountofbondsonFebruary 1, 2022 1,027,000
Saleprice (1,000,000
X 108) . 1,080,000.
'
Gain on sale \ 53,000

J ournal entries on the date of sale, February 1, 2022

a. To update the amertizationof the premium up to the date
of sale, February 1, 2022. Presumably, the last
amortization was December 31, 2021. :1

'
Interest income (1 month x 1,000) 1,000
Investmentinbonds - 1,000
.

b. To record the sale of bonds:

Cash . 1,110,000
Investmentinbonds 1,027,000
Interest income. 30,000
'
Gain on sale of bond investment . 53,000

Callable bonds

arethose
Callablebonde whichmaybecalled ' by
in orredeemed
the issuing entity prior to their date of maturity.
thecallpriceer redemption
Usually, 01'
priceis at a premium
more than the face amount of the bonds,
The differencebetweenthe redemptionprice and the
0
carrying amount of the bond investment on the date
redemption is recognized in proflt or loss.
Convertible bonds

bondsarethosewhichgivethebondholders
Convertible the
right to exchange their bonds for share capital of the issuing
entity at any time prior to maturity.

The existence of the conversion feature generally precludes

classihcation of the convertible bonds as financial assets at
amortized cost because that would be inconsistent with paying
for the conversion feature, meaning the right to convert into
equity shares before maturity.

Accordingly, investment in convertible bonds can be

classified as financial assets measured at fair value.

Serial bonds

Serial bonds are those which have a series of maturity dates

or those bonds which are payable in installments.

a P1,000,000
~Forexample, onJanuary1, 2020
bondissued
may provide that the bond will mature as follows:

December 31, 2020 200,000

December 31, 2021 _ 200,000
December 31, 2022 200,000
December 31, 2023 . 200,000
December 31, 2024 200,000

Term bonds

Term bonds are those bonds that mature on a single

date.

Callable and convertible bonds can be classified as term

bonds despite their special features.
Methods of amortization
a. Straight line method This method provides for an equal
amount of premium or discountamortization each accounting
period.
b. Bond outstanding method- This method is applicable to
serial bonds and provides for a decreasing amount of
amortization
!

0. Effective interest method or simply interest method or

scientificmethod This methodprovidesfor an increasing
amount of amortization.

'In accordance with PFRS 9, bond investments shall be

classified as financial assets measured at amortized cost
.using the effective interest method.

This means that any discount or premium must be amortized

using the effective interest method.
The straight line method and bond outstanding method are
acceptable only when the computation Will result in periodic
interest income that is not materially different from the
amount that would be computed using the effective interest
method. .-

I .1

- Diseount
linemethod
Straight 'é
'
Face amount of bonds ' 2,000,000
Acquisition coston J anuary 1, 2020 1 ,850,000
Discounton the bonds ' L50,000
Date of bonds - J anuary 1, 2020
Date of maturity January 1, 2023
Interest payable semiannually on J une 30
and December 31 ~ 12%

Following the straight line method, the annual amortization

of discount is simply computed by dividing the discount of
P150,000 by the life of the bonds of 3 years or P50,000.
Schedule of annual amortization of the discount
2020 . 50,000
2021 50,000
2022 50,000

Totalbonddiscount £21999.
W
Journal entries for 2020
1, Acquisitionon January 1:
Investmentinbonds
Cash 1,850,000
1,850,000
2 Collection of semiannual
inte rest on June 30:
x 12%x 6/ 12or
(132,000,000
P120,000)
Cash
120,000
Interestmcome 120*000
3. Collection of semiannual interest on December31:

. , 120,000
Interest mcome 120,000

4.~ Annual amortization of discount:

Investmentinbonds 50,000
Interest income: . 50,000

line method - Premium

Straight

Faceamount of bonds 0 . 2,000,000

cost
Acquisition on J anuary 1, 2020 2,200,000
Premiumon the bonds 200,000
Dateofbonds , January 1, 2020
-
Dateofmaturity JanuaIy.-1,2024
.
Interest annually
payable on 31
December 12%
'
F 110 th strai htlinemethod, annual
the. 0famortization
is
Silpgmcgmpibedb?! the
dividing prelmum the
P200000
by
of 4
lifeofthebonds years or P50,000.

of
Schedule annual of
amortization the premium
00 50,000
20:? 50,000
2022 50,000
2023 50,000
Totalbond
prommm 200,000
 Journal entiies for 2020 .
1. Acquisitionon January 1:
Investmentinbonds 2,200,000
Cash _ 2 200)000
'
\

2. Collectionof annual intereston December31:

(P2,000,000x 12%equalsP240,000)
Cash 240,000
Interestincome 240.000

3. Annual amortization of the premium:

Ihterestincome 50,000
Investmentinbonds 50.000

Bond outstanding method - Discount

Face amount of bonds 2,000,000

Acquisition coston J anuary 1, 2020 1, 900, 000
Discount on the bonds 100,000
31,2020and
AnnualinstallmentonDecember
every December 31 thereafter 500,000
Date of bonds January 1, 2020
Interest payable semiannually on J une 30 and
December 31 - 12%

Year Bond outstanding Faction Discount amortization

2020 2,000,000 20/ 50 40,000

2021 . 1,500,000 15/50 30,000
2022 1,000,000 10/50 20,000
'
2023 500,000 5/ 50 10,000
5,000,000 100,000

The bond outstanding1sdeterminedeverybond y.earThus,the

bond outstanding for 2020 is P2,000,000 and 13 decreasedby
the payment of P500, 000 each year
The fractions are developedfrom the bond outstanding column-
The annual discountamortizatwnis computed
by multiplying
Thus,for2020
by theamountof thediscount.
the fractions
20/50timeaP100,000equalsP40,,000 andsoon.
Journal entries
2020

Jan.1 Investmeht
inbonds 1' 900' 000
Cash
_ 1,900,000
Jun. 30 Cash(2,000,000
x 12%x 6 / 12) 120,000
Interest income
120,000
Semiannual interest.

Dec. 31 Cash
120,000 /
Interest income
120,000
31 Investmentinbonds 40,000 /
Interest income
40,000
Amortization of discount for 2020.
31 Cash '
500,000 .r-

Investment in bonds 500,000

First installment.

2021

Jun. 30 Cash (1,500,000 x 12% x 6/ 12) 90,000 .

Interest income 90,000
Semiannual interest.

Dec. 31 '
Cash 90,000
Interest income 90,000
'
31 Investment in bonds 30,000
Interest income 30.000
Amortization for 2021.

31 Cash 500,000
Investment in bonds 500.000
Second installment. .
 math!" Premium
Bondoutstan ding
d 4,000.00!)
unt of
cost
ban
on J
a
2020
1»
anuarY . 4 200
izgzlglptihn
onthebonds
Premium and
2020
2001333
De
on
installment 31
camber 1000000
Annual 31 1
afte
there
December
every I January
1'9020
b0 01
annually
31:10:03;
pgyzble 31
December
on 12%
Annual of
amortization premium
outstanding
Year Bond FractionPremium
amortizatiOn
2020 4,000,000 3/ 10 4 / 10
2021 3,000,000 23,338
,
2 / 10 * 40,000
2022 ' 2,000,000
2023 1,000,000 1/ 10 , 20,000
M99999 399.999.
The bondoutstandingfor 2020is P4,000,000and thisis reduced
.
by P1,000,000 each year.
The fractions are developedfrom the bond outstanding column.
The annualpremiumamortizationis computed
by multiplying
the fractions by the amount of the premium. .

Thus, for 2020, 4/ 10 times

' P200,000 equals P80,000, and so 2
'
on. -
'
l

entries
Journal for 2020
Jan, _1 Investmentinbonds .. .
. Cash 4,200,000
-: ~,
4,200,000
Dec;31 Cash(4,000,000x
12%) 480,000
Interestincome . 480 000
Annual interest.
Dec.31 Interest
income 80,000
Investmentinbonds 80 000
Amortization
of premiumfor 2020.
31 Cash

Investmentinbonds 00,000 1,0

Fmst
installment.
1 000
000