INVESTMENT IN

DEBT SECURITIES

December 31, 2019 May 1, 2020 December 31, 2020

4 mos. 8 mos.

Accrued interest 500,000 x .12 x 4/12 = 20,000

JOURNAL ENTRY:
May 1, 2020
Investment 545,039
Interest Receivable 20,000
Cash 565,039
545,039 545,039 + 20,000 = 565,039
 Balance sheet date-December 31

April 1 August 1 October 1 December 31

4 mos. 2 mos. 3 mos.
EARNED / INCOME EARNED / INCOME

EARNED AND RECEIVED EARNED BUT NOT YET

RECEIVED

45,000 2,000,000 x .09 x 3/12 = 45,000

45,000 2,000,000 x .045 x 3/6 = 45,000
Interest Income = 5 months
December 31, 2019 June 1, 2020 December 31,2020
5 mos. 7 mos.

Accrued interest 600,000 x .12 x 5/12 = 30,000

SALES PRICE : 600,000 x 1.01 = 606,000 606,000 + 30,000 = 636,000

INTEREST INCOME = Face value x Nominal rate
NOMINAL INTEREST ( Face value x Nominal rate )
Cash / Interest Receivable xx
Interest Income xx
AMORTIZATION ( Nominal interest - Effective interest )

DISCOUNT PREMIUM

Investment xx Interest Income xx

Interest Income xx Investment xx
 Total Cash PAID 860,652

Accrued Interest (-0-)

Transaction Cost (110,000)

Initial Cost of Investment 750,652

Interest Income (2018) 800,000 x .12 x 12/12 = 96,000
Carrying Value, 12/31/19 800,000 x 1.09 = 872,000
Fair Value, 12/31/18 ( 800,000 x 1.08 ) 864,000

Carrying Value bef. remeasurement ( 750, 652 )

Unrealized Gain ( P/L ) 113,348

 AI = 800,000 x .12 x 3/12 = 24,000

Sales Price 896,000 + 24,000 = 920,000 ( Cash RECEIVED )

(800,000 x 1.12 )
Carrying value (872,000)
(800,000 x 1.09)
GAIN on sale ( P/L ) 24,000
 INTEREST INCOME ( FVPL ) = Face value x Nominal rate
INTEREST INCOME ( FVOCI & IAC ) = Amortized cost x Effective rate
NOMINAL INTEREST ( Face value x Nominal rate )

Cash / Interest Receivable xx

Interest Income xx
AMORTIZATION ( Nominal interest - Effective interest )

DISCOUNT PREMIUM

Investment xx Interest Income xx

Interest Income xx Investment xx
CUMULATIVE UG/UL or ACCUMULATED OCI
Fair Value, BS date xx
Amortized Cost, BS date (xx)
Shareholders’ Equity section of
Unrealized gain or loss, ending balance xx Statement of Financial Position

UNREALIZED GAIN / LOSS FAIR VALUE

Unrealized gain or loss, ending bal. xx

UG/UL Before Adjustment (xx)
Unrealized gain or loss, current period xx OCI section of Statement of
Comprehensive Income
 FAIR VALUE ADJUSTMENT (FVA) - FVOCI
Reciprocal account of UG/UL account

DEBIT (INCREASE in Fair Value) CREDIT (DECREASE in Fair Value)

ADJUNCT account CONTRA account
+ FVOCI at Amortized cost - FVOCI at Amortized cost
FVA-FVOCI xx UL xx
UG xx FVA-FVOCI xx
FVOCI at Amortized Cost xx FVOCI at Amortized Cost xx
Fair value adjustment-FVOCI xx Fair value adjustment-FVOCI ( xx )
FVOCI at Fair Value xx FVOCI at Fair Value xx
Initial cost, 1/1/18 = 860,652
 CV, 12/31/18 = 860,652 x 1.10 - 96,000 = 850,717
Interest income ( 2019 ) = 850,717 x .10 x 12/12 = 85,072
Amortized cost, 12/31/19 = 860,652 x 1.10 - 96,000 x 1.10 - 96,000 = 839,789
Nominal interest ( 800,000 x .12 ) 96,000 Amortized cost, 12/31/18 850,717
Effective interest ( 850,717 x .10 ) (85,072) Amort. of premium (10,928)
Amortization of PREMIUM 10,928 Amortized cost, 12/31/19 839,789
Fair Value, December 31, 2019 872,000 Amortized Cost, December 31, 2018 850,717
Fair Value, December 31, 2018 864,000 Amortized Cost, December 31, 2019 839,789

2018 2019
Fair Value, BS Date 864,000 872,000
Amortized Cost, BS Date ( 850,717 ) ( 839,789 )
Unrealized gain or loss, ending bal. 13,283 UG 32,211 UG
Unrealized gain or loss before adjustment 0 ( 13,283 ) UG
Unrealized gain or loss, current period 13,283 UG 18,928 UG

DATE AMORTIZED COST

12/31/18 850,717
12/31/19 839,789
32,211 UG 18,928 UG 12/31/20 827,768
32,211 UL 18,928 UL
FVOCI at Fair Value, 12/31/18 864,000
Amortization of Premium (2019) (10,928)
FVOCI at Fair Value, 12/31/19 bef. remeasurement 853,072
Fair Value, 12/31/19 (872,000)
Unrealized Gain for the year 2019 - OCI in SCI 18,928

FAIR VALUE = 8,000

Profit or Loss Other Comprehensive Income

( Amortization ) ( Change in Fair Value )
10,928 18,928
Sales Price 440,000
(400,000 x 1.10)
Carrying value ( 413,884 )
( 827,768 x 1 / 2 )
GAIN on sale ( P/L ) 26,116* DATE
12/31/18
AMORTIZED COST
850,717
12/31/19 839,789
*(880,000 - 827,768 = 52,232 x 1/2 = 26,116 gain
12/31/20 827,768
 INVESTMENT AT AMORTIZED COST ( IAC )

Transaction cost Capitalized

Amortization Nominal - Effective
Interest income Amortized cost x Effective Rate

Carrying value, BS Date Amortized Cost

Unrealized Gain/Loss ( Fair Value ) None

Cumulative UG/UL or Accumulated OCI None

Gain or Loss on Sale Profit or Loss

Interest income ( 2018 ) 860,652 x .10 x 12/12 = 86,065
 DATE AMORTIZED COST
12/31/18 850,717
12/31/19 839,789
12/31/20 827,768
 IMPAIRMENT LOSS
CV of Investment > PV of Restructured Future Cash Inflows
BALANCE SHEET DATE - IMPAIRMENT TEST
Carrying Value of Investment XX

PV of Restructured Future Cash In ows ( XX )

Impairment loss XX

Journal entry: Present value of FACE VALUE XX

Impairment loss xx Present value of INTEREST XX

Investment xx
PV of Restructured Future
XX
Cash Inflows
fl
Carrying Value of Investment, 12/31/20 827,768
PV of Restructured Future Cash In ows ( 772,192 )
Impairment loss 55,576

Present value of FACE VALUE

661,120
( 800,000 x .8264)
Present value of INTEREST
111,072
( 64,000 x 1.7355)
PV of Restructured Future Cash Inflows 772,192

fl
Alternative solution : Impairment loss = 32,000 x 1.7355 = 55,536

Journal entry:
Impairment loss 55,576
Investment at Amortized cost 55,576

CV of Investment AFTER Impairment = 827,768 - 55,576 = 772,192

Interest Income for the year 2021 = 772,192 x .10 = 77,219

 FREQUENTLY ASKED QUESTIONS
1. How much is the Initial Cost of Investment?
2. How much is the Interest Income?
3. How much is the Carrying Value of Investment that should be reported in the Statement
of Financial Position?
4. How much is the Unrealized Gain or Loss that should be reported in Profit or Loss/
OCI?
5. How much is the Gain or Loss on Sale?
6. How much is the Interest Receivable/ Accrued Interest at the balance sheet date?

7. How much is the Amortization of Premium or Discount?