Since 1977

FAR OCAMPO/CABARLES/SOLIMAN/OCAMPO
FAR.2921-Investments in Debt Instruments OCTOBER 2020

DISCUSSION PROBLEMS
1. Investments in debt instruments are financial assets 4. Which of the following returns is consistent with
because they are contractual cash flows that are SPPI?
a. Cash equivalents. I. Return for passage of time.
b. Equity instruments of another entity. II. Return for the risk that one party to a financial
c. Contractual rights to receive cash or another instrument will cause a financial loss for the other
financial asset from another entity. party by failing to discharge an obligation.
d. All of the above. III. Return for the risk that an entity will encounter
difficulty in meeting obligations associated with
2. PFRS 9 requires entities to measure their financial financial liabilities that are settled by delivering
assets based on cash or another financial asset.
a. The contractual cash flow characteristics of the IV. Return for amounts to cover expenses and a profit
financial asset. margin.
b. The company’s business model for managing its
a. I, II, III and IV c. I and IV only
financial assets.
b. I, II and III only d. II and III only
c. Both a and b.
d. Neither a nor b.
5. Which of the following may be classified as a financial
asset at fair value through profit or loss?
LECTURE NOTES:
a. A derivative
Financial Assets Classification Flowchart (2014 PFRS 9) b. A non-derivative debt instrument
c. A non-derivative equity instrument
d. All of the above

6. Which of the following may be measured subsequently

at amortized cost?
a. A derivative
b. A non-derivative equity instrument
c. A non-derivative debt instrument
d. None of the above

7. Under what circumstances under PFRS 9 can an entity

classify financial assets that meet the amortized cost
criteria as at FVTPL?
a. Where the instrument is held to maturity.
b. Where the business model approach is adopted.
c. Where the financial asset passes the contractual
cash flow characteristics test.
d. If doing so eliminates or reduces an accounting
mismatch.

8. Which of the following is correct regarding the

classification of investment in debt instruments as
financial asset at fair value through OCI?
a. This classification is not allowed for investment in
debt instruments.
b. An entity may make an irrevocable election to
classify investment in a debt instrument that is not
‘held for trading’ as such.
c. In order to be classified as such, a debt instrument
3. Which statement is incorrect regarding contractual
needs to both have simple principal and interest
cash flows that are solely payments of principal and
cash flows and be held in a business model in
interest (SPPI)?
which both holding and selling financial assets are
a. Contractual cash flows that are SPPI on the
integral to meeting management’s objectives.
principal amount outstanding are consistent with a
d. All of the above.
basic lending arrangement.
b. Principal is the fair value of the financial asset at
9. All financial assets are initially measured at fair value
initial recognition.
plus transaction costs, except
c. An entity shall assess whether contractual cash
a. Fair value through profit and loss
flows are SPPI on the principal amount outstanding
b. Fair value through OCI
for the currency in which the financial asset is
c. Amortized cost
denominated.
d. None of the above
d. An originated or a purchased financial asset can be
a basic lending arrangement only if it is a loan in
its legal form.

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EXCEL PROFESSIONAL SERVICES, INC.
Use the following information for the next two questions.
On April 1, 2020, Purefoods Company purchased a
P1,000,000 face value 8% bond for P910,000 including
accrued interest and commission. The commission to
acquire the bonds was P5,000. The bonds are dated
January 1, 2020 and mature on January 1, 2025, and pay
interest semi-annually on January 1 and July 1. On
December 31, 2020, the bonds had a fair value of
P920,000. On April 1, 2021, Purefoods sold the bonds for
a total consideration of P950,000.
10. What amount should Purefoods report as unrealized
gain in its 2020 profit or loss?
a. P35,000 c. P15,000
b. P30,000 d. P 0 and pay interest semi-annually each July 1 and
11. How much is the gain from the sale of investment in
debt securities on April 1, 2021?
a. P65,000 c. P30,000
b. P45,000 d. P10,000
Use the following information for the next five questions.
On January 1, 2020, Alaska Corporation purchased
P1,000,000 10% bonds for P1,051,510 (including broker’s
commission of P20,000). Interest is payable annually
every December 31. The bonds mature on December 31,
2022. The prevailing market rate for the bonds is 9% at
December 31, 2020.
12. If the bonds are classified as FA@FVTPL, the amount to
be recognized as fair value adjustment loss in its 2020
profit or loss is
a. P33,900 c. P13,900
b. P26,180 d. P 6,180
13. If the bonds are classified as FA@AC, the amount to be
reported on the entity’s December 31, 2020 statement
of financial position is
a. P1,034,340 c. P1,025,330
b. P1,035,630 d. P1,017,610
14. Investment in debt instruments classified as
FA@FVTOCI recognizes which of the following in OCI?
a. Changes in fair value
b. Impairment gains and losses
c. Interest calculated using the effective interest
method.
d. All of the above.
15. Which statement is correct if the bonds are classified
as FA@FVTOCI?
a. The amount to be recognized in 2020 profit or loss
is P100,000.
b. The amount to be recognized in 2020 other
comprehensive income is P33,900.
c. The amount to be reported on the entity’s
December 31, 2020 statement of financial position
is P1,035,630.
d. None of the above.
16. If the entity sold the investment on 31 December 2020
at fair value and bonds are classified as FA@FVTOCI,
the entity will report a ‘reclassification adjustment’ of
a. Nil c. P18,021
b. P13,900 d. P(18,021)
17. On 1 January 2020, an entity purchased a debt
instrument at its face value of P1,000,000. The
contractual term is ten years with an annual coupon of
6%. On 31 December 2020, the fair value of the
instrument decreases to P955,000. 12-month expected
credit losses as determined under the impairment
model are P25,000.
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Which statement is correct if the debt instrument is
classified as FA@FVTOCI?
a. The net amount to be recognized in 2020 profit or
loss is P60,000.
b. The amount to be recognized in 2020 other
comprehensive income is P45,000.
c. The amount to be reported on the entity’s
December 31, 2020 statement of financial position
is P930,000.
d. None of the above.
18. On July 1, 2020, Morales Corp. acquired P4,000,000
face value of X Corporation bonds with a nominal rate
of interest of 4%. The bonds mature on July 1, 2025
January 1, with the first interest payment due on
January 1, 2021. The bonds are held for collection. At
the date of issuance the bonds had a market rate of
interest of 6%. On December 31, 2020, the market
value of the bonds was P3,700,000. The amount to be
recognized in 2020 profit or loss related to the bond
investment is
a. P109,764 c. P219,529
b. P109,896 d. P219,791
19. On February 1, 2020 Red Bull Company purchased 5-
year bonds with face value of P2,000,000 and stated
interest of 12% per year payable annually every
January 1. The bonds were acquired to yield 10%.
How much was the total amount paid to purchase the
bonds?
a. P2,151,592 c. P2,126,751
b. P2,149,522 d. P2,169,522
20. Which statement is incorrect regarding reclassification
of financial assets?
a. Reclassifications are only permitted on the change
of an entity's business model and are expected to
occur only infrequently.
b. An entity shall account for transfers between
categories prospectively, at the beginning of the
period after the change in the business model.
c. An entity shall restate any previously recognized
gains, losses (including impairment gains or
losses) or interest.
d. None of the above.
21. In accordance with PFRS 9, an entity may reclassify
a. Financial assets designated at FVTPL
b. Investments in equity instruments designated at
FVTOCI
c. Derivatives
d. None of the above
22. Which statement is incorrect regarding reclassification
of financial assets?
a. Reclassifications to FVTPL measurement category
result to amounts recognized in profit or loss.
b. The effective interest rate is determined on the
basis of the fair value of the asset at the
reclassification date when an entity reclassifies a
financial asset out of FVTPL measurement
category.
c. The effective interest rate and the measurement of
expected credit losses are not adjusted as a result
of the reclassification from AC measurement
category to FVTOCI and vice versa.
d. All reclassifications out of FVTOCI measurement
category result in ‘reclassification adjustment’.
FAR.2921
EXCEL PROFESSIONAL SERVICES, INC.
LECTURE NOTES:
Summary of reclassification of financial assets
FROM TO ACCOUNTING
AC FVTPL The FV is measured at the
reclassification date. Any gain or
loss arising from a difference
between the previous AC and FV
is recognized in P/L.
FVTOCI FVTPL The FA continues to be
measured at FV. The cumulative
gain or loss previously
recognized in OCI is reclassified
from equity to P/L as a
reclassification adjustment at
the reclassification date.
FVTPL AC The FV at the reclassification
date becomes its new gross
carrying amount.
FVTPL FVTOCI The FA continues to be
measured at FV.
AC FVTOCI The FV is measured at the
reclassification date. Any gain or
loss arising from a difference
between the previous AC of the
FA and FV is recognized in OCI.
The EIR and the measurement
of expected credit losses are not
adjusted as a result of the
reclassification.
FVTOCI AC The FA is reclassified at its FV at
the reclassification date.
However, the cumulative gain or
loss previously recognized in
OCI is removed from equity and
adjusted against the FV of the
FA at the reclassification date.
As a result, the FA is measured
at the reclassification date as if
it had always been measured at
AC. This adjustment affects OCI
but does not affect P/L and
therefore is not a reclassification
adjustment. The EIR and the
measurement of expected credit
losses are not adjusted as a
result of the reclassification.
Use the following information for the next four questions.
On January 1, 2019, YOU TOO Corporation purchased
P1,000,000 10% bonds classified as FA@AC. The bonds
were purchased to yield 12%. Interest is payable annually
every December 31. The bonds mature on December 31,
2023. On December 31, 2019 the bonds were selling at
99. On December 31, 2020, YOU TOO sold P500,000 face
value bonds at 101. The bonds were selling at 103 on
December 31, 2021.
23. How much is the gain on sale of the investment in
bonds in 2020?
a. P41,060 c. P35,387
b. P29,010 d. P10,000
24. If the entity reclassified the bonds as FA@FVTPL after
the sale, how much should be recognized in profit or
loss on reclassification date?
a. P39,010 c. P31,895
b. P29,010 d. P 0 changes in market prices.
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25. If the entity reclassified the bonds as FA@FVTOCI after
the sale, how much should be reported as separate
component of equity at December 31, 2020?
a. P39,010 c. P31,895
b. P29,010 d. P 0
26. If the entity reclassified the bonds as FA@FVTOCI after
the sale, how much should be reported as separate
component of equity at December 31, 2021?
a. P39,010 c. P31,895
b. P29,010 d. P 0
27. Which statement is incorrect regarding presentation
and disclosure of financial assets?
a. The carrying amounts each category of financial
assets shall be disclosed either in the statement of
financial position or in the notes.
b. FA@FVTPL are usually presented as current.
c. FA@FVTOCI are either current or noncurrent.
d. FA@AC shall be presented as noncurrent.
28. In accordance with PAS 1, the profit or loss section or
the statement of profit or loss shall include line item
for gains and losses from derecognition of
a. Financial assets measured at fair value through
profit or loss.
b. Financial assets measured at fair value through
other comprehensive income.
c. Financial assets measured at amortized cost.
d. All of these.
29. In accordance with PAS 1, which of the following gains
or losses from reclassification of financial assets need
not be presented separately in the profit or loss section
or the statement of profit or loss?
a. Reclassification of financial assets out of the
amortized cost measurement category to FVTPL.
b. Reclassification of financial assets out of the
FVTOCI measurement category to FVTPL.
c. Reclassification of financial assets out of the FVTPL
measurement category.
d. None of these.
30. PFRS 7 requires entities to provide disclosures in their
financial statements that enable users to evaluate
a. The significance of financial instruments for the
entity’s financial position and performance.
b. The nature and extent of risks arising from
financial instruments to which the entity is exposed
during the period and at the end of the reporting
period, and how the entity manages those risks.
c. Both a and b.
d. Neither a nor b.
31. PFRS 7 requires qualitative and quantitative
information about
a. Market risk c. Liquidity risk
b. Credit risk d. All of these
32. Market risk is
a. The risk that one party to a financial instrument
will cause a financial loss for the other party by
failing to discharge an obligation.
b. The risk that an entity will encounter difficulty in
meeting obligations associated with financial
liabilities that are settled by delivering cash or
another financial asset.
c. The risk that the fair value or future cash flows of a
financial instrument will fluctuate because of
d. None of the above.
- now do the DIY drill -
FAR.2921
EXCEL PROFESSIONAL SERVICES, INC.
DO-IT-YOURSELF (DIY) DRILL
1. An investor purchased a bond as a long-term
investment on January 1. Annual interest was received
on December 31. The investor’s interest income for the
year would be highest if the bond was purchased at
a. Par. c. A discount.
b. Face value. d. A premium.
2. The fair value of debt securities not regularly traded
can be most reasonably approximated by:
a. Determining the value using similar securities in
the NASDAQ market.
b. Using the relative fair value method.
c. Calling a licensed and registered stockbroker.
d. Calculating the discounted present value of the
principal and interest payments.
3. In 2019, Emong Co. acquired, at a premium, Bobads,
Inc. ten-year bonds as a long-term investment. At
December 31, 2020, Bobads’ bonds were quoted at a
small discount. Which of the following situations is the
most likely cause of the decline in the bonds’ market
value?
a. Bobads issued a stock dividend.
b. Bobads is expected to call the bonds at a premium,
which is less than Emong’s carrying amount.
c. Interest rates have declined since Emong
purchased the bonds.
d. Interest rates have increased since Emong
purchased the bonds.
4. Investment in debt instruments shall be measured at
fair value through profit or loss unless it is measured
a. At amortized cost.
b. At fair value through other comprehensive income.
c. Either a or b.
d. Neither a nor b.
5. The Polythene Pam Company purchases P2,000,000 of
bonds. The asset has been designated as one at fair
value through profit and loss.
One year later, 10% of the bonds are sold for P400,000.
Total cumulative gains previously recognized in
Polythene Pam's financial statements in respect of the
asset are P100,000.
What is the amount of the gain on disposal to be
recognized in profit or loss?
a. P190,000 c. P200,000
b. P 90,000 d. P100,000
6. On January 1, 2020, SMB Company acquired the entire
issue of Beerman’s P6,000,000 12% serial bonds. The
bonds were purchased to yield 10%. Bonds of
P2,000,000 mature at annual intervals beginning
December 31, 2020. Interest is payable annually on
December 31. What is the carrying amount of the
investment in bonds on December 31, 2020?
a. P6,105,650 c. P4,304,622
b. P4,105,650 d. P3,820,702
7. On January 1, 2020, Alexander Corporation purchased
P1,000,000 10% bonds for P927,880 (including
broker’s commission of P20,000). Alexander classified
the bonds as FA@AC. The bonds were purchased to
yield 12%. Interest is payable annually every
December 31. The bonds mature on December 31,
2024. On December 31, 2020 the bonds were selling
at 99. How much is the carrying amount the
investment in bonds on December 31, 2020?
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a. P961,626 c. P939,226
b. P916,534 d. P990,000
8. On July 1, 2020, Morals Corp. acquired P4,000,000
face value of T Corporation bonds with a nominal rate
of interest of 4%. The bonds mature on July 1, 2025
and pay interest semi-annually each July 1 and
January 1, with the first interest payment due on
January 1, 2021. The bonds are classified as FA@AC.
At the date of issuance the bonds had a market rate of
interest of 6%. The entity incurred transaction costs
of 1% of the purchase price. On December 31, 2020,
the market value of the bonds was P3,700,000. The
amount to be recognized in 2020 profit or loss related
to the bond investment is
a. P105,740 c. P109,764
b. P106,797 d. P142,498
9. On April 1, 2020, Saxe, Inc. purchased P2,000,000
face value, 9%, Treasury Notes for P1,985,000,
including accrued interest of P45,000. The notes
mature on July 1, 2021, and pay interest semiannually
on January 1 and July 1. Saxe uses the straight-line
method of amortization. If the notes are classified as
FA@AC, the carrying amount of this investment in the
company’s October 31, 2020 statement of financial
position should be
a. P1,985,000 c. P1,976,000
b. P1,968,000 d. P1,964,000
Use the following information for the next two questions.
On January 1, 2020, Choson Corporation purchased
P4,000,000 10% bonds for P3,711,520. These bonds are
held in a business model whose objective is achieved by
both collecting contractual cash flows and selling financial
assets. The bonds were purchased to yield 12%. Interest
is payable annually every December 31. The bonds
mature on December 31, 2024. On December 31, 2020
the bonds were selling at 99. On December 31, 2020,
Choson sold P2,000,000 face value bonds at 101, which is
the fair value of the bonds on that date, plus accrued
interest.
10. The unrealized gain to be recognized as a separate
component of equity on December 31, 2020 is
a. P203,098 c. P152,270
b. P248,480 d. P 0
11. The gain on sale of the bonds on December 31, 2021 is
a. P217,684 c. P 14,586
b. P116,135 d. P141,549
12. On June 30, 2020, Aileen Corp. purchased a two-year
bond, which it classified as FA@FVTOCI. The bond had
a stated principal amount of P10,000,000, which Aileen
Corp. will receive on June 30, 2022. The stated
coupon interest rate was 10% per year, which is paid
semiannually on December 31 and June 30. The bond
was purchased at a quoted annual yield of 8% on a
bond-equivalent yield basis. On December 31, 2020,
the bonds are quoted at 101.1. How much should be
recognized as component of equity as of December 31,
2020 related to this bond investment? (Round off
present value factors to four decimal places)
a. P167,550 c. P110,000
b. P 78,550 d. P 0
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FAR.2921
EXCEL PROFESSIONAL SERVICES, INC.

ILLUSTRATIVE PROBLEMS
PROBLEM NO. 1 SOLUTION:
Compute for the total amount paid to purchase the bonds
Situation 1
under the following independent situations: (Round off
present value factors to four decimal places) PV of P (P1,000,000 x 0.7118) P 711,800
PV of I (P1,000,000 x 10% x 2.4018) 240,180
Situation 1 Purchase price/amount paid P951,980
Face value P1,000,000
Date of bonds January 1, 2020
Situation 2
Date of maturity January 1, 2023
Acquisition date January 1, 2020 PV of P (P1,000,000 x 0.7462) P 746,200
Nominal rate 10% PV of I (P1,000,000 x 6% x 5.0757) 304,542
Effective rate 12% Purchase price/ amount paid P1,050,742
Interest payment date January 1

Situation 2 Situation 3
Face value P1,000,000 PV of P (P1,000,000 x 0.7050) P705,000
Date of bonds January 1, 2020 PV of I (P1,000,000 x 5% x 4.9173) 245,865
Date of maturity January 1, 2023 Purchase price, 1/1/20 950,865
Acquisition date January 1, 2020 Add discount amort. 1/1/ - 3/1:
Nominal rate 12% EI (PV on 1/1 x 6% x 2/6) P19,017
Effective rate 10% NI (P1M x 5% x 2/6) ( 16,667) 2,350
Interest payment dates January 1 and July 1 Purchase price, 3/1/20 953,215
Add accrued interest (P1M x 5% x 2/6) 16,667
Situation 3 Total amount paid P969,882
Face value P1,000,000
Date of bonds January 1, 2020
Situation 4
Date of maturity January 1, 2023
Acquisition date March 1, 2020 Prin- Int. PVF@
Nominal rate 10% Date cipal @10% Total 12% PV, 1/1/20
Effective rate 12% 12/31/20 1M .3M 1.3M 0.8929 1,160,770
Interest payment dates January 1 and July 1 12/31/21 1M .2M 1.2M 0.7972 956,640
12/31/22 1M .1M 1.1M 0.7118 782,980
Situation 4 Total 3M 2,900,390
Face value P3,000,000
Date of bonds January 1, 2020
Date of maturity P1,000,000 annually starting
December 31, 2020
Acquisition date January 1, 2020
Nominal rate 10%
Effective rate 12%
Interest payment December 31

PROBLEM NO. 2
On January 1, 2020, Isabela Corporation purchased P1,000,000 8% bonds for P924,164 (including broker’s commission
of P50,000). The bonds were purchased to yield 10%. Interest is payable annually every January 1. The bonds mature
on January 1, 2025.

Quoted price of the bonds as of the dates indicated follows:

December 31, 2020 98.0
December 31, 2021 99.0

REQUIRED:
A. Prepare the journal entries on the books of Isabela Corporation to record the following: (Round off present value
factors to four decimal places)
1. purchase of the investment on January 1, 2020;
2. accrual of interest income on December 31, 2020;
3. amortization of premium or discount on December 31, 2020; and
4. fair value adjustment as of December 31, 2020
under the following assumptions:
a. the investment is FA@FVTPL;
b. the investment is FA@FVOCI; and
c. the investment is FA@AC

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EXCEL PROFESSIONAL SERVICES, INC.

B. Compute for the carrying amount of the investment in bonds at December 31, 2020 if:
a. the investment is FA@FVTPL; P980,000
b. the investment is FA@FVTOCI; and P980,000
c. the investment is FA@AC P936,580

C. Assuming the bonds were sold on December 31, 2021 at 99, prepare the journal entry to record the sale under the
following assumptions:
a. the investment is FA@FVTPL;
b. the investment is FA@FVTOCI; and
c. the investment is FA@AC
- end -

SOLUTION:
FA@FVTPL FA@FVTOCI FA@AC

A.1) Purchase of investment:

FA@FVTPL P874,164 FA@FVTOCI P924,164 FA@AC P924,164

Commission exp. 50,000 Cash P924,164 Cash P924,164
Cash P924,164

A.2) Accrual of interest:

Interest receivable P80,000 Interest receivable P80,000 Interest receivable P80,000
Interest income P80,000 Interest income P80,000 Interest income P80,000

A.3) Amortization of discount:

No entry FA@FVTOCI P12,416 FA@AC P12,416
Interest income P12,416 Interest income P12,416

A.4) FV adjustment:
FA@FVTPL P105,836 FA@FVTOCI P43,420 No entry
FV adj. gain (P/L) P105,836 FV adj. G/L (OCI) P43,420

C) Sale of investment:
To update amortization To update amortization To update amortization
No entry FA@FVTOCI P13,658 FA@AC P13,658
Interest income P13,658 Interest income P13,658

FV adjustment before sale FV adjustment before sale FV adjustment before sale

No entry FV adj. G/L (OCI) P3,658 No entry
FA@FVTOCI P3,658

Disposal entry Disposal entry Disposal entry

Cash P1,070,000 Cash P1,070,000 Cash P1,070,000
FA@FVTPL P980,000 FV adj. G/L (OCI) 39,762 FA@AC P950,238
Interest income 80,000 FA@FVTOCI P990,000 Interest income 80,000
Gain on sale 10,000 Interest income 80,000 Gain on sale 39,762
Gain on sale 39,762

Amortization schedule:
Date EI (10%) NI (8%) Disc. Amort. Amortized cost
01/01/20 P 924,164
12/31/20 P92,416 P80,000 P12,416 936,580
12/31/21 93,658 80,000 13,658 950,238
12/31/22 95,024 80,000 15,024 965,262
12/31/23 96,526 80,000 16,526 981,788
12/31/24 98,212 80,000 18,212 1,000,000

J - end of FAR.2921 - J

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