Debt Securities

- A FINANCIAL ASSET ARISING FROM A LOAN GRANTED BY A BANK OR

OTHER FINANCIAL INSTITUTION TO A BORROWER OR CLIENT.
Bond Investment
- 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.
- A bond is evidenced with bond certificate while the terms and condition of the bonds are
written in another instrument which is called bond indenture

CLASSIFICATION OF BOND INVESTMENTS

- Bonds are classified according to the purpose of the bond investment or the
business model of the investment

1. AMORTIZED COST BONDS

2. FAIR VALUE BONDS
• Financial assets at fair value through profit or loss
• Financial Assets at fair value through other comprehensive income
Amortized Cost
- Used if the entity holds the bond for both of the following reasons
a. To collect future cashflow at specified date
b. The contractual cashflow to be collected is solely for principal
payment and interest payment
- Used if the problem is silent in Bond investment

Initial Recognition
= Fair Value + Direct Transaction Cost

Subsequent Measurement
= Amortized Cost
= Initial recognition amount minus repayment, plus or minus amortization of
the discount or premium, and minus impairment loss.
Initial Recognition
= Fair value + Transaction Cost
= Present value of the future cash flow
Future Cashflow
1. Principal Payment
2. Interest Payment
Type of Interest in Bonds
1. Nominal Rate
- Also called coupon rate and stated rate
- The rate in the bond certificate
- The basis for computation of Interest Receivable
2. Effective interest rate
- Also called as yield rate and market rate
- The true interest rate of the bonds
- The basis of computation of Interest Income

Note :
- If the problem doesn’t have effective interest rate, the assumption is that the nominal rate is equal to the effective interest
rate, that is why no need to compute for the present value if the problem is silent
Initial Recognition
1. Premium on Bonds
- There is a premium when the payment to the bonds is greater than the face value
- There is also premium if the nominal rate is greater than the effective rate
- The present value is greater than the face value

2. Discount on Bonds
- There is discount when the payment to the bonds is less than the face value
- There is also a discount if the nominal rate is less than the effective rate
- The present value is less than the face value

Note
1. In bonds receivable, the discount or premium has no account title, it goes directly to
the account title of Bonds Receivable
Method of Amortization
1. Straight line method
- the interest would be divided by the life of the bonds
- the amortization is the same every year
- only used if the problem states that the entity uses straight line method
Sample Problem 1
On July 1,2021, the entity purchased 15% P1,000,000 bonds at 110. The interest payment is semiannually every July 1 and December 31.
Bonds are dated July 1,2021 to July 1,2026
Journal Entry Dec. 31 (Amortization)
July 1 Amortization = Discount or Premium / Life of bonds
Bonds Receivable (1,000,000 x 110%) 1,100,000 Amortization = (1,100,000 – 1,000,000) / 5 years
Cash 1,100,000 Amortization = 100,000 premium / 5 years
Amortization = 20,000 per year
Dec. 31(Recording of receipt of interest)
Cash(1,000,000 x 15% x 6/12) 75,000 Interest Income 20,000
Interest Income 75,000 Bonds Receivable 20,000
Sample Problem 2
On February 1,2021, the entity purchased 12% P1,000,000 bonds at 90 plus accrued interest. The interest payment is semiannually every
April 1 and October 1. Bonds are dated April 2020 to April 2025.
Journal Entry April 1( Recording of receipt of interest)
February 1 Cash (1,000,000x 12% x 6/12) 60,000 Dec. 31 (Amortization)
Amortization = Discount or Premium/Life of bonds
Bonds Receivable (1,000,000 x 90%) 900,000 Interest Income 60,000
Amortization = (900,000 – 1,000,000) / 50 months
Interest Income* 40,000 October 1( Recording of receipt of interest) Amortization = 100,000 discount / 50 months
Cash 940,000 Cash (1,000,000x 12% x 6/12) 60,000
Amortization = 2,000 per month
*Interest Income Interest Income 60,000
1,000,000 x 12% x 4/12 = 40,000 Bonds Receivable(2,000 x 11) 22,000
4 months = From October 1 to February 1 December 31( Accrual of Interest) Interest Income 22,000
Interest Receivable (1,000,000 x 12% x 3/12) 30,000
Interest Income 30,000
Method of Amortization
2. Outstanding balance method
- the interest would be divided using the ratio of the current balance of the bonds every year
- the amortization every year is directly proportional to the balance of the bonds receivable
- only used if the problem states that the entity uses outstanding balance method
Sample Problem 1
On January 1,2021, the entity purchased 15% P1,000,000 bonds at 105. The interest payment is every December 31. The bonds are payable
equally every December 31 for the next 4 periods.
Journal Entry
Dec. 31 (Amortization)
January 1
Discount or premium = (1,050,000 – 1,000,000)
Bonds Receivable (1,000,000 x 105%) 1,050,000
Discount or premium = 50,000 premium
Cash 1,050,000

Dec. 31(Recording of receipt of interest) Amortization = Ratio of Outstanding balance x Premium or discount on bonds
Cash(1,000,000 x 15%) 150,000 Date Outstanding Balance Amortization
Interest Income 150,000 Jan. 1,2021 1,000,000 /2,500,000 X 50,000 20,000
Jan. 1,2022 750,000 /2,500,000 X 50,000 15,000
Jan. 1,2023 500,000 /2,500,000 X 50,000 10,000
Jan. 1,2024 250,000 /2,500,000 X 50,000 5,000
Total 2,500,000 50,000

Interest Income 20,000

Bonds Receivable 20,000