Investment in Debt Securities

Classification will be based on (1) SPPI test or solely payments of principal and interest test and (2) BM test
or business model test

START

Payments solely principal No

Investment at FVPL
and interest?

Yes

Determine the Business

Model

to collect contractual cash to collect contractual cash

to sell
flows and to sell flows (P and I)

Investment at Amortized
Investment at FVPL Investment at FVOCI
Cost
 Classification Initial Subsequent P/L items OCI items
Measurement Measurement
Investment at Purchase Price or Fair value 1. (Transaction costs) None
FVPL FV 2. Interest Income – at stated
rate; no amortization
3. Unrealized gain (loss) due to
change in FV
4. Realized gain (loss) due to
sale
Investment at Purchase Price or Fair value 1. Interest Income – at effective 1. Unrealized
FVOCI FV plus rate; with amortization gain (loss)
transaction costs 2. Realized gain (loss) due to due to
sale change in
3. Expected credit loss FV
2. Expected
credit loss
Investment at Purchase Price or Amortized 1. Interest Income – at effective None
amortized FV plus cost rate; with amortization
cost transaction costs 2. Realized gain (loss) due to
sale
3. Expected credit loss

Sample problem:
On January 1, 2021, ABC Co. purchased 10% (stated rate) P500,000 bonds at 94 (94% of the face value;
P500,000 x 94%) (inclusive of commissions of P50,000) when the prevailing interest rate is at 12% (effective
rate). The bonds mature after four years and pay interest every January 1 starting 2022.

On January 3, 2024 (very close to the interest payment date, immaterial accrued interest), the bonds were sold
at 110 (110% of the face value; P500,000 x 110%). The effective interest rates as of the end of the year were
as follows:
December 31, 2021 10%
December 31, 2022 11%
December 31, 2023 8%
December 31, 2024 13%

REQUIRED: Complete the table below:

FVPL FVOCI AC
1. Initial recognition 420,000 470,000 470,000
2. Unrealized gain (loss) 80,000 None None
in P/L for 2021
3. Unrealized gain (loss) None 23,600 None
in OCI for 2021
4. Interest income for 50,000 56,400 56,400
2021 (470,000 x 12%)
5. Cumulative (OCI) None 23,600 None
gain (loss) as of
December 31, 2021
6. Carrying value as of 500,000 500,000 476,400
December 31, 2021
 7. Unrealized gain (loss) (8,575) None None
in P/L for 2022
8. Unrealized gain (loss) None (15,743) None
in OCI for 2022
9. Interest income for 50,000 57,168 57,168
2022 (476,400 x 12%)
10. Cumulative gain (loss) None 7,857 None
as of December 31,
2022
11. Carrying value as of 491,425 491,425 483,568
December 31, 2022
12. Realized gain (loss) on 40,755 58,404 58,404
sale in 2024

Fair value computation

1/1/2021 (effective rate as of 1/1/2021 is 12%; 4-year term)
Cash Flow PVF PV
Principal 500,000 0.6355 317,750
Periodic Interest 50,000 3.0373 151,865
Total (including transaction costs) 469,615
The initial total present value should be P470,000 (rounding off error due to rounding off of the effective
rate from 11.974339% to 12%)

12/31/2021 (effective rate as of 12/31/2021 is 10%; 3-year remaining term)

Cash Flow PVF FV
Principal 500,000 0.7513 375,650
Periodic Interest 50,000 2.4869 124,345
Total (including transaction costs) 500,000
FV = P500,000 because stated rate = effective rate as of 12/31/2021 (rounding off error due to rounding off
of the PV factor)

12/31/2022 (effective rate as of 12/31/2022 is 11%; 2-year remaining term)

Cash Flow PVF FV
Principal 500,000 0.8116 405,800
Periodic Interest 50,000 1.7125 85,625
Total (including transaction costs) 491,425

12/31/2023 (effective rate as of 12/31/2023 is 8%; 1-year remaining term)

Cash Flow PVF FV
Principal 500,000 0.9259 462,950
Periodic Interest 50,000 0.9259 46,295
Total (including transaction costs) 509,245

Fair values:
1/1/2021 (excluding transaction costs) – 420,000
12/31/2021 – 500,000 (from 420,000 to 500,000, change = 80,000 increase)
12/31/2022 – 491,425 (from 500,000 to 491,425, change = 8,575 decrease)
12/31/2023 – 509,245 (from 491,425 to 509,245, change = 17,820 increase)
 Selling price (500,000 x 110%) 550,000
Carrying value (509,245)
Realized gain (loss) 40,755

FVPL Journal entries:

1/1/2021 Investment – FVPL 420,000
Expense (Transaction cost) 50,000
Cash 470,000

12/31/2021 Investment – FVPL 80,000

Unrealized Gain – P/L 80,000

Interest Receivable 50,000

Interest Income 50,000

1/1/2022 Cash 50,000

Interest Receivable 50,000

12/31/2022 Unrealized Loss – P/L 8,575

Investment – FVPL 8,575

Interest Receivable 50,000

Interest Income 50,000

1/1/2023 Cash 50,000

Interest Receivable 50,000

12/31/2023 Investment – FVPL 17,820

Unrealized Gain – P/L 17,820

Interest Receivable 50,000

Interest Income 50,000

1/1/2024 Cash 50,000

Interest Receivable 50,000

1/3/2024 Cash (500,000 x 110%) 550,000

Investment – FVPL 509,245
Realized Gain – P/L 40,755

FAAC
Amortized Cost – Carrying Values
1/1/2021 470,000
12/31/2021 or 1/1/2022 (470,000 x 1.12 – 50,000) 476,400
12/31/2022 or 1/1/2023 (476,400 x 1.12 – 50,000) 483,568
12/31/2023 or 1/1/2024 (483,568 x 1.12 – 50,000) 491,596
 Selling price (500,000 x 110%) 550,000
Carrying value (491,596)
Realized gain 58,404

FAAC Journal Entries:

1/1/2021 Investment – FAAC 470,000
Cash 470,000

12/31/2021 Interest Receivable 50,000

Investment – FAAC 6,400
Interest Income (470,000 x 12%) 56,400

1/1/2022 Cash 50,000

Interest Receivable 50,000

12/31/2022 Interest Receivable 50,000

Investment – FAAC 7,168
Interest Income (476,400 x 12%) 57,168

1/1/2023 Cash 50,000

Interest Receivable 50,000

12/31/2023 Interest Receivable 50,000

Investment – FAAC 8,028
Interest Income (483,568 x 12%) 58,028

1/1/2024 Cash 50,000

Interest Receivable 50,000

1/3/2024 Cash 550,000

Investment – FAAC 491,569
Realized Gain – P/L 58,404

FVOCI Calculation – FAAC (with amortization) + FV adjustment

Amortized Adjustment Fair

Cost OCI Value
1/1/2021 470,000
12/31/2021 or 1/1/2022 (470,000 x 1.12 – 50,000) 476,400 23,600 500,000
12/31/2022 or 1/1/2023 (476,400 x 1.12 – 50,000) 483,568 7,857 491,425
12/31/2023 or 1/1/2024 (483,568 x 1.12 – 50,000) 491,596 17,649 509,245
 1/1/2021 OCI 0
2021 adjustment 23,600
12/31/2021 OCI 23,600
2022 adjustment (15,743)
12/31/2022 OCI 7,857
2023 adjustment 9,792
12/31/2023 OCI 17,649

FVOCI Journal Entries

1/1/2021 Investment – FVOCI 470,000
Cash 470,000

12/31/2021 Interest Receivable 50,000

Investment – FVOCI 6,400
Interest Income (470,000 x 12%) 56,400

Investment – FVOCI 23,600

Unrealized Gain – OCI 23,600

1/1/2022 Cash 50,000

Interest Receivable 50,000

12/31/2022 Interest Receivable 50,000

Investment – FVOCI 7,168
Interest Income (476,400 x 12%) 57,168

12/31/2022 Unrealized Gain – OCI 15,743

Investment – FVOCI 15,743

1/1/2023 Cash 50,000

Interest Receivable 50,000

12/31/2023 Interest Receivable 50,000

Investment – FVOCI 8,028
Interest Income (483,568 x 12%) 58,028

12/31/2023 Investment – FVOCI 9,792

Unrealized Gain – OCI 9,792

1/1/2024 Cash 50,000

Interest Receivable 50,000

1/3/2024 Cash 550,000

Investment – FVOCI 509,245
Realized Gain – P/L 40,755
 Unrealized Gain – OCI 17,649
Realized Gain – P/L 17,649

Total realized gain (40,755 + 17,649) = 58,404

Assuming instead of 1/3/2024, the investment was sold at 110 (if silent, this is interest-on) on 3/31/2024.
Determine the realized gain or loss using: (1) FVPL, (2) FVOCI and (3) FAAC.

Selling price, interest-on (500,000 x 110%) 550,000

Accrued interest as of 3/31/2024
Face amount 500,000
Stated rate x10%
Fractional year x3/12 (12,500)
Selling price, ex-interest 537,500

FVPL
Selling price, interest-on (500,000 x 110%) 550,000
Accrued interest as of 3/31/2024
Face amount 500,000
Stated rate x10%
Fractional year x3/12 (12,500)
Selling price, ex-interest 537,500
Carrying value (FV as of 12/31/2023) (509,245)
Realized gain 28,255

Alternative:
Principal Accrued Interest Total (including interest)
Selling price 537,000 12,500 550,000
Carrying value (509,245) (12,500) (521,745)
Realized gain 28,255 0 28,255

FVOCI AND FAAC

Amortized Cost – Carrying Values
1/1/2021 470,000
12/31/2021 or 1/1/2022 (470,000 x 1.12 – 50,000) 476,400
12/31/2022 or 1/1/2023 (476,400 x 1.12 – 50,000) 483,568
12/31/2023 or 1/1/2024 (483,568 x 1.12 – 50,000) 491,596
12/31/2024 (491,596 x 1.12 – 50,000) 500,588 or 500,000

Amortized cost 12/31/2024 500,000

Amortized cost 12/31/2023 (491,596)
Amortization for 2024 (12 months) 8,404
Fractional period from 1/1 to 3/31 x3/12
Amortization 1/1 to 3/31 2,101

Selling price, interest-on (500,000 x 110%) 550,000

Accrued interest as of 3/31/2024
 Face amount 500,000
Stated rate x10%
Fractional year x3/12 (12,500)
Selling price, ex-interest 537,500
Amortized cost as of 3/31/2024
Amortized cost as of 12/31/2023 491,596
Amortization for 1/1/2024 to 3/31/2024 2,101 (493,697)
Realized gain 43,803
PROBLEM B:
On July 1, 2022, ABC Co. purchased as held to maturity (at amortized cost) 8% (5M x 8% = 400,000 annual
interest x 6/12 = 200,000 semi-annual interest) bonds with face value of P5,000,000 for P4,615,000 to yield
10% (5% per six months) per year. The bonds pay interest semi-annually on January 1 and July 1.

REQUIRED:
1. How much is the carrying value of the investment as of December 31, 2022? 4,645,750
2. How much is the accrued interest as of December 31, 2022? 200,000

Amortized cost
7/1/2022 4,615,000
12/31/2022 or 1/1/2023 (4,615,000 x 1.05 – 200,000) 4,645,750
7/1/2023 (4,645,750 x 1.05 – 200,000) 4,678,038