Investments in

Debt Securities
Financial asset at Amortized Cost

a. The business model is to hold the financial asset in order to

collect contractual cash flows on specified dates.

b. The contractual cash flows are solely payments of principal

and interest on the principal outstanding.

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Bonds

Is a formal unconditional promise made under

seal to pay a specified sum of money at a
determinable future date, and make periodic
interest payments at a stated rate until the
principal sum is paid.

Bond holder Issuer

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Bonds

1. Term bonds – are those bonds that mature on a single date

2. Serial bonds – are those which have a series of maturity dates
or those bonds which are payable in installments.
3. Callable bonds – are those which may be called in or redeemed
by the issuing entity prior to their date of maturity.
4. Convertible bonds – are those which give the bond holders the
right to exchange their bonds for share capital of the issuing
entity at any time prior to maturity.
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Investment in Bonds at
Amortized Cost
Amortized cost – amount at which the financial asset or liability is
measured at initial recognition minus principal repayments, plus or
minus the cumulative amortization using the effective interest method.

⬢ Effective interest method – allocating the interest income or

interest expense over the relevant period
⬢ Effective interest rate – is the rate that exactly discounts estimated
future cash payments or receipts through the expected life of the
financial instrument

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Bonds at Discount or Premium
Discount Premium

⬢ Acquisition cost is less ⬢ Acquisition cost is more than

than the face amount the face amount

⬢ Effective interest rate is ⬢ Effective interest rate is less

greater than nominal rate than nominal rate

⬢ There is a gain deferred ⬢ There is a loss deferred and

and amortized as addition amortized as a reduction to
to interest income interest income
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Interest income and receivable
Interest income = Effective interest rate x Present value

Interest receivable = Nominal interest rate x Face amount

Bonds may be purchased in between scheduled interest payments

dates.

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Illustration: Sale of bonds

On Jan. 1, 2021, ABC Co. acquired 10%, P1,000,000 bonds for

P951,963. The principal is due on Jan. 1, 2024 but interest is due
annually starting Dec. 31, 2021. The yield rate on the bonds is 12%.
The bonds were classified as investment measured at amortized cost.

On July 1, 2023, the entire bonds were sold at 110. Commission paid
to the broker amounted to P10,000.

Compute the gain or loss on the sale.

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Illustration: Sale of bonds
Amortization table Gain on sale

Interest Interest Sale price (1M *110%) 1,100,000

Date received income Amortization Present value Purchased interest (1M *10%
*1/2) (50,000)
Jan. 1, 2021 951,963
Jan. 1, 2022 100,000 114,236 14,236 966,199 Sale price excluding purchased
interest 1,050,000
Jan. 1, 2023 100,000 115,944 15,944 982,143
Commission to broker (10,000)
July 1, 2023 50,000 58,929 8,929 991,072
Net disposal proceeds 1,040,000

JE on July 1, 2023 CA of investment (991,072)

Realized gain on sale 48,928
Interest receivable 50,000
Investment in bonds 8,929
Interest income 58,929
To record amort. of discount
Cash (1M *110% -10K) 1,090,000
Investment in bonds 991,072
Interest receivable 50,000
Gain on sale of securities 48,928 9
 Illustration: Amortization of serial bonds
On Jan. 1, 2021, ABC Co. purchased 10%, P3,000,000 bonds for P2,900,305. The bonds
were classified as investment measured at amortized cost. Principal on the bonds mature
as follows:
Dec. 31, 2021 1,000,000
Dec. 31, 2022 1,000,000
Dec. 31, 2023 1,000,000
Total 3,000,000

Interest is due annually at each year-end. The effective interest rate on the bonds is 12%.

a. Provide journal entries.

b. Compute for the current and noncurrent portions of the investment as of December
31, 2021.
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 Illustration: Amortization of serial bonds
Future cash flows of serial bonds Journal entries

Interest on outstanding Total Investment in bonds 2,900,305

Date Principal principal balance collections Jan. 1, 2021 Cash 2,900,305
Dec. 31, 2021 1,000,000 3M *10% = 300,000 1,300,000 Cash 1,300,000
Dec. 31, Interest income 348,037
Dec. 31, 2022 1,000,000 2M *10% = 200,000 1,200,000
2021 Investment in bonds 951,963
Dec. 31, 2023 1,000,000 1M *10% = 100,000 1,100,000
Cash 1,200,000
Dec. 31, Interest income 233,801
Amortization table 2022 Investment in bonds 966,199
Cash 1,100,000
Interest Dec. 31, Interest income 117,857
Date Collections income Amortization Present value 2023 Investment in bonds 982,143
Jan. 1, 2021 2,900,305
Current portion of bonds 966,199
Dec. 31, 2021 1,300,000 348,037 951,963 1,948,342
Dec. 31, 2022 1,200,000 233,801 966,199 982,143 Noncurrent portion of bonds 982,143

Dec. 31, 2023 1,100,000 117,857 982,143 0 CA as of Dec. 31, 2021 1,948,342

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Illustration: Callable bonds

On Jan. 1, 2021, ABC Co. purchased 5-year, 10%, P1,000,000 callable bonds at
95. Transaction costs incurred amounted to P16,199. Principal is due on Dec. 2025
but interests are due annually at each year-end. The bond indenture restricts the
issuer to call the bonds within 2 years from date of bonds. The bonds are classified
as investment measured at amortized cost.

On Jan. 1, 2021, based on past experience with similar investments, ABC CO.
expects that the issuer will call the bonds on Jan. 1, 2023 after the lapse of the 2-
year call restriction. Using the trial and error approach, the imputed rate of interest
is determined at 12%.

Provide all the relevant entries.

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 Illustration: Callable bonds
Journal entries

Jan. 1, Investment in bonds @AC 966,199

Initial carrying amount of investment 2021 Cash 966,199

Transaction price (1M *95%) 950,000 Cash 100,000

Dec. 31, Investment in bonds @AC 15,944
Transaction costs 16,199 2021 Interest income 115,944
Initial carrying amount 966,199
Cash 100,000
Dec. 31, Investment in bonds @AC 17,857
2021 Interest income 117,857
Amortization table
Holding period of 2 years, effective interest of 12%

Interest Present
Date Collections income Amortization value
Jan. 1, 2021 966,199
Dec. 31, 2021 100,000 115,944 15,944 982,143
Dec. 31, 2022 100,000 117,857 17,857 1,000,000
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Illustration: Callable bonds

Case 1: Computation of gain or loss

Call price (1M *101%) 1,010,000

Assume that on Jan. 1, 2023, the bonds were
CA of investment, Jan. 1, 2023 (1,000,000)
in fact called-in by the issuer at 101.
Gain on redemption of bonds 10,000

Cash 1,010,000
Jan. 1, Investment in bonds @AC 1,000,000
2023 Gain on redemption of inv. 10,000
Case 2:

Assume that the bonds were not called-in by Dec. 31, Cash 100,000
2023 Interest income 100,000
the issuer on Jan. 1, 2023

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Illustration: Financial assets measured at FVOCI
On Jan. 1, 2021, ABC Co. acquired 10%, P1,000,000 bonds for P951,963. The
principal is due on Jan. 1, 2024 but interest is due annually every Jan. 1. The
effective interest rate on the bonds is 12%. The bonds are held under a “hold to
collect and sell” business model. Accordingly, the bonds were classified as
investment measured at FV through OCI.

Information on fair values follows:

Dec. 31, 2021 98

Dec. 31, 2022 103
Jan. 1, 2023 104

On January 1, 2023, ABC Co. sold the bonds at 104, the FV on this date.
15
Illustration: Financial assets measured at FVOCI
Initial recognition
Change in Fair value
Jan. 1, Investment in bonds -FVOCI 951,936
2021 Cash 951,936 CA 12/31/2021 966,199
FV (1M* 98%) 980,000
Amortization table
Unrealized gain -OCI 13,801
Interest Present
Date Collections income Amortization value Dec. 31, Investment in bonds –FVOCI 13,801
Jan. 1, 2021 951,963 2021 Unrealized gain -OCI 13,801

Jan. 1, 2022 100,000 114,236 14,236 966,199

Investment in Bonds -FVOCI
Jan. 1, 2023 100,000 115,944 15,944 982,143
1/1/21 951,963
Jan. 1, 2024 100,000 117,857 17,857 1,000,000
12/31/21
(Amortization) 14,236
Subsequent measurement
12/31/21 (FV
Interest receivable 100,000 change) 13,801
Dec. 31, Investment in bonds –FVOCI 14,236 End. balance 980,000
2021 Interest income 114,236
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 Illustration: Financial assets measured at FVOCI
December 31, 2022

CA 12/31/2022 982,143
Interest receivable 100,000
Dec. 31, Investment in bonds –FVOCI 15,944 FV (1M* 103%) 1,030,000
2022 Interest income 115,944 Unrealized gain –OCI (cumulative) 47,857

Dec. 31, Investment in bonds –FVOCI 34,056

2022 Unrealized gain –OCI (47,857-13,801) 34,056 Investment in Bonds -FVOCI
1/1/21 951,963
12/31/21
(Amortization) 14,236
Unrealized gain -OCI 12/31/21 (FV
12/31/21 (FV change) 13,801
13,801 change) 12/31/22
12/31/22 (FV (Amortization) 15,944
34,056 change) 12/31/22 (FV
47,857 End. balance change) 34,056
End. balance 1,030,000
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 Illustration: Financial assets measured at FVOCI
(Derecognition)

January 1, 2023

Jan. 1, Investment in bonds –FVOCI 10,000

2023 Unrealized gain –OCI [1M* (104%-103%) 10,000

To record the sale

Jan. 1, Cash 1,040,000 CA 12/31/2023 982,143

2023 Investment in bonds –FVOCI 1,040,000
FV (1M* 104%) 1,040,000
Cumulative balance of gain -OCI 57,857
The cumulative balance of gain in equity is transferred to profit or
loss as a reclassification adjustment.

Jan. 1, Unrealized gain –OCI 57,857

2023 Gain on sale –P/L 57,857

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 Regular way purchase or sale of
Financial asset
⬢ It is a purchase or sale of financial asset under a contract whose terms
require delivery of the asset within the time frame established generally by
regulation or convention in the market place.

⬢ Governed by the “T-plus-3” convention cycle – investor must complete or

settle his security transaction within 3 business days from the transaction
date.

⬢ Financial asset is recognized or derecognized using trade date accounting

or settlement date accounting.
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Illustration: Trade date vs. Settlement date

On December 29, 2021, an entity commits itself to purchase a financial asset (a

debt instrument) for P1,000 which is its fair value on commitment date (trade date).
On Dec. 31, 2021 and on January 4, 2022 (settlement date) the fair value of the
asset is P1,002 and P1,003, respectively.

Provide JE under trade date accounting and settlement date accounting assuming
the financial asset purchased is measured at:
a. FVPL;
b. FVOCI – mandatory (debt instrument);
c. Amortized cost

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 Illustration: Trade date vs. Settlement date
Financial asset measured at profit or loss

Trade date accounting Settlement accounting

Dec. 29, Held for trading securities 1,000 No entry

2021 Accounts payable 1,000

Dec. 31, Held for trading securities 2 Dec. 31, Accounts receivable 2
2021 Unrealized gain –P/L 2 2021 Unrealized gain –P/L 2

Held for trading securities 1 Held for trading securities 1,003

Accounts payable 1,000 Accounts receivable 2
Jan. 4, Unrealized gain –P/L 1 Jan. 4, Unrealized gain –P/L 1
2022 Cash 1,000 2022 Cash 1,003

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 Illustration: Trade date vs. Settlement date
Financial asset measured at other comprehensive income

Trade date accounting Settlement accounting

Dec. 29, Investment in bonds -FVOCI 1,000 No entry

2021 Accounts payable 1,000

Dec. 31, Investment in bonds -FVOCI 2 Dec. 31, Accounts receivable 2

2021 Unrealized gain –OCI 2 2021 Unrealized gain –OCI 2

Investment in bonds -FVOCI 1 Investment in bonds -FVOCI 1,003

Accounts payable 1,000 Accounts receivable 2
Jan. 4, Unrealized gain –OCI 1 Jan. 4, Unrealized gain –OCI 1
2022 Cash 1,000 2022 Cash 1,003

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 Illustration: Trade date vs. Settlement date
Financial asset measured at amortized cost

Trade date accounting Settlement accounting

Dec. 29, Investment in bonds -AC 1,000 No entry

2021 Accounts payable 1,000

No entry No entry

Jan. 4, Accounts payable 1,000 Jan. 4, Accounts payable 1,000

2022 Cash 1,000 2022 Cash 1,000

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Illustration: Reclassification of Financial asset
On January 1, 2021, ABC Co. acquired 10%, P1,000,000 bonds for P951,963. The
principal is due on January 1, 2024 but interest is due annually. The effective
interest rate is 12%.

In 2022, ABC Co. changed its business model. It was ascertained that the
investment should be reclassified to another measurement category.

Information on fair value follows:

Dec. 31, 2021 98

Dec. 31, 2022 103
Jan. 1, 2023 104

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 Illustration: Reclassification of Financial asset

Case 2: FVPL to Amortized cost

Amortization table

Jan. 1, Held for trading securities 10,000

Interest Present 2023 Unrealized gain –P/L [1M* (104%-103%) 10,000
Date Collections income Amortization value
Jan. 1, 2021 951,963 Jan. 1, Investment in bonds @ AC (1M*104%) 1,040,000
Jan. 1, 2022 100,000 114,236 14,236 966,199 2023 Held for Trading securities 1,040,000

Jan. 1, 2023 100,000 115,944 15,944 982,143 The trial and error approach may be use to determine the effective interest rate
Jan. 1, 2024 100,000 117,857 17,857 1,000,000 that discounts the bonds on P1,040,000.

Case 1: Amortized cost to FVPL Case 3: Amortized cost to FVOCI

Held for Trading securities (1M*104%) 1,040,000 Investment in bonds -FVOCI (1M*104%) 1,040,000
Jan. 1, Investment in bonds @ AC 982,143 Investment in bonds @ AC 982,143
2023 Gain on reclassification 57,857 Gain on reclassification 57,857

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 Illustration: Reclassification of Financial asset

Case 5: FVPL to FVOCI

Case 4: FVOCI to Amortized cost Held for trading securities 10,000

Unrealized gain –P/L [1M* (104%-103%) 10,000

Jan. 1, Investment in bonds –FVOCI 10,000

2023 Unrealized gain –OCI [1M* (104%-103%) 10,000 Investment in bonds -FVOCI (1M*104%) 1,040,000
Held for trading securities 1,040,000

CA 12/31/2023 982,143
Case 5: FVOCI to FVPL
FV (1M* 104%) 1,040,000
Cumulative balance of gain -OCI 57,857 Investment in bonds -FVOCI 10,000
Unrealized gain –OCI [1M* (104%-103%) 10,000
Investment in bonds @ AC 982,143
Jan. 1, Unrealized gain -OCI 57,857 Unrealized gain –OCI 57,857
2023 Investment in bonds -FVOCI 1,040,000 Gain on reclassification 57,857

Held for trading securities (1M*104%) 1,040,000

Investment in bonds -FVOCI 1,040,000

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 Dividends

⬢ Distribution to shareholders of cash, property or stocks from

unrestricted retained earnings on the basis of all issued and fully paid
shares and all subscribed par value shares except treasury shares.

Dates relevant to the accounting for dividends

1. Date of declaration
2. Date of record
3. Date of distribution

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 Illustration: Dividends
Cash dividends
ABC Co. holds 10,000 shares of XYZ, Inc. as Apr. 1, Dividend receivable (10K *10) 100,000
investment in equity securities. On April 1, 2021, ABC 2021 Dividend income 100,000
Co. receives notice of declaration of P10 per share Apr. 20, Cash 100,000
cash dividends. On April 20, 2021, ABC Co. collects 2021 Dividend receivable 100,000
the cash dividends.

Apr. 1, Inventory 120,000

Property dividends
2021 Dividend income 120,000
ABC Co. holds 10,000 shares of XYZ, Inc. as
investment in equity securities. On April 1, 2021, ABC
Co. receives inventory with a cost of P130,000 and fair
value of P120,000 as property dividend.

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 Illustration: Dividends
Cash dividends
ABC Co. holds 10,000 shares of XYZ, Inc. as Apr. 1, Dividend receivable (10K *10) 100,000
investment in equity securities. On April 1, 2021, ABC 2021 Dividend income 100,000
Co. receives notice of declaration of P10 per share Apr. 20, Cash 100,000
cash dividends. On April 20, 2021, ABC Co. collects 2021 Dividend receivable 100,000
the cash dividends.

Apr. 1, Inventory 120,000

Property dividends
2021 Dividend income 120,000
ABC Co. holds 10,000 shares of XYZ, Inc. as
investment in equity securities. On April 1, 2021, ABC
Co. receives inventory with a cost of P130,000 and fair
value of P120,000 as property dividend.

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 Illustration: Dividends
Share dividends Financial asset designated at FVPL
ABC Co. holds 10,000 shares of XYZ, Inc. as
investment in equity securities. On April 1, 2021, ABC Apr. 1, Financial asset designated at FVPL 130,000
Co. receives shares with fair value of P130,000 and 2021 Unrealized gain- P/L 130,000
aggregate par value of P100,000 as share dividend.
Financial asset measured at FVOCI

Apr. 1, Investment in equity securities 130,000

2021 Unrealized gain- OCI 130,000

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Stock rights
⬢ If an entity decides to issue new shares, the existing share holders
have the right to purchase from the new issue, in proportion to their
current holdings, before such shares are offered to other potential
investors.

Dates relevant to the accounting for stock rights:

1. Date of declaration
2. Date of record
3. Date of issuance
4. Exercise period
5. Date of expiration
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Disclosure of risk in the financial
statements
⬢ Credit risk – the risk that one party to a financial instrument will cause
a financial loss for the other party by failing to discharge an obligation.

⬢ Liquidity risk – the risk that an entity will encounter difficulty in meeting
obligations associated with the financial liabilities that are settled by
delivering cash or another financial asset.

⬢ Market risk – the risk that the fair value of future cashflows of a
financial instrument will fluctuate because of changes in market prices
i.e. currency risk, interest rate risk, other price risk.
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Other Long-term Investments
Sinking fund
⬢ It is a fund set aside for the repayment of a long-term obligation and all
income earned are treated as part of the fund and are to be used to settle
the related obligation. e.g., bonds payable.
⬢ The classification is either current or non-current asset parallels the
classification of related obligation.

Cash surrender value

⬢ It represents the amount of cash to be received from the insurance
Company in case the life insurance is cancelled before the insured key
employee dies.
⬢ It also represents the amount that can be borrowed from the insurance
company and the amount that can be used as collateral.
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Next topic:
Investments in associates

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