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Intermediate
Accounting 1
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Investments
Financial Asset at Amortized Cost
by: Prof. Ernie D. Tano, CPA, MBA
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Bond

- A bond is a formal unconditionally 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.
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Bond

- A bond is issued in small denomination of

P100, P1,000 or P10,000 to enable more
investors to purchase the bond issue.

- A P50,000,000 bond may be issued in

denomination of P1,000. Thus, there shall
50,000 bonds with face of P1,000 each.
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Bond
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Bond
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Interest payment date

The interest on the bond investment is usually

paid semiannually or every six months as follows:
a. January 1 and July 1
b. February 1 and August 1
c. March 1 and September 1
d. April 1 and October 1
e. May 1 and November 1
f. June 1 and December 1
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Classification of bond investments

Bonds may be acquired as current or noncurrent investment

depending on the business model of managing financial assets.

a. Financial asset held for trading

b. Financial asset at amortized cost
c. Financial asset at fair value through other
comprehensive income
d. Financial asset at fair value through profit or
loss by irrevocable designation or by fair
value option
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Initial measurement

PFRS 9, par 5.1.1 – Bond investments are

recognized initially at fair value plus transaction
costs that are directly attributable to the
acquisition

However, transaction costs attributable to the

acquisition of bond investments held for trading
or fair value through profit or loss are expensed
immediately.
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Subsequent measurement

Subsequent to initial recognition, bond

investments are measured and accounted as:

a. At fair value through profit or loss

b. At amortized cost
c. At fair value through other comprehensive
income
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Acquisition of bond investments

- May be acquired on interest date or between

interest dates.
- In this case, two assets are acquired, the bonds and
the accrued interest. On the date of acquisition, the
accrued interest is charged either to accrued
interest receivable or interest income.
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Illustration

- An entity acquired 12% bonds with face amount of

P2,000,000 for P2,200,000 which includes accrued
interest of P20,000. The bonds are held for “trading”.

Accrued Interest Receivable approach Interest Income approach

Trading securities 2,180,000 Trading securities 2,180,000

Accrued interest Rec 20,000 Interest income 20,000
Cash 2,200,000 Cash 2,200,000
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Illustration

- When the first semiannual interest of P120,000 is

received, the journal entry is:

Accrued Interest Receivable approach Interest Income approach

Cash 120,000 Cash 120,000

Accrued interest Rec 20,000 Interest income 120,000
Interest income 100,000
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Illustration – Trading Securities

April 1 Purchased P1,000,000 12% bonds at 96 plus accrued

interest. Interest is payable January 1 and July 1 The
bonds are held as trading investment.
Trading Securities 960,000
Interest Income 30,000
Cash 990,000

Note that the accrued interest is for three months

from Jan. 1 to Apr. 1. (P1,000,000 x 12% x 3/12 =
P30,000)
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Illustration – Trading Securities

July 1 Received semiannual interest:

Cash 60,000
Interest income 60,000
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Illustration – Trading Securities
Sold P600,000 face value bonds for 101 plus
Oct. 31
accrued interest.
Cash 630,000
Trading securities 576,000
Interest income 24,000
Gain on sale of TS 30,000

Sales Price (P600K x 101) 606,000 Sales Price 606,000

Add: Accrued interest from 24,000 Less: Carrying amount of 576,000
July 1- Oct 31(600,000 x 12% x 4/12) bonds sold (6/10 x 960,000)
Total cash received 630,000 Gain on sale 30,000
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Illustration – Trading Securities

Dec 31
Recorded the accrued interest from Jul 1 – Dec 31
on the remaining bonds of P400,000.

Accrued interest receivable 24,000

Interest Income 24,000

The accrued interest on the P400,000 face amount is

for 6 months (Jul 1 – Dec 31). The computation is
P400,000 x 12% x 6/ 12 = P24,000.
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Illustration – Trading Securities

Dec 31 The bonds are quoted at 120 at the end of the year.
Changes in fair value of trading securities are
recognized in profit or loss
Trading securities 96,000
Unrealized gain - TS 96,000

Market value (400,000 x 120) 480,000

Carrying amount of remaining 384,000
bonds (960,000 – 576,000)
Unrealized gain 96,000
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Investment in bonds at amortized cost

PFRS 9, par 4.1.2 – financial asset shall be measured at

amortized cost if both the following conditions are met:

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

order to collect contractual cash flows on special
dates

b. The contractual cash flows are solely payments of

principal and interest on the principal amount
outstanding.
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Amortization of premium or discount

Investment in bonds shall be measured subsequently

at amortized costs.

This means that any premium or discount on the

acquisition of long-term investment in bonds must be
amortized

Bond premium or discount is amortized over the life of

the bonds. On the part of bondholder, the life of the
bonds is from the date of acquisition to the date of
maturity.
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Amortization of premium or discount

Amortization is done through the interest income account:

a. Amortization of bond discount:

Investment in bonds xx
Interest income xx

a. Amortization of bond premium:

Interest income xx
Investment in bonds xx
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Philosophy on amortization

The reason for amortization of bond premium or

discount is to bring the carrying amount of the
investment to face amount on the date of maturity

When the bonds are redeemed on the date of

maturity, the entry will simply be a debit to cash and a
credit to investment in bonds at face value.

The bondholder is a creditor and will collect on the

date of maturity an amount equal only to the face
amount of the bonds no more and no less.
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Philosophy on amortization

Bond premium is a loss on the part of the bondholder

for paying more than what can be collected on the
date of maturity

Such loss is not recognized outright but allocated over

the life of the bonds to be offset against the interest
income to be derived from the bond investment.

Bond discount is a gain on the part of the bondholder

because the bondholder paid less than what can be
collected on the date of maturity
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Philosophy on amortization

Such gain is not recognized outright but allocated over

the life of the bonds to be added to the interest
income derived from the bond investment.
Such process of allocating the bond premium as
deduction from the interest income and the bond
discount as addition to interest income is what is
traditionally call amortization.
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Acquisition on interest date
2020 Purchases P1,000,000 face amount 12% bonds at 94.
Apr 1 Bonds pay interest semiannually April 1 and October
1 and mature on April 1, 2025
Investment in bonds 940,000
Cash (1,000,000 x 94) 940,000

In as much as the acquisition is on interest date,

April 1, there is no accrued interest involved.
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Acquisition on interest date
2020 Received semiannual interest
Oct 1
Cash (1,000, 000 x 12% x 6/12) 60,000
Interest income 60,000

Dec 31 Adjustment for accrued interest for 3 months

Accrued interest receivable 30,000

Interest income 30,000
(P1.0M x 12% x 3/12)
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Acquisition on interest date
2020 Amortization of the bond discount for 9 months from
Dec 31 April 1 to Dec. 31, 2020.
Investment in bonds 9,000
Interest income 9,000

Face amount 1,000,000

Cost 940,000
Discount 60,000
Annual amortization
(60,000 / 5 years) 12,000
Annual amortization
(12,000 x 9/12) 9,000
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Acquisition on interest date
2021 Reversal of the adjustment for accrued interest on
Jan 1 December 31, 2020
Interest income 30,000
Accrued interest receivable 30,000

Apr 1 Received semiannual interest:

Cash 60,000
Interest income 60,000
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Acquisition on interest date
2021 Received semiannual interest:
Oct 1
Cash 60,000
Interest income 60,000

Dec 31 Adjustment for accrued interest for 3 months

Accrued interest receivable 30,000
Interest income 30,000

Dec 31 Adjustment for amortization of bond discount for 1 year

Investment in bonds 12,000
Interest income 12,000
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Acquisition on interest date
Investment in bonds

04/01/20 Cost 940,000

12/31/20 Amortization 9,000
12/31/21 Amortization 12,000
12/31/22 Amortization 12,000
12/31/23 Amortization 12,000
12/31/24 Amortization 12,000
04/01/25 Amortization 3,000
1,000,000

The redemption of the bonds may then be simply recorded

Cash 1,000,000
Investment in bonds 1,000,000
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Acquisition between interest dates
Purchased 12% P1,000,000 face amount bonds at 105
2021
plus accrued interest on Feb. 1, 2021. Interest is payable
Feb 1 semiannually on April 1 and Oct 1. Bonds are dated April
1, 2020 and mature on April 1, 2025:
Investment in bonds 1,050,000
Interest income 40,000
Cash 1,090,000

Cost (1,000,000 x 105) 1,050,000

Accrued interest from Oct 1, 2020 40,000
to Feb. 1, 2021
Total cash paid 1,090,000
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Acquisition on interest date
2021 Received semiannual interest:
Apr 1
Cash 60,000
Interest income 60,000

Oct 1 Received semiannual interest:

Cash 60,000
Interest income 60,000

Dec 31 Adjustment for accrued interest for 3 months

Accrued interest receivable 30,000
Interest income 30,000
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Acquisition on interest date
Adjustment for the amortization of the bond premium
Dec 31
from Feb. 1 to Dec. 31, 2021 or 11 months using the
straight line method of amortization.

Interest income (11 x 1,000) 11,000

Investment in bonds 11,000

Life of bonds From Feb. 1, 2021 50 months

to Apr. 1, 2025
Monthly amortization (50,000 / 50) P 1,000
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Acquisition on interest date
Investment in bonds

01/01/21 Cost 1,050,000 12/31/21 Amortization 12,000

12/31/22 Amortization 12,000
12/31/23 Amortization 12,000
12/31/24 Amortization 12,000
04/01/25 Amortization 3,000
Balance 1,000,000

The redemption of the bonds may then be simply recorded

Cash 1,000,000
Investment in bonds 1,000,000
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Sale of bonds prior to maturity

Determine the carrying amount of the bond

investment to be used as basis in computing gain or
loss on the sale.

Amortization of the premium or discount should be

recognized up to the date of sale.

If the sale is between interest dates, the sale price

normally includes the accrued interest.
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Sale of bonds prior to maturity

Accordingly, that portion of the sale price pertaining to

the accrued interest should be credited to interest
income.

The difference between the sale price, after deducting

the accrued interest, and the carrying amount of the
bond investment represents the gain or loss on the sale
of the investment.
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Illustration
Purchased 12% P1,000,000 face amount bonds for
2020
P1,075,000 including accrued interest. Interest is payable
Aug 1 semiannually on May 1 and Nov. 1. Bonds are dated
May 1, 2020 and mature May 1, 2024:
Investment in bonds 1,045,000
Interest income 30,000
Cash 1,075,000

Total cash paid 1,075,000 Note that the cash payment of

Accrued interest from May 1 to 30,000 P1,075,000 includes accrued interest
Aug. 1, 2020 (P1.0 M x 12% x 3/12) The accrued interest purchase is not
Cost of bond investment 1,045,000 part of cost. This is deducted from the
cash paid.
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Illustration
2020 Received semiannual interest:
Nov 1
Cash 60,000
Interest income 60,000

Adjustment for accrued interest for 2 months from

Dec 31
November 1 to December 31, 2020
Accrued interest receivable 20,000
Interest income 20,000
( months x 1,000)
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Illustration
Adjustment for the amortization of the bond premium
Dec 31
from Aug. 1 to Dec. 31, 2020 or 5 months using the
straight line method of amortization is used.

Interest income (5 mos. x 1,000) 5,000

Investment in bonds 5,000

Life of bonds From Aug. 1, 2020 45 months

to May. 1, 2024
Monthly amortization (45,000 / 45) P 1,000
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Sale of bonds
On February 1, 2022, the bonds were sold at 108 plus accrued
interest.

Sale price (1,000,000 x 108) 1,080,000

Add: Accrued interest for 3 months: Nov. 1, 2021 – Feb. 1, 2022 30,000
Total cash received 1,110,000

Original cost 1,045,000

Less: Amortization from Aug 1, 2020 - Feb. 1, 2022 or 18 months 18,000
x 1,000
Carrying amount of bonds on Feb. 1, 2022 1,027,000
Sale price (1,000,000 x 108) 1,080,000
Gain on sale 53,000
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Sale of bonds
a. To update the amortization of the premium up to the date
of sale, Feb. 1, 2022. The last amortization was Dec. 31, 2021
Interest income (1 mo. X 1,000) 1,000
Investment in bonds 1,000

b. To record the sale of bonds

Cash 1,110,000
Investment in bonds 1,027,000
Interest income 30,000
Gain on sale of bond investment 53,000
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Callable bonds
Callable bonds are those which may be called in or
redeemed by the issuing entity prior to their date maturity.

Usually, the call price or redemption price is at a premium or

more than the face amount of the bonds.

The difference between the redemption price and the

carrying amount of the bond investment on the date of
redemption is recognized in profit or loss.
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Convertible bonds
Convertible bonds are those which give the bondholders the
right to exchange their bonds for share capital of the issuing
entity at any time prior to maturity.
The existence of the conversion feature generally precludes
classification of the convertible bonds as financial assets at
amortized cost because that would be inconsistent with
paying for the conversion feature – the right to convert into
equity shares before maturity.

Investment in convertible bonds – classified as financial

assets measured at fair value.
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Serial bonds
Serial bonds are those which have a series of maturity dates
or those bonds which are payable in installments.

For example, a P1,000,000 bond issued on January 1, 2020

may provide that the bond will mature as follows:

December 31, 2020 200,000

December 31, 2021 200,000
December 31, 2022 200,000
December 31, 2023 200,000
December 31, 2024 200,000
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Term bonds

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

Callable and convertible bonds can be classified as term

bonds despite their special features.
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End of Presentation.
Reference:
Intermediate Accounting 1a, 2019 Edition
by: Zeus Vernon B. Millan

Intermediate Accounting 1, 2020 Edition by:

Conrado T. Valix, [Link]