📘 INTERMEDIATE ACCOUNTING NOTES — CHAPTER • Measured at fair value plus transaction costs,
19 (BOND INVESTMENTS) EXCEPT if FVTPL (costs expensed immediately).
(Complete, Clean, Easy-to-Study Summary) • Meaning: trading securities do not include
transaction costs.
1. DEFINITION OF A BOND Subsequent Measurement Options:
A bond is a formal unconditional promise (under seal) a. FVTPL
to: b. Amortized cost
c. FVOCI
• Pay a specified amount of money at a set
future date (principal/maturity value).
• Make periodic interest payments at a stated 4. ACQUISITION OF BOND INVESTMENTS
rate until maturity. When bonds are purchased between interest dates,
Basic Nature: cost includes:
• It is a contract of debt. • Price of the bond
• Issuer = borrower (debtor). • Plus accrued interest (seller’s earned interest)
• Investor/bondholder = lender (creditor). Interest is always recorded separately from the bond
cost.
Documentation:
• Evidenced by a bond certificate.
5. ILLUSTRATION — TRADING SECURITIES (FVTPL)
• Details are in a bond indenture (contract
between issuer & investor). Detailed example given on pages with journal entries.
Key points:
Denominations:
• Purchase at price + accrued interest.
Commonly issued in:
• Record interest income when received.
• ₱100
• Fair value changes go to gain or loss.
• ₱1,000
• No amortization of premium/discount is
• ₱10,000
required for trading securities.
(Example in text uses ₱1,000 denominations.)
Interest Payments:
6. INVESTMENT IN BONDS AT AMORTIZED COST
Usually semiannual, but may be annual.
Typical semiannual dates: Under PFRS 9, amortized cost classification requires
BOTH:
• April 1 & October 1
1. Business model is to hold financial asset to
• May 1 & November 1
collect contractual cash flows.
• June 30 & December 31
2. Cash flows are solely payments of principal and
interest (SPPI).
2. CLASSIFICATION OF BOND INVESTMENTS Amortized Cost includes:
Financial Asset Categories: • Acquisition price
a. Fair value through profit or loss (FVTPL) (held for • Minus repayments
trading)
• Plus/minus amortization of premium/discount
b. Amortized cost
c. Fair value through other comprehensive income • Minus impairment/uncollectibility
(FVOCI)
d. Fair value option (irrevocable designation) 7. BOND PREMIUM & DISCOUNT
Premium
3. INITIAL & SUBSEQUENT MEASUREMENT Cost > face value.
Initial Measurement: Discount
Cost < face value. Equal amortization every period.
Purpose of Amortization: B. Bond Outstanding Method
• To bring the carrying amount to face value at Amortization depends on bond outstanding balance
maturity. each year.
• Premium reduces interest income. • Larger amount in early years (for discount).
• Discount increases interest income. • Larger amortization of premium in early years
Conceptually: (opposite direction).
• Investor will receive face amount at maturity C. Effective Interest Method (Interest Method)
regardless of cost. Required by IFRS.
• Premium/discount is part of the carrying • Uses constant effective rate.
amount of the investment. • Most accurate method.
8. ACQUISITION ON INTEREST DATE 13. BOND OUTSTANDING METHOD – DISCOUNT
When purchase occurs exactly on interest date: (Illustration)
• No accrued interest is included. • Bond outstanding decreases every year.
• Amortization begins immediately. • Fraction = outstanding ÷ total of outstanding.
Includes a 5-year straight-line amortization example. • Annual amortization = fraction × total discount.
Journal entries provided in the text.
9. ACQUISITION BETWEEN INTEREST DATES
Cost = quoted price + accrued interest 14. BOND OUTSTANDING METHOD – PREMIUM
Monthly amortization may be used for convenience. (Illustration)
• Outstanding decreases yearly.
10. SALE OF BONDS BEFORE MATURITY • Fraction × total premium = annual amortization.
To compute gain or loss, determine:
1. Carrying amount at date of sale 15. PROBLEMS SECTION (Summary of Topics)
2. Selling price Problems cover:
3. Accrued interest (separate from price) • Held-for-trading entries
Gain = sale price – carrying amount • Amortized cost classification
• Straight-line method
11. SPECIAL TYPES OF BONDS • Bond outstanding method
1. Convertible Bonds • Accrued interest treatment
Right to convert bonds into share capital. • Sale of bonds before maturity
2. Callable Bonds
Issuer can call/redeem early (often at premium).
3. Serial Bonds
Mature in installments.
4. Term Bonds
Mature on a single date.
12. METHODS OF AMORTIZATION
A. Straight-Line Method