CHAPTER 19

Financial Asset at Amortized Cost

Bond Investment
What is a Bond?
In simple language, a Bond is a Contract
of Debt.

Issuer (debtor) borrows fund from the

Investor (creditor).
A bond is evidenced by a certificate and
the contractual agreement between the
issuer and investor is contained in
another document knows as “Bond
Indenture.”
An investor acquires a bond either as a
temporary or permanent investment and
derives regular income in the form of
interest.
What are the 4 classification of Bonds?
Initial measurement of Investment in
Bonds?
Subsequent measurement of Investment
in Bonds?
True or False. The acquisition cost of Bonds
acquired on interest dates is the purchase
price.
Acquisition of Bonds
Acquired on Interest Date – purchase price = acquisition
cost initially.

Acquired Between Interest Dates – acquisition date is not

any one of the interest date. The purchase price is normally
includes the accrued interest.

*That portion of the purchase price representing accrued

interest should not reported as part of the cost of investment
but should be accounted for separately (bonds and accrued
interest)
Accrued Interest on Date of Acquisition
(Between interest dates)

2 Approaches:
a. Accrued Interest Receivable
b. Interest Income
Illustration – Trading Securities
Interest Date - Jan. 1 and July 1
Acquisition Date - April 1
Interest - Jan. 1 to April 1 = 3 months - Accrued Interest Receivable

Interest Income - Investor (6mos. Jan1-July1)

1. Unrealized Gain/Loss - changes in MV

2. Accrued Interest Receivable (July 1- Dec.31)
 Amortized Cost – is the initial recognition
amount of the investment minus repayments,
plus amortization of discount, minus
amortization of premium, and minus
reduction for impairment or uncollectibility.
 True or False. When bonds are acquired and
classified as financial assets at amortized cost,
the bond investments are classified as
noncurrent investments.
 PFRS 9 requires that investment in bonds
shall be measured at amortized cost. How are
bond premium or discount accounted?
Amortization - It is the process of allocating
the bond premium as deduction from the
interest income and the bond discount as
addition to interest income.
Philosophy of Amortization
- bring the carrying amount of the investment to face
amount on the date of maturity.

Bond Premium
Bond Discount
Bond Premium - bondholder (investor) paid more.
ex. Investor A purchased a P1,000,000 bond at
P1,500,000.00

Bond Discount - bondholder (investor) paid less.

ex. Investor A purchased a P1,000,000 bond at
P800,000.00
Illustration – Acquisition on Interest Date
True or False. If amortization is made on every
interest date, it is still necessary to disclose
such treatment at the end of the reporting
period should there be accrued interest.
Illustration – Acquisition Between
Interest Dates
True or False. Bonds can be sold prior to
maturity.
 Illustration – Acquisition Between
Interest Dates (same illustration)

Sale of Bonds (before maturity)

On July 1, 2022, the bonds were sold at 109 plus

accrued interest.
Define the following:
a. Callable Bonds
b. Convertible Bonds
c. Serial Bonds
What are 3 methods of amortization?
Explain each.
Problem 19-1
Problem 19-2
Problem 19-2
CHAPTER 20
Effective Interest Method
Amortized Cost, FVOCI and FVPL
3 Methods of Amortization
a. Straight Line Method
b. Bond Outstanding
c. Effective Interest Method
PFRS 9 requires that bond discount and bond premium
shall be amortized using the effective interest method.
In connection with the effective interest method of
amortizing premium or discount, what are the 2 interest
rate that should be classified?
 Effective Rate - true/ actual rate of interest which the
bondholder earns on the bond investment.

Nominal Rate - coupon/ stated rate appearing on the face

of the bond.
Effective Rate = Nominal Rate
Bond Investment = Face Value
True or False. When the bonds are acquired at a
premium, the effective rate is lower that the nominal
rate.
 E<N = Premium
E>N = Discount

Bond Discount - GAIN

Bond Premium - LOSS
How are the following computed?
a. Interest Earned/ Interest Income
b. Interest Received
Interest Earned/ Interest Income
ER x CA

Interest Received
NR x FA
True or False. The carrying amount of the bond
investment is the initial cost gradually decreased by
periodic amortization of discount or gradually
increased by periodic amortization of premium.
Problem 20-1 Charisma Company
Problem 20-1
Problem 20-1
Problem 20-2 Demeanor Company
Problem 20-2
Problem 20-2
True or False. Under PFRS 9, the term “held to
maturity” is now eliminated. The equivalent
term is, “financial asset at amortized cost.”
Jent Company purchased bonds at a discount of
P100,000. Subsequently, Jent sold those bonds at a
premium of P140,000. During the period that Jent
held this long-term investment, amortization of the
discount amounted to P20,000. What amount
should Jent report as gain on the sale of bonds?
On January 1, 201A, Carr Company purchased Fay
Company 9% bonds with a face amount of
P4,000,000 for P3,756,000 to yield 10%. The bonds
are dated January 1, 201A, mature on December 31,
201J, and pay interest annually on December 31. Carr
uses the interest method of amortizing bond discount.
What total amount should Carr report as interest
revenue from the bond investment for 201A?
On July 201A, Cody Company paid P1,198,000 of
10%, 20-year bonds with a face amount of
P1,000,000. Interest is paid on December 31 and June
30. The bonds were purchased to yield 8%. Cody
uses the effective interest method to recognize
interest income from this long-term investment.
What should be reported as the carrying amount
of the bonds in the December 31, 201A statement
of financial position?
 Fair Value through Other Comprehensive Income

1. BOTH collecting contractual cash flows and selling the

financial asset.

Contractual cash flows - principal and interest.

 Fair Value through Other Comprehensive Income

- transaction cost is included in the cost.

interest income must be calculated using effective interest method and
included in the profit or loss.
requires amortization of any discount/ premium.
Problem 20-7 Agusan Company
Problem 20-7 Agusan Company
Problem 20-7 Agusan Company
Problem 20-7 Agusan Company
Problem 20-7 Agusan Company
Fair Value Option
Problem 20-8 Reign Company
Problem 20-8 Reign Company
 Problem 20-9 Havoc Company
At the beginning of current year, Havoc Company
purchased 10-year bonds with a face amount of
P5,000,000.

The stated rate is 8% per year payable semiannually June

30 and December 31. The bonds were acquired to yield
10%

WHAT IS MISSING IN THE PROBLEM?

 Market Price/ Purchase Price of Bonds

Present Value (PV) of the Principal plus the Present Value

of Future (PVF) Interest Payments using the Effective
Interest Rate.
 Market Price/ Purchase Price of Bonds

Present Value (PV) of the Principal

PV of Principal = Face Amount x PV Factor

r - effective rate
n - number of periods
 Market Price/ Purchase Price of Bonds

Present Value of Future (PVF) Interest Payments

PVF of Interest Payments = Annual nominal interest payment x

PVF Factor

r - effective rate
n - number of periods
 Problem 20-9 Havoc Company

At the beginning of current year, Havoc Company

purchased 10-year bonds with a face amount of
P5,000,000.

The stated rate is 8% per year payable semiannually June

30 and December 31. The bonds were acquired to yield
10%
Problem 20-9 Havoc Company
Problem 20-9 Havoc Company
On January 1, 2011, an entity purchased bonds with face
value of P5,000 000 at a cost of P4,650,000. The nominal
interest rate is 10% payable annually every December 31.
The bonds mature on January 1, 2016 or in 5 years.

WHAT IS MISSING IN THE PROBLEM?

 Computation of Effective Rate
Trial and Error or Interpolation Process
On January 1, 2011, an entity purchased bonds with face
value of P5,000 000 at a cost of P4,650,000. The nominal
interest rate is 10% payable annually every December 31.
The bonds mature on January 1, 2016 or in 5 years.

E<N = Premium
E>N = Discount
 Computation of Effective Rate

Trial and Error or Interpolation Process

Find an Effective Rate wherein

Acquisition Cost = PV of Future Cash Flows
On January 1, 2011, an entity purchased bonds with face value of P5,000 000
at a cost of P4,650,000. The nominal interest rate is 10% payable annually
every December 31. The bonds mature on January 1, 2016 or in 5 years.

Acquisition Cost = P4,650,000

Face Amount = P5,000,000
Bond is issued at a DISCOUNT (Acquisition Cost is lesser than the Face
Amount.)

E>N = Discount
?>10%
On January 1, 2011, an entity purchased bonds with face value of P5,000 000
at a cost of P4,650,000. The nominal interest rate is 10% payable annually
every December 31. The bonds mature on January 1, 2016 or in 5 years.

Let’s try 11%

PV of Principal (5,000,000 x .5935) 2,967,500

PVF of Interest Payments (500,000 x 3.6959) 1,847,950
Total PV of Cash Flows 4,815,450

Acquisition Cost (4,650,000) is still lower than PV of Cash Flows (4,815,450).

This means that the effective rate must be higher than 11%.
On January 1, 2011, an entity purchased bonds with face value of P5,000 000
at a cost of P4,650,000. The nominal interest rate is 10% payable annually
every December 31. The bonds mature on January 1, 2016 or in 5 years.

Let’s try 12%

PV of Principal (5000,000 x .5674) 2,837,000

PVF of Interest Payments (500,000 x 3.6048) 1,802,400
Total PV of Cash Flows 4,639,400

Acquisition Cost (4,650,000) is now higher than PV of Cash Flows

(4,639,400). This means that the effective rate must be lower than 12%.
On January 1, 2011, an entity purchased bonds with face value of P5,000 000
at a cost of P4,650,000. The nominal interest rate is 10% payable annually
every December 31. The bonds mature on January 1, 2016 or in 5 years.

In conclusion, the effective rate must be between 11% and 12%.

X - 11%
12% - 11%

The PVs applicable to the rates are substituted as follows:

4,650,000 - 4,815,450
4,639,000 - 4,815,450

0.94
which means that the effective interest rate is 11.94%